Roadmap for Privatization and Restructuring of Indian Coal Mining Industry

1. Introduction

Privatization and restructuring of coal mining industry is a must if the nation has to achieve the targets of coal production. The inclusion of private participation has been in the government’s agenda since the National Mineral Policy formulated in 1993. The results have however been modest so far.

While the question of the future ownership of the industry has been much discussed in the recent years of restructuring, the industry’s ownership structure has remained mostly unchanged. About 85% of the coal production in the country comes from Coal India Limited followed by about 9% from Singareni Collieries Company Limited. Both these companies are under the government control. This has had impacts over the coal supply scenario in the country and pricing of coal. CIL and SCCL have successfully met their production targets but the industry has failed to cater to the burgeoning demand for coal. India’s dependence on imports seems imminent if the industry is not opened soon enough to privatization and restructuring.

Coal sector clearly demonstrates that perceptions of a major industry and its attractiveness to investors can change dramatically over a short period of time. The industry did not see much private participation in the last decade. However, if the response to the last round of application for coal blocks for captive mine development is an indication to go by, it can be safely inferred that private players are willing to enter into this sector even with policy and financial uncertainty of these ventures.

Under such environment, it should be good economic sense to look at the option of unlocking value in government coal mining companies. CIL is one of the largest coal producers in the world. It has, however, potential to improve upon its operational and financial performances and has the technical and managerial capability to take up a large number of Greenfield projects which would help India tide over the supply shortages.

It is noteworthy that in all cases of disinvestment and privatization in India, the successful players for the assets have been Indian investors, which may eventually be the case in coal industry as well, although legislation on privatization may not exclude foreigners. It is possible that foreigner investors might be attracted to apply for coal sector assets if the Government carries out such best-practice measures as the appointment of investment bank advisors; preparation of financial accounts to international accounting standards; environmental audits; debt restructuring; etc. But these are not standard practices in India.

Also, it would be more appropriate to view the absence of foreign investors in the coal sector in the broader context of the general problem of attracting foreign investment into the Indian economy, compounded by specific aspects of the coal sector (the need for long-term financing, limited export potential, etc.) In most cases, and certainly in countries with more attractive investment climates and where environmental standards are more consistently applied than in India, the goals of privatization would be more effectively furthered through the implementation of these best-practice measures and with the participation of foreign investors.


2. Roadmap for Restructuring and Privatization


The privatization process is fraught with political, financial, market and price risks. A well defined and planned process that identifies the role of government agencies and private players and addresses key issues of concern should go a long way in mitigating risks. In Indian context, the privatization process in coal mining industry will be an onerous task in light of the political opposition to dilution of stakes in the public sector behemoths. But the reforms process which has been an irreversible phenomenon in all its formats will someday take its shape in the Indian coal mining industry too.

There are three basic steps that need to be followed for the effective restructuring and privatization process - Legislative and administrative arrangements; Company preparedness; and Determination and implementation of methods of sale.

These steps may have different manifestations depending upon the political and financial set ups in which privatization is sought. However, in any form, such steps are expected to be followed for a successful privatization.


3. Legislative and administrative arrangements


The legislative and administrative arrangements need to be made to oversee the processes of restructuring and eventual privatization of government assets. The arrangements are necessary to identify institutions that decide and implement the processes. The legislative force needs to back privatization process that allows the executive to put their assets on the anvil for privatization, which were initially acquired through another piece of legislation. In case of Indian coal mining industry, the Coal Mines (Nationalization) Act 1973 provided for the acquisition and management of coal mines by the government. An amendment or repeal of the Act may be required for the reversal of the process. There have been some amendments in this Act for allowing private participation in coal mining activities. For privatization of Coal India Limited, the Act will require an overhaul.

Once the appropriate legislative approval is given by the vote of the parliament, the government has to make appropriate institutional arrangements for the administration of privatization process. The government may have a overseeing authority, as the Department of Disinvestment, or a Committee or a Board to manage the processes of restructuring the companies and preparing them for private ownership, followed by eventual sale of government stakes.

