The Comptroller and Auditor General of India (CAG), in a report tabled in Parliament on Tuesday, pointed to what it said were "inadequacies" in the processes underlying the recent auction of coal block mining concessions by the government. It is not at the moment being suggested that illegal gains were made. After all, the CAG's remit is merely to audit the government's account and estimate costs and benefits. Nor is there any other indication at present that illegal gains were being made at the time of the coal auctions, the way that they were made, according to earlier investigations, by some parties during the earlier licence-based allocation of coal mines. Nevertheless, the CAG has asked serious questions about the design of auctions that should be addressed by the government as soon as possible if it wishes to continue to insist that the coal auctions were a conspicuous success.
The point of auctions is to ensure wide and transparent competition. In the case of natural resources such as coal, such auctions should ensure the most efficient use of resources, and also that the government gets the best possible share of revenue. The CAG, in its report on the first and second round of coal auctions, has thus correctly examined the level of competition that the auctions brought in, and found it wanting. For this, they pointed to a flawed auction design in which the "standard tender document allowed participation of joint ventures and simultaneously limited the number of qualified bidders which could participate". As a consequence, in 11 of 29 successful coal auctions in the first two rounds, there was insufficient competition, as multiple bidders were essentially from the same company. The CAG report also pointed out some flaws in the calculation of the "intrinsic value" of a mine, which led to under-valuation of the mine at the time it was auctioned. Floor prices and upfront payments were correspondingly lower, with a significant cost to the government in terms of lost revenue. This happened in as many as 15 mines.
Again, there is as yet no credible reason to suppose that, in spite of the lost revenue, any illegal gains were made by anyone, or that the rules favoured any particular party. However, the history of the coal sector - and the degree to which the previous government was hamstrung by accusations of presumptive losses in the allocation of mines, and associated corruption - should cause the government to move quickly to fix any problems. The ministry has already made the claim that it tweaked the rules to increase competition in the third round of coal auctions. It must also engage credibly with Parliament and public on the subject of proper evaluation of "intrinsic value", and of criticisms of the auction process more generally. There is no point in being defensive about existing auction methods; the best way to avoid political blow-back is by being open and transparent about possible problems and convincing observers that the government will apply any correctives needed. The risks of not doing so are high, as the United Progressive Alliance's eventual fate should make clear.