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Road Map for Coal Sector Reform, Shri R V Shahi, Former Secretary, Ministry Of Power

Road Map for Coal Sector Reform

R V SHAHI

The Indian Coal Industry, except for a few captive mining activities, is controlled by Govt. owned companies namely Coal India Ltd., its subsidiaries, Neyveli Lignite Corporation and Singareni Coal Company Ltd. (a J.V. of Govts. of India and Andhra Pradesh). More than 80% of coal is consumed by the power sector. Coal industry has witnessed a growth rate of about 5.2% in the 10th Five Year Plan. In the 9th Five Year Plan this industry witnessed the poorest growth rate of average 2.2%. The industry did reasonably well during the periods of 6th, 7th and 8th plans, with average growth rate varying between 6.5 to 7.5%. Obviously, since the Indian Power Sector has predominantly coal based power generation, the growth of Indian coal industry significantly influences the growth of the power industry. During the year 2004-05, severe mismatches surfaced when a large number of power stations became critical in their stock position; some of the power stations which had been commissioned did not have linked mines opened up. It became quite clear that unless coal supplies are augmented through imports, significant amount of power generation capacity would remain un-utilized.

Concerned about the inadequacy of coal supply, the Govt. of India set up an Expert Committee to give a road map for coal sector reforms with the following Terms of Reference of the committee

  1. Measures for meeting the demand-supply gap in Coal in the short, medium and long-term.

  2. How to improve productivity of man and machinery in Indian Coal Sector, particularly in Coal India.

  3. Introduction of cutting edge technology in Coal Sector.

  4. How to convert CMPDIL into a center of Excellence for Planning and Research in Coal Sector.

  5. Restructuring of CIL to make it a World Class Company.

  6. Other matters that the committee may consider important for the general improvement in the functioning of the coal sector.

  7. Examining the merits of opening up trading in coal.

  8. Examining the current policy of providing captive coal mining, and considering recommendations which might reduce the demand - supply gap.

This committee which was set up in December 2004 gave the first volume of its Report covering short terms measures needed, in December 2005. It has drafted the second volume of its report and has asked for comments from various stake holders. Some of the important recommendations of the Expert Committee alongwith brief comments are listed below:

  1. Considering the present production and future programmes, it appears necessary that 30-40 Million tone of coal needs to be imported every year atleast till 2012. This is a well conceived suggestion. Experience of last few years indicates that this approach has proved useful for both power sector and coal sector.

  2. Even though domestic coal production increases it would be desirable to continue importing this much of coal so that it would provide competitive pressure on Indian Coal Sector. This would again be in the national interest and would enable the country to preserve this important national resource for future generation.

  3. Port capacities need to be enhanced to meet the requirement of coal import alongwith import of other material. During the year 2004-05, 05-06 and 06-07, when we had to facilitate and motivate power utilities for importing coal, these issues did require very close coordination with Ministry of Shipping & Railways.

  4. As an approach and strategy coastal Power Stations on imported coal should also be developed. Ultra Mega Projects Policy initiated by the Ministry of Power has been on this approach.

  5. In order to expedite the process of clearances and sactioneces, particularly the investment decisions for the coal companies for development of new coal mines, Coal India Ltd. should be upgraded to Navratna category and the Subsidiary companies to Mini Ratna category. This would enable them to make investment decisions for a large number of their coal mines. Perhaps, only a few large projects will then need to be taken up to the level of Public Investment Board (PIB) and Cabinet Committee on Economic Affairs (CCEA). This recommendation will facilitate much needed relief for quicker commencement of new projects.

  6. 25% of additional production from an existing mine may be allowed without the necessity of fresh environmental clearance. This is such a suggestion which needs to be implemented on immediate basis.

  7. The process of environmental and forest clearance need to be streamlined so that decisions could be faster.

  8. The present pace of exploration of mines is very slow - two billion tones per year. This must be increase to 10 billion tones per year. This has been one of the most important reasons holding the process of expansion of this industry.

  9. The drilling capacity of CMPDI should be increased from present 3 lac meter per year to 15 lac meter per year.

  10. CMPDI should be allowed to independently hire sub contractors or bid out exploration work.

  11. These are valid recommendations. But, to expedite the process it would be necessary that we allow more agencies to take up this work. Qualifying requirement for such agencies in terms of their capabilities would, however, have to be carefully structured. This has not been specifically recommended, but needs to be considered and included in the Report.

  12. There is a need to introduce exploration cum mining lease in coal industry in line with NELP in the Petroleum sector. We will deal with this later.

  13. The share of underground mining has reduced over last 30 years. It should be increased from present 15% to 20% to the next five years. There is a need to deploy state of the art technology of coal production through under ground mining.

  14. Since there are legal issues involved, opening of coal sector or private mining is not permitted, role of captive mining should be enhanced.

