Public Private Partnership in Coal Mining in India - My Forum Contribution in Powerline magazine

What should be the structure of the proposed PPP framework with Coal India Limited to enhance domestic coal production? What checks and balances should be imposed to ensure a fair and transparent framework?

The public private partnership (PPP) in coal mining sector in India given the statutory and regulatory environment may well be a misnomer. The PPP structures with CIL as the key partner with ownership of coal mining assets and also owner of coal produced from these mines would leave PPP restricted to contract mining, which by definition would not be PPP. That said, however, contract mining would in itself be useful for enhancing capacities. It has been observed that in the past CIL and its subsidiaries have resorted to various kinds of contracts – from overburden removal to coal extraction – to enhance coal production, productivity and efficiency. So, the new PPP regime is likely to increase the scale and is unlikely to make any significant departures in terms of roles and responsibilities that haven’t been done yet.

The most likely structure that CIL would adopt would be outright contracts with the contract mining company having no ownerships in the project, no stake in the deposits and no rights over coal produced. This is similar to small scale coal production done in countries like Malaysia and Philippines, and contracts awarded by CIL itself as well as several electricity utilities that have been awarded captive coal blocks. The key factor here is the market depth. In the past there have been some participation of global contract miners but mostly the participation has been restricted to local players, typically in view of scope of work that have included activities such as land acquisition, rehabilitation and resettlement of project affected people, and mine development, operations and maintenance. Some of these are not typically included in the scope of work for contractors in global context and hence, obviously have led to global contract miners considering these projects too risky. The proposed PPP framework needs to take into account the shallow market depth and the risk perceptions of global contract miners to be able to enhance participation and hence to truly competitive.

The qualification parameters have played crucial role in success of contract mining tenders. With limited number of players with any significant coal mining experience, the qualification parameters have tended to be more inclined to keep stiff financial criteria and loose technical criteria. This also underscores the belief that a financially strong player can pull off a mining project. This is however not true. Coal mining projects are capital intensive and are challenging to manage in scope, time schedule, quality, risks and costs, and therefore have proven to be difficult even for deep pocketed participants in the contract mining tenders, causing substantial delays. The proposed PPP structure may need to correct this anomaly and focus significantly on qualification of players with proven capabilities in managing mining projects. It may be a good idea to keep the fields open for relatively smaller contractor miners for whom the time is ripe to scale up. From Indian experience in other infrastructure sectors including roads and power projects, the relatively smaller players of today may be well placed to grow and add value through their better comprehension of Indian mining risks and rewards pay-offs.

The other prudent measure required in the PPP framework is that of risk sharing between mine owners and the contract miners. The risks are asymmetric in several cases of contract mining and hence, many haven’t progressed as expected. Unreasonable risk aversion on part of the mine-owners may lead to the project becoming unviable sometimes right from start and sometimes in future, even though these may be well participated tenders. There are geo-technical risks that are not within reasonable control of the contract miners and the same should be recognized so and appropriately addressed in the contracts. The same may be true for several issues pertaining to land acquisitions and rehabilitation and resettlement. In several cases, these issues have been overlooked and risks have been totally pushed on to contract miners leading to untenable positions. Land acquisition in India has become unpredictable and there are cases of failures from public, private and PPP domains. The framework for PPP in coal mining needs to address the risks just as they are.

A transparent and fair process of evaluation is a must. The PPP proponents need to prepare well and make the projects marketable. At the same time, they need to establish an economic range for the project to operate. This will help the mine-owner assess if the bids are too expensive or too aggressive, neither of which are sustainable propositions. In place of a deep focus on lowest tender, the mine-owner needs to establish a set of evaluation parameters that gives due weightage to economic costs of operating a project along with the capabilities of the bidders. This would go well for a long term contract and the mine-owners wouldn’t have to face requests for “compensatory fees” nor would have to renegotiate fees due to “supernormal” profits being made by contract miners at the expenses of mine-owners.