Coal Mining Quagmire in India - My article in the Mining India magazine

Coal mining in deep rut is pulling power sector down

Coal mining has been the fulcrum for power sector in India. One of the most conspicuous trends in energy sector has been the capacity addition in power generation, in which for the first time the expected addition from private sector alone would cross 10,000 MW in FY 2012. This also when simultaneously the average plant load factor for coal based power plants has taken a dip to about 64% and is also expected to fall further. The major reason for lower than expected capacity utilization has been fuel issues. Coal production from domestic sources saw stagnation while generation saw capacity addition; imports grew but prices and foreign exchange dynamics kept affordability distant. Sector also saw little on reforms and distribution companies’ financial losses and apprehensions about their viability kept finances for them as well as for generation projects getting tough to secure.  

The three biggest challenges for power sector in India are – fuel availability & pricing; cost of supply and tariff gap; and open access implementation. These put together have also led to issues in financial closure. Coal from domestic sources look getting scarce as CIL is unable to produce at the expected growth rate while the political controversies will cause few coal blocks to be invested in and developed. These notwithstanding, new coal mining projects have had severe challenges of land acquisition, rehabilitation & resettlement, environmental and forest clearances and such others. Imports have been rising and prices of coal although on a downslide for now do not make imports an affordable option. The story on the fuel side looks gloomy. On the cost of supply and tariff gap, efforts need to be made in the right earnest to have cost reflective tariffs. Several aggressively bid case 1 bids have now been referred to courts on fuel cost issues. It is obvious that unsustainable tariffs would not see several projects take off. Interestingly, there are however pockets of demand that can afford to pay higher tariffs but are not connected with supply sources due to financially broke distribution companies and their claims to open access charges. These have muffled the growth opportunities for the power sector.  

The one most critical part of the value chain that determines affordability of power, which conforms to the adage that mitigation against default risks is low tariff, is availability of low cost domestic coal. The government can open up the coal mining sector for independent mining companies, including foreign majors, with expertize, experience and technology to help India exploit its large untapped resources. Greater the supplies from domestic sources and lower the dependence on one monopolistic producer, the prices of coal would be determined by economic equilibrium and can remain lower. However, till such time that market stabilizes, regulatory supervision of such mining ventures and price fixation of coal produced can be done. That can certainly be the biggest boost the power sector can get from the government.

Not that this has not been comprehended fully, and as a result the Coal Mines Nationalization (Amendment) Bill 2000 was presented in the Indian parliament. However, pending it still is in the upper house for the lack of political accountability and willingness to move towards reforms.

Coal block allocation has been in the news

Much has been investigated and written about the levels of scam in coal mining sector, including the astronomical numbers of notional losses to the government for not following the auction route for coal block allocation. Resource ownership is a key competitive advantage for businesses now since raw materials occupy significant proportion of costs in the energy and metals manufacturing value chain. Given this, the rush to capture resource assets is an obvious conclusion. The trend, however, is more prominent in India and China while globally, there are firms still focused largely on their core competencies. Looking at the regulatory and statutory frameworks in India and economics of energy generation and manufacturing, the trend in India is unlikely to change in future as well. The much sought after coal resources were allocated through a screening committee mechanism that evaluated applications on parameters like - status (stage) level of progress and state of preparedness of the projects; net worth of the applicant company (or in the case of a new SP/JV, the net worth of their principals); production capacity as proposed in the application; maximum recoverable reserve as proposed in the application; date of commissioning of captive mine as proposed in the application; date of completion of detailed exploration (in respect of unexplored blocks only) as proposed in the application; technical experience (in terms of existing capacities in coal/lignite mining and specified end use); recommendation of the administrative ministry concerned; recommendation of the State Government concerned (i.e. where the captive block is located); and track record and financial strength of the company. This method of evaluation can be as good as the implementation. And when the number of application reached 750 for 16 blocks for power generation in 2006 round, the method was stretched beyond its normal application. Hence, the questions are raised and lack of objectivity and transparency has led to allegations of corruption.

