Economic reforms that transformed CIL
Coal India Ltd is known today as a hugely profitable, debt-free, dividend-paying listed PSU. But those associated with the company for four decades or more have seen CIL born sick in 1975 and continue to remain so till 1991. It was the economic reforms and the unleashing of a changed thought process that pushed the company into financial self-reliance. As we observe the 25th anniversary of economic reforms, it is worth sharing the impact it had on the fortunes of one of the largest Maharatna PSU of the country.
Nationalisation of Coal in the ‘70s and formation of Coal India Ltd with five subsidiaries in Nov 1975 happened under trying circumstances. An oil price shock in the ‘70s leading to evaluation of energy options for the country by a high powered Committee with Dr Sukhomoy Chakrabarti, eminent economist and Member Planning Commission in the Chair identified Coal as the mainstay in the energy scenario.
The growth in coal sector in the ‘60s was less than 2 percent Compound Annual Growth Rate (CAGR), clearly inadequate to fuel the then aspired GDP growth rate of 5 percent. The low growth was primarily due to inadequate private investments caused by unattractive returns arising from unremunerative administered price of coal. To set the coal price at a remunerative level was equivalent to a political harakiri since coal was widely used as domestic fuel in kitchens. The only option was to inject massive public funds. This made nationalisation imperative.
Coal workers were a deprived lot with wages well below the organised industrial workers. The first task upon nationalisation was to set that right. Consequently, a wage accord conferring 80 percent hike was implemented, adding substantially to costs and losses.
Infusion of public funds through budgetary support by way of plan loan and equity met capex needs in full. Non-plan loan was allowed additionally to cover cash loss for the group as whole till 1982-83 after which the group in totality ceased to incur cash loss.
Coal price revisions happened with a lag of six months to a year after successive wage accords. This gap added to the losses. While setting prices, return on capital was not considered on most occasions. In a few cases, even depreciation was left out on the grounds that the plan budgetary support covered replacement capex as well. There was virtually no way left for the company to operate profitably.
As if these were not enough, financial viability was systematically ignored while approving Coal projects. These were taken up mainly to meet the target of production growth and the criteria were mostly overall economic viability covering the interests of the consumer and transporter (railways) besides the coal producer, rather than the stand-alone financial viability of the coal project. As a consequence, a good number of coal projects planned for losses were under implementation.
The journey of Coal India Ltd from 1975 to 1991 continued under these conditions. Commendably, the company reversed the growth rate from less than 2 percent to the mandated growth of over 5 percent CAGR but predictably incurred an aggregate loss of Rs.2499 crores as on March 31, 1991 - eroding 40 percent of paid-up equity. Besides, the overdue liabilities to the government on the loan component of the budgetary support aggregated to a staggering Rs. 2229 crores!
Notwithstanding the huge losses and overdue debt service liabilities, there was hardly any financial strain. The capex was met by the government, cash losses in some companies were cross-subsidised by diverting cash from other cash surplus companies under a Retention price scheme introduced since 1982-83 once CIL as a group ceased to incur cash loss. With debt service payments to the government being regulated in a “payable when able” manner, life was cosy and normal not impacted much by the precarious financial results.
Fortunately, for the company and the nation, the cosy cycle fell through in 1991 when the country witnessed one of the worst financial downturns. The budgetary support for capex got slashed to a meagre 30 percent. Coal price revision that was promised to be done annually was kept in abeyance since 1989. Losses of the company reached a peak in 1990-91. Overnight, it became a challenge to finance a large number of ongoing projects. Everything seemed to be in a mess.
A few months after the new government took over in July 1991, the issue of enabling CIL to become financially self-reliant was taken up in a meeting of the Union Cabinet in Dec 1991. A few far-reaching decisions in sync with the reform process were taken. The coal prices were revised after a gap of three years. The authority for future revisions was delegated by the Cabinet Committee to the Ministry of Coal with the proviso of being carried out at intervals not less than one year based on a formula prescribed by BICP. However, CIL was clearly directed to cease its dependence on budgetary support within the 8th Plan period (1992-97). In an arm’s length approach, timely debt service payments were enforced.
The phasing out of budgetary support coupled with strict debt service payments led to an almost sudden reversal of cash flows to CIL from the government from a net inflow of Rs.500 to 600 crores to a net outflow of Rs.400 to 500 crores annually.
Coal India responded to the changed circumstances proactively with grit, determination, and prudence of a very high order. It briskly decided to shun coal projects that failed to yield IRR of 16 percent at 85 percent capacity utilisation. It enforced strict debt service payments on due dates. The master stroke in internal reforms came in 1995 when it implemented the policy of Corporatising financial flows between itself and subsidiaries. The policy disallowed CIL to access the profits of the better performing subsidiaries, other than by way of a transparently laid out dividend mechanism. Similarly, it didn’t allow funding operating losses of the loss-making companies. The retention price scheme was disbanded.
With investments focused on high return projects, gradual reduction in debt, fast track attrition of around 10 percent of the workforce through VRS and a pragmatic pricing framework, CIL soon established an uptrend in profits since 1991-92. After three years of default free debt servicing (1992-95), CIL took up the case of restructuring previous overdue debt liability of Rs.2229 crores. The Cabinet approved the restructuring in Feb 1996. It comprised of interest waiver of Rs.892 crores, conversion of plan loan arrears of Rs.904 crores to 8 years, Preference Equity and a 3-year moratorium on interest accrual and repayment of non-plan loan arrears of Rs.433 crores, repayable thereafter in three annual instalments with interest.
The resultant cleaning up of Balance Sheet enabled CIL to secure for the first time an investment grade rating for its bonds. More importantly, it enabled securing a 1 billion $ sectoral loan from World Bank/JBIC combine to implement 24 high return opencast projects in the profit making subsidiaries, of which 50 percent was drawn in view of the subdued demand for domestic coal during the 9th plan. The demand was restored during the 10th plan when the created capacity was available for utilisation. CIL emerged during 10th plan as a strong profitable dividend paying company.
The journey consolidated further during 11th plan with CIL being conferred Miniratna status in 2007, Navratna in 2008, and pursuant to the hugely successful largest ever IPO of 2010, the ultimate Maharatna Status in 2011.
It may be worthwhile to note that the runaway success of the CIL IPO in 2010 is partly attributable to sharing of this transformation journey with global investors that actually fascinated them and left an impression of a consistently credible management at the helm at all times.
(The views expressed are strictly personal.)