Disequilibrium

The continuous and consistent plan to emasculate credible and
functioning institutions like the Supreme Court, Central Vigilance
Commission, Comptroller & Auditor General, the Election Commission and
most recently the Indian Army is not just a worrying but increasingly
irksome phenomenon. Interestingly, at least two of the government’s
chief problem children currently – Vinod Rai and General V K Singh –
went to the same school and class in Pilani, Rajasthan – Birla Public
School Vidya Niketan. With the executive having failed to discharge
its duty of governance, since nature abhors a vacuum, it is
constitutional and other institutions that have stepped into the
breach to literally keep us sane and safe. Much like Hans Brinker, the
eight year old boy in a Dutch town called Haarlem who put his finger
in the dike to save his town when it was lashed by storm waters. Even
has democracy was failing, democratic institutions have burnished the
image and flame.
A growing catalogue of unseemly rows which have at times escalated
into a virtual communication gridlock between the executive and the
institutions has left a bad taste in the mouth. Regular kerfuffles
have shown that all is not kosher with this government which reacts
adversely when harangued. In many ways it is a travesty that the Army
is now being viewed with suspicion because of its chief’s actions. At
another level, the government is taking CAG Vinod Rai’s many damaging
reports bitterly and personally, forgetting that the same CAG has also
indicted Narender Modi’s Government. The auditor is merely doing its
job. It used to do its job earlier as well, but with the excessive
overhang of corruption and and in your face media, these reports have
a knack of becoming a ‘pain you know where’ for an already embattled
government.
Take CAG’s latest report on the great coal scam. Despite protestations
and a smoke a mirrors type of strategy adopted by the Govt to deride
CAG on its draft report on coal, one hears that Vinod Rai is sticking
to his guns. The tent poles of the final report are being put in place
and as soon as parliament reconvenes in the third week of April, the
CAG coal report will be tabled. And the figure remains very much the
same – Rs 10.7 lakh crore. A few things need to be made clear after
studying the facts. The so called ‘windfall gain’ is the aggregate
over the life of the mine which is 25 years and not the six year
period of 2004-09 during which allocations were made. This draft
report is based on the notified Coal India’s transfer price at the
time of allocation. Least grade quality (lowest) coal has been taken
into consideration while computing these estimates, which I believe in
coal lingua franca is ‘F’ grade coal. The audit has attempted to
estimate the so called windfall gain based on parameters like cost of
extraction and the notified price of CIL at the time of allocation and
as on March 31, 2011.
As mentioned in the files of Government ‘windfall gain’ is defined as
the difference between CIL’s notified price and the cost of extraction
of coal. It is nowhere the audit argument that the ‘windfall gain’ is
equivalent to the loss to the exchequer. The source of the ‘windfall
gain’ is the discretionary allocation of coal blocks without charging
an upfront price. Since there has been no price discovery through a
bidding process, it can only be conjectured what the upfront price
would be. Auctions would have succeeded only in capturing a
significant fraction of the ‘windfall gain’. Value on date is a
function of net cash flows and their timing which is indeterminate .
The cost of extraction would depend on stripping ratios and the
extractable reserve which could vary from 85% to 95% of the geological
reserve for an open cast mine. Extraction ratios vary significantly
within a region and so does the coal quality based on calorific
values or intrinsic energy content.
Faced with inherent uncertainties in estimation, a natural reaction
would be to just elaborate on the dimensions of the problem and avoid
giving any figures. One hears that therein lies the basic conundrum
for the professional auditor as his Reporting Standards require him to
quantify ‘……the possible effect(s), individually and in aggregate’ of
the gravity of an alleged misstatement or a transgression. In such a
scenario, the practical approach is to suggest a figure to the entity
being audited and arrived at some consensus on figures which could be
considered fair and reasonable. The responsibility for assigning a
financial figure lies on the stewards of public property and not on
the auditors who come in late in the game to provide assurance to
stakeholders. This is amply clear from the ritual opening line given
by all professional auditors in signing off an audit opinion and
should be well known to anyone minimally acquainted with corporate
balance sheets. Dismissing a figure suggested by the auditors as
ludicrous is often a ruse to divert attention from the underlying
materiality or seriousness of a transgression.
The chasm between objectivity and subjectivity can never be bridged.
For instance, I disagreed with the big number that emerged from the
CAG report on 2G. My understanding was based on simple facts – that
there were too many basis used for computation including the S Tel
offer in the courts. That there was a loss to the exchequer was well
established and that daylight robbery took place of precious national
resources on January 10, 2008 was irrefutable. The draft CAG report on
coal clearly throws into stark relief that the cut-off date for
switching from the extant Screening Committee procedure to competitive
bidding of coal blocks was decided by the Government to be 28 June
2004. What is pertinent is that CAG’s audit reports go through the
usual legislative process and do not provide any forensic evidence for
criminal prosecution.
Coming to the figure itself, it is based on an elaborate calculation
with reference to the mining costs and notified prices of Coal India
Ltd in a contiguous region, assumption of 90% extractable reserve and
uniform behavior of output (both quality and quantity), costs and
prices over the life of the mining lease of 25 years. The figure would
go up substantially by a multiple of 3 to 5 if CIL’s notified prices
(long term) for coal linkage are replaced by the spot prices in
e-auction or imports under Open General License. Amounts would
increase further on assumptions of buoyancy in rupee values over the
extended time span. Allocations to Public Sector Enterprises would be
revenue neutral only if PSEs do the mining themselves, which is
unlikely. Since fuel prices are a pass through in power tariffs, the
consumer would ultimately bear the burden of the so called ‘windfall
loot’.
The fragments of the aggregate figure are spread over different time
zones and different beneficiaries. A figure of Rs 10.7 lakh crore or
$212 billion will make the presumptive loss suffered by the Government
in 2G look like small potatoes. This Rs 10.7 lakh crore figure is now
set to rock parliament. The Rs 10.7 lakh crore report is armed and
ready in the silos. The order – FIRE – will have devastating
consequences for this Government because it once again covers a time
line of 2004-2009, even if the figures arrived are calculated on the
basis of 25 years.