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Co(a)llateral Damage

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[The deeper you go into the reasons behind India's ongoing coal crisis, the more it appears to be a tale of a disaster-in-waiting. Innumerable questions beg an answer. Some have obvious answers: bureaucracy, corruption and connivance. For others, the answers are buried under piles of moth-eaten files that have been pushed from one department to another just to avoid taking sane decisions. Despite having 287 billion tonnes of reserves, India is in the midst of an acute coal shortage. Consider this: India produced 532 million tonnes (MT) of coal in 2010-11 against a demand of 650 MT. The 20 per cent shortfall was met by imports, but not before it had brought cement plants close to shutting down and forced power plants to operate sub-optimally. "Domestic production was targeted at 680 MT in the Eleventh Plan ending 2012, but is expected to be only 554 MT," says the Planning Commission's draft report for the 12th Five-Year Plan. A Central Electricity Authority (CEA) assessment says that as of 29 February, 34 power plants had less than 7 days' stock and 25 less than 4 days' stock. With plans to add 100 GW of power generation, India is staring at a shortfall of 200 MT by 2017, says the Planning Commission. Now, over to the questions: Why is There No Price Discovery For India's Coal? India has traditionally followed an opaque process of allocating coal blocks to companies at pre-determined prices, rather than through bidding/auction. Curiously, as far back as 2004, the coal ministry had taken a decision to only give out blocks through auction. But it's still to be implemented. Despite the law ministry's unambiguous opinion that the decision to auction the blocks could be taken by the executive, the coal ministry repeatedly asked the power ministry, states, and the prime minister whether there were provisions in the law to auction coal blocks. "Auction is not always the best route...raw materials may be cornered by big multinational mining companies," says an email response from Jindal Steel and Power which has been allotted seven blocks. CAG alleges JSPL benefited to the tune of Rs 23,138 crore apart from jointly owned blocks. Meanwhile, India's coal-mining duopoly, Coal India (CIL) and Singareni Coalfields, are able to meet just 74 per cent of India's coal requirement (captive mines and imports meet the rest). In three years, CIL has not signed any fuel supply agreement (FSA), holding up the setting up of new thermal power plants, says a CAG report. It's worse outside of CIL. There are 208 captive coal blocks allotted to private players in power, steel and cement, holding 49 billion tonnes of reserves with potential of 657 mtpa. But the estimated annual production will only be 37 mtpa, says the Planning Commission. One way in which the Planning Commission proposed price discovery was e-auctions —starting with 10 per cent of production, going up to 30 per cent in the seventh year. But e-auctions did not take off because CIL fell short of supply by 2-8 per cent (e-auction prices were 58 to 81 per cent above the notified prices of coal). This argument is at the core of the Comptroller and Auditor General (CAG) of India's scathing draft report accrued to the allottees gains worth an estimated Rs 10.67 lakh crore as on 31 March 2011, indicating revenue loss. The draft report picked on Reliance Power's Sasan Ultra Mega Power Project (UMPP) to highlight the irregularities in block allocation, saying it got "undue benefit" of Rs 4,875 crore over a 25-year period. The report also says its Tilaiya UMPP got undue benefit of Rs 10,974 crore over the 25-year power purchase agreement. Reliance Power did not repond to an email questionnaire. Why are Blocks Being Allocated Without Getting Clearances? <table style="width: 300px;" border="0" cellpadding="10" cellspacing="10" align="right"> <tbody> <tr> <td><a href="/businessworld/system/files/images/March_12/coal-graphic_pu_0.jpg" target="_blank"><img src="/businessworld/system/files/images/March_12/coal-graphic_300px_0.jpg" style="float: right; margin: 10px;" height="255" width="300"></a></td> </tr> <tr> <td>Click here to view enlarged image</td> </tr> </tbody> </table> That allocated coal blocks could get embroiled in a struggle to get clearances seems to have slipped through the cracks during policy-making. Around the time the coal auction policy was being formulated in the Ministry of Coal, the power ministry was finalising the UMPP policy. It decided to hand over projects only after acquiring land and environment clearances. The coal ministry didn't adopt that method. "Coal production could have increased as rapidly as demand if there were not so many problems in front of us: land acquisition... Naxalism...forest and environment clearance," said coal minister Sriprakash Jaiswal in an earlier intierview with BW. "It would be smarter to cut down the forests for mining with the condition that four times as much afforestation must be carried out," he says. Most delays occur in securing environmental clearances, approvals for land and mining leases from the state governments and in land acquisition. Of the 68 non-producing blocks as of June, 2011, 62 await land acquisition, 58 mining leases, 53 forest clearances and 26 environment management plan. But it's not as if there aren't enough ideas to resolve problems. In December 2005, an expert committee on Road Map for Coal Sector Reforms suggested setting up a high powered committee to consider the application for environment clearances within 4-6 months. However, the suggestion continues to