PRLog - Jan. 16, 2013 - BRISBANE, Australia -- "CIL [Coal India Ltd] is in the process of finalising documents for the development of 27 identified projects through outsourcing to enhance coal production capacities during the XII five year plan [ending 2016-2017],"
Indian Coal Mining News & Analysis | Coal India Limited | Projects | Production
The 27 identified projects, consisting of 12 underground and 15 open-cast mines, have a production capacity of 136Mtpa.
There is now widespread consensus (or at least a perception) that coal shortages are severely limiting India’s economic growth. Past solutions, pegged on the three pillars of CIL, captive coal and imports, are proving to be inadequate.
First, it is becoming increasingly clear that CIL, the near monopoly producer, will be unable to meet growing production targets on its own. Second, production from captive coal blocks, long regarded as the best supplement to CIL, have failed to increase meaningfully. Third, integrating imports into the Indian power sector is proving to be far more politically and economically challenging than expected.
Domestic production outsourcing is the now the flavour of the year. Outsourcing, it is hoped, will allow the private sector to be more meaningfully engaged to help boost production. The proposal has the direct support of the Prime Minister, whose office has directed the Ministry and CIL to pursue this approach more vigorously.
Production outsourcing is also a clever way of getting around the Coal Nationalization Act, which prevents private marketing of coal. While coal prices have been liberalized, coal marketing has not. Domestic coal prices have increased over the years. Margins are significantly better. Coal India, for instance, is sitting on US $15B of cash, and profits continue to remain healthy.
Production outsourcing could provide the private sector access to some of these margins without actually having to market the coal in violation of the Nationalization Act.
The viability of production outsourcing, of course, hinges on how the sharing of risks and gains is structured in the contract. That definition is now the subject of much wrangling and could emerge as the defining issue of 2013 (assuming, of course, that the lead up to the general election in 2014 allows anything to be discussed).
CIL has already been experimenting with outsourcing production. It has, for instance, just as many contract staff (about 310,000) as permanent staff. About 50% of its production will come from contract-based mining in some way. CIL is increasingly beginning to favour a mine developer operator (MDO) model, an approach that outsources all of the development and production except coal ownership. This year about 50Mt, almost 10% of total production, will be mined this way.
CIL’s past experiments with outsourcing production haven’t been entirely successful. Production has not soared. No major advancements in technology deployment, methods, safety, environmental sustainability or productivity have occurred.
Even outside of CIL, contract mining is still not favoured despite the tremendous opportunities with the captive coal blocks. There have been a few successes, though. The biggest contract mine, NTPC’s (the country’s largest power generation company) Pakri Barwadih Mine in Jharkhand, is scheduled to come into operation later this month. Thiess India secured the $5.5B, 27 year deal to produce 15Mtpa (later discussed to be 18Mtpa) in 2010.
CIL’s outsourcing of production for all the 27 new blocks is expected to follow the MDO approach. Draft guidelines and bidding documents are now being discussed between the Ministry of Coal, Coal India and the Finance Ministry. One of the key challenges will be who bears responsibility for environmental clearance, land acquisition and rehabilitation. Another critical issue will be balancing risks and rewards to the contract miner.
The issues under discussion are not particularly new. They’ve been discussed many times over to streamline the MDO.
But the new focus this year is how to attract international miners to bid for these opportunities.
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