One step back for coal mine reform: MDO contracts with state PSUs are back

Four years after the Supreme Court declared them illegal, the MDO model has become the private mining industries' route to cornering a larger piece of the coal mining business again

Cancelling the allocation of 204 coal blocks in August 2014, the Supreme Court said several of these had opened an illegal and arbitrary backdoor for the private sector to enter the mining business. The apex court found state government-owned companies formed joint-venture companies with the private sector to get coal blocks. These then handed over control to private players by signing mining development and operation (MDO) contracts. It held this practice of the state PSUs to be illegal (central PSUs were excluded from this ban).    

Unlike a plain vanilla subcontractor, a coal MDO is required to not just mine, but run the whole show -- from securing clearances, acquiring land, rehabilitation of displaced people, financing, development, mining and the operation and maintenance of the coal mine to its subsequent closure. The private company concerned promises delivery of coal to the public sector unit (PSU) at agreed terms and prices.   

Yet, this MDO model has become the private mining industries' route to cornering a larger piece of the coal mining business again. So far, out of the 204 coal blocks, 31 have been auctioned (of which five have been cancelled). Nearly double that number, 58, have been allotted to state and central government PSUs at a much lower reserve price. Of the allotted blocks, 15 have already tied up for MDOs and many others are in the process of doing so. Eleven of them involve state government PSUs.  
 

This time, however, the National Democratic Alliance government has provided MDO contracts legislative and regulatory backing, and provided a protective veil of secrecy over the contracts.

The Union government has said that, at its discretion, the details of the MDO contracts can be withheld from disclosure even under the Right to Information (RTI) Act. State government PSUs that have signed up MDOs have subsequently refused to disclose the terms of such contracts under the RTI.   

The MDO business, now with clear legal support, is attracting many private players (see table) while direct commercial mining remains a plan on paper. Of these, the Adani group has bagged the most -- four mines comprising six blocks. It has also bagged the MDO for a seventh block, Kente Extension, from the Rajasthan government, which did not form part of the 204 cancelled by the Supreme Court. The company held mining interests in three of these five before the Supreme Court's ruling, either as MDO or as joint-venture companies with the state PSUs.  

Industry players see potential for rapid growth, particularly if the government allocates more coal blocks to state PSUs with no mining expertise instead of auctioning them directly to miners. Thus, in financial year 2017-18, Adani Enterprises earned a revenue of Rs 8.63 billion from the state and central government coal MDO contracts with its earnings before interest, tax, depreciation and amortisation (EBITDA -- a measure of a company's operating performance) pegged at Rs 4.66 billion, says an investor presentation by the company. This was from MDO contracts for total mineable reserves of 2.1 billion tonnes. 

The company hopes to tap more into a potential MDO business worth 52 billion tonnes of coal from the NDA government allocating and auctioning more blocks that the Supreme Court cancelled in 2014. Several other players in the market are also looking to increase their share.  

How did state PSUs' MDO business become legal? In 2015, the NDA first brought an ordinance and then passed the Coal Mines (Special Provisions) Act through Parliament, allowing both -- auctions fetching a higher amount of potential revenue and direct allocations to not just central PSUs but also state PSUs. The new laws and regulations also permitted state government PSUs to bid out their coal blocks to MDOs. 

Initially, the rules required that allocations follow strict criteria. But, the Union government diluted these regulations in 2015. It gave itself the discretion to allocate coal blocks only to central PSUs without following the parameters "in public interest" that was to be put down in writing.

In response to an RTI, the Union government has admitted that it has not followed its own regulations of keeping track of these MDO contracts to ensure they follow the laws. The coal ministry does not have a copy of a single one of the 15 MDO contracts, it admitted.

The possible advantage of the MDO model for a PSU lies in getting the private company to run the coal block and provide a supply of coal at a steady and cheaper supply to other alternatives. But as Priyanshu Gupta, researching the coal sector after the Supreme Court 2014 order at IIM Calcutta, points out, "Unless the terms of the MDO contracts are known, one cannot say who has really gained from this dispensation. Are we back to the pre-2014 situation? The only way to assess is to know the details of the contracts. But the Union government is not maintaining these records and the states are not sharing them." 

In August 2018, Congress Member of Parliament Digvijay Singh submitted a Parliamentary question asking the government to clarify whether MDO agreements can be accessed through RTI applications or to disclose the "details of the key commercial terms of all such agreements".

Minister for Coal Piyush Goyal replied, "It has been mandated by the government that the selection of mine developer and operator (MDO) be done through a transparent and competitive bidding process. The provisions of Right to Information Act, 2005, and disclosure requirements specified in Model Contract Agreement are applicable on such agreements."

But, the Model Contract document that Goyal referred to puts the actual MDO agreements with PSUs outside the pale of the RTI Act at the Union government's discretion! The model MDO document sent to states to follow says that the agreement would be a "protected document", which the state or central governments could decide not to disclose even under the Right to Information Act, 2005. Thus, Rajasthan stripped the commercial terms from the MDO agreement with the Adani group to disclose it under RTI, though the contract in question dated back to 2008, before the Supreme Court had cancelled the block. 

The RTI Act does not provide for any particular "protected documents" being kept out of its purview at the government's discretion. It does provide that authorities can deny information that breaches commercial confidence, trade secrets or intellectual property, the disclosure of which would harm the competitive position of a third party, unless the government is satisfied that public interest warrants the disclosure of such information. At the same time, government guidelines on RTI require proactive disclosure of details of "public-private partnerships" -- but no state government has done so with its MDO agreements.