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Myopia on Coal

The brouhaha over Coalgate has pushed the genuine long-term issues in coal to the background. India's coal reserves are smaller than estimated and the flurry of coal-based power plants that have been approved in recent years has seen a frenetic rush to tie up coal resources, which at this rate would last no more than 20 years. Auction of mines is by itself no solution to the problems created by private allotment; auctions need to be carefully crafted and there should be production-sharing contracts monitored by a statutory regulator. Last but not the least, there is the issue of pollution and environment degradation caused by the mining and burning of coal. India needs a strategy based on demand management of energy, including introducing efficiency improvements in both the coal and the electricity sectors. It also needs to make a decisive shift in favour of renewable sources of energy. The country needs to move away from coal as quickly as possible.

E A S Sarma is a former Secretary, Ministry of Power, Government of India.

The ongoing probe into “Coalgate” has generated more heat than light on the future of the coal sector in India.

It has pitted one political party against the other in a mutual blame game. Honesty in decision-making has come face to face with an outright, dishonest cult of crony capitalism. There are some who will not accept anything less than an across-the-board cancellation of all the irregularly allotted coal blocks, while there are others who want the business-as-usual approach to continue, allotting blocks in a non-transparent manner under the guise of quickly meeting a demand, that has been artificially hiked. In the process, genuine, long-term concerns of coal mining and their associated impacts have got relegated to the background and a myopic vision has come to the forefront, obfuscating the real issues of the coal sector.

When Mohan Kumaramangalam nationalised private coal mines in the early 1970s, his intentions were laudable: to put an end to unscientific “slaughter” mining practices, ensure the safety and welfare of the miners, channel large-scale public investment into coal mining and facilitate integrated planning of coal development on optimal lines.

Coal Mining in Public Sector

Coal India Ltd (CIL), created in 1975 as a 100% government-owned company, pursued these objectives fairly effectively, though it remained a typical public sector undertaking (PSU) monopoly with all the associated privileges and the usual inefficiencies that arise in a system of ambivalent shareholder accountability. Despite this, with a dedicated workforce of 0.4 million and equipped with strong mining capabilities, CIL established 21.7 billion metric tonnes (BMT) of reserves (as per the Indian Standard Procedure (ISP) classification that estimates geological reserves), producing 430 million metric tonnes (mt) of coal annually.1 It soon became a Maharatna company with greater autonomy. The government disinvested 10% of its equity, subjecting CIL to greater public shareholder scrutiny. The present trend is that more and more of government equity in CIL will progressively shift into the hands of retail investors, financial institutions and private agencies, though in all probability, the government will continue to be the majority shareholder for decades to come. If CIL has become answerable to the public on one side under the recently enacted Right to Information Act, it has become equally accountable to its minority shareholders under the Companies Act with reference to its assets, its costs, pricing policies and profitability.

CIL’s Future Role

There is an understandable lack of clarity about CIL’s future role.

As a PSU par excellence, it will continue to be under an obligation to fulfil the development goals set for it by the government from time to time. Under Article 12 of the Constitution, it is deemed to be an instrument of the government. As in the case of any PSU, the government can issue “policy” directives to it. In practice, however, when crony capitalism has become the order of the day, the distinction between a “policy” direction and interference in the company’s day-to-day commercial operations has got blurred, as happened recently when a presidential directive was issued to CIL2 on how it should formulate its Fuel Supply Agreements (FSAs) with influential private power producers. The directive would impinge on the finances of the company in more ways than one. The minority shareholders had rightly questioned this, placing CIL in a genuine dilemma. CIL’s future role will critically depend on the manner in which the government is going to resolve this dilemma.

If the government insists on its business-as-usual relationship with CIL and expects the company to obey its diktats, it should perhaps give up its disinvestment mode, restore 100% ownership control, rationalise CIL’s pricing policy and supplement its resources with budgetary support. Or, if the government wants CIL to attract private equity and grow as a disinvested company, it should change its mindset, stop issuing presidential directives and permit 100% commercial autonomy to the company. These two approaches are mutually exclusive. The government can no longer afford to sit on the fence and hope that this dilemma will get spontaneously resolved. The sooner a decision is taken on this matter, the better it would be for the future of the coal sector in India, as CIL is going to be an important player in developing the indigenous coal resources for a long time to come.

