Supreme court ushered in coal sector reforms and e-auctions brought in transparency, but is it viable for the power sector companies jostling for mining blocks?
Jasleen Kaur | April 8, 2015 | New Delhi
The clearance of the coal mines bill by both houses of parliament has certainly given a boost to coal sector reforms. Coal mining is now open to private companies engaged in power, iron and steel, and cement sectors. They can now mine coal for their own use and to sell it in the open market.
While the Narendra Modi-led NDA government ushered in reforms to the sector that had largely remained untouched for many years, it is mainly credited to the supreme court (SC), which pushed for reforms through its judgment on cancellation of coal blocks.
In September 2014, the apex court decided to cancel 204 coal blocks when the it found the allotment done by the screening committee of the central government “arbitrary and illegal”.
Under the Coal Mines (Nationalisation) Act, 1973, coal fields were allocated by a screening committee to companies selected on the basis
of different parameters. Companies from only three sectors – power, iron and steel and cement – were allowed to carry out captive coal mining. The cancellation of coal blocks ordered by the SC led to uncertainty in the coal sector.
The Coal Mines (Special Provisions) Bill, 2015, cleared by the Rajya Sabha on March 20, replaces the ordinance issued by the NDA government – first on October 21, 2014, and then repromulgated on December 26, 2014 – following the SC order of September 24, 2014.
The ordinance, for the first time in more than 40 years, allowed private companies to mine and sell coal from blocks allocated to them through an e-auction process. Till now, private companies could mine coal but use it only as fuel for their own purpose. The government will directly allocate mines to state-owned companies.
E-auctions have brought transparency to the allocation process thereby reducing corruption. It will also empower states, which will get all the revenue and land rights.
The CAG had estimated losses of '1.86 lakh crore due to the allocation of coal blocks under the previous law. So far, states have earned over '2 lakh crore from the ongoing auction of coal blocks. Meanwhile, the government has doubled its target of producing coal to 1.5 billion tonnes by 2020. Coal secretary Anil Swarup told Governance Now this cannot be achieved alone by Coal India Ltd (CIL), the world’s largest miner, and the new law will help increase the coal production of the country by roping in the private sector players.
Power sector and coal
Already bearing the brunt of the coal scam and the burden of regaining the trust of India Inc, the coal ministry may have been successful in the gigantic task of opening up the coal sector and re-allocating mines in a fair and transparent way, but there remain lots of nuts and bolts that need to be tightened, say industry experts.
Vinay Kumar Mittal, a former joint secretary (power), says the coal sector has been highly unregulated for all these years and with the new law in place, competition will increase which will result in high production of coal. But, he adds, there is no clarity on at what rate these companies would sell coal to power generating companies. “Auction was essential, as it is the most transparent method to allocate mines and it has also reduced corruption. But the skyrocketing prices [in bidding] is a matter of concern. For generating electricity 70 percent of the cost is the cost of fuel [which is coal for thermal power stations]. Revenue generation for the government is clear. But at what price coal will be sold in the open market is not clear.” He added, “We are getting fair price for our natural resources. But our dream to have cheaper electricity is still distant.”
The allocation of mines to private companies may benefit the government, but many believe it will not be good for the power sector in the long run. Having paid to the government a high price, power sector players will find it difficult to raise further capital to mine the allocated coal and to reduce the fuel cost. Bidding has been most aggressive by companies belonging to this sector.
RS Sharma, chairman at Energyconnect Efficiency Solution Private Limited and a former chairman at NTPC, said that it may serve the government well, but it will not serve the public good. Exemplifying the case of 3G service auction, he said the sector may not have the capacity to invest further to provide services to people.
“The government definitely scores high in the methodology it has used to bring transparency and for generating a lot of revenue for itself, but what is the objective. This way they will kill the industry.”
Sharma says the government had the disadvantage of time for allocating mines, but it should have devised a method to avoid negative pricing.
“How will these companies survive the additional cost, which is not payable by the distribution company? And if coal can be mined at such low price why couldn’t CIL do this?” Also, he said, out of the many suggestions sent to the government during consultations, hardly any has been used by the government. “Which player will survive in the long run? Does that not raise questions on how this price is made up?
