Coal India to benefit from mining reforms

The government has finally paved the way for ending the state monopoly, by allowing commercial mining in the private sector.

The backdrop for the Coal Mines (Nationalisation) Act (CMNA) of 1973, leading to the formation of Coal India (CIL) in 1975, was sluggish annual growth of two per cent, lack of private investments and mismanagement by private parties.

The Act worked but only to an extent. CIL, in a monopolistic position since, has raised annual production to 462 million tonnes (mt) from 79 mt earlier.

The increase is way behind demand requirements and India had to import 171 mt in 2013-14, a rise of 18 per cent over the previous year.

The Planning Commission believes coal imports could go up to 185 mt at the end of the 12th Plan (2012-2017), based on total demand of 980 mt and domestic supply of 795 mt.

The supply mismatch is in spite of India having coal reserves of at least 250 billion tonnes, one of the largest in the world.

Naturally, the chorus for private coal mining gained momentum in the past couple of years, with the 12th Plan document noting, “It is simply not logical to keep private investment out of coal, when it is allowed in petroleum and natural gas.” P C Parakh, the Union government’s former coal secretary, writes in his recent book, Crusader or conspirator—Coalgate and other truths: “Had we opened coal to the private sector for commercial mining, along with the power sector, in the early 1990s, we would by now have at least half a dozen large coal mining companies in the private sector.”

The Narendra Modi government has taken the first step towards opening the sector to private players with its recent ordinance on e-auction of blocks.

The ordinance has inserted a section in the CMNA, according to which government and private companies “may carry on coal mining operations in India, in any form either for own consumption, sale or for any other purpose, in accordance with the prospecting licence or mining lease, as the case may be”, paving the way for an end to CIL’s monopoly.

Will CIL have reason to worry? Finance Minister Arun Jaitley has said the larger interest of the public sector would be fully protected.

And, experts say competition will be beneficial for the company.

The decision could also mean the entry of global mining majors such as BHP Billiton and Rio Tinto, which have so far steered clear of India even though foreign direct investment up to 100 per cent was allowed in captive mining. \Opening the sector will mean that end-use (as in captive mining) will not be specified and global players could grab the opportunity to sell in a country with a huge supply shortfall.

Also, entry to India means access to the world’s fifth largest reserves. “It will increase production and bring in new technologies, which will immensely help the sector.

CIL, too, will benefit,” says former CIL chairman and managing director Partha S Bhattacharyya.

However, these global majors would wait for a word on pricing from the government, which is silent on that aspect.

Many say coal prices could go up sharply, a potentially tricky decision for the government. China opened its mining sector in 1978 and there has been a 40-plus per cent rise in thermal coal prices in the past couple of years.

Bhattacharyya makes light of these concerns. “Yes, prices might go to international standards. But we are becoming self-sufficient in coal, so what is the problem?

The choice is ours, whether we can afford to import coal,” he says. Currently, CIL's notified price is 30-40 per cent lower than international prices. As reserves are given almost free of cost, CIL has the lowest production cost in the world, from as low as Rs 400 to around Rs 1,600 a tonne in open cast mining and Rs 1,500-4,500 a tonne for underground mining.

When, the blocks are e-auctioned, a private party will obviously try to recover the auction price, which will increase their cost of production and, in turn, pass it on to the customer.

For CIL, too, if prices are kept at international levels, it would financially benefit the company. To ensure checks and balances, a regulatory body might be set up, which could be given pricing power if commercial mining is allowed by private entities.

The coal ministry had introduced the Coal Regulatory Authority Bill, 2013 in the Lok Sabha; it is yet to get Parliament’s nod.

The Bill did not give pricing power to the body, on the reasoning that CIL was the lone entity in the sector. As and when the sector is opened, the logic would not hold ground.

The regulator can put in place clauses that help in developing the sector.

The exercise should attract mining majors which can bring in new technologies, rather than becoming an experimental ground for cash-rich companies with no expertise.

Not everybody is optimistic about the prospect of a drastic change after the sector’s opening.

They say the private sector’s record before 1973 was poor, with hardly any company having invested in modern mining technologies.

The Centre had allocated 218 coal blocks for captive mining since 1993, with reserves of at least 48 billion tonnes, mostly to the private sector.

Only 42 were operational and total production from captive mining reached only 50 mt in 2013-14, the Supreme Court found before cancelling all the allocations.

Environmental clearances were a big problem for CIL and the private sector.