The Union Cabinet on Tuesday approved the methodology for auctioning coal blocks, enabling the government to allot coal mining licences through competitive bidding for the first time.
The move comes nearly three years after Parliament vetted changes in allocation procedure. Coal blocks, since 1993, used to be allocated on recommendations of an empowered inter-ministerial panel. However, the Comptroller and Auditor General (CAG) had, last year, said that the process lacked "transparency" and had allegedly caused a loss of Rs 1.86 lakh crore to the exchequer. The CBI is currently probing the alleged irregularities and has filed two preliminary enquiries and 13 FIRs so far. According to the methodology approved on Tuesday, auctioning would take place for fully explored coal blocks as well as regionally explored blocks after ascertaining the geological data.
The Cabinet Committee on Economic Affairs (CCEA) approved the production-linked payment on rupee per tonne basis, plus a basic upfront payment of 10 per cent of the intrinsic value of the coal block. The intrinsic value of coal block will be calculated on the basis of net present value of the block arrived through Discounted Cash Flow (DCF) method.
The DCF method relates the value of an asset to the present value of expected future cash flows of the asset. It is based on the principle that for any initial investment an investor will assess future cash flows from that entity to provide a minimum return.
To help benchmark the selling price of coal, the international freight-on-board price from the public indices like Argus/Platts will be used to calculate the mine mouth price. As a buffer against short-term volatility, the average sale price will be calculated by taking prices of the last five years.
For the power sector, the CCEA directed providing 90 per cent discount on the intrinsic value for tariff-based bidding, which will help in rationalising the electricity tariff.
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