Should coal be denationalised?

Last Updated: Wed, Aug 29, 2012 05:14 hrs

Advisory Partner-Infrastructure Practice, Ernst & Young

Coal mining was nationalised in two phases in 1973, which translated into the enactment of the Coal Mines (Nationalisation) Act, 1973, the central legislation determining the eligibility of coal mining in India. The Act stated that all mines will be under the control of the state. Amendments to the Act in 1976, 1992, 1996 and so on allowed captive mines for industries like iron and steel, electricity and coal-washeries.

India boasts the world’s fifth largest coal reserves. Ironically, we are net coal importers (which will be one-third of the annual production capacity of the national company by 2017). Although we are also a net energy importer owing to poor oil and gas assets, we should not just attempt to be self-sustainable in coal supplies, but also to normalise the net energy import. Our long-term target should be to balance the equation of calories/oil equivalents that we import and export.

Indian coal production stands around 0.5 billion tonnes compared with Chinese production of 3.5 billion tonnes. When the coal industry was reorganised in 1978, China allowed private mining to kick-start production. Countries such as Indonesia and Australia have been able to design markets in which the private sector is pushing up production.

In India, private sector participation will not only help increase the supply, but will also lead to investments in the infrastructure and allied sectors. Much of the Indian outbound private sector investments (particularly in Africa) have been towards developing integrated coalfields, including the last mile connectivity from the port, in addition to the development of the local area through providing health, education and so on. There are direct tangible benefits to private sector participation in coal mining, ranging from employment generation, contribution to GDP, control over inflation, greater self- sustenance in energy security and growth of the value chain (including equipment and service suppliers). Private investors are also more likely to pick up coal assets for mining in areas where the government is reluctant to invest, for lack of technology and infrastructure or because the seams are deeply embedded. Greater domestic production from the private sector will, in turn, lower the burden on the current account deficit and balance of payment, control subsidies and create allied advantages in terms of its impact on power tariff, cost of steel and cement and the development of alternate energy sources like coal bed methane.

Drawing parallels from telecom, power and automobiles, it is possible to say with some confidence that the Indian coal mining industry is yet to see the kind of much-needed thrust on innovation, entrepreneurship, technology, safety and competitiveness that saw the other industries grow.

We are increasingly expecting the private sector to push power generation. The natural next step should be the liberalisation of the fuel supply chain to unleash competition. Without adequate supply at competitive prices, the growth story in the power sector and other end-use industries may be at risk. We also need to debate the indefinite lease vis-a-vis limited lease, given that natural resources are scarce and strategic ownership eventually has to be with the government. Long-term lease ownership arrangements with private players require a strong governance mechanism.

It is worth noting that the objectives of nationalisation were: conservation of scarce natural resources (particularly coking coal), preventing relentless mining, introducing appropriate mine plans and safety mechanisms, optimal utilisation and improving quality of life. These objectives are equally important in the contemporary context. In any forward-looking democracy, the government must transfer the business of doing business to businesses and focus on governance and the welfare of its people. Therefore, these objectives can form the pillars of regulatory oversight so that the spirit of the nationalisation remains even as the government attracts private sector participation in coal mining.

We know that the issue of denationalising coal is about energy security, growth of the economy and the future of the country, so we must ensure all forces come together to unearth responsibly the potential of this resource.

These views are personal

Chairman and Managing Director, Coal India Limited

It has become common among several sections in the country to demand the denationalisation of coal mining without fully appreciating the unique nature of the sector. Many think it can be compared to the liberalisation of the telecommunication sector, which has been a resounding success. It is true that Coal India Limited (CIL) has not been able to cope with the steep rise in demand for coal during the past eight years. The fact remains that CIL’s coal was unsold for want of demand until 2001. Even as there are many inherent limitations for CIL to increase production, some are within its control while many are beyond it. To meet the increase in demand for coal, the Union government has allocated coal blocks with an estimated 48 billion metric tonnes of coal reserves to various private and public sector entities. Even such a policy has not yielded the desired results so far.

The underlying principle behind nationalisation of coal mines that began in 1973 was to improve the safety in the working environment. The number of fatalities in the coal mines in the pre-nationalisation era was very high, given the level of coal production at that time. Moreover, mining practices then were termed “slaughter mining”, which involves mining just the coal that is seen to be profitable (that is, high quality and low production costs). The result was that a lot of deposits were not extracted optimally. The nationalisation of coal mines saw better safety and conservation standards enforced.

Perhaps one of the most important reasons for nationalisation is who gets the benefit of coal mining. Being a natural resource, it is but rational that the benefit should go to the sovereign nation, which was what nationalisation sought to achieve. In the event of denationalisation, the private sector will be allowed to get the benefits of its efficiency in operations, management and technology but the value of coal reserves shall rightfully go to the Indian state. Formulating and enforcing such a policy in its true spirit is not easy.

Nearly half the coal reserves that lie within a depth of 600 m is quite poor in quality, whereas the cost of production will be independent of its quality but depends on geo-mining conditions. Producing coal from open cast mines is relatively cheaper than from an underground source. If the private sector, including multinational corporations, is allowed to mine coal for commercial purposes, it will probably stick to producing from areas that have a low cost of production and high quality of coal. In fact, will the private sector even venture into properties that yield low quality coal with higher production costs? It is quite unclear how one might address these issues. Therefore, technical issues pertaining to Indian coal have a significant influence on the nationalisation policy.

CIL mines from sources that have production costs ranging from as low as Rs 400 to around Rs 1,600 a tonne in open cast mining and between Rs 1,500 to Rs 4,500 a tonne for underground mining. The quality of coal, too, has as wide a range, with the calorific values ranging from 3,200 to 6,000 kCal per kg. Pricing in CIL is done by a weighted average system that takes into account the cost of production, the quality, the location of the mine and so on, which ensures a relatively lower price for coal in India. Currently, the average notified price of power grade coal is around Rs 1,200 a tonne and the landed price of imported coal is about Rs 5,000 per tonne. If domestic coal is equated to the same quality, coupled with taxes and duties, the cost comes to Rs 2,500 a tonne.

There is no doubt that the private sector would market domestic coal, if permitted, at prices comparable to international prices but what really is in doubt is how the proponents of denationalisation of coal propose to address this issue. CIL passes on the benefits of cheaper coal to the power sector, which results in relatively lower costs of power generation and pays substantial dividends to the Union government. Therefore, all relevant and very crucial issues should be kept in view before any decision to amend the policy regarding coal mine nationalisation is made.

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