From Coal India to Air India

Soon after the private power promoters met the Prime Minister requesting intervention for ensuring coal supplies to languishing power plants, the Prime Minister's Office (PMO) directed Coal India to sign fuel supply agreements (FSAs), by March 31, 2012, with power plants that have entered into long-term power purchase agreements with power distribution companies and have been commissioned/ would get commissioned on or before March 31, 2015. The FSAs are supposed to be for the entire quantity of coal mentioned in the Letters of Assurance for a period of 20 years. The cut-off point would be at 80% (Coal India had suggested only 50% earlier) and Coal India will have to pay penalty for any shortfall. The PMO further directed that, if need be, Coal India may import coal to fulfil the commitment.

The PMO declared that this directive would provide relief to over 50,000 MW of new capacity lying idle due to lack of firm coal linkages and would boost investors' confidence in India's power sector. Also, this intervention would not only achieve the targeted capacity addition in the 12th Plan but also the growth target of GDP, but what about Coal India? This directive of the PMO has put Coal India in the most unenviable position among the 'Ratna' PSUs.

To maintain healthy profits as a responsibility towards its investors, Coal India needs to increase domestic production quickly or increase coal prices; neither of which seems possible due to various reasons.

Coal India can repeat over-exploitation of existing large opencast mines which it had done a few years ago on orders from the PMO by adding 100 MT in a very short span. This action will further reduce the life of mines and would have serious implications when linked power plants will not get coal.

If the ministry of environment & forests is forced to clear all the virgin coal blocks that are being held up because of either the Comprehensive Environmental Pollution Index or due to dense forest cover, it would take several years to produce and supply coal, which will fail to meet immediate commitments. However, the country will lose large chunks of forest cover, lowering the already declining figure of 21%. This option will also result in a higher degree of pollution in certain mining areas, which have already crossed the limits.

Coal India's production has been stagnating at 431 MT since 2009-10 and the production this year may be much lower. Coal India tried to change the price structure from Useful Heat Value to Gross Calorific Value, which would have resulted in about 12% increase in coal price, thus keeping Coal India's bottom line intact. The earning from this move was estimated to be about R6,000 crore, which would have more than offset the impact of wage increases. This effort was also rolled back by the government on strong reaction from coal consumers.

There is also talk of diverting e-auction coal to meet the above commitments, which again will further dent the profitability of Coal India. Realisation through e-auction is about R3,000 per tonne, or 300% higher than coal sold through FSAs at about R1,000 per tonne. Coal India reported a 54% rise in third quarter profits at Rs 4,037 crore. However, the burden of wage increase estimated to be about R6,000 crore annually will have a serious impact on the bottom line of Coal India's balance sheet from the next quarter.

The PMO has directed Coal India to meet the the commitment of FSAs, even by importing coal. In such a case, Coal India will be forced to sell high-priced imported coal at huge discounts, resulting in continuing loss to the PSU. Domestic coal under FSA is cheaper at R1,100 compared to over R5,000 for imported coal, a price which is likely to increase if Coal India plans to import large quantities. If, by miracle, Coal India is able to charge the actual import price, how will the costly power be sold when the cost difference between domestic and imported coal is huge? The merchant power plants are already feeling the heat. The other alternative of pooling of prices has already been trashed by the coal ministry, which called the proposal impractical and untenable.

Clearly, none of the above options are sustainable. Coal India is in a catch-22 situation. If it complies with the PMO directive in letter and spirit, its net worth would turn negative in due course. If it signs the FSA and fails to meet the full commitment of 80% supplies, the same fate awaits it.

It is almost impossible for Coal India to comply with the dictum of the PMO and still remain a profitable PSU. The country has failed to learn lessons from the past and is now on the verge of creating another Air India.

Tags: Coal India Ltd, fuel supply agreements, Coal import, deregulation, reforms and restructuring