  15. Transparent and effective procedure of allocating captive coal blocks should be put into implementation.

  16. In case of default, in timely development, penalties for failure should also be provided.

  17. The committee has recommended detailed guideline on the qualifying requirement of allocation of coal blocks for captive mining depending on the size of the block and its annual production capacity the qualifying requirement in terms of net worth of the company has been suggested. In order that the parties which are allotted coal blocks developed these mines in a timely manner, bank guarantees have been prescribed so that they take up this work with seriousness.

  18. In the light of the present market conditions coal prices need to be regulated. This is an important recommendation; till coal market fully develops, regulation of price will be essential.

  19. The committee has also made a number of recommendations in relation to matching speedy system of rail transport. It is also suggested that railway tariff should be subjected to detailed review by an independent agency. Power Ministry has been taking up this issue in last 2-3 years.

This report was subjected to a Round Table Discussion organized by Infraline Energy and IDFC. I had the opportunity of convening and initiating the discussion. Member, Energy Planning Commission chaired the round table and the panelist including CMD Coal India Ltd. Director Operation NTPC and a representative from Price Waterhouse Coopers and Shri T. L. Sankar, chairman of the Expert Committee. A number of points emerged during the round table. Some of them are worth mentioning:

  1. Coal India Ltd. had practically no debt. It is highly under leveraged. Obviously it could raise enormous amount of fund to launch upon a massive expansion programme.

  2. Beneficiation of coal by coal companies has been on a lukewarm approach.

  3. It has been established that for transportation beyond 400 km beneficiated coal would be cost effective. While more than 70% of coal is moved for more than 400 km, only 20% is washed.

  4. Rehabilitation and resettlement for land requisition is emerging as a very serious issue everywhere.

  5. Purchase of coal mines outside India is no doubt a good strategy but not much has been done on this.

  6. R&D in coal mining technology has received very poor budgetary support from the coal companies. Larger fund and better attention are needed.

  7. Private sector investments in coal - special efforts are required.

  8. Criteria for allotment of coal blocks must be made very clear and the process should be transparent.

It was a general consensus that the Report is indeed very comprehensive. It has covered all the aspects of this sector with reference to the terms of reference given to the Committee, and recommendations, by and large, are action oriented both with reference to short term and long term strategy. Some of the points which would require marginal alterations or orientation changes and elaboration are as follows:

  1. It may be brought out in the report that Coal India Ltd, with practically no debt on its balance sheet, is highly under leveraged and that it should embark upon its massive expansion programmes for which there is no difficulty in organizing finances with such strong balance sheet. Their financing strategy should rely upon accessing debt market to fully utilize their net worth to organize debt.

  2. In respect of the sanctions and clearances for new projects, the Report seems to have proceeded on the assumptions that projects got delayed only on account of factors beyond the control of Coal India and its subsidiaries. During the middle of the 10th Five Year Plan, a detailed study indicated that even the Project Reports for a large number (15) of projects, the matter was shuttling between the Subsidiary Companies and Coal India Board. Therefore, a number of procedural changes are necessary within the CIL and subsidiaries companies' jurisdiction, which have, in the past, contributed towards delayed decision making on investments. This point needs to be clearly brought out that in addition to the procedural changes, that may be necessary, for sanction of projects at the level of government, major changes may be necessary in the working of the Subsidiary and CIL Boards on important issues relating investment decisions on new projects. As it is, the report appears to have captured only CIL's perception.

  3. While recommendations do cover the need for washed coal, a clear cut guideline needs to be recommended saying that the coal companies must take immediate action for supplying washed coal to power plants beyond 500 KM or so from coal mines. In any case, recommendation has been made about fixing the price of coal by regulatory mechanism. Such a system would obviously take care of additional investments which are made for setting up coal washiers. Already there are a few private sector coal washery companies and cost of washing is generally available now to power companies.

  4. There is a recommendation about the opening up of the coal sector in line with NELP. While as an approach NELP has found favour across the Board, it is now well known that it is fraught with a number of problems, for example the reliability of the capital expenditure, fixation of price etc. Therefore, the recommendation should bring out the difficulties, anomalies which are being experienced in petroleum sector and should clearly spell out that necessary safe guards must be provided so that there is an authentic estimation of capital cost and in any case price needs to be regulated. A mere mention of NELP type of approach may not be adequate, infact, it may perhaps be misunderstood. Exact adoption of NELP approach may push up the cost of coal and therefore the need for a word of caution for required safe guards.

  5. Though it has been covered in the Report, perhaps a clearer articulation may be helpful on the need for protecting the larger interest of consumers. Opening up of the coal sector in general and during the interim period through captive coal mining is the right strategy but the process should not lead to escalation of cost. Therefore, any bidding approach which entails payment of premium etc. may only increase the cost of coal that is supplied. The bidding process in case of power sector aims at minimizing the cost of power supply. It provides, a good basis. Any other requirement of bidding which inevitably means jacking up of the cost of coal needs to be discouraged.

  6. Allowing expert Consulting Firms also to do drilling and establish the extent of extractible reserves would go a long way in this slow process being expedited. Qualifying Requirements (Q. R.) for such firms should be carefully structured. We should facilitate such expert agencies coming up.

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