Notwithstanding the legal repercussions, It is critical for the captive blocks to be developed efficiently so that resources are made available for power generation. Regulatory reviews of cost of mining can be a way to ensure consumers are protected and the developer is adequately compensated. The current proposal by the Ministries of Power and Coal to allow continuation of captive coal block allocation only when the attached power project sells power through competitive bidding may have its own limitation. Forcing the developers to bid for tariff based competitive bids may not always achieve these objectives of consumer protection as well as incentivization of project development as the competition is typically market determined and discovered tariffs may still have super profits or unviability, both unwarranted. However, liberalizing the sector such that there is regulated competition in coal mining would do good to the sector.

Coal linkages have been challenged too

Coal sector in India suffers structural deficiencies due to statutory restrictions, resulting in rationing for coal produced as well as for coal resources. These deficiencies have aggravated in the times of severe shortage. Large number of applications received for relatively smaller number of coal blocks and Standing Linkage Committee issuing letters of assurance for quantities that far exceed the coal likely to be produced by CIL are manifestations of this. In such circumstances, process quality and efficiency of its implementation open themselves for scrutiny, and quite rightly so.

Processes based on merit are as good as the implementation. With growing number of applicants for linkages, the process has been evolving too to take care of emerging challenges, However, in any merit evaluation, subjectivity cannot be eliminated altogether, which is where the issues of equity and transparency arise. Linkages have two-fold story - one of getting the letters of assurance (LOA) from the standing linkage committee (SLC) that equals an in-principle approval, followed by the other of getting the LOA converted to Fuel Supply Agreement (FSA) with the CIL subsidiaries. Both follow a set of instructions that prescribe for the degree of progress on the end use plant with certain identifiable milestones. While for issue of LOA, the evaluation on the parameters rate the applications on points, which have evolved in the last couple of years, meeting all the milestones on schedule is essential for LOA to convert to FSA.

Evaluation of applications for LOA depends upon scrutiny similar to that for coal block allocation, where agencies at the centre and at the states are involved and their recommendations are considered for the purpose.

Mine Developer cum Operator (MDO) selection are next in the queue

Equally important observations are with respect to mine development through contract mining. Turnkey project commissioning through Mine developer cum operator (MDO) route can be an effective way for participation of private and foreign contract miners. Standardizing documents for MDO selection may serve the purpose of enhancing efficiency and transparency, as has been the result in tariff based competitive bidding in power sector. However, questions would remain pertaining to scope of work for MDO wherein there could be variations in land acquisition, rehabilitation & resettlement, clearances & approvals, capital expenses for immovable assets, and such others.

State government and some private captive coal block owners have preferred the MDO route for fine development and there are various business models, from outsourcing to joint ventures, in view of suitability from investment objectives and risk sharing principles. Coal mining being a unique proposition at each location the practice has been to devise appropriate contractual relationships. However, in matured mining industries of Australia and elsewhere, the contract miners' roles and responsibilities have evolved and hence, standardized contracts are being used. 

In India, due to captive coal block allocation, the end users such as the power generation companies or steel manufacturers have been awarded coal blocks and many do not have any experience in coal mine development. State owned power utilities have lacked financial resources as well for the development, where problem has been compounded for them when the coal blocks they have been given are outside of their own states.

MDO selections in several such cases have also not been transparent. These are the challenges faced in a competitive scenario but where the competition is lop-sided, the market participants in the contract mining tenders themselves have not much experience or expertize and hence, the processes of selection have tended to be liberal on technical qualification criteria. Often, the financial criteria have been formulated with no specific needs or objectives in mind. As a result, the awards have been questioned and are likely to be questioned in times to come. 

Conclusion

The more labyrinthine the legislations, regulations and rules become, the greater are the chances of hoarding, profiteering, corruption, unlawful activities and such other manifestations of rut. Simplicity and ease of compliance reflects in the functions of an industry. From the legislative and regulatory points of views, it will be better for India to adopt openness in coal mining business and let there be competition in production and supplies. There needs to be a wide range of market participation – from independent miners to contractors, from producers to traders, from logistics service providers to financiers, from risk managers to speculators – all with regulatory supervision so the excesses of open markets are not allowed to distort the market the other way. Vested interests cannot be checked by creating layers after layers of regulations, under multiple agencies at central and state levels.  Repeal of the outlived-its-shelf-life Coal mines Nationalization Act can be a good beginning.