Chhattisgarh Sponge Association Proposes Maximum Production-Maximum Revenue Model for Mineral Auctions

With discussions underway at Niti Aayog for changes in the bidding parameters in the upcoming mineral auctions in 2020 - so that the auction policy is a success - it has been understood that the government wants to now shift from the revenue maximization model to that of production maximization.

The Chhattisgarh Sponge Iron Manufacturers Association (CSIMA), however, feels that while it supports the idea of a realistic bidding and reasonable revenue-sharing model, weightage should always be given to the maximum annual revenue generated for the government, including levies like royalty and DMF and, in this context, the organization has made certain recommendations to the government, which are in the possession of SteelMint. The proposals have been sent to the PMO; Chhattisgarh chief minister; the chairman of Niti Aayog; Secretary, Ministry of Steel; Secretary, Ministry of Coal; and the Mineral Resources Department, Chhattisgarh.

Single Round of Bidding

Among the key proposals, first, CSIMA has recommended that there should be just one round of bidding and every bidder may be allowed to quote the premium once. The actual total annual revenue proposed to be paid to the state government, including royalty and DMF, should be the only criteria. "If there are several rounds of bidding, prices will go up abnormally. In a single round of bidding, every player will calculate what is the best that he can get," Vijay Jhanwar, President, CSIMA, told SteelMint.

Penalty for Production Below 75%

Secondly, Jhanwar said, "We have suggested maximum production, competitive pricing, and maximum revenue. The state government should get at least 75% of the committed revenue. There should be penalty below 75% of the total production committed on an annual basis. The penalty should be 50% of the total revenue share, including royalty, DMF, NMET and other levies (for the shortfall quantity below 75%). If there is fall in production below 60% for a continuous period of three years, the lease should be terminated and re-auctioned," Jhawar observed.
He added that the peak rated capacity of minimum 75% should be achieved from the third year of commercial operation of the mine. In case an operational mine is being auctioned then it should be within two years from the date of commercial operations.

Any excess mining above 75% should be allowed to be adjusted within the next two successive years only and cannot be carried forward beyond that period to prevent artificial shortages, insisted Jhanwar.

Further, the peak rated capacity, as declared under the environmental clearance (EC) of the existing operating mines should not be allowed to decrease for at least 10 years from the date of its operation. And that the reasons beyond control for waiver of penalty should be clearly defined.

Maximum Revenues

Jhanwar gives an illustration to explain the revenue maximization angle. For instance, suppose an existing mine with a rated capacity of 5 MnT is being auctioned. If we assume the Indian Bureau of Mines price to be at INR 2,000 per ton of iron ore, this will vary as per the IBM-declared rates every month and, accordingly, the actual revenue will also vary.

The above illustration reveals that the bidder who commits the maximum annual revenue is "C" and so he should be declared the preferred bidder. This will ensure that the production of the mineral can increase in the country and it will be available at a lesser premium which will ensure competitive pricing for the industry and boost value addition, said Jhanwar.

Moreover, if the penalty conditions are strict then no bidder is likely to quote unrealistic targets in terms of production which leads to wrong statistical data and based on which industries are often planned. "Due to less actual production, there is shortage and price get inflated which leads to NPAs," Jhanwar emphasized.

Consortiums be allowed to Bid

CSIMA has also requested the government that consortium of companies be allowed to bid for the mines. And that the net worth of such consortia should be considered the sum total of the net worth of all individual members who hold not less than 20% share in the consortium.

The organization has said, it supports the intent of the government to maximize production but, at the same time, there should be a fair opportunity for new bidders who are ready to generate more annual revenues for the government so that the "purpose of common good", as defined under Section 39B of the Indian Constitution can be achieved.