Coal Block Auctions

It took hardly 10 years for those who succeeded Mohan Kumaramangalam to dent his coal nationalisation legislation by permitting privatisation to the extent of captive coal mining. The fig leaf for this was that only “isolated blocks” in the proximity of the end-users would be offered for captive mining, a condition that provided enough space for crony capitalism to take over. Section 11(2) of the Mines and Minerals (Development and Regulation) Act 1957 envisaged a first-come-first-served approach to selection of candidates for mining licences. One would have expected the much talked about economic reforms of 1991 to change this to a more transparent procedure but it was not to be the case as it suited the private corporates to retain such a provision.

In the operation of crony capitalism, one is reminded of an old Arabian proverb, “If the camel gets its nose in the tent, the body will soon follow.” A typical characteristic of crony capitalism is that a hype is created on two fronts, first, creating an artificial hike in demand for scarce resources and, second, creating the illusion of their abundance so that a business-politician-bureaucrat coterie could be formed to hand over control over resources to favoured private players.

Questioning the case filed recently against a private coal company, Union Minister for Commerce and Industry Anand Sharma said, “The country which has coal in abundance ends up importing coal worth $18 billion at a time when confronted with very serious challenges of current account deficit and trade account deficits.”3 With specific reference to the word “abundance”, we will shortly see how disconnected he is with the ground reality!

Strategy for Auctions

No doubt, the first-come-first-served approach should be discarded at the earliest and an auction system put in place. However, the latter cannot be a panacea for all the ills in the coal sector. Even the auctioning system could yield pervert outcomes if the bidding criteria are vague and evaluation of the bids is subjective. If the ministers and other public functionaries collude with the private players, even an auctioning system will give room for enormous corruption.

An auction system can be complex. The Ministry of Coal (MoC) is apparently not ready with a clear strategy on auctions.

The Coalgate experience has shown that inadequate exploration data, the entry of fly-by-night players as franchisees, inordinate delays in developing the blocks, unauthorised transfer of blocks to third parties, the absence of a sound monitoring system, and so on have facilitated fraud and inhibited coal development. The format that MoC is going to adopt for auctioning coal blocks should necessarily address these concerns.

Should unexplored or under-explored blocks be put to auction? As prescribed in the Mines and Minerals Act, it is desirable that isolated blocks alone in the proximity of the end-users are offered to private players for captive uses. The rest of the blocks should remain with CIL. Though MoC had tried in the past to extend private participation beyond captive use, it failed to succeed in getting the necessary statutory amendment approved in Parliament. Therefore, the responsibility for exploration of the blocks contiguous to CIL’s coalfields will necessarily continue to rest with the PSU. Unless CIL is adequately reformed and equipped as indicated above, the company will find it difficult to explore and develop the huge reserves in its custody.

Should the franchisees be entrusted with mine development alone or be permitted to take up exploration activity also? Auctioning reasonably explored blocks will be more advantageous for the government as it will minimise the uncertainty for the franchisee and yield more positive outcomes for the government.

How many blocks should be auctioned at a time? Auctioning too many blocks in a hurry will attract spurious bidders and MoC will then place itself at their mercy. A limited number of blocks auctioned within a time frame of two to three years will subserve the public interest better.

What should be the criteria for evaluating the bids? Should the government be satisfied with a modest royalty revenue from each block or should there be a revenue-sharing or a production-sharing format? Giving away the blocks for a pittance will create scope for rent-seeking. A revenue-sharing or a production-sharing model will help a more accurate valuation of the coal resources.

Should the government worry about the impact of auctioning coal mines on the price passed on to coal and electricity consumers? Should the bidders be assured of an “arms length” market price or should pricing be determined by an independent statutory regulator? In order to obviate the scope for windfall profits at the expense of the state exchequer, it will be prudent to set up a statutory regulator to determine the price on a cost-plus-a-reasonable-return basis, as in the case of the electricity sector.

Should there be a minimum prescribed work programme to be carried out by a franchisee to develop coal and offer it to consumers within a given time frame? How is the government going to formulate incentives and disincentives to prompt a franchisee to explore and develop its block within a strict time frame or relinquish it in the event of a failure to enable the government to put the block to a fresh auction?

Apparently, the MoC has not given much thought to these questions, as the ministry is yet to formulate a draft policy paper accessible to the public for suggestions.

