Sunday, 2 February 2020

Black Diamond 0302020

Coal licensees via discretionary allotment prone to rent-seeking: Economic Survey

Analysis of related-party transactions of coal block licensees immediately after the allotment makes a strong case for market-based allocation of natural resources in Economic Survey 2019-20 released by Chief Economic Advisor K Subramanian on January 31.

Discretionary allotment of natural resources leads to opportunities for rent-seeking via related-party transactions (RPTs) in firms that receive coal blocks via discretionary allotment.

In such cases, the rupee value of specific RPTs  shows significant spike in the years immediately after allotment, even as their market share steadily decreases, the Survey said.

The study of RPTs reveals a stark difference in the behaviour of firms depending on whether the coal block licenses have been obtained through committee-based allotment or through competition-based auction process, reveals research by Abraham, Chopra, Subramanian & Tantri (2018) that was cited in the Survey.

The rupee value of RPTs under heads such as capital purchases, revenue income and revenue expenses show a marked increase in the three year period following a discretionary allotment by a committee as compared to the three years prior.

Similarly, the RPTs with unlisted or foreign entities, based out of internationally recognised tax havens, show a spike in the three years period following allotment. One-time payments to directors also follow the same trend.

In the universe tracked by the study, the director commissions rose 12 percent, perquisites by 5.7 percent and consulting expenses by 7.6 percent for firms which received coal blocks through the committee system. Interestingly, the research found that director (and not other employees) salaries shrank after coal block allotment on the auction basis.

Interestingly, other types of RPTs such as capital sales, loans and advances given and taken do not show any such increase. And such an increase is also not seen in the case of competitive auctions.

According to the Survey, the increase in the value of the RPTs in discretionary allotment indicates transfer of wealth away from the firm. The RPTs that allow large one-time non-recurring cash outflows can serve as a mask to hide transactions from regulators.

Meanwhile, the beneficiaries of discretionary allotment also show a perplexing trend of shrinking market share in the years following the allotment.

The Survey explains: "The gain of an almost free resource should have aided firm productivity and business fundamentals. Instead the market share has fallen over the years -- suggesting a case of Dutch disease -- firms that got the free resource diverted efforts towards the tunnelling of the windfall gain instead of towards productive business activity."

Further, committee-based allotment leads to wealth destruction in the firms that are beneficiaries relative to firms which do not get such licenses. For instance,

Metric decline over three-years post-allotment
Total income: 54.9 percent
Total expense: 58.7 percent
PAT: 37.8 percent
Total assets 76.2 percent
Land & building: 48.2 percent

Plant & machinery: 51.1 percent

Interestingly, such spikes in RPTs or such declines in income and assets do not occur in case of auction of coal blocks, the research pointed out.

JSW Steel bags two iron ore mines in Odisha

JSW Steel has bagged two iron ore mines with a total reserves of 980 million tonnes in the auction in Odisha, a source said. The company won Narayanposhi iron block with 190 MT reserve on Sunday, according to the industry source. Others in the fray for this iron ore mine include Arcelormittal Mittal India Pvt Ltd, Vedanta, Tata Steel and JSPL. On Friday, JSW Steel bagged the Nuagaon mine, which is the largest iron ore block in the auction in Odisha. It has a total estimated reserve of around 790 million tonne. Both the mines are operational and its leases were expiring in March. JSW Steel at present has a capacity of 18 million tonnes per annum (MTPA). "Both wins will give Jsw Steel around 22 mtpa of captive iron ore for its plants. Also, it has won 6 category C- Mines in last year in Karnataka which are not fully operational providing another 7-8 mtpa of iron ore," according to an expert.

Securing iron ore linkages in Odisha was also important for JSW Steel as the company is planning a green field steel project of 12 MTPA in the state at an investment amount of over Rs 53,000 crore. After the annulment of three notices inviting tender (NIT) in October 2019 for auction of iron ore and manganese blocks because of conflicts between participating bidders, the Odisha government released an NIT for 20 iron ore and manganese blocks on December 6, 2019. While 15 of the 20 mines to be auctioned predominantly have iron ore, three have both iron ore and manganese, while the remaining are primarily manganese reserves. The 18 mines containing iron ore reserves together hold 1,600 million tonne of which 33 per cent (five mines) are reserved for specified end-use (captive usage). These are old mines where leases are set to expire in March 2020. ABI BAL

Budget didn't have measures to boost auto demand: TV Narendran, Tata Steel

ET Now: A big fillip to 'Make in India' is happening through protectionism no doubt and custom duty. As one of the largest manufacturers, are you happy?

TV Narendran: I am happy that there is a lot of focus on infrastructure, which has been announced earlier, and I see a follow through on that, which is positive. So from a steel company point of view, we are always happy to see investment in infrastructure. The fact that there is a greater share of capital expenditure from the government, I think that is important because over the last many years that has been dropping. It has been noncapital expenditure, which has been taking a greater share. So there is a 22 per cent increase in capital expenditure, which is good. I think the focus on the rural economy helps consumption to some extent.

ET Now: But we have heard these statements before, it has to be executed. We need the private sector to come back with investment, to participate in tenders and all of that. This whole NHAI bundling that you are going to be seeing and monetisation can that help at all?

TV Narendran: That can help. Again the other area which helps is oil and gas. Gas pipelines across the country helps, focus on water supply to all helps. So I think there are multiple of these initiatives upgrading 100 airports or creating 100 airports, privatisation of railways.

ET Now: I do not know how the Kisan Udan is going to work and Kisan Rail is going to work, especially when you are trying to privatise Air India. But from your sector perspective as well, housing is of course, you need a revival of housing. I do not know if enough has been done for that. For the road sector and transport sector you talk about new policy and new logistic policy and all of that. But will all of this bring back demand for you guys to kick start manufacturing?

TV Narendran: The part of our demand, which we are not seeing growing yet is automobile. So that sector is 10 per cent to 15 per cent of steel consumption, and I did not see much on that. In construction, infrastructure we saw something. Commercial is anyway being quite positive. Residential continues to be weak apart from affordable housing, and I think that will help to some extent and industrial construction has also been reasonably positive because of warehousing and a lot of investments going into supply chains because of post GST as well as the growth in e-commerce companies and things like that. So there are parts of construction where we are seeing some green shoots.

ET

Coal India Jan production rises 10% YoY

Coal India announced its production and offtake numbers for the month of January 2020. Coal India on Saturday said that its total coal production in January 2020 stood at 63.11 million tonnes as compared to 57.21 million tonnes in January 2019, recording a rise of 10.3%. Coal offtake rose 6.9% to 56.05 million tonnes in January 2020 as against 52.44 million in January 2019. In Saturday's special budget session, shares of Coal India closed 4.48% lower at Rs 173.70 on BSE Coal India (CIL) is a coal mining company, which is engaged in the production and sale of coal. The firm offers products, including coking coal, semi coking coal, non-coking coal, washed and beneficiated coal, middlings, rejects, coal fines/coke fines, and tar/heavy oil/light oil/soft pitch. As of 31 December 2019, the Government of India held 69.05% stake in the company.

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