Govt must ensure coal denationalisation works to make it a game changer

The government’s decision to open up the coal sector to commercial mining by private entities is a long-awaited reform measure that is set to usher in competition in coal supply, reduce coal imports and help stressed power plants to attempt a turnaround through better fuel management. It also ends Coal India’s (CIL’s) monopoly after 45 years. The state-owned company and its affiliates account for almost 80 per cent of all the coal mined in the country and the balance is reserved for other entities, but only for captive use. However, there are many question marks over CIL’s efficiency in coal extraction and its ability to meet targets. Among other reasons, outdated technology and logistical bottlenecks played spoilsport. Considerable inventories of coal could not be dispatched each year because the facilities to do so were limited. The lack of domestic capacity to extract an adequate amount of coal also meant that India resorted to substantial imports.

Approval for the private sector to enter coal mining is likely to allow the best and most efficient private players to bring in their technical expertise to increase productivity and efficiency in the sector. The process will also likely result in a significant increase in the overall supply of coal, thus reducing costs for domestic power consumers.

However, for the denationalisation of coal to work for all stakeholders, the government needs to address many associated issues. The first is to ensure that it offers coal blocks that are big enough to attract the biggest global players. For instance, blocks of production size of less than 20-25 million tonnes per annum are unlikely to gain much traction. Second, the government must ensure a clear road map for the future. Without that, auctions can easily be treated as a means to grab assets without an understanding of their best use. An equally important fallout of this is the way bidding happens. Often, given the uncertainty about future coal blocks, companies tend to overbid, which later makes the project unviable.

An associated point is that the government should not look at the auctions from the prism of maximising revenue alone. If, for instance, the bidding is for power generation, it could look at the goal of lower tariffs and sustainable production rather than simply filling government coffers. Another important aspect is that new players must have pricing freedom. If private companies are expected to sell at a premium to the price notified by CIL, then it will be a clear disincentive. It is true that such pricing freedom could hurt the government’s revenues from CIL if private players are more efficient at coal extraction and sell significantly below CIL prices, but this should be used as the trigger to force CIL to shape up. The need of the hour is to set up an enabling framework that includes the appointment of a regulator with statutory backing. While it is true that things can go awry even in a proper regulatory regime, someone has to play the referee in case of any wrongdoing or dispute. This apart, regulations must be conducive for competitive and sustainable price discovery.