For coal companies to be sold through competitive privatization, the decision to privatize should emerged as a consensus between the two major agencies involved, the Ministry of Coal (MoC) and the Ministry of Finance (MoF). There may be other government and non-governmental agencies involved but they may have relatively smaller sphere of influence. The role of the Ministry of Finance (MoF) may be to participate in the commission that sets the floor price and may have a role in the preparation and execution of the transaction. Also, as has been the case traditionally, MoF through its Department of Disinvestment may be the driving force for preparation of privatization plans and for provision of support to the Ministry of Coal that has the administrative control of the coal mining companies. The form of sale may be specified in the legislation to “unreserve” the government block of shares in the company.

The processes of institutionalizing the privatization process have never been without active resistance from within the government and the corporations being privatized. An effective measure to curb this may be to remove the resisting management which, in case of India, definitely is a politically complicated proposition.


4. Company preparedness


There are various measures that are part of the preparation of a company for privatization, including activities of a procedural nature and activities of a political or consensus-building nature.

Un-reserving the shares – The legislative structures prevailing at the time of privatization generally reserve shares for government ownership. However, for privatization, these shares need to be un-reserved using the legislative mandate.

Establishing ownerships in subsidiaries – The companies for privatization will need to establish clear ownership in subsidiaries and the assets and liabilities pertaining to such ownerships. CIL has now eight subsidiary companies. The Central Mine Planning and Design Institute Limited (CMPDIL), a subsidiary of CIL is engaged in mine planning and designing in the coal sector and is also rendering mining and engineering consultancy services. Seven other subsidiaries of CIL are coal producing companies directly engaged in raising and distribution of coal. These are Eastern Coalfields Limited (ECL), Bharat Coking Coal Limited (BCCL), Central Coalfields Limited (CCL), Northern Coalfields Limited (NCL), Western Coalfields Limited (WCL), South Eastern Coalfields Limited (SECL), and Mahanadi Coalfields Limited (MCL). CIL also owns and manages the North Eastern coalfields at Assam, which contributes approximately 0.5% to CIL's consolidated turnover. If the privatization has to happen in the form of sale of stakes in CIL, resulting into ownership of all the subsidiaries, the structure may continue. However, in case of divestiture in subsidiaries, the ownership of assets by each of the subsidiaries will need to be clearly identified. There should not be ambiguities that may result in litigations which may delay the process or defeat the purpose of privatization.

Organizational restructuring – There may be pre-privatization restructuring of the companies to allow for effective control of the private owners on them. This may also include consolidation and hiving off all the social assets which may remain with the government and the companies may take the shape of profit-oriented entities. Such restructuring may delay the process. If there exists lack of financial resources to carry the pre-privatization restructuring or if the government believes that private parties may know best how to restructure, the companies may be privatized without such restructuring measures. This may provide for quick privatization. However, leaving strings attached may cause more problems than what they solve and there may be risk of the company being ill-suited to function in the new environment.

Financial restructuring – The government coal companies may be financially restructured to clean up the balance sheets. The debts and other liabilities which may have been on the books due to governmental compulsions may be written off. Not writing off such debts may result in bankruptcy risks post privatization and may render privatization process less attractive to investors. In India, many of the mining companies have debt to a lower extent due to cultural reasons, which may reduce the vulnerability of coal mining companies. Therefore, in Indian coal mining privatization such financial restructuring may not be required.

Contingent liabilities audit – The Indian coal mining industry may have been shielded from some liabilities but for the government ownership. The government agencies have been regulators and enforcement agencies as well as monopoly player in the industry and hence, may have had lower operational risks. However, private investors may be exposed to such risks upon transfer of ownership. For providing comforts to prospective investors, an audit of contingencies should be taken up before privatization. This must include environmental and safety audits aimed at verifying the levels of compliance of the government companies with relevant rules and regulations. The assets under privatization may be provided with compliance certificates from the State Pollution Control Boards, Ministry of Environment and Forest and Directorate General of Mines Safety that may ascertain comfortable degrees of compliance records.

Fair market valuations – Before the government companies are privatized, their fair market values must be assessed. This may set the floor price for privatization. In India, the valuation practices for minerals are not standardized and hence, the government may have to exercise prudence in such assessments. The under-pricing may deprive the government of much deserved resources while overpricing may keep the investors off. Income approach using discounted cash flows, market approach using multiples and asset approach using value of proven reserves and other assets are generally used techniques to arrive at fair values. Use of real option methods is also gaining grounds. These approaches need to be backed with financial and technical due diligence to provide desired levels of confidence for the private investors.

