Though PPP in coal mining can enhance coal production, the successful implementation of a PPP structure largely depends on the balance between risk allocation and financial gain. The Centre must also look at restructuring CIL and decentralising ownership of coal.
T he coal ministry recently put an end to the power ministry´s optimistic plans to provide coal to all coal-based power generation projects. According to the coal ministry, it can commit to fresh fuel agreements only after meeting its existing commitments to 78,000-MW power plants. The ministry has further added that Coal India Limited´s (CIL) production will decrease by 50 million tonnes in 2016-17 if clearances and attached rail links are delayed. This emphasises the predicament of the coal sector and the immense supply gap that the coal sector in India is facing. The Indian coal sector is in dire need of rejuve¡nation and long awaited reforms.
From being known
as the country with the world´s largest coal reserves, India is now known for substantial quantum of coal imports over the last few years. After the discrepancies of coal block allocation and subsequent ban on mining as well as de-allocation of blocks, the coal sector in India has faced a huge setback. The recent decision of the Supreme Court holding the allocation of coal blocks between the period of 1993 to 2010 illegal (other than competitive bidding for UMPPs) will have a further adverse impact on this long suffer¡ing sector, requiring a rethink on the manner of private participation of coal. A new direction could be in the offing.
In the Union budget for the financial year 2013-2014, the then Finance Minister´s announcement to undertake coal mining through the public private partnership (PPP) route, was an important step towards bridging the demand-supply gap in the sector. The current Finance Minister Arun Jaitley´s maiden budget speech indicated that the ´current impasse´ in the beleaguered sector will be given a boost by encouraging investments and bridging the supply-demand gap.
With the other budget pronouncement of establishing an institution with a corpus of Rs 500 crore to provide support to mainstreaming PPPs called 3P India, Jaitely has set the ball rolling for more effective implementations of PPPs in the country across sectors. There are indications that this government is also keen to implement PPPs in coal mining.
Private Participation in Coal Production- Current Status In the Economic Survey for 2013-2014, based on the demand and supply projections of the coal sector, and the current status of coal mining, three action points were suggested. Among these were permitting commercial coal mining by the private sector and the restructuring of CIL.
As CIL has an almost monopolistic hold over
coal production in India, controlling almost 85 per cent of the total coal production, the scope for private sector participation has been limited. Such participation is in the form of coal mining through allocation and development of captive coal blocks, contract mining through Mine Developer cum Operator (MDO) model and joint ventures for exploration with State governments/corporations that have been allocated coal blocks. These are briefly examined below.
1.Coal Allocations: Coal allocations under the provisions of the Coal Mines Nationalisation (Amendment) Act, 1976 (CMN Act) by the Central government to private entities has been a matter of controversy of late. The latest verdict of the Supreme Court pronounced on August 25, 2014 in the Writ Petition filed by Manohar Lal Sharma against the Central government states that such allocations were illegal being impermissible under the scheme of the CMN Act. The Supreme Court has held under the CMN Act, coal blocks can only be allocated to companies engaged in the production of iron & steel and generation of power, washing of coal obtained from mine or production of cement.
2.Joint Ventures (JVs): State-held companies which were allocated coal blocks entered into JVs with private entities wherein they held 51 per cent and the private entity held 49 per cent. The private entity would then be responsible for mining operations. These JVs would also enter into MDO agreements with either the private joint venture partner or their central concerns. The Supreme Court has held that allocation to the State government or corporations held by them were itself illegal and consequently these JVs.
3.MDO Model: Conceptually, the MDO model enshrines contract mining carried out by private entities for government entities that are entitled to mine allocations. By such an arrangement, private finance as well as technical knowhow and expertise are available for enhancing the producti¡vity of mining operations. There are certain variations in this arrangement:
As discussed above, in some cases, MDO agreements are executed between a JV where the contractor or a sister concern is a party. These kinds of arrangements have been criti¡cised by the Supreme Court as defeating the provisions of the CMN Act.
MDO agreements are entered by corporations that are allocated coal blocks with private entities to subcontract mining operations. Obligations relating to land acquisition, resettlement and rehabilitation of affected persons were imposed on private contractors.
The Supreme Court has in its decision mentioned that the coal allocation under the earlier regime was done on an ad-hoc, casual basis without transparency. The relevant authority had made the decisions without application of mind. The status of existing allocations under the older regime is currently unclear and a cause of widespread concern.