be in disuse. India's coal reserves are calculated via the Indian Standard Procedure code of 1956. It's based on geological classification and does not consider mineability. India's reported coal reserves also include an estimated 10 billion tonnes of coal extracted over the last 200 years. In 2001, the government scrapped the ISP method and adopted to measure coal reserves through the United Nations Framework Classification for Minerals. The coal ministry's report — work on which began in April 2007 — was expected in March 2012, but is yet to be submitted. break-page-break Why Are Sectors Such As Cement And Steel Being Allotted Coal Blocks? Since tariffs are tightly regulated in power, there is, perhaps, a case for giving out coal blocks on concession so that the government can prevent a tariff shock to the consumers. However, analysts argue that there is no such ground for steel and cement sectors, since both sell at market rates. A major problem is of ‘squatting' on blocks after allocation. Even the CAG draft report has blasted the tardy rollout of captive coal blocks. "We find it difficult to agree with the ministry because scheduled production plans of 86 blocks were formulated after considering the time required for pre-production clearances and activities. A shortfall of 52.55 per cent in production targets reflects that the objective of enhancing production through allocation of captive coal blocks largely remained unachieved." But look at the irony. Essar Power and Hindalco which have joint rights to the Mahan block in MP have power plants of 1320 MW and 750 MW ready, but have no coal because the mines are awaiting environmental clearance. Why Is CIL Sitting On Cash Reserves When Mines Struggle With Obsolete Machinery? Finally, a large part of the blame for India's coal woes lands at the doorstep of CIL. Not all of which is without reason. It's ironic that while CIL had cash reserves of Rs 43,776 crore as on 31 March 2011, it outsourced 48 per cent of production instead of deploying modern machinery to enhance production. The current technology used to mine coal can only extract up to 300 metres. However, the reserves are calculated for up to 1,200 metres. A majority of the 273 underground mines are loss-making, largely due to poor mechanisation. For instance, of the 3.75 lakh people deployed in mines, 2.01 lakh (53.6 per cent) are deployed in producing just 40 mtpa (about 9.25 per cent of production) from underground mines. <table style="width: 150px;" border="0" cellpadding="10" cellspacing="10" align="right"> <tbody> <tr> <td><img src="/businessworld/system/files/images/March_12/prakash-Jaiswal_RS_150x150.jpg" style="float: right; margin-top: 10px; margin-bottom: 10px;" height="150" width="150"></td> </tr> <tr> <td>"It will be smarter to cut down trees for mining with the condition that four times as many be planted," Sriprakash Jaiswal, Coal Minister</td> </tr> </tbody> </table> Underground mines require 5-7 years to reach production stage, which increases the cost of production. There was a Rs 3,256-crore cost over-run on open cast and underground mining projects worth Rs 8,926 crore. "We are fortunate to have resources mostly within 300 metres of the surface. If you go by the cost of mining, wherever feasible, open cast mining is the cheapest way," said Coal India former CMD N.C. Jha. "The country needs coal at a cheaper price so that power is available at a much lower price." "In India, most mines are open-cast and underground mining is not done beyond 300 metres which is a major reason for lower production," notes J. P. Chalasani, CEO, Reliance Power. Due to poor mechanisation, CIL is short of Planning Commission's actual and revised targets by 73.50 MT and 39.50 MT, respectively. Why is Coal India's Production Not Priced at Market Rates? In December last year, the Ministry of Coal announced that the pricing of coal would move to the internationally accepted system of pricing by Gross Calorific Value (GCV) from January 1, 2012. India previously used the system of Useful Heat Value based on the ash content of coal (15-35 per cent in Indian coal). The GCV mechanism measures heat released from carbon and hydrogen. The new pricing mechanism would increase the cost of inputs for power plants by an average 50 per cent (depending on the grade of coal used). But it would also reduce the range in prices of different grades of coal. The GCV system being tried since 1990s has met with opposition, especially from power producers. CIL is currently reviewing it on issues such as revenue-neutrality, applying it to existing FSAs. Despite the litany of problems facing the industry, some remain hopeful. "The efforts...to solve the coal crisis have to a good extent helped and will bring back investor confidence," says Sanjay Sethi, executive director, Kotak Investment Banking. Optimists such as Sethi are banking on a spate of positive news coming their way. In 2010, Parliament passed an amendment to the Minerals and Metals Regulation and Development (MMDR) Act to incorporate auction as the way forward for awarding coal blocks. And though that's yet to be implemented, the coal minister's promise to set up a regulator for the sector to decide on bids/auctions and pricing of coal has come as a breath of fresh air. None of these, however, will be able to cater to the inherent problems of CIL. As of now, it is still to abide by the Prime Minister's directive to sign fuel supply agreements with power plants, saying it will face penalties if it fails to meet at least 80 per cent of its commitments. yashodhara(dot)dasgupta(at)abp(dot)in (This story was published in Businessworld Issue Dated 02-04-2012)