Could More Private Sector Participation be the Solution to India’s Recent Coal Scandals?

Dec. 5, 2012 - PRLog -- It is easy to reduce the Indian coal sector’s misfortune to a series of policy missteps and greed. But that misses the fundamental tussle currently underway on coal.

The evident corruption and policy uncertainty is as much a struggle between two visions on who should really be the beneficiaries of coal.

Over the last two decades, the argument was that you could rely on the private sector to mine the coal and translate the benefits of cheap, domestic and, supposedly, abundant coal to all consumers, rich and poor, rural and urban, agricultural and industrial.

The role of the private sector in coal mining has grown despite the legal barrier of the Coal Mines (Nationalisation) Act 1973. This Act restricts coal marketing to the state. An amendment was attempted over a decade ago but that effort and all subsequent attempts have been unsuccessful.

Private sector participation in coal mining has grown in a number of ways. More than half of the production from Coal India Limited (CIL), the country’s largest coal producer, already involves private sector. CIL outsources production to private companies.

Last week, the Chairman of the Prime Minister’s Economic Advisory Council, Mr. C. Rangarajan, reiterated the need to expand on this arrangement. He recommended that CIL use the private sector to mine coal and then buy it at an agreed price.

This model is not entirely new. In 2005-2006, CIL deployed an ‘emergency production plan’ that sought to add 20 -25 Mt of incremental production through production outsourcing models. In September this year, the Ministry of Coal began revising the contractual framework and bidding documents to allow CIL to expand production outsourcing through ‘mine developer operator’ (MDO) models. In it, CIL outsources all of the operation, including mine development, to the developer but retains ownership and the sole marketing rights.

Along with the growing involvement of the private sector in mining, the Government has also accelerated awards of coal blocks to private parties for captive use. Thus far, 117 blocks, representing about 22Bt of reserves, have been awarded to private companies. About 65% of these blocks were awarded in the last seven years.

Production from the captive blocks has failed to meet expectations. Against a production target of 100Mt by 2011- 12, these blocks could produce only about 35Mt. The ability of the private sector to translate the benefits of cheap, abundant coal to all of India is now being questioned. The question now being asked is whether the emphasis on private participation in the sector is benefiting consumers.

At this stage, this concern hasn’t yet begun to evolve into a full-scale movement threatening a reversal. But the momentum is gathering around these challenges.

One of the first announcements of the new Union Minister of Power, Jyotiraditya M. Scindia, was that no new power plants would go without supply of domestic coal.

But there was one caveat: power plants entitled to a fuel supply agreement with Coal India will be required to get a confirmation from the Ministry of Power that domestic coal supply from Coal India to the plant will benefit consumers.

How the benefit to consumers will be measured, how it will be established what ‘benefit consumers’ even means, is not entirely clear. Though cheered by business, the recent increases in electricity tariffs across several states were not welcome. In some cases, tariffs rose as much as 20%.

The tariff hike was desperately needed to balance revenues against the cost of supply. Most distribution companies are effectively bankrupt under accumulated debt and continuing losses. But there is also a growing sense that the two-decade long drive to liberalize coal hasn’t made electricity any cheaper or any affordable.

Placing the ‘benefit of consumers’ at the centre of the coal dividend may be no more than just a rhetorical populist response to the coal scandals, in anticipation of forthcoming elections. But it may also be a sign of things to come.

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