“Coalgate” Could Clean Up India’s Coal Industry

Sept. 23, 2012 - PRLog -- “Hands will always turn black if you hold coal. One has to drop it and wash the hands to clean them,” India’s Home Minister, Sushilkumar Shinde, was quoted by the Times of India as having said at a gathering in Pune last Saturday.

That remark, along with an earlier statement that the coal scandal would be forgotten saw the minister under fire over the last few days. On Monday, he offered a clarification of sorts - those statements had been made in jest, he said.    

Whatever the context for the statements, the minister is now discovering that some stains may be a lot harder to wash away. On Tuesday, several media reports cited from a 2007 letter written by Mr Shinde, then the Minister of Power, to the Prime Minister requesting the latter’s involvement in directing the coal ministry to "allocate a captive coal block to let the operations begin at the 2,000MW thermal power plant [of Bhushan Energy Limited] in Angul district".

On Wednesday, Government cancelled the coal block license of Bhushan Steel, the parent company of Bhushan Energy Limited.

The coal scandal known as “Coalgate”, where Government is accused of unfairly allocating coal blocks to favoured private companies, offers just the right testament to a new study that shows India’s competitiveness is fast declining. The Global Competitiveness Report 2012-2013, released by the World Economic Forum (WEF) earlier this month, reveals that in the competitiveness rankings India dropped three spots from last year to 59 out of 144.

Three years ago, India was in the 49th place, ahead of South Africa and Brazil. It has since dropped 10 places and now trails both those countries and China.

“…energy infrastructure remains largely insufficient and ill-adapted to the needs of the economy. Indeed, the Indian business community repeatedly cites infrastructure as the single biggest hindrance to doing business, well ahead of corruption and bureaucracy,” the report noted.

Findings of the WEF competitiveness report have played out repeatedly in the national media, perhaps as proof of mounting evidence that scandals, like this one in coal and the previous one in telecom, were eroding the country’s competitive position and preventing continued growth.

In many ways, this coal scandal reflects the failure to manage change during a period of unprecedented growth. Those years of high growth introduced many structural imbalances that gave rise to opportunities for quick profit and created the basis for corruption (or “crony capitalism”).

In the case of energy markets, it was the growing disconnect between fuel markets and electricity or other end use products, as much as the boom in commodity prices that gave rise to short-term profiteering. While coal and gas remained tightly controlled, electricity and other end-use products operated in a much more open environment with an ability to set prices.

India’s coal scandal reinforces the perception that the country is a tough place to do business. At the same time, the country is perennially listed as an “emerging giant,” seemingly always at the cusp of an economic break-through.

In the face of such contradictions, many foreign energy companies, both in coal and gas, have been hesitant to bet on India. They have been content to wait for better regulatory clarity and structural stability.

That may be a long time coming. Structural uncertainty will continue to plague the Indian market place for a long time. For foreign businesses drawn by India’s potential but daunted by its challenges, the trick is to identify local partnerships that can help manage the structural risks.

There are plenty of such opportunities in Indian coal markets. Several smaller traders actively seeking international suppliers; local mining related companies seeking access to technology, know-how and finance; power plant owners seeking tolling arrangements with international fuel suppliers and power traders.

One of the important lessons for international players from the coal scandal is not that India’s long-term prospect has dimmed. Rather, it is that India is impossible to navigate without a local partner who knows exactly which minister’s hand has been washed and whose has not.

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