Rush Of Coal Cases: Why Price Control Measures Are Not Working

by Subhomoy Bhattacharjee - Jan 22, 2018 02:06 PM +05:30 IST
Rush Of Coal Cases: Why Price Control Measures Are Not WorkingThe Coal Bhawan of Coal India Limited at Rajarhat in Kolkata.  (Indranil Bhoumik/Mint via GettyImages) 
  • Every fifth case with Competition Commission is from the sector; the regulator has imposed fines in all its rulings so far.

Which sector of the economy has the largest number of cases arraigned before the Competition Commission of India (CCI) in the past one year? It is surprisingly, coal. I say surprisingly because coal even now is mostly a monopoly prerogative of the Indian government. It should then have one of the least instances of price gouging? Or the possibility of any other behaviour that qualifies as anti-competitive?

Apparently not! At a point when the government has set up an anti-profiteering body to monitor price transgressions under good and services tax (GST) as well as for other sectors like medical products and aviation, it is an intriguing bit of statistic to mull over. Of the 36 orders the CCI passed in just one year (including the first week of January 2018) relating to busting of monopoly pricing and anti-competitive behaviour, eight were from the coal sector. It means every fifth case that landed on the desk of the fair play regulator was about the coal sector. Those are imposing statistics. Also, none of the cases were dismissed as unsubstantiated; the regulator imposed penalties in all the cases.

How many of them will retain the verdict at the appellate stage is a difficult call to make. What they clearly demonstrate though is that the presence or absence of the state from the sector as a business entity does not tilt the sector towards or away from fair play. The key question to ask instead is if the state agencies are playing the role of a fair referee. Competitive conditions get a far better run in such an environment maximising welfare outcomes.

To return to the coal cases, a perusal of their dateline shows most of them refer to the period when the current government was not in power at the Centre. But the disclaimer apart, they demonstrate that without significant reform in the ownership conditions in the sector (read – denationalisation) the risks of cartel formation and other anti-competitive behaviour will continue to haunt the sector.

The latest case is about how MAHAGENCO (Maharashtra State Power Generation Company) was hit by a cartel of coal suppliers. While the cartel was possibly in operation for a long time, the CCI order refers to the period 2009 to 2013, principally because the commission came into play since then.

There are vital lessons from the episode. The coal was sourced from three subsidiaries of Coal India – Western Coalfields, South-Eastern Coalfields, Mahanadi Coalfields and Singareni Coal Company. These are all state-run companies. MAHAGENCO too, is government run. The coal would often come via the government-owned railways, rarely via trucks. It should be theoretically impossible for the public to be cheated in this environment. Yet the public was cheated because none of the suppliers or buyers could provide in time supply of coal to the seven thermal power plants of MAHAGENCO. None of these state-owned entities have the wherewithal despite so many decades of existence to chalk out the necessary details of the consignments to service each others’ needs.

So the power producer had to depend on intermediaries. “In order to procure quality coal and to make proper supervision of the said supply through rail and other modes of transportation, MAHAGENCO engages services of liasoning agents.”(sic)

Let us be clear that the intermediaries are not doing any illegal operations. They have been in existence as bonafide entities for a long time. In the case of Karam Chand Thapar & Bros as well as Naresh Kumar & Co, the companies trace their history to before India’s Independence. While their existence in the pre-nationalisation phase was easy to understand as the specialisation that markets throw up, why were they needed post 1973? They were needed to fill the efficiency gaps that the lumbering coal companies left in their wake. CIL and Singareni Collieries Company Limited (SCCL) could only manage to extract the coal from the mines, despite large marketing departments. For the NTPCs of the world, the Coal Ministry steps in to facilitate the exercise.

In 2017, for instance, the ministry concluded the contours of the auction based fuel supply agreement with the largest of the coal buyers. Those would be monitored but the MAHAGENCOs of the world are often left high and dry. For them from the pithead companies like Karam Chand Thapar & Bros or Naresh Kumar & Co step in to transport the coal on time to their garages. Their presence is essential as coal supply has a habit of drying up without notice from the government-run coal companies bringing downstream operations to a juddering halt. In the angst driven literature of the coal sector in India, there has been no deep study of the role these coal merchants fulfil or the costs the economy would pile up if they were absent.

Yet allowed to operate without controls they are likely to create nests of illegal profits. This is what they have done in this case. They have apportioned the supply of coal to the seven thermal plants between themselves through collusive bids.

While one can fathom why they would do it, why were the state-owned power generation company, CIL or SCCL not able to bring these companies to heel though they were obviously hurting the commercial interests of the buyers and sellers of coal for a long time? Even the present case arose because of a dispute between parties that were not able to win the tenders because they were not in the circle.

That they had formed a cartel is clear from the CCI order: “The Commission is of opinion that the present case falls in the category of hard core cartels as (the intermediaries) reached an agreement to submit collusive tenders and to divide the markets. Thus, the case deserves to be dealt with utmost severity.”

It would be facile to claim it is corruption among the managers of the state-run entities, which let the intermediary companies operate the cartels merrily. I do not dispute that. But it does not answer why such cartels are so pervasive and easy to form.

There is another case in the CCI court which could provide an answer to this puzzle. This is a case where MAHAGENCO is again the aggrieved party. Its complaint is against, surprise! Western Coalfields! And what are the complaints?

“...failure on the part of WCL to entertain objections raised by MAHAGENCO before execution of FSA (fuel supply agreements); failure to formulate the joint sampling protocol in FSA as also failure to provide joint sampling at both loading and unloading points; making provisions in FSA whereby MAHAGENCO is deprived of its right to participate in joint sampling of coal or the sampling procedure which could lead to supply of lumpy, wet and sticky coals and also stones/coal of large size which cannot be used; and failure on part of WCL to crush and wash coal which is an integral process of dressing coal before supply.” So even when there is a government mandated fuel supply agreement, the quality of supply is in serious doubt.

The intermediary companies ensure these travesties of supply do not occur. The coal that is needed reach the boilers. MAHAGENCO is a company with deep purse and can mulct CIL for the damages. But small units with single boilers or less access to the powers cannot afford to play a guessing game with a monopoly like CIL. They depend on Karam Chand Thapar, or Nair Coal Services among the 60-odd such companies, which claim membership of the national coal merchants association for an assured supply of the mineral at a quality which will not damage their furnaces. The high disintermediation costs of such supply keep the coal mining sector financed as a government monopoly. It would have been called profiteering had this happened in the private sector.

It is a lesson that government presence in a sector is no guarantee against profiteering. Laying down clear rules of the game and enforcing it would help, instead. It is a lesson for all sectors where both the state and central governments try to set up price controls, including agriculture.

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