Paradoxes of Coal Mining Policies in India

The ambitions of our growing economy hinge on the performance of coal sector. Hence, the amount of debates that coal mining policies attract is much deserved.

Prices determined by the coal companies are not reflective of the global surge in prices although they may still be higher than the cost of production of a hypothetical financially prudent coal mining company. The pricing of coal was fully deregulated after the Colliery Control Order, 2000 was notified with effect from January 2000. But this has led to monopolistic market. Coal India controls almost 90% of the domestic production and maintains a supply which is only sufficient to meet the projected demand, thereby limiting the scope of competition. Also, there are high entry barriers for competing producers to enter coal mining and a complete inability exists to freely sell the coal they mine under current law. Due to these it is believed that coal prices may not be fair and competitive. At the same time, unlike a monopoly player, CIL has not been able to raise prices since last two years even in the face of unprecedented growth in demand and despite the higher management of both CIL and SCCL mulling over such moves. Also, in light of the international coal prices, which have witnessed rise in the last three years, the prices of domestic coal are still low. The cost of energy per unit at pit head for domestic coal and at port for imported coal comes out approximately as Rs. 0.66 for domestic coal and Rs. 1.57 for imported coal. Therefore, the domestic coal prices may be considered fairly competitive.

There are talks of coal regulatory commission being set up through appropriate legislation to control the prices of coal. The process of fixation of coal prices lacking transparency has given birth to the idea prices as ad hoc and irrational. However, advocacy for coal prices being determined by regulator may be better substituted by advocacy for opening up the market for competition. The demand and supply of coal should determine the prices and economic phenomena of gradual progress towards equilibrium prices should be allowed to take its own course. With greater degree of competition in the market such regulatory requirement may be obviated.

The proposal of the Ministry of Power as reported in the Economic Times to give preference to distribution companies for allocation of coal blocks is fraught with challenges and risks. The power distribution companies are not the end-users of coal, unless they are vertically integrated companies. Even the budgetary proposal of enhancing the definition of ‘captive’ to include companies with firm supply orders from the core sectors will still exclude the discoms and hence, the amendment of the Coal Mines Nationalization Act would be indispensable. Also, the Mines and Minerals (Development and Regulation) Act, 1957 prevents any sub-leasing. The discoms will have to develop mining capabilities or legislative changes in the MMDR to allow sub-leasing of the coal mines will be required.

The policy to allocate coal blocks to discoms needs to be supported by guidelines on which the coal blocks will be allocated to them. Since the discoms are mostly state specific, there will be challenges of allocating coal blocks to them. If the blocks are distributed uniformly across the board, the question of mining and transporting coal from a distant land will occur for most discoms. Unless the open access model of power supplies is implemented such geographical dispersion of coal mining, power generation and distribution may not be feasible.

The policy of competitive bidding for coal blocks on the basis of production linked payments to the government has been changed to include upfront payment as one of the criteria. The inclusion of upfront payment linked to the value of reserves may mark a significant departure, again fraught with both risks and challenges. With regard to the process of valuation, the stakeholders in general and the government in particular need to be prudent. There is an absolute lack of standards with regard to valuation of businesses and mineral properties in India. Globally too, the mineral appraisals are not yet properly understood. These issues are likely to manifest in more precarious forms in bidding process since the companies may not have all relevant information at the time of bidding. Also, question of whether the value of captive coal blocks should be determined on investment value standards and the those for Independent Power Plants be determined on fair vale standards will remain disputable.

There are two sides of the story with regard to the wages of coal mining workforce. The levels of wages are generally considered low in light of the difficult working conditions of the employees of coal mining companies, particularly so, of the underground mines. The other side of the coin reveals that the salaries and other benefits of the employees constitute on an average about 45% of the net sales of the coal mining companies. This may seem to indicate a deadlock scenario. However, the solution again lies in the opening of the market and allowing private participation in coal mining. An open market for coal mining will open up avenues of employment and hence, create better opportunities for all. Rise in salaries will not necessarily mean higher employee expenses for the coal mining companies. It is expected that there would be re-distribution of resources and the manpower of existing coal mining companies will be streamlined, thus, bringing down the overall expense of the companies.

The coal sector requires substantial investments to bridge the gap in demand and supply projected by the Integrated Energy Policy of the Planning Commission. The needs are important and more importantly, urgent. Hence, effective and efficient policies need to be framed and applied. Any scope of disputes will delay the process and India will remain on the brink of power failures.

(This article was published in the Economic Times in 2006)