Roadmap for Restructuring Coal Sector

The merging of ministries for power, coal and new & renewable energy is a good beginning but still falls short of an all-encompassing Ministry of Energy that could include oil and natural gas as well. This is necessary in view of the need to look at the comprehensive energy policy, energy security challenges and planning to meet the needs of our growing economy. While that may be essential and critical, but need to restructure coal industry is both and also urgent so that power sector may meet the expectation of electricity generation and supplies.

The immediate priority for the Government of India should be to ensure that coal supplies are enhanced from domestic production and that the investment environment in power sector improves. The roadmap for opening of coal sector for greater private and foreign participation needs to be drawn, which may include de-nationalization and also creating independent subsidiaries out of Coal India Limited monolith.

The coal blocks allocated to government-owned companies and private sector companies from the approved end-users of power generation, cement and steel sectors haven’t met the expectations of production, which is around 37 million tonnes per annum. More than a quarter of the allocated coal blocks have been de-allocated and several more have been served notices for explanations for delays in project development. The controversies in these allocations notwithstanding, the performance of these coal blocks in itself indicates the failure of captive mining policy. End user companies with no experience and no expertise are not the best candidates for allocation in any case since most of them in turn resort to hiring contract miners for development and operations of these mines.

Given this, the best way forward will be to remove the entry barriers to coal mining and auction the coal blocks through transparent and objective process to independent miners or end users if they desire. Increasing the number of suppliers in the market will not only improve supplies but also make pricing transparent and market driven. It is time that the pending Coal Mines Nationalization Amendment Bill of 2000 enacted.

The other mechanism for enhancing competition in coal sector that has been mooted is to split Coal India Limited into independent companies. The newspapers report that CIL unions may not resist such a move. However, looking at the fact that the subsidiaries are still monopolies in their geographies and these subsidiaries were created based on coalfields, and also that these may still be controlled by the Ministry, the mechanism of competition may not help. It is also noteworthy that marketing function of Coal India Limited and its subsidiaries are restricted and coal linkages are provided by Standing Linkage Committee, which is a multi-ministerial and multi-stakeholder body constitute by the Ministry of Coal. Under these circumstances, competitive forces in the proposed liberated subsidiaries will still be dormant and negligible. To make splitting of CIL effective, it needs to be supplemented with large scale stake sale of each of these subsidiaries; mostly to the public should outright privatization be politically unpalatable. Government may still be in control but large floating public shareholding will enhance accountability of the Boards of Directors and help competition. 

Through the transition of coal sector from the current state to market oriented with private and foreign participation state, the Coal Regulator may play a crucial role. The framework for the regulator is already in place but needs to be strengthened in scope.

Short term challenges of the domestic supply of coal will persist since the projects that CIL has planned may need quicker permissions and development of infrastructure for coal evacuation.  But with strategic roadmap laid for the turnaround of the sector will pave the way for reducing import dependence and create a vibrant domestic market.  

dipesh@jenissi.org

Will PPP in coal mining provide value for money?

Government of India has proposed public private partnerships (PPP) for coal mining in India and expects the business model to enhance production capacity, which has been a concern as the supplies have fallen short of demand consistently and have led to import dependence. But does PPP in coal mining have the potential to provide value for money for the Government.

It has been proposed that Coal India Limited (CIL) will be the nodal and executing agency for coal mining PPPs. Development of coal mining projects of CIL through PPP aims to add about 60-70 million tonnes per annum capacity in the next five years. CIL has been using contract miners for overburden removal and in some cases for coal winning for some time and have been successful in harnessing private efficiencies. These contracts have however tended to be short term contracts with lives up to 5 years. The concept of Mine Developer and Operator (MDO) has been evolving and the public electricity utilities have tied up with MDOs for turnkey development of coal mining projects but the efficacy of the model is yet to be established. MDO contracts that have been awarded have been varying in terms of scope of work for the contract miners, the most successful ones have been those in which the ground has been prepared with all clearances and approvals taken and land acquired and possessed for the contract miner to begin excavation and production.

There is potential value for money in the PPP in coal mining due to the fact that private sector tends to utilize capital assets including mining machinery, beneficiation plants and handling facilities better and extracts better efficiencies. Human resources productivity in private mining may also be higher even though there have been reports of labour exploitation in contract mining with long hours of work with lower salaries and little other benefits. There may also be some value in better procurement processes and lower overheads in cases of private contract miners.

The potential for value for money in PPP can be unlocked only by ensuring the risk perception of the project and its associated risk premium does not exceed the efficiency, utilization and productivity gains of private partner. That precisely has been the cause of concern for several contract mining tenders floated by the State government owned utilities. When the scope of work for contract miner tends to include any or all of the exploration works, mine planning, obtaining clearances and approvals, land acquisition, rehabilitation and resettlement, the risk premium of the project tends to exceed the probable gains from private efficiencies.

The proposed PPP with CIL as the counterparty willing to invest in mining equipment, infrastructure and associated capital outlay may still have low value for money since the scope of private partner includes risk enhancing components.

The reason for such a structure of PPP is the perception that private partner may find getting clearances and approvals and acquiring land easier that the public or government-owned partner. The recent experiences in coal and other sectors do not conclusively support such an opinion. The reason for such risk perception of these activities emanate from the need to pay more than legally due to various stakeholders involved; these payments considered difficult for public partner but easier for private partner; inevitable in any case. This is fundamentally wrong assessment. Several of Indian and globally renowned contract miners in view of their reputation and compliance requirements will never consider these extra-legal payments and hence, they may not able to start the project on expected timeline if they at all bid and win such a contract. Given such complexities in project development, PPP in coal mining may not hold much value for money and may not be successful as much as expected.

PPP in coal mining is the only way to enhance production given the current statutory framework that prohibits private participation except for captive mining by approved end users. If that were to continue, the externalities in clearances and approvals, land acquisition, R&R need to be simplified, made objective and predictable. The recent land acquisition legislation has attempted at land acquisition process fair and equitable and thus predictable but its efficacy is not proven as yet.

PPP in coal mining is sure in for rough weather.       

dipesh@jenissi.org