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Will privatisation help fire up the coal industry?

In the absence of transport network and faster envt clearances, benefits will be limited

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Shine JacobProbal Basak Kolkata

After nearly 40 years of state ownership, the chorus of support for privatisation of coal mines is growing louder. With the economy ravenously short of coal to fire its power plants, and the state-owned Coal India Limited (CIL), which has a near monopoly in the sector, failing to meet the ever increasing demand from industry, the cause of privatisation is gathering strength.

Planning Commission Deputy Chairperson Montek Singh Ahluwalia recently said the coal sector in private hands will be much more productive and help tame the huge demand-supply gap. To be sure, the coal sector has not been performing well under the government. Total demand for coal grew around 6.6 per cent in the 11th Plan period (2007-12) against domestic production growth of only 4.61 per cent. That’s a huge shortfall.

 

But it wasn’t the lack of foresight in the government that is hobbling the sector. It was keeping with the objective of growth in mind that the coal sector was nationalised in 1975. Mismanagement of mines by private companies, lack of investment and a slower-than-expected two per cent annual growth forced the government to come up with the Coal Mines (Nationalisation) Act, 1973, which led to the formation of Coal India in 1975.

Coal India accounts for more than 80 per cent of domestic production and controls nearly 18 billion tonnes of reserves. In recent years, it has also expanded its footprint overseas through its joint venture, International Coal Ventures, in partnership with NTPC, NMDC and SAIL. But while on paper, Coal India's growth looks impressive — from mere 79 million tonnes in 1975 to 458 million tonnes today — it has failed miserably to keep pace with demand.

In last financial year, the country has supplied only 534.5 million tonnes, while the demand zoomed to 696 million tonnes. The shortfall was 161.5 million tonnes, compared to 132.8 million tonnes in 2010-11. Coal India’s production has also fallen flat at 435.8 million tonnes against 431.32 million tonnes in 2010-11, while contribution of the other public sector undertaking, The Singareni Collieries Company, was a mere 52.2 million tonnes.

Has Coal India failed to live up to the growing needs of the country and will denationalisation help?

“The deficit for the power sector alone, as of today, is 80 million tonnes. Hence, it is vital to open up the industry to private players. While 360 million tonnes is reserved for fuel supply agreements signed before 2009, the projects that came after that are running at about 50 per cent availability, while the normative coal availability is 85 per cent. Even if the introduction of private sector increases prices, we want coal readily available to back these huge investments, where Coal India is a failure,” says Ashok Kumar Khurana, director general, Association of Power Producers . Out of the total installed capacity of 1,20,103 mega watts (Mw) in India, more than 55 per cent come from coal-based plants.

The power ministry is looking to add 76,000 Mw during the 12th Plan period (2012-17), taking the total capacity to 269,000 Mw. Going by the recent production figures, it seems well-nigh impossible to meet the target. “Forget other sectors, it seems impossible for CIL to meet the power sector target. To produce 22,000 Mw, you need at least 100 MT of coal,” adds Khurana. While the initial target during the 11th Plan period was 78,500 MW, the country was able to meet only 34,000 Mw, mostly due to fuel crisis.

Beneficial step
For Coal India, denationalisation may not be a bad thing. Analysts believe private control of the coal sector won’t hit its profitability. “Since the prices are de-regulated, time to time increase, like they did in February 2011, will take care of operational cost,” says Rupesh Sankhe, research analyst at Karvy Computershare, a financial consultancy.

Denationalisation has also found favour with former Coal India boss Partha S Bhattacharyya. “I am completely in favour of what Ahluwalia said,” says he, adding that the ills of pre-nationalisation — exploitation of workers — is a thing of the past. “New players will add competition, increase production and bring new technologies too,” he says, while condemning the idea of restructuring the company.

Bhattacharyya, however, points out, getting everyone around the idea of denationalisation may not be easy. A coal regulatory body will need to be set up before any denationalisation can take place to sort out issues related to pricing, among other things. The draft coal regulator Bill has been discussed several times by the empowered group of ministers (GoM), but is yet to be cleared by the Cabinet.

The pricing power for the regulator was a major issue of contention in the draft. In the initial draft, the coal ministry wanted the regulator to determine the price of raw and washed coal as well as any other by-product generated during the process of coal washing.

Several GoM members had earlier questioned the need of giving pricing powers to the coal regulator since there is no commercial mining in India by companies other than Coal India. Going by the present system, Coal India decides price without any formal directive from the coal ministry, although the government, being the majority shareholder, has a say. Incidentally, the pricing power will be important when the coal sector is opened up.

Misguided policy
However, Coal India’s woes in part may have been the outcome of a lack of clarity on its future plans. Its chairman and managing director, S Narsing Rao, says, “Till 2000, coal companies were thinking whether there is a need for expansion, as there were no takers for coal until the economy started expanding.”

“Environment clearances take way too much,” he adds. Coal India claims that the environmental constraints for capacity worth about 180 million tonnes should be addressed, in order to meet the 615 million tonnes production target during the 12th Five-Year Plan. As of now, at least 66 projects are waiting environment clearance, while another 182 projects are waiting for forestry clearance at the state level. Among these forestry clearances, 132 projects are in Stage II and have been awaiting clearances for more than seven years. In addition, environmental clearances itself take an average three years. Currently, there are 435 Coal India mines that are operational.

On the estimated reserves of 293 billion tonnes that the country is sitting on, Rao says, “More than 48 billion metric tonnes of captive reserves were allotted to private parties, in order to boost production, but they also faced the same problems and projects are struggling to take off. So the case will not be different for private parties.”

There are others who are wary of privatisation. N C Jha, a former chairman of a coal company, says: “The captive allocation itself landed in a mess. Centre should remove these environment hurdles, if the country is craving for coal. You should give Coal India a chance, even after that if it is failing then only one should go for denationalisation.”

Experts say even if mines are allotted across the country, lack of road and transport links will continue to hobble supplies. Faced with such network issues, Coal India is set to fund construction of a large rail network connecting the country’s coalfields. For this, it would float a special-purpose vehicle that would lay a 180-km line for evacuating coal currently blocked in Chhattisgarh.

Another concern is prices. While Coal India is selling coal at 40 per cent less than international prices, the entry of private players may push the prices up. As reserves are given almost free cost, Coal India has the lowest production cost in the world ranging from as low as Rs 400 to around Rs 1,600 a tonne in open cast mining and between Rs 1,500 and Rs 4,500 a tonne for underground mining.

Privatising the coal sector, therefore, is going to be a tall task. Besides will on the part of the government and other stakeholders, it would also require an amendment to the existing law. To wriggle out of that, the government is looking at an alternative plan to restructure Coal India and spin off its subsidiaries into separate entities. Both Bhattacharyya and Jha believe that the idea will not be viable for the coal behemoth. “Rather than looking to recast the company, why aren't they looking at privatising those blocks that Coal India has not taken up, or those which captive users failed to take off?” a top CIL official says.

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First Published: Jan 15 2013 | 12:39 AM IST

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