Unfair rules in Odisha’s mining auction (The Hindu)

Mains Paper 3:Economy 
Prelims level:  Auction merchant mines
Mains level:Need to classification of auction merchant mines

Context:

• The auction of iron ore merchant mines expiring on March 31, 2020, has been successfully completed by the Odisha Government and the Letter of Intents to the successful bidders are being issued. 
• The successful conduct of auctioning brings in focus a large number of issues.

Classification of auction merchant mines:

• The auctioned merchant mines were classified into two categories: captive and non-captive/open category. 
• Only five mines were classified as captive and balance 14 mines as non-captive/open. 
• These five captive mines accounted for around 30 per cent of the total auctioned reserves and the balance 14 mines, 70 per cent. 
• While for a mine reserved as captive, only end-users could bid, the open category blocks could be bid by both captive as well as merchant miners. 
• The access and option available to the end-users in bidding was not available to merchant/standalone miners.

Why the classifications are essential? 

• This classificationlaid the foundation of an absence of a level-playing field where the end-users had a distinct advantage vis-à-vis the standalone miners. 
• The lack of correspondence between the classification of mines and access of participation in the auction process is the main contributor to the present outcome of the auction process. 
• Had the auctioned mines earlier operated by merchant miners been offered to only merchant miners, or had the classification permitted only end-users to bid for captive mines and merchant miners to bid for open category mines, the outcomes would have been somewhat different and more sensible. 

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Outcome of the auction: 

• The auction outcome is perplexing. It has presented an unprecedented scenario of winning bids’ premium ranging from 90.9 per cent to 154 per cent. 
• This clearly shows that for every ₹100 a bidder earns from its sale, it has to pay premium starting from ₹90.9 to as high as ₹154. 
• A bidder in addition to the revenue-share premium, has to pay royalty, dead rent, District Mineral Foundation (DMF), National Mineral Exploration Trust (NMET) and other statutory dues of about 17 per cent. He has to incur the cost of production, salary and other operating expenses.
• The results show that the successful bidder has to incur a cost by way of premium and other statutory duties/levies which is much more than what it earns. 
• The rationale of such a model is incomprehensible. 
• The present auction policy discriminates against the standalone miners by incentivising the end-users as they have the ability to absorb and accommodate the high cost of revenue-share and other associated cost in their value-added activities and ultimately in the price of the final product. This privilege is not available to standalone miners.
• Auctions were held for total estimated iron ore resource of about 1,788 million tonnes (mt). Out of this, 527 mt was reserved for end-users and the balance 1,261 mt earmarked for open category for which captive and merchant miners could bid. 
• The outcome reveals that of 1,261 mt reserves meant for open category, the end-users/steel-makers bagged 923 mt.

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Steel-makers gain:

• It is also important to observe that a steel-maker having won four leases (two captive and two end-users) will have control over 65 per cent of the total auctioned reserves. 
• Two steel-makers with five mines will account for 75 per cent of the resources.
• This will show that the sector is getting polarised where few steel-makers will have dominant control over the resources and hence production, leading to a very skewed and asymmetric situation.

Critical aspect of auction:

• The most critical aspect of auction is the exorbitant revenue sharing premium in each case of a successful bidder. 
• The revenue as per the tender document is calculated by multiplying the mineral dispatched during a month with the sale price declared by the Indian Bureau of Mines (IBM). 
• The future will revolve around the IBM declared price. Currently the average price in a month of sales made by merchant miners is taken as the IBM-declared price. 
• The spread of the consumer base and the prices at which merchant miners sell to different customers and very often different merchant miners serving to overlapping customers, has given rise to a situation where IBM declared prices are fair and transparent.
• In a sense the IBM declared price is representative of the market prices except where there could be a time lag in publishing the IBM prices vis-à-vis current market prices. 
• In the new regime where the market is dominated by few end-users, the IBM prices being vulnerable to manipulation can’t be ruled out. 
• IBM will be at the receiving end. Like a tariff authority empowered with statutory and regulatory powers, IBM needs to be equipped and empowered to address the pricing issues in the new regime.
• It is possible that IBM prices can be influenced or even suppressed by both captive or non-captive miners by selling iron ore to their sister concern and related parties by entering into schemes of arrangement. 

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Way ahead: 

• Therefore, the government has to take measures to ensure that IBM declared prices are fair, transparent and confirming to arm’s length principle, otherwise government revenue in the form of revenue sharing premium, royalty and GST will be adversely impacted.
• Non-captive and non-related sales by captive or merchant miners should be the guiding principle for fixing the IBM prices.
• The principle that has been adopted for revenue sharing and valuation of estimated reserves in the tender document needs to be followed in its true spirit by the winning bidders during their lease terms.

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General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1)With reference to the R-naught, consider the following statements:

1. The R-naught, or R0, is a virus’s basic reproductive number — an epidemiologic metric used to describe the contagiousness of infectious agents. 
2. If the R0 is above one, a group of infected people are less likely to spread the infection.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer......................................

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Mains Questions:
Q.1)What do you mean by the classification of auction merchant mines? Why the classifications are essential?  What are the critical aspects of auction?