Novel Challenges for Contract Coal Mining in India - Published by the Financial Express

Contract coal mining appears a promising business model given captive consumption mode being the preferred route for private sector participation in coal sector. A large number of the coal block allocatees have no expertise in mining, and they may need to develop the mines through contracting out on engineering, procurement, construction, operation and maintenance (EPCOM) basis. For such contracts, generally, selections of contractors thus far have been done through competitive bidding, which have had their own pros and cons.

There are significant differences in contract mining business models in India and those practiced in the other mineral rich countries. For example, the Australian contract mining industry appears to be matured with the well defined risk sharing mechanisms, whereas in India, a lot of ground still remains to be covered in terms of roles and responsibilities, and consequent risk sharing mechanisms, of mine owners and contractors. In many cases, particularly those with government owned companies as mine owners; risks are intended to be heavily loaded on contractors. Even legal, statutory and political risks are sometimes bourn by contractors, which may result in high cost of mining and limited competition for such projects.

The critical issues for survival of contract mining business, apart from contractual risks and available risk mitigation options, in India are - uncertain legal and regulatory framework and resource crunch. It has been widely debated whether, under the provisions of Coal Mines Regulations and Contract Labour Act, coal contractors can discharge their roles as agents and managers of mines. Similarly, their capacity to excavate and win coal is debated, with some views in favour of restricting contractors’ role only to overburden removal.

Resource crunch is also likely to have an impact on contract mining. With financial downturn, funding projects may be all the more difficult with high contractual risks of land acquisition and development included in the contractor’s scope of work. The shaken and stirred banking system may not have appetite for high risk lending to contract miners. Those who manage to get loans may have higher costs of debt financing. Higher cost of equity may also raise concerns about the financial viability of contract mining proposition in comparison to own-mining – the components of depreciation tax shields, returns on investment required and service taxes weigh down contract mining unless there are significant efficiency improvements that may offset these costs by sufficient margins.

Rise of contract mining has lead to concerns about safety and environmental issues. Aggressively bid contracts may sometimes have risks of compromising priorities and may have challenges of compliance. The mine owners may stand to lose on reputation, if they are too keen on lowest bids. Similarly, handling of rehabilitation and resettlement issues by contract miners may sometimes prove inadequate and result in project delays, cost over-runs and public outcry. In matured markets, mine owners tend to keep land acquisition, rehabilitation and resettlement works. In India, however, due to financial and organization capacity constraints, mine owners may like the contract miners to shoulder the responsibility.

A relationship based contract mining may be a successful model, which may contributes to high performance and commercial success of the project. This may also have solutions for ambiguous contractual obligations and amicable dispute resolution. However, relationships will hinge on cultural compatibility and mutual concern for commercial interests. In India, contractual relationships between government-owned and private companies have had shades of gray and the same is likely to continue in mining sector as well. But whether or not the contract miners take them in their stride and grab the opportunities has to be seen in times to come.