Abandon state monopoly in coal and captive mining

The coal sector remains the most inefficient and least open to private investment, despite coal being the country´s primary source of fuel, says Krrishan Singhania, Managing Partner, Singhania Associates.

It has been close to two years since the Mining Act was amended. What are the ground level realities in the sector since? Have the amendments resulted in improvements like (a) creating a level playing field (b) streamlining the auctions platform (c) increasing revenue collections for the government´s tax kitty and (d) giving a thrust to innovations being applied to the mining sector?

Creating a level playing field
The MMDR Amendment Act, effective from January 12, 2015, has replaced the ´first-come first serve´ mechanism of mineral blocks allotment with a transparent and competitive auction process in place.

Some of the salient features of the amended Act are as follows:
Mining Licence (ML) has to be awarded only through auction. The old prospective licence holders will be given the ML directly.
Reconnaissance Permits (RP): The amended MMDR Act has removed the earlier provision of RP and provides for the usage of non-exclusive Reconnaissance Permit (NERP).
Prospect Licence (PL): New NERP holders will have to submit the exploration data and a bid for composite licence, i.e., PL-cum-ML. The old RP holders will be given the Prospect Licence (PL) directly.
NTPC was given coal mines in 2004 to enable it to reduce the dependency on Coal India. It had some problems regarding the lack of experience in mining, difficult social conditions and cancellation of coal blocks by the Supreme Court in 2014.

It has been widely assumed that the high prices bid for coal in the ongoing auctions for captive mines vindicate the government´s new policy on coal. This is simplistic. Instead of allowing presumed success of these limited auctions to guide further policy on coal mining, the government should abandon both state monopoly in coal and its corollary, captive mining, and open up coal mining to professional mining companies operating in a competitive market. This is the only way to achieve both sustainable & efficient mining of coal and create a level playing field for the industry that uses coal. We know that as a matter of fact, all the non-power companies were dependent on Coal India for their supplies of coal, but the scenario has changed. The non-power companies do not have to be dependent on Coal India for the supplies of coal solely because of the change in the auction patterns introduced by the ministry.

The monopolistic approach to coal bidding and the industry will be removed. This will result in other solutions too.

The coal sector remains the most inefficient and least open to private investment, despite coal being the country´s primary source of fuel. The near monopoly of two public companies that obstruct the necessary increase of coal production and cause serious fuel shortages should be ended.

Private participation in coal mining on a level playing field with state entities should be allowed.

Streamlining the auction platform
We know that after the amendment, the auction policies have changed a bit. Indian metal and cement companies have bid aggressively for coal blocks in the country´s first auction to sell as they look to cut imports and the dependency on Coal India. The government has asked the MSTC to create an e-auction platform for supply of coal to the non-power industries. For starters, the platform will conduct e-auctions for 24 million tonnes of coal for those companies that do not have any supply contract with Coal India.

Valuation of coal mines was necessary before allocation of the cancelled coal blocks.

Auction Process
Coal mines earmarked for the power sector were auctioned with the twin objectives of increasing the generation of power along with providing cheaper coal for the benefit of consumers of power.

The benefits of e-auctions are the following:

Total transparency in coal marketing;
Equal treatment to all categories of customers without any discrimination;
Buyers can get coal of their choice in respect of source, grade, size/mode;
Buyers can purchase coal from anywhere in the country;
New consumers, snapped consumers and consumers seeking additional coal over and above their FSA quantity can buy coal under this scheme;
Tendency of diverting coal to the secondary market at a premium is greatly reduced, if not fully eliminated;
No quota/linkage/sponsorship needed for purchase of coal;
Option for depositing money for registration/EMD online.

Increased revenue collections
According to CAG reports, India´s coal reserves have been assessed at about 286 million tonnes (MT) this year, 3.25 per cent higher than last year´s 276.8 MT. The earlier Coal Minister Sriprakash Jaiswal had said that the current level of production is 550 MT and will last for 100 years. The Amendment Bill passed by the legislature helped in creation of the District Mineral Forum (DMF). The amount of DMF is 3.3 per cent of royalty payable, and the existing mines will have to pay to the DMF a royalty of 100 per cent over and above the amount paid by them to the state government. The levy of tax to the state governments in the form of DMF is seen by the integrated mining companies as an additional burden. The rate on royalty on coal should be 14 per cent ad-valorem as shown on the invoice, excluding taxes, levies and charges. According to the Policy Initiatives and Reform Measures, Annual Report of 2015-2016 of the Ministry of Coal, the estimated revenue which would accrue to coal-bearing states during the life of mine/lease period from the auction of 31 coal mines is Rs 1,96,700 crore. Further, an estimated amount of Rs 1,48,275 crore would accrue to coal-bearing states from the allotment of 42 coal mines. In addition, the benefit to consumers in terms of reduction of electricity tariff is likely to be about Rs 69,310 crore. Allotment of remaining coal mines for specified end uses under the Coal Mines (Special Provisions) Act, 2015, will be undertaken during 2016-17, keeping in view prevalent market conditions.

These policies will help the industry very much and will boost the processes. There will be transparency in the governmental policies and there will be better funding. When there is a better amount of funding, the results will be better too. There will be development in the coal industry with better mining facilities and manufacturing which will eventually lead to the effective growth of the industries, mainly that of the power sector.