Public Private Partnership
In the context of the Supreme Court´s decision, whether the exploitation of coal on a PPP basis is permissible would also need further scrutiny.
Proposed Framework
The proposed structure of PPPs to grant private companies access to the mines contemplates CIL as a central agency. CIL, through a subsidiary would award PPP projects in coal mining. Such subsidiary would enter into JVs with private companies as an equity partner. The ownership and control of the mine would be retained by the government.
A recent press release by the Central government has indicated that a Model Concession Agreement (MCA) has been finalised for engagement of Mine Developer cum Operators in CIL and its subsidiary companies in consultation with the Planning Commission and other concerned ministries and has been sent to CIL for its adoption by their board.
The draft is not yet available to the public.
Based on the previous MDO model, it is anticipated that the PPP model would have a wider scope than the same, with the private sector potentially taking on greater development roles. It is also expected that the PPP model would operate for a longer term. According to Business Line, the draft MCA appears to be heavily lopsided with CIL being responsible for clearing all hurdles to mining an area under the PPP mode, includ¡ing land acquisition, rehabilitation and resettlement initiatives, and environmental clearances, provide rail connectivity, etc. The draft of MCA seems to have no legal or financial obligation for MDOs subjecting them to just an annual assessment by an independent assessor.
Underlying the PPP regime is appropriate balancing of risks. Whether the draft MCA correctly allocates risk needs to be scrutinised as both public interest as well as incentive to the private participant needs to be addressed.
Regulatory Hurdles
The Supreme Court´s judgment clearly states that the current regulatory framework does not favour dispensation of rights in favour of either private entities or State governments. The CMN Act in Section 3(3) thereof (read with notifications thereunder), provides that no person other than the Central government or any corporation or company, owned and controlled by it, companies engaged in production of iron, steel or cement, power generation or washing of coal can carry on coal mining operations in India.
The Supreme Court does not expressly mention whether MDO arrangements are illegal. However, it has criticised the practice of coal blocks being mined by MDOs by private entities who are members of JVs granted coal blocks. What this means for the new PPP regime remains to be seen. The intent of the CMN Act as interpreted by the Supreme Court is to limit exploitation to those entities expressly mentioned. Whether CIL is empowered to grant concessions to private entities could be questioned in light of there being an absolute bar on private entities other than those specifically permitted.
A statutory amendment seems imminent. The press release mentioned above indicates that the Coal Mines (Nationalisation) Amendment Bill, 2000 (Amendment Bill) that was introduced in the Rajya Sabha on April 24, 2000 to amend the Coal Mines Nationalisation Act, 1973 to allow Indian companies in the private sector to mine coal in the country without the existing restriction of captive mining shall be taken up after consultation with stakeholders. This considerably widens the scope of potential private sector participation.
The Amendment Bill inter alia seeks to permit State governments and companies to carry on coal mining operations in India in any form either for its own consumption, sale or for any other purpose in accordance with the prospective license or mining license or sublease. The Central government is empowered to prescribe location and size of coal mines and other conditions for the purpose of coal operations by companies.
Given the Supreme Court´s harsh indictment of the ad hoc and arbitrary manner of coal allocation resulting in exploitation of mines by private parties, it may behoove the Central government to formulate rules or conditions toward ensuring transparency and protection of public interest in what is a national resource of great importance, at the same time, encouraging private sector participation.
The Way Forward
There is no doubt that PPP in coal mining can enhance coal production. The current statutory framework does not permit direct private participation. If the proposed changes to the law discussed above are brought into force (with adequate safeguards), there is a potential for the private sector to enhance coal production and give a much needed impetus to the sector. However, the successful implementation of a PPP structure largely depends on the balance between risk allocation and financial gain. Although a sharp delineation of roles and responsibilities is required, the public sector would have to assist in areas where it is in a better position to get the work done, e.g., land acquisition, environmental clearances, etc. Control over the mines and coal would also need contemplation, given that national interest is involved. At the same time, too much government interference may result in the desired objectives of increased efficiencies not being achieved. Further, environmental concerns need to be taken into account and the conditions of any concessions should adequately tackle them.
However, the PPP structure is more like a patchwork solution to a larger problem. Restructuring CIL, decentralising ownership of coal to other government entities (including State government entities) may be a possible approach. An increase in competition in this sector with multiple players may be the shot in the arm that is needed. In all cases however, public interest should be paramount.
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