Financial Daily from THE HINDU group of publications
Tuesday, Aug 23, 2005
Captive coal mining policy Unearthing a win-win model
Given the importance of coal in India's energy matrix and in downstream industries such as steel and cement, the policy framed for private participation in coal mining is quite inadequate and short-sighted.
A captive coal mining policy introduced some years back was a non-starter as most of the mines allotted for captive use were not commissioned. The allocation of these coal blocks was made through a Screening Committee in the Coal Ministry. Companies awarded the coal blocks promised investments in the power, steel and cement sectors.
This was a prerequisite for allocation of a coal block for captive end-use. As there was no price to be paid for the coal block, it was easy to commit to investments on paper and be eligible for allocation. Any company could put in its application and wait to get lucky.
As expected, none of the applicant companies brought in the promised end-use investment. Consequently, these companies had also not developed the coal block as per the approved mining plan. In fact, most of these mines were taken with no intention of development or end-use investment. The companies were just waiting for the policy to eventually allow free sale of coal in the open market. They were holding a valuable national asset, which could be sold at a hefty profit, and the rights over the assets were awarded free of cost!
The Ministry should terminate the mining lease in cases where the coal block has not been developed and there has been no investment in the proposed end-use.
The Ministry has now come up with an auction policy to allocate blocks for captive end-use. By the new policy, the blocks would be awarded through an auction to an end-user company that promises the maximum production-linked payment to the government over the life of the lease. The payment would have to be a specified guaranteed (minimum) one and, irrespective of the value of production. Essentially, the bidding company would have to make massive payment commitment to the Ministry without any knowledge of the actual cash flows from the mining asset. The end-user company would also have to specify the project, its location, size and product mix.
Even sincere bidders would not be able to develop the coal block as these lease conditions are impractical. Given the market dynamics, the bidding company may eventually be required to change the size of the end-use investment, its composition, location and product mix. Also, the quality and grade of coal produced may not be suitable for the captive end-use envisaged today. There is no way of ensuring that the quantity and grade of coal produced would match the end-use investment.
This policy is not just misplaced, but may lead to litigation and a waste of national resources. If the idea is to ensure that a national resource is developed in an optimal way, the proposed auction policy does not achieve it.
The Ministry could alternatively allow companies to bid for coal blocks without any captive end-use requirement. The company, after a successful bid, would develop the mine as per the plan and start producing coal, which would be sold back to CIL.
The latter, adopting the e-auction route would, in turn, sell the coal in the open market. (Even now CIL plans to increase sales by following this route.)
The price paid by CIL to the mining company would be linked to that received through the e-auction.
The mining company, while bidding for the coal block, would propose the percentage of e-auction price that CIL can retain from the sale of coal produced by the mining company. This would form the basis for allocation of the coal block.
Such a mechanism would fulfil all the objectives of a national resource policy. The mining company would get a market-linked price for the coal it produces and, therefore, has a fair chance of getting a risk-related return on investment.
The sale of coal would be at market-linked prices and the mechanism would ensure an optimal allocation of coal among end-users.
(The author is an investment advisor on infrastructure projects and can be reached at email@example.com)
Stories in this Section
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | The Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |
Copyright © 2005, The
Hindu Business Line. Republication or redissemination of the contents of
this screen are expressly prohibited without the written consent of
The Hindu Business Line