Millennium Post

The Coal Fallacy

A problem well understood is half solved goes a popular saying. It applies in a great measure if India has to find a solution to the worsening coal shortage problem. The adverse fallout of the situation on idle power capacity with stress on the banking system in particular and economic growth in general is well known. This article attempts to analyse the factors responsible for the country to find itself in the present situation and to derive solutions consistent with the analysis.

The Fuel Policy Committee set up by the government in early 70s recommended a dominant role for coal in the energy scenario. Low investments caused by inadequate returns due to non remunerative prices restricted the growth of coal sector in 60s to less than two per cent p.a. With coal being used in households as domestic fuel, increasing coal prices to remunerative levels was politically infeasible Massive investment of public funds disregarding financial viability was possibly the only way to get the sector grow commensurate to the desired GDP growth (five per cent in those days). This was the main trigger for nationalisation. 

Coal India was formed in 1975. From 1975 to 1991, with capital investments funded by Plan outlay, Coal India achieved its mandate of growing at over five per cent p.a, in complete reversal of the n sub two per cent growth prior to nationalisation. Besides, it spread its operations to a number of virgin areas, which became the focus of growth in later years. The Singrauli belt under Northern Coalfields, Korba under South Eastern Coalfields and Talcher/IB valley under Mahanadi coal fields are cases in point.  However disregarding financial viability as criteria for investment decision took its toll. By 
March 1991, the company was saddled with cumulative loss of Rs 2,500 crores, equivalent to over 40 per cent of its paid up equity and overdue debt service 
liability of Rs 2,230 crores to government. In July 1991, the new government as part of economic reforms introduced the concept of arms length distance with PSUs thus phasing away their dependence on budgetary support. 

With a set of reforms package introduced with vigor, CIL turned around and phased away budgetary support completely by 1997. Financial viability became a core criterion for investments. CIL developed mining practices akin to commercial mining globally. Instead of spreading mining to isolated virgin blocks it concentrated on expansion of existing mines thus stretching the infrastructure to its maximum. As a corollary large number of virgin coal deposits were identified that were not planned for mining by CIL in the short or medium term. Accelerated addition to capacity for power generation was sought as one of the outcome of the initial reform agenda of 90s. Would Coal India be capable of meeting the resultant demand? A committee under KSR Chari concluded clearly in the negative. Bringing new players to operate the virgin blocks was the obvious solution for accelerating growth in coal production. Opening up the coal sector to commercial mining by private sector was perceived to have huge pitfalls. 

Trade unions apprehended that CIL was still in the process of trying to become financially self reliant and may hence lose out to competition. The ills of coal mining by private sector prior to nationalisation involving faulty labour and mining practices were still haunting. The only alternative  available to the government was to introduce mining by end users of coal for captive consumption as opposed to commercial mining. Enabling statutory changes to the Coal Mines Nationalisation Act was carried out in 1993, paving the way for allotment of blocks to end users. The experiment did not succeed. After 20 years we find only 15 per cent of the allotted blocks being mined. As estimated at the beginning of 11th plan, the share of this segment in domestic coal production was expected to be 18 per cent by 2011-2012 and over 30 per cent by 2016-2017. By this time it should have been around 22 per cent. In reality it is only around seven per cent with not much confidence of picking up going forward. 
End users mining coal is not the practice in most countries. Commercial mining by accomplished mining companies account for most of coal produced in USA, Australia, South Africa, China and even Indonesia. In other words India was politically compelled India to adopt a suboptimal practice which did not have precedence of success elsewhere.
Incidentally, the power sector reforms did not yield accelerated capacity addition in 8th, 9th and 10th plan. The average annual addition during this period hovered in the range of 3.5 to 4 GW requiring incrementally 17 to 20 million tones of coal per annum which CIL was largely able to provide. This created a sense of complacency in the coal sector that formally found its place in the 2007 New Coal Distribution Policy (NCDP) document of Ministry of Coal making Coal India responsible to meet coal demand in the country. By then more than 200 coal blocks were taken away from CIL for allotment to captive end users. Clearly this policy document did not envisage the power sector getting its act together in the 11th plan leading to capacity addition of 55 GW i.e 11GW p.a. on the average.

