The Indian federal government is working on a proposal under which state-owned Coal India Ltd. (CIL) would engage private sector companies to undertake mining on behalf of the coal miner, reports Business Standard.
A PTI report published in the newspaper says that the government move is a result of criticism for its inability to meet the growing demand for coal. Citing unnamed sources, the report says that the proposal to involve the private sector under the public-private partnership (PPP) mode was recently discussed between top level government officials.
Reports suggest that India’s Coal Secretary Alok Perti recently convened a meeting between private coal mining companies and CIL to identify projects that could be outsourced to private coal miners. The meeting will discuss all the details on the proposed model, including the legal framework under which private mining companies can enter the sector through the competitive bidding route.
The Planning Commission had earlier written to Indian Coal Minister Prakash Jayaswal in March, asking his ministry to explore development of projects on a PPP basis to expand coal production.
How Coal Bidding Works
Media reports suggest that according to the proposed model, bids are invited for a particular coal block that has to be mined. While the ownership of the block remains with CIL, the mine is given out on a long-term agreement and the coal produced is bought back by CIL at a fixed price. The bids are ranked on the basis of cost per metric ton and these have to be lower than the notified cost of CIL.
CIL has already outsourced two mines under the same model as part of a pilot project to Essel Mining, an AV Birla Group company, under a long-term contract. The federal government and CIL are under pressure to enhance coal production and fulfill the demand by domestic power producers, steel mills and cement manufacturers, fertilizer and chemical industries.
Coal is the primary raw material for thermal power generation in India. Coal accounts for more than half of the country’s power generation. It is also the main fuel for steel mills and cement makers and many other industries. In addition to industrial demand, coal is still a basic fuel to make food for many Indians in rural parts of country.
Coal Monster Growing
Indian power demand is on the rise. Currently, India has a power generation capacity of 170,000 MW and expects to add 62,374 MW by 2012. The Indian federal government also has plans to set up 16 Ultra Mega Power Projects (UMPPs), each with a minimum generating capacity of 4000 MW.
But CIL remains unable to supply enough coal as demanded by the various industries — especially the power sector.
It may be recalled that domestic power producers and steel manufacturers frequently import coal to fill their requirements. Many Indian companies have also acquired overseas coal blocks for the fuel supply. Experts believe that the country’s need for coal imports could jump nearly 70 percent next fiscal year to 142 million metric tons.
As per the Planning Commission, domestic coal demand will increase to 1 billion tons by the end of the 12th Five-Year Plan (2012-17), necessitating about 200 million tons of imports to bridge the shortfall in domestic output. The commission has also estimated that domestic production will rise to 770 million tons by 2017 on the basis of projected annual growth of around 7 percent in output.
India’s federal government has admitted that there was a wide gap between availability and commitments made by the company to various consumers.
India’s Coal Minister Prakash Jayaswal recently informed the lower house of the parliament (Lok Sabha) that there is a wide gap between the availability of coal and the commitments made by CIL through fuel supply agreements (FSAs) and letters of assurance (LOAs) for supply of coal.
Coal India Ltd. Can’t Deliver
Reports suggest that CIL, accounting for over 81 percent of India’s coal production, has missed its revised production target as it produced only 435.84 million metric tons of coal in fiscal 2011-12 against the target of 447 million metric tons. CIL has already missed the target in 2010-11 with the production inching up only 0.2 percent over a year before, touching 431 million metric tons.
CIL cited various reasons for the downward revision in the production target, such as heavy rainfall, strikes and delays in gaining forestry grants and environmental clearances to coal projects.
CIL had earlier asked the government to scale down its production target for the 2011-12 to 448 million tons, fearing it would not be able to make up for the slippage in output in the first half of the fiscal year. However, the Planning Commission is likely to set a coal production target of 574.4 million tons for 2012-13.
Meanwhile, CIL is under huge pressure to supply the fuel to domestic power producers because back on April 3, the government issued a presidential directive to CIL that will make it mandatory for the company to supply a minimum level of fuel to thermal power projects.
Earlier this year in February, the Prime Minister’s Office (PMO) had asked CIL to sign such agreements after a meeting with private-sector power producers in January. The PMO had given CIL a deadline of March 31, 2012, to sign these agreements for the power projects commissioned before December 2011. In case CIL failed to meet the 80 percent of committed coal supply, it would be penalized.
But CIL’s board members rejected the prime minister’s directive to sign the agreements, saying the penalty clause under such contracts was too stringent. After the presidential directive, however, CIL was forced to sign the fuel supply agreements with power producers.
CIL Not Out Of The Woods
This decision has created another controversy. One of its minority shareholders, British hedge fund Children’s Investment Fund, has alleged that directing the public sector coal giant to sign fuel supply pacts with power producers would amount to “direct transfer” of $19 billion to the private sector.
According to a PTI report, the fund has initiated legal proceedings against CIL, charging it with selling coal at a price that’s up to 70 percent below the market price, hurting minority shareholders.
According to the fund, the coal prices should be linked to market rates as it would bolster the profitability of Coal India Ltd.
Source: AG Metal Miner.com
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