India coal sale scandal hits output

(Financial Times) -- A report suggesting India's government lost $210bn in revenue by underpricing coal assets also reveals a catalogue of wider delays and mismanagement, deepening pressure on the nation's embattled coalition government. The draft document from India's comptroller and auditor-general, which provoked a furore when leaked last week, suggests that the provision of coal to businesses without competitive auctions resulted in significant production shortfalls. The report, a copy of which has been seen by the Financial Times, shows that 60 of 86 allocated coal concessions had failed to begin production as planned by March 2011, resulting in coal output falling more than 50 per cent below target. "This would imply that either some of the allocattees [sic] were non-serious about production and/or the set of incentives which was required to help expedite commencement of production was not available", the report says. Many of the remaining projects were also mired in a mixture of land disputes, environmental clearances and delays in the allocation of mining licences, which the report says can take up to eight years to grant. India is the world's third largest coal producer, but inefficiency and slow decision-making in the state-dominated coal sector has increasingly forced many private sector energy groups to import supplies from countries such as Indonesia and Australia. The report says attempts to improve domestic production through the introduction of a market-based system as far back as 2004 were effectively rejected by the coal ministry, which continued to allocate licences at below market rates despite advice confirming the legality of a competitive alternative. The office of Manmohan Singh, prime minister, has conducted a damage-limitation operation in the aftermath of the leaking of the report to rebut accusations that its policy provided windfall gains to power and steel companies. The head of India's audit body also publicly recanted on the draft analysis at the end of last week, saying the findings were preliminary and therefore "exceedingly misleading". Nonetheless, the government is understood to be considering a new system that allocates mining rights through competitive bidding, one of the report's main recommendations, with guidance on licences said to be released before the summer. Analysts say introducing such a system, while beneficial in the long run, could prove politically problematic in a country where fuel shortages dog the power sector and consumers rely on heavily subsidised energy. Arvind Mahajan, head of natural resources and infrastructure at KPMG India, said: "Auctions are transparent and they maximise revenues, but introducing them means users will have to pay much more for coal, in turn meaning that the cost of power would go up." "The more important issue is when will the government look at more competition in the coal sector in general to allow coal companies to sell in the open market, which isn't allowed at the moment."