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President Pranab Mukherjee, in his address to the joint session of Parliament on June 9, said: “Reforms in the coal sector will be pursued with urgency for attracting private investment in a transparent manner.”

With this, he revived the debate on ‘privatisation in the coal sector’. Different interpretations of ‘privatisation’ are emerging, including:

-- a proposed amendment to the Coal Nationalisation Act, which will end Coal India’s monopoly and allow private players to mine;

-- privatise Coal India, or

-- split the company into three or four entities

Coal India has not been able to cater to the demands of the power sector. The Central Electricity Authority’s data, as on June 18, show that 48 out of 100 coal-based power plants have critical levels of just a week’s coal stocks.

This does not mean coal is not available in the country. The problem is with mining. India’s coal reserves are put at nearly 250 billion tonnes — the fourth largest in the world.

Technical and capacity problems, coupled with delays in environmental clearance, are cited as the main reasons for such critical stock levels. According to the Coal Ministry, demand was 769 million tonnes (mt) last year against the domestic production of 564.76 mt, which necessitated imports.

The discussion on privatisation is also taking place at a time when the Government is in the process of addressing the irregularities in coal block allocation by the previous regime. Even the previous Government had talked about auction of coal blocks, but finally settled on allocation to various companies for captive use.

Privatisation debate

Does privatisation mean handing over coal blocks to private players for exploration for a specified period, with royalty paid to the Centre and States, just like in the oil and gas sector? Or is it auctioning the resources to private players, like telecom spectrum? The coal industry feels privatisation in this sector means selling blocks in the open market and the Government earning royalty. The bidders will assess the market price and quote a royalty rate that they are ready to pay the Government.

This is unlike the oil and gas sector, where the developers do not know the reserve estimates. In coal blocks, one knows the reserves. One argument is that, for coal, the Government should specify the per-tonne royalty it wants.

End-users

Right now, there is private participation, but with the end-users already assured. In an end-user tie-up, the entity operating the mine needs to invest in end-user plants, have expertise in the segment and factor in the economics of the end-use plant during the bidding. Coal industry players say that, as in the case of iron ore, limestone and gold mines, in coal-mining too, the miner should not be weighed down with a firm end-use agreement.

India has merchant mines for all minerals except coal. At present, the Government is only considering auctioning it to end-users. Persons from the industry feel the Government has to make it open for merchant-miners too.

Lesson from other sectors

In the oil and gas sector, under the New Exploration Licensing Policy (NELP), the Government puts on offer areas for players to explore and tap. The winners, who qualify after meeting the technical and financial parameters, sign a production-sharing contract (PSC) with the Government, while the mineral resource still belongs to the Government.

NELP allows pricing of crude oil and natural gas discovery on a market basis, while natural gas pricing needs the Government’s approval. The award of exploration blocks are governed by PSC cost recovery up to 100 per cent.

But constant tinkering with the contracts by the Government has resulted in many players moving away from the sector. The Government itself is revisiting the PSC to make it simpler for investors.

In the telecom arena, the Government owns spectrum, which it auctions to private players to provide various services. Such auctions have been successful, with the Government netting over ₹1.5 lakh crore.

Earlier, spectrum was allocated on a ‘first come, first serve’ (FCFS) basis. But this failed because certain loopholes allowed departments to interpret rules. For instance, in 2G spectrum, the FCFS rule was twisted by the telecom ministry to favour some private companies. The DoT reportedly changed the criteria of FCFS from the date of application to the date of paying licence fee.

Considering the experience of these two sectors, it would be better if the Government auctions coal blocks to a private player to mine for a specified period. The players, in turn, will sell in the open market at a price fixed by the Government, say analysts.

Source-On Request