In brief, the current scenario of huge coal shortage, projected to worsen even further, is primarily due to a largely unsuccessful mode of adding new players in coal mining in 1993 followed by introduction of NCDP in 2007 that failed to foresee the subsequent rapid addition to power capacity and thus forced unreasonable expectations on Coal India.

The ailment was compounded by a perception among the environment and forest authorities that coal mining degrades large tracts of land, displaces tribal population, is bio diversity negative etc. In particular the blanket ban on all industrial expansion including coal mining in critically polluted areas disregarding the fact that the CEPI score in coal mining areas are invariably much lower than the critical limit dealt a huge blow on growth in coal production. While the track record of CIL in managing environmental, forest, tribal and social issues is generally good scope exists for doing better by adopting global best practices. Restoration of land post mining is a case in point. While CIL creates a biologically well reclaimed hill on the overburden dump in opencast mines, the global best practice is to restore the land to its original shape permitting wider choice of land use post mining. 

This is notwithstanding the pioneering work done by CIL in introducing satellite surveillance of restoration and reclamation in opencast mines in 2008 that led to over 50 mines qualifying for ISO 14001 and the GIS application winning a global award at Netherlands in 2012 – an application that global mining companies may consider emulating. Having tracked the genesis of the problem and the way it has evolved the solution clearly does not lie in restructuring CIL or auctioning further blocks to end users once again. On the contrary, it lies in bringing formidable mining companies with global best practices in the coal mining space w/o any further delay. Nothing short of opening up the coal sector for commercial exploration and mining can make this happen. 

Since the residual blocks are mostly under explored or unexplored, these should initially be offered for exploration within a limited time frame through invitation of Expression of Interest (EOI) only to global mining companies with credible track record in exploration and mining. A list of such companies in order of ranking based on the response to EOI should be maintained with the Ministry of Coal. In cases where coal reserves are established through exploration within the prescribed time limit the Exploration Licence (EL) may be converted to regular Mining License (ML) on payment of an amount based on the estimated reserves and a $/tonne rate. The actual payment could be partially upfront and rest on a recurring basis linked to projected coal production. While these rates should be decided keeping in view the market rates for acquiring explored coal blocks elsewhere in the World, a substantial discount must be allowed to the EL holder to cover the costs incurred in exploring the block with adequate risk adjusted returns. In case the original EL holder fails to prove the reserves within justifiable time frame the next agency in line may be allowed to step in. The allotment of old blocks not being developed for unsatisfactory reasons should be cancelled and offered for exploration/mining commercially by global mining companies through a transparent process. 

Adopting this mode would require enabling changes in the Coal Mines Nationalisation Act which, in fact is pending in the Parliament since 2000. The apprehension to open up the sector as perceived then is largely unfounded today. Coal India has transformed to emerge as the largest coal miner in the World producing coal at a low cost that enables it to earn a margin of 25 per cent even after selling coal at a deep discount to international prices. It needs to be appreciated that the issue price for the IPO of CIL in 2010 was benchmarked to the globally best rated coal mining companies and even at that price the response of the global investors was historic. In other words it is squarely capable of facing competition from global mining companies. Restricting coal mining to the global best would remove all apprehensions of revisiting the ills of pre nationalisation era. India will witness the global best practices in coal mining in terms of technology 
infusion for underground mines, coal beneficiation and quality improvement with sharper focus on environmental and social sustainability. All this is expected to also compel Coal India improve internally improve and perform better. Restructuring forced by market dynamics is expected to yield more desirable outcome than administratively carried out restructuring.

With these measures, the current scenario of alarmingly growing coal shortage shall transform to a scenario of abundance sooner than later. The consequential benefits in terms of revitalising large number of stressed assets in the power sector, relieving worries of the banks for growing NPA and restoring the momentum of economic growth in the medium term of five to seven years is mind boggling. Besides, this will enable the power sector to generate power at a fraction of cost of gas based power and enhance gas availability for creating fertiliser and food security in the country.

The author is former chairman, Coal India Ltd.
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