There is hardly any difference between the two governments as the process is not going to bring any relief to the power sector.”
Most of the winning bids so far have been higher than market analysts’ expectations based on the benchmark price of state-run CIL. While the government is being appreciated for initiating the process with utmost transparency in the shortest possible time, whether it is conducive to promoting sustainable mining depends only on the premise that the bidders be fully aware of the implications of their actions.
Citing examples from the past, experts say the possibility of winners throwing up their hands after finding it impossible to deliver power at the offered price, cannot be ruled out. The government, despite its best intentions, may eventually witness coal mining not picking up to the desired level due to lack of financial sustainability.
Swarup agreed that the companies would not be able to sail through the process. “As far as my understanding is concerned, they cannot. But they were told in the beginning [that they cannot pass the burden on the (power) tariffs]. Otherwise, what is the meaning of reverse auction? Reverse auction was the purpose of transferring this benefit to the tariffs. And we have discussed it with them at regular intervals.”
A senior official from a private power company, which has bid in the current coal auction, on the condition of anonymity, said having paid to the government at the high auction price, companies which do not have power purchase agreements (PPA) with state governments or others may find it hard to adjust the value. “Though the government is trying hard to cap the tariff and ensure the burden is not passed on to customers, companies may find some loopholes. And the companies which have PPAs in hand will pass the burden on to customers in the form of fixed tariffs. Fuel cost is zero now and the whole burden of fuel is on them. In the next three months it will be clear how things unfold.”
He also said there was a possibility that the successful bidders may call it off in case of few successful bids. “But if companies decide not to go further after accepting the coal block, they will have to pay a huge price, as was made clear by the coal ministry and mentioned in the auction document.”
He added while the first phase of auction had mines which were already operational and the companies do not have to invest in building infrastructure. In the second phase, mines were ready to be operational and some of these mines had the infrastructure.
“The bidding was very aggressive mainly for the power sector which eagerly needs support of coal to survive. But even if these companies go for imported coal, it would not have been viable. Secondly, after the mining cost and the heavy amount paid to the government, the value of coal will be close to what is provided by CIL. Thus, the companies may not have good profit immediately but it will prove to be beneficial in the long run.”
The social aspect
Revenue maximisation by way of auction should not be the whole purpose behind allocating natural resources, said a senior official from a private power company.
The auction process is open and transparent enough and the government has earned huge money out of it, but it should have kept few blocks for the purpose of research and development like the previous government did by allocating two blocks in Odisha. “Apart from commercial gain, the government is responsible for thinking in that direction as well,” he added.
The government should also think about people living nearby mines and if at all companies, which have given huge money in auction, will invest wisely in CSR activities around the region, as was done earlier.
“The government should give importance to people in the form of investment and development. If that is done, e-auctions should be considered successful. Else, the government is just selling coal and is indulging in clear business. If the poor people around the mines do not benefit from this, it will not lead to any reform.”
He said in the next phase of the auction, which is expected to start from the first week of May, aggressive bidding is not anticipated as in most of those blocks, infrastructure has not been developed.
The Black Hole
March 2012: The CAG accuses the government of inefficient allocation of coal blocks during 2004-2009
June 2012: Inter-ministerial panel formed to review the process of coal block allocation
August 2012: In its final report submitted in parliament, the CAG points out losses worth '1.86 lakh crore in coal block allocation
September 2012: PIL filed in SC seeking cancellation of 194 coal blocks
August 2014: The apex court cancels the allocation of 204 coal blocks made from 1993 to 2011, calling it illegal and arbitrary
October 21, 2014: NDA government brings an ordinance amending the Coal Mines (Nationalisation) Act, 1973. It allows commercial mining by private companies and mandates e-auctioning of mines
December 26, 2014: The re-promulgated ordinance is signed by president
March 2015: Parliament passes the coal mines (special provisions) bill, 2014
The coal mines (special provisions) bill, 2014
(The article appears in the April1-15, 2015, issue)
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