Private participation - A feasibility check

The Indian coal sector is of strategic importance to the Indian economy with coal meeting more than 50% of its energy requirements. The sector is predominately state-controlled with the government of India (GoI) carrying the ultimate responsibility for the industry including production through public sector enterprises (PSEs) such as Coal India Limited (CIL) and Singareni Collieries Company Ltd (SCCL). These PSEs are confronted with various constraints that impede efficiency, such as conflicting role and objectives—whether social or commercial, government and political control and day-to-day interference in management, multiplicity of strong and politicised trade unions, procedural delays in decision making, etc. The growing inability of PSEs to meet the increasing demand-supply gap has resulted in much talk of increased private participation in the sector. The private sector in India is currently limited to captive mining for production of iron and steel, cement, for washing, power generation, and gasification of coal, which has recently been allowed as one of the end uses of coal mining for captive use.

Promoting greater private participation is expected to hike production, increase competition, and lead to greater efficiency of existing mining players. Around 70% of coal requirements are expected to be met locally with greater private participation. However, the question here is whether greater private participation, though desirable, is feasible in the Indian coal sector.

The current institutional and policy framework governing the coal sector has been developed to bring coal resources under the control of the central government and facilitate operations of the PSEs. Various exemptions and preferential treatment have been granted to PSEs that are not extended to private players. Consequently, there is no level playing field between the public and private sectors. Moreover, the framework creates regulatory uncertainties for the private sector and discourages investments into the sector. There are special provisions in law (Coal Bearing Areas Acquisition and Development Act) that gives the central government greater public control over coal production by empowering it to acquire un-worked coal-bearing land and assume all rights on it without involving the state government. Thus, there is no security of licences issued to the private sector for prospecting and this constant threat of acquisition discourages private investments in economically and commercial viable deposits. In addition, there are uncertainties created as a result of no efforts to demarcate go/no go areas.

Mining activities have been restricted in certain areas like dense forest area, national parks and wild life sanctuaries; however, the schedule of lands where mining will not be permitted under any circumstances has not yet been prepared. Consequently, investors may carry out exploration and complete feasibility studies only to find that the diversion of forest land may not be permitted in the area. These incoherent policies create risks for private players and make them less confident in their dealing with state institutions. Recently, the a group of ministers has been constituted by the Prime Minister to demarcate go/no go areas, though the progress has been slow.

However, even if regulatory amendments are made to introduce a common legislative framework and remove regulatory uncertainties, private investments may not be forthcoming due to the monopoly structure of the coal industry and incumbency benefits accruing to the existing players, which increases the risk and cost of entry into the sector, thereby inhibiting investments by potential private players.

Captive mining emerges as an alternative option and there has been an increase in the number of blocks awarded over the past few years. However, there has not been a significant increase in production from captive mining due to flawed selection of blocks to be released to private players. Some of the blocks released have been too small and entailing non-viable reserves, others are confronted with problems in obtaining site clearances and yet others are located in areas requiring major investments in infrastructure. The guidelines for selection of blocks are not made available—the only requirement is that CIL will not be using those blocks and there appears to be no legal basis on which block are attributed to CIL. There is also no transparency in the selection of applicants by the selection committee for captive mining though the efforts to introduce competitive bidding and thereby transparency has been made in the recent amendment to Mines and Minerals (Development and Regulation) Amendment Bill, 2010.

Thus, given the current institutional and regulatory framework and the dominant position of CIL, significant private investments are unlikely into the sector. The entry of private sector is dependent on the introduction of fair and transparent procedures, a common legislative framework that provides a level playing field between the public and private sector and addressing loopholes and uncertainties in policy framework that currently throttle private investments into the sector. In addition, the role of government needs to be appraised from being the operator to a facilitator creating enabling policies for private investments to flow in.

Tags: SCCL, Indian economy, Indian coal sector, Coal India