India Eyes New Laws To Usher In Coal Sector Reforms - Quoted in the Dow Jones Newswire

NEW DELHI (Dow Jones)--Taking a cue from its oil industry, India plans tostart auctioning coal mines to speed up exploitation of its vast coal resources- the fourth largest in the world. India desperately needs to raise domestic output as coal demand is expectedto grow fourfold to more than 2 billion metric tons a year within 20 years, andthe country is already suffering from shortages.

The government plans to tweak older laws, introduce new ones and to create anindustry regulator to gradually reform the coal business, in new steps towardscreating a more open and liberal energy sector. Commercial mining and selling of coal in India now is limited to a couple ofstate-run coal companies, even though India sits on 10% of the world's coalreserves - the biggest after the U.S., Russia and China.

By contrast, India has a huge deficit in oil, importing more than threequarters of its needs, but it attracts billions of dollars of private money toexplore and produce hydrocarbons through yearly auctions of oil and gasexploration blocks.

Coal India Ltd., or CIL, the government-owned mining monopoly, produces 80%of the country's coal but it can't keep up with demand because of a lack ofinvestment and technology.

Previous Failures

Previous governments had also tried to attract private investment in coal byallocating coal blocks for captive use by the power, steel and cementindustries. But most of these reserves haven't been developed "because of a lack ofcommitment and concerted effort to bring them into production," said N.C. Jha,technical director at CIL. Some blocks allocated more than a decade ago remain undeveloped as thecompanies involved don't face any financial risk if they don't start work onthem. To rectify that, the government last week introduced a parliamentary bill toamend an older law, which will allow competitive bidding in the allocation ofcoal blocks for captive mining. "It will streamline the process of allocating the mines and could potentiallyattract big investments, like the oil sector," said Kuljit Singh, partner,Ernst & Young India.

Once the competitive auction is in place, bidders will have to make firmcommitments to develop the mines and risk losing money if they don't deliver,said Dipesh Dipu, principal mining consultant at PricewaterhouseCoopers India. "It will increase the incentive and motivation for end users to makecommitments and improve project implementation," he said. Auctions will improve transparency and hasten project implementation,although they could also result in higher mining costs, he said. "But looking at the bigger picture and the urgency to develop coal assets toproduce coal to meet the growing demand, the pros certainly overweigh the consby quite a margin," Dipu said.

Other recent moves by India to shake up the sector include CIL in June offering several huge coal blocks to domestic and foreign companies wanting toset up coal-to-liquid plants.

Coal Regulator

After introducing the auctions, the government plans to set up a coalregulator to monitor the process and to make sure that successful bidders keeptheir commitments. Apart from the production side of the industry, the regulator is alsoexpected to usher in reforms in the coal marketing and trading sectors thatwill encourage higher output. "We need the regulator to be an impartial referee because the number ofproducers and consumers is growing," Coal Secretary H.C. Gupta told Dow JonesNewswires.

Coal is sold in India at roughly a third of international prices on an energycontent basis, but even so producers and consumers constantly tussle overprice. Once the regulatory body is established - for which the government needs tointroduce a new law - it would be responsible for fixing coal prices in India,currently decided by CIL, Gupta said. It would also determine the prices at which captive mine owners can sell coalto CIL while waiting for their user plant to come online. CIL has been able to keep coal prices low because it gets most of its coalfrom open-cast mines that are easier to excavate. With most of its future output growth likely to come from more expensivenunderground mines, the cost of production - and hence the coal price - islikely to increase significantly, said Jha. Because of current local prices, CIL loses INR30 billion ($600 million) every year producing coal from its underground mines, he said.

"The market economy may be the ultimate objective of the regulatory mechanismand the coal regulator may facilitate the transition from the current state ofnear monopoly," said PricewaterhouseCoopers' Dipu. The new laws should help India raise its output faster by making the industrymore transparent and increasing the participation of private players, saidDipu. "These are some transitory steps towards liberalization. But the governmentwill have to take a revolutionary step to make the kind of changes that arerequired. That would be clearing the bill pending since 2000."

India tried fully opening up its coal sector to private players in 2000,three decades after it nationalized its coal mines. The proposal met with heavy opposition and some 600,000 mine workers went onstrike. A privatization bill has now been languishing in the Parliament for eight years.

With the kind of demand-supply gap India is facing, it's a case of "if thisdoesn't work, try something else," said Bishal Thapa, a managing director atconsultancy firm ICF International.

-By Gurdeep Singh, Dow Jones Newswires; 91-11-4356 3308;gurdeep.singh@dowjones.com