India: Reinvent PPPs In Coal Sector

Last Updated: 26 November 2014
Article by Jay Cheema

Protracted electricity shortages in India are a grave threat to the country's growth. Despite having among the largest coal reserves in the world, India's reliance on imported coal is increasing and there is a clear need for innovation, technology and infrastructure in the domestic coal sector. Public private partnerships (PPPs) could be a major part of the solution.

Coal commands a 54% share of India's energy basket. However, coal production has consistently been below planned targets and the current model of private participation is clearly not delivering the results needed. There is a need to reinvent the way PPPs are utilised in the coal sector—as has been done in the airports, highways and ports sectors.

The ministry of coal has overall responsibility for policies and strategies regarding exploration and development of coal through Coal India Ltd, the single largest coal producing company in the world.

About 60% of India's total installed power capacity is generated using coal and 85% of new capacity coming on-stream by 2016-17 will also be coal-based. Although India accounts for nearly 10% of global coal deposits, the demand for coal has been outstripping indigenous production. Demand is expected to rise to 980 MT by 2016-17 and to 1,373 MT by 2021-22. Supply, however, is expected to be just 795 MT by 2016-17 and 1,102 MT by 2021-22.

The shortages caused by inadequate or delayed receipt of coal from Coal India and insufficient imports are hitting the electricity generation sector hard. The power minister recently said that several large coal-based projects have, at best, four days of coal reserves on-hand.

The situation was exacerbated when Indonesia, a key source of imported coal, substituted the long-term bilateral coal supply contracts regime that hedged the price and quantity since 1967, with a new coal pricing regulation that resulted in an increase in the landed price of imported coal from USD 36 per tonne to USD 102. The hike threatened to make several competitive tariff based power purchase agreements unviable.

Harnessing India's coal potential is constricted by political and socio-environmental factors. Monopolistic Coal India can't mine coal fast enough, and the country has failed to develop adequate transportation infrastructure to swiftly move coal freight. In addition, substantial coal deposits lie under India's already shrinking forest cover, which houses endangered species and a large tribal population.

While the government needs to fast-track other sources of energy like renewables, LNG and shale, India's dependence on coal means it must find ways to ramp up coal production. PPPs in the coal sector should be one of the more viable solutions.

A number of options currently exist for private participation in India's coal mining sector but they are not without their issues. Through Miner Developer Operator (MDO) participation, the MDO undertakes all mining related activities and has responsibility for seeking approvals and land acquisition. Since the MDO is selected through competitive bidding, the mine owner derives the advantage of the lowest price and the agreement is based on fixed output and fixed revenue.

In the case of joint allotment of a coal block, the JV model is used wherein each consortium member is required to hold equity in the JV company in proportion to their assessed requirement for coal. Their allocation of coal must be used exclusively for their respective end use projects.

Self-mining for captive use is also permitted for companies in iron, cement and power production and they can mine allocated coal blocks, but only for the designated end-use purpose.

While these avenues exist for PPP participation, the system is peppered with regulatory hindrances. Changes required urgently include implementation of a fair and transparent bidding system. In 2012, a massive coal allocation scam was reported by the CAG. The aftermath of the scam resulted in cancellation of a number of coal blocks. The scam left a trail of unanswered questions about the non-transparent method of allocation of coal blocks and increased the clamour for overhaul of the bidding methodology

The current MDO model is just contract-mining, based only on a fixed fee per tonne formula. As a result, there is no in-built incentive for the contractor to scale-up production or to maximise revenue and profit. A PPP route that grants ownership rights to the private partner would result in faster production as the contractor would have invested an upfront equity in the coal block and would have a natural interest in faster turn-around of the mine asset.

In the interest of faster production, the mine owners under MDO arrangements must sort out land acquisition issues and seek regulatory approvals beforehand. It is currently common practice for mine owners to pass on obligations relating to land acquisition and regulatory approvals to MDO contractors, causing long delays in the production of coal.

India must also urgently do away with the end-use clause. No other major country allocates minerals based on an end-use. While tying a mine to an end-use project guarantees security of supply for the project, it also restricts full exploitation of the quality and quantity of the mine. Equally, restrictions on the sale of surplus coal in the open market by captive consumers must be lifted. The right to sell surplus coal in the market has the potential to make the PPP model in coal mining more attractive for investors. The government in this respect is moving in the right direction by formulating a draft policy on usage of surplus coal.

The government could also consider giving "infrastructure status" to the coal mining industry to attract more players. Fiscal concessions available to the infrastructure sector would economise coal production. Coal companies engaged in power generation would also be able to import equipment and machinery at concessional duties.

Arbitrary barriers to private participation need to be broken down to attract foreign investment. Current conditions prohibit the formation by government coal entities of a JV with any foreign private company for developing areas containing coal. This condition is particularly damaging in the context of promoting PPPs in coal mining where private sector companies have the skills, technology and experience required to accelerate development of assets.

Other initiatives such as opening coal exploration to the private sector, boosting investment in development of underground coal mining and incentivising development of coal transport infrastructure with rail, road, pipeline and shipping enhancements would work to rebalance the supply and demand.

If these barriers were removed and appropriate incentives for PPPs put in place, the benefits for India's coal sector, and its economy, would flow. Introduction of new PPPs in India's coal sector is a long-awaited move—and one that requires urgent attention

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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