Innovative thrust
Recent reforms have the potential to redefine coal procurement strategies of various Indian companies that use coal as raw material. Each of the available coal souring options has its own pros and cons for various end users. However, options for long-term fuel security are limited and differ for various industries. Certainly, as a strategic decision, players have to consider their respective industries, location-based factors and acceptable profit margins.

The concept of innovation is very important in any field. By innovating, many new techniques are evolved and can help in cutting down the cost of production and increase profit margins and revenue. The potential buyers and users can get to know what is happening and by the concept of transparency, people will get an idea as to how to go about investment policies so that they can get better returns and in turn create a platform, dwelling on which there can be industrial developments, ultimately leading to economic development of the country.

How is the mining industry reconciled to the Chinese transitioning phase and outputs in the sector, especially iron ore and steel? How will this impact the profitability aspects?
India, with a population almost as large as that of China and with a similarly rapid rate of economic growth, will also be a major contributor to atmospheric carbon emissions. Like China, India has extensive coal reserves and it is the world´s third largest coal producer after China and the United States. Coal use in India is growing rapidly, with the electric power sector accounting for a large share of new demand. However, India´s per capita electricity consumption is only 35 per cent of China´s, and its current rate of coal consumption (460 MT in 2005) is about a fifth of that of China. India´s total installed generating capacity in the utility sector in 2005 was 58 per cent, which was coal-fired. Coal currently accounts for about 70 per cent of total electricity generation.

In India, as in China, self-generation by industry is also a significant source of coal demand.

A large fraction of future growth in the electricity sector will be coal-based. Current government plans project growth in coal consumption of about 6 per cent/year. At this rate, India´s coal use would reach the current level of US coal consumption by about 2020, and would match current Chinese usage by about 2030. This suggests that there may be time to introduce cleaner, more efficient generating technologies before the greatest growth in coal use in the Indian power sector occurs.

With a view to get in commercial miners into the sector, the government had inserted an enabling provision in the Act. Has industry moved along on this government-set roadmap?
The Indian government has set the stage for a paradigm shift in the Indian mining sector with the recent Supreme Court direction of coal auctions and the proposed auction of other minerals. The industry is moving along this government-set roadmap at a decent pace as the FDI numbers are seen to be on the rise.

How has the Indian steel industry, which was relatively insulated, been affected by global developments – including cheap energy sources, raw material price volatility, capital availability constraints, shifting global cost curve, bilateral trade arrangements, trade protection measures and stringent environmental regulation?
Cheap energy sources have helped in reducing production costs. As producers cut cost of production, it will increase profit margins and revenue margins too.

Raw material price volatility: Resource security at competitive prices has been a critical success factor for steel in India, but challenges have emerged over the past couple of years. Strategies to address this issue and manage the volatility should include investing in infrastructure to facilitate imports and creating joint ventures with global miners. There are already enabling fiscal measures to support conservation of resources for domestic industry.

Capital availability constraints: A significant investment of capital will be required for building new capacity. In addition, steelmakers will need to constantly evaluate capital allocation decisions. Given the quantum of risk that is involved in the steel business, particularly for non-integrated players and going by leaders´ experience, availability of large capital in India at reasonable cost is a challenge. The government will have to create a supportive environment for investors and lenders to release capital needed at competitive costs.

Environmental regulations: Steel companies have recognised the need to become more energy efficient and implement means to control emissions. The increasing scarcity of natural resources has led to the introduction of regulations for the use, management and protection of resources. It becomes imperative for steelmakers to align their business growth agenda with a sustainable environmental agenda. While transparency in awarding coal blocks for companies is important, that alone does not account for complete transparency of the coal sector. There are many discrepancies in how environmental and forest clearances were awarded, how land was acquired, how pollution control norms were violated and how consent of forest dependent communities was obtained. Ignoring those aspects of the coal sector and moving ahead with auctioning will not only do grave injustice, but will also put the new coal block bidders in conflict with communities and throw up legal challenges.

Is the government-set target of 300 MT steel capacity by 2025 scalable? Is India Mining Inc en route to the same? What further policy tweaks – like in land acquisition and clearances needed – are imperative to achieve the set goals?
The government-set target of 300 MT steel is scalable as the steel industry is growing at a reasonably good pace. Last year, the growth in crude steel production in India was more than 8 per cent. Modernisation and privatisation of steel plants is the key factor to achieve it. According to us, the Indian iron & steel industry can meet the set target of steel production of 300 MT by 2025 by developing new path-breaking technology and using Indian raw materials through R&D at the pilot/demonstration scale.

What infrastructure initiatives are needed to ensure transport efficiencies and logistical smoothening in the coal and mining sector? What is the recourse for the government to facilitate investment at competitive costs for the mining sector?
The Pai Committee Report recommends the transmission of electricity over long distances at very high voltage, instead of setting up mega thermal plants at the pit heads or in close proximity to the mines. The transfer of power over long distances is relatively cheaper, eco-friendly and easy to manage. Another proposal which can be adopted is to upgrade the quality and to beneficiate the coal at its source and then undertake the transportation activity.

The recourse for the government to facilitate investment is to upgrade our rail capacity and to improve rail infrastructure.

(Nishant Upadhyay, Sanket Palshikar, and Saptashya Roy Chowdhury, Associates, Singhania Associates, also contributed to this interview).