My views on CAG Report: Part 3 - Analysis of the CAG Report on Coal Mine

CAG Report - Reading between the Lines

Part 3: Technical Analysis

I recently got hold of the CAG report pertaining to Coal Mining. The report indeed had some technical errors, a couple of which I would like to discuss.

• Geological Reserve – 
• In my first blog I stated the ratio of Mineable reserve to Geological Reserve. But In CAG report, there seems to be some error in documenting the geological reserve, a reserve that forms the basis to calculate Mineable reserve. The Coal Reserve (Geological Reserve) is considered on the basis of ISP(Indian Slandered Procedure Code 1956), when it should be calculated on the basis of UNFC (United Nation Frame Work Classification). The Geological Reserve should be calculated in accordance with the Technical, Economical and Geological dimensions along with Geographical consideration. These factors needs to taken in consideration while preparing the Mine Plan.

• Valuation of the Coal Reserve
• The Coal Reserve will be extracted in a fixed duration of the time. Thus a simple multiplication of Coal Reserve and per ton price cannot be used to do the valuation of the coal reserve. To calculate the value of the Coal Reserve we need to apply Discounted Cash Flow Method. (Ref. Chapter 4 of CAG Report)

• Per ton Sale Price of Coal
• The Quality of the Coal extracted from the Mines fall into one of the categories, namely A,B,C,D,E,F,G; A being the highest quality grade Coal. The Coal blocks allotted by the government consisted of the open cast mines, mixed mines. In the open cast mines the extracted coal falls in quality grade E, F, G. The notified price of E-G grade coal falls in between 440rs/ton to 840rs/ton. The CAG report has calculated the value of coal by taking a per ton price of 1028.42rs/ton, which is very high.

• Stripping Ratio
• In mining, stripping ratio or strip ratio refers to the ratio of the volume of overburden (or waste material) required to be handled in order to extract 1 ton volume of coal. In case of CIL, for open cast mine the stripping ratio is 1 to 2 (Refer GEVRA , DIPIKA. KUSMUNDA mines of S.E.C.L. & Mines of N.C.L., M.C.L., etc.). Such a stripping ratio results in a low production cost. But in case of the allocated coal mines the stripping ratio can go upto 3 to 4. Thus the production cost will be higher. Thus the Cost of extraction taken by CAG doesn’t seems to be justified.

• Underground Mine vs Opencast Mine
• The production Cost of Underground mine is higher than production cost of open cast mine. Thus calculating the production cost by taking the two values (cost pertaining to OC mine and cost pertaining to UG mine) same is not justified

My views on CAG report : Part 2 - What the report should have addressed

CAG Report - Reading between the lines

Part 2 - What the report should have addressed

The CAG report on Coal bloc allotment just looks at the financial aspect overlooking the real time working as well as operation and the legalities involved in allotment of coal bloc and their operations there after.

How Coal Bloc is allotted?

Coal Block allotment to end user like Power Producer, Cement Producer, Steel Producer and other is undertaken on the basis of the coal requirement of the plant with the State, where it is being opened and will used for production, and respective ministry recommendation. Ministry of Coal sets up a committee consisting of representative from various ministries, state government officials for allotment of coal block. 

Production from the allotted coal block is fixed on the basis of coal requirement of the end use plant. If the operator ends up producing more coal from the block than sanctioned then the excess production is to be given to Coal India nearest subsidiary for disposal.

Malpractices/Kickbacks

In case of Reliance, Tata etc. coal block allotted by Ministry of coal for a specific project have been allowed not only to produce more coal than required for the specific project but also use the excess produce to any of their other projects rather than sell is to Coal India as expected.This is clearly AGAINST the framed guidelines of coal block allotment rule and regulation.

Also, some certain end user unethically share their allotted coal block to other end user with hefty premium for coal extraction. This is achieved by inviting partners and selling them more than 90% stake in the coal bloc against the cost of coal extraction and the profit to be realized by selling the extracted coal.Now, its pretty evident that the incoming partner will or has to sell the coal at higher premium if  they want to make profit thus increasing the production cost of the end output - Power, cement etc - which gets passed on to the common man. 

The same malpractice is being practiced by state governments and state mineral development corporation of MadhayaPradesh, Chattisgarh,Goa, Andhra Pradesh. Allotted coal bloc is offloaded to private parties at hefty premium which results in increased production cost of end product.

This whole practice is AGAINST the ethics of coal block allotment.

Rather than just reporting the loss incurred and debating about it , CAG should look into the inner real time working of the allotted coal bloc and ensuring no kickbacks are allowed as well as end users involved in malpractices are brought to books.

My views on CAG report : Part 1 - The major flaws

CAG Report - Reading between the lines

Part 1 - The major flaws

The CAG estimated a loss of Rs 1.86 lakh crore to the exchequer on allocation of the blocks. However, the initial draft had estimated the losses at close to Rs 10.7 lakh crore...

          As read on 17 Aug, 2012, EconomicTimes.com

Flaw I - Geological Reserve vs Raiseable Coal
CAG report is based on Geological Coal Reserve to calculate the loss which is a major technical error and cannot be justified. To understand  why we need to have a crystal clear understanding as to how coal reserve is calculated and the key terms used to do so

• Geological Reserve -The coal reserve as given by nature.

• Net Geological Reserve - Due to uncertainty w.r.t to geological disturbances,thickness of coal bet and other factors the Net Geological Reserve is calculated as 

                       Net Geological Reserve = 0.90 * Geological Reserve

• Mineable Reserve - Now,all the Net Geological Reserve cannot be mined by Underground or Opencast system, due to Surface factor, Geological constraint, Ecological factor etc.The loss varies from 15% to 30%. Hence,

                       Mineable Reserve = (0.85 or 0.70) * 0.90 * Geological Reserve

• Mining Losses - In Underground Mining, Coal area is divided into smaller block for development and final extraction while some coal is left between these smaller block on the basis of rate of extraction, heating criteria etc. and due to this in underground mine the extraction of coal varies from 50% to 60%. So 

                       Mineable Coal (Underground) = 0.6 *  Mineable Reserve 

• Raiseable Coal - All Coal which is mined dose not reaches to saleable/dispatch point. The loss is attributed to transportation and weather which amounts to about 2% to 5%. 

So, based on the above the actual coal for dispatch in case of 

• Underground Mine is - 50% - 60%  of Net Geological Reserve.   
• Open cast mines is -  80% - 85% of Net Geological Reserve.

Thus the final output taken into account to calculate the loss in profit is not an big as reported.

Flaw II - Profit realized by private vs public operators

In case of Greenfield Coalfield coal area the investment on infrastructure required by an individual(private) operator is high compared to public undertaking(like CIL) as the latter mostly operates more than one mine in same area where as a private operator is only 1 bloc in an area. Also, public undertaking companies enjoy certain freebies and lower material cost than private operator who have to procure everything at market rate.
Thus the profit realized by public sector undertaking is much more than any private operator.

The CAG report, while trying to determine the the loss to the exchequer (Central Government Of India) , on coal block allotment to private sector took the economies/operational cost and profit percentage of public sector undertaking which the second major flaw and not technically justified.

In the next post I will list few key points missed out by CAG in their report, which makes the report/analysis incomplete for final justification/remediation.