State government agreements – The minerals are properties of the states and the government coal companies have leases granted by the state governments. A change in ownership may have legal implications on the continuity of leasehold agreements. A prudent approach, therefore, will include having blanket agreements with concerned state governments to ally legal risks pertaining to leasehold transfers.

Trade unions agreements – There may be resistance to restructuring and privatization from the trade unions. Privatization plans may not explicitly be agreed with the coal trade unions, but the trade unions should be accorded an important role as a partner in the development and implementation of the Government’s coal sector restructuring program, and they may maintain their own dialogue with the private owners of the industry. Factors that may contribute to the lack of controversy in this regard are the assurance from the government and prospective owners for the absence of any major post-privatization reductions in workforce, the private owners’ excellent track record in the timely payment of wages and the reportedly higher wages at private companies, and the new owners’ willingness to consider the collective agreement between the union and a group representing sector employers. Partnership with trade unions and giving their concerns due recognition and consideration during the process of restructuring and privatization alone can make these processes see the daylight, particularly so, in the context of Coal India Limited that happens to be one of the largest employers with well organized trade unions.

The preparations may culminate into privatization plan with publishing all relevant information in the Privatization Information Bulletin of information about the coal companies or assets to be privatized.


5. Determination and implementation of method of sale


There are methods of privatization for government ownership in Indian coal mining that include the following methods. Certain combinations of these methods may also be applied.

Joint ventures are one of the options for privatization. These may combine components of other methods, typically institutional private placements, partial tender and management contracts. A joint venture partner may be expected to bring significant expertise in production, marketing, management and the capacity to expand the business.

Private placement, typically with institutional investors, by negotiation and buyouts by management and/or employees may also be thought of. Buyouts, for companies like CIL and SCCL, may not be a successful proposition because of the sheer size of these companies.

In public tender prospective purchasers in response to a tender provide the best written price and investment proposal, which also include discussions of the investments in the privatized company’s assets to be financed through the increase of its authorized capital. Public tenders are generally followed by negotiations to improve the offered conditions.

While each method may have pros and cons, in practice, two or more methods may be used to sell the government shares. The advantage of a mixed approach is that it gives the Government greater tactical flexibility to achieve whatever particular strategic goal it has set for itself in deciding to divest its interest in a given company. There exist however risks that the Government fails to sell all of its shares in a company, or will fail to maximize revenue from the sale, or will generally suffer from the loss of timeliness in completing the privatization process.


6. Conclusion


Partial dilution of government stakes in Coal India Limited and Neyveli Lignite Corporation was put on hold in light of the stiff resistance to the proposal by the trade unions and their political outfits. However, the reformation is the need of hour since there is expected to be severe shortfall in coal supplies for the power-hungry nation. Such reforms will allow private investments and hence, development of new mining projects which otherwise may be held or delayed due to resource constraints. If the country has to grow at eight plus percentage growth year on year, the efficiency in energy sector has to be ensured. Privatization may be the first step in the direction.


7. References


A) Stefan Bogdan Salej, Privatization methods and their impact on competition: the Brazilian experience, Helsinki, August 1998
B) Erik J Woodhouse, A political economy of international infrastructure contracting: lessons from IPP experience, Working paper, September, 2005
C) World Bank Group, Private Sector Development Strategy implementation progress report, June 20, 2003
D) Igor Artemiev and Michael Haney, The Privatization of the Russian Coal Industry, April 2002
E) John Bennett, Saul Estrin, James Maw and Giovanni Urga, Privatization Methods and Economic Growth in Transition Economies, 2003
F) Jan Bruha, Delia Ionascu and Byeongju Jeong, Organized Labor and Restructuring: Coal Mines in the Czech Republic and Romania, May 2005
G) Dick Welch and Olivier Fremond, The Case-by-Case Approach to Privatization – Techniques and Examples, World Bank Technical Paper number 403, March 1998

(This paper was presented in Golden Jubilee Seminar of Mining Engineers' Association of India)