The Ministry of Petroleum and Natural Gas’s (MoPNG) Production Sharing Contracts (PSC) could provide guidance to the MoC in formulating its own approach. The MoC could opt for production-sharing as the primary bidding criterion subject to a minimum time-bound work programme to be carried out. As in the case of the PSCs of the MoPNG, it would be necessary to stipulate stringent conditions to force the franchisees to invest within the prescribed time frames, decide on the viability of the blocks and act promptly on relinquishment or otherwise. Unfortunately, in the case of the PSCs of the MoPNG, their enforcement is left to the whims and fancies of the political executive and the technical regulator, the Director General of Hydrocarbons (DGH), has no statutory backing. The MoC will have to set its own ground rules in this respect. A statutory technical regulator set up specifically for this purpose should be entrusted with the task of enforcing the coal PSCs.

To think that auctioning will remove the scope for Coalgate-like scams will be a folly. If the MoC, unlike the MoPNG, can bring about transparency in enforcement of its PSCs, the scope for corruption will get minimised.

Sustainability of Coal Mining

The indiscriminate manner in which successive governments have resorted to allotting coal blocks to private players is apparently based on the premise that abundant coal resources are waiting to be exploited in the country. This assumption is untenable and is fraught with the risk of pushing India soon into becoming a large importer of coal.

Since 2000, governments have plunged the country into a headlong coal rush based on artificially-inflated demands.

For example, a study by a Pune-based non-governmental organisation (NGO), Prayas, in August 20114 had shown that during 2004-11 alone, the MoEF had cleared coal-based power projects of 5,80,000 MW to be executed within the next five to 10 years, a figure that was twice the capacity projected by the Planning Commission5 as the requirement till 2032. As a result, the planning process has gone awry, leading to a feverish, uncalled for allotment of a large number of coal blocks to private players. In turn, the PSU banks found themselves joining this rush, giving large amounts as loans to coal and power project promoters who had questionable credentials. Apparently, Coalgate is only one component of a mega scam that is going to cost the nation dearly.

Let us look at the indigenous availability of coal resources.

CIL’s ISP figure of 21.7 billion tonnes is an overestimate of the extractable reserves as, according to CIL’s own subsidiary, Coal Mine Planning and Design Institute (CMPDI), it is not viable to extract at least 3.5 billion tonnes of this 21.7 billion, either due to the excessive depth at which these deposits are situated or due to other constraints. The CMPDI has adopted the globally accepted classification known as the UN Framework Classification (UNFC), on which basis it found6 that the recoverable reserves estimate is 18.2 billion tonnes. Even the UNFC is deficient in its own way as it fails to factor in the non-recoverability of coal on account of the coal deposits lying under dense forest growth, or in urban areas or located in tribal tracts where safeguarding the tribal rights could constrain extraction.

The average of the coal demand projections made in the Integrated Energy Policy report of the Planning Commission over the time horizon extending up to 2032 works out to 1,200 mt per year. If this were to be taken as an indicator of the future demand scenario for coal, the UNFC reserves at 18.2 billion tonnes will not last for more than 15 years. Even if CIL were to establish incremental reserves through additional exploration activity in the coming years, considering that most of the accessible blocks have already been explored, it would at best extend this time frame by another five years. Therefore, one should face the bitter truth that India’s coal reserves would not last more than 20 years. This is a truly scary picture. If this is the case, should India plunge into the kind of a coal rush that we witness today?

Both coal mining and coal burning have destroyed the environment, deprived people of their livelihoods and spread toxic pollution far and wide, poisoning the food chain systems that sustain life. At the macro level, coal burning will cause global warming. India, as a responsible member of the community of nations, should do everything to contain the use of coal. Apart from livelihood and environmental implications, an unconstrained demand for coal will soon make the economy turn to coal imports and the vagaries of the global coal markets. We are already reeling under the shock of oil imports and this will only compound the problem further.

Conclusions

Sooner rather than later, we should unshackle ourselves from the Coalgate illusion that seems to blur our vision at present. We should work out a strategy based on demand management, including efficiency improvements in both the coal and the electricity sectors, and make a decisive shift in favour of renewable sources of energy. Undoubtedly, we should move away from coal as expeditiously as possible.

Source: EPW