Cleaning up the mess: Why the unions of Coal India are becoming increasingly irrelevant

coal

Vivek Kaul

It’s always about timing. If it’s too soon, no one understands. If it’s too late, everyone’s forgotten – Anna Wintour

For their threats to be credible it is important that the trade unions get their timing right. Gurudas Dasgupta, the general secretary of the All India Trade Union Congress, has clearly got the timing all wrong, in trying to derail the government’s initiatives for sorting up the mess in the coal sector.
The government has promulgated an ordinance which will give it the power to e-auction coal blocks. The Supreme Court in a decision given in September 2014 had cancelled the allocation of 204 out of the 218 blocks that various governments since 1993 had allocated to companies for captive consumption.
These blocks will now be auctioned. And this hasn’t gone down well with Dasgupta and other trade union leaders who have threatened to protest and possibly even go on a strike. Dasgupta said that the government decision on coal blocks is “a backdoor entry for taking over the entire coal sector by the private corporates”.
Jibon Roy, the general secretary of the All India Coal Workers Federation (AICWF) said that “to protest against the enabling provision and proposed e-auction, the workers would stage nationwide dharna on November 5 to 7.”
The decision to allot coal blocks to private players for captive consumption was made in 1993. The idea, as the Economic Survey of 1994-1995 pointed out, was to “encourage private sector investment in the coal sector, the Coal Mines (Nationalisation) Act, 1973, was amended with effect from June 9, 1993, for operation of captive coal mines by companies engaged in the production of iron and steel, power generation and washing of coal in the private sector.”
This allowed private companies engaged in the production of iron and steel, power and cement to own coal blocks for their captive use. Hence, if a coal block had been allocated to a power plant, the coal produced needed to be passed on to the power plant.
In 1993, the government allocated only one coal block. Until 2002, the government had allocated only 19 coal blocks in total. The allocation of coal blocks picked up since 2003. During that year 20 coal blocks were allocated. A considerable number of these blocks were allocated to private companies for captive consumption.
The question is why are the trade unions protesting now? The allocation of coal blocks to private companies had been on for a while. The government has decided to go in for an e-auction of the coal blocks after the Supreme Court cancelled most of the allocations that had been made. Hence, only the method of allocation has changed and not its purpose. So why are the trade unions protesting now?
Further, the process of auctioning is transparent, unlike the earlier “screening committee” method of allotment which was fairly opaque as well as arbitrary, leading to crony capitalists gaining in the process. Also, the government has decided to hand over the money raised from the auction to the state government where the coal block is based. Why have the unions got a problem with all this?
The government has also said that sometime in the future it will allow private companies to commercially mine coal. Currently only the government owned Coal India is allowed to do that. The trade unions are bound to have a problem with this. As Dasgupta put it “We strongly protest and call upon the government to reverse the decision as there is an enabling clause in the Ordinance which gives rise to concerns and apprehensions of sweeping privatisation of coal sector.”
This, Dasgupta said could lead to “serious industrial disturbances,” and added that allowing private companies to commercially mine coal would jeopardise “national interest” and weaken Coal India.
Let’s look at this statement of Dasgupta in detail. Coal India had an average manpower of 4,76,577 individuals in 2004-2005. Since then the number of employees has constantly come down. In 2013-2014, the average manpower stood at 3,52,282. The number has fallen further, and as on August 31, 2014, it stood at 3,39,769 individuals.
Hence, between 2004-2005 and 2013-2014, the total manpower of Coal India came down by 26% and the unions haven’t been able to do anything about that. During the same period, the total production of coal went up by 43% from 323.58 million tonnes to 462.42 million tonnes.
So, the coal production went up despite the number of employees coming down.
This has happened due to two reasons. Coal India was overstaffed and has not been filling up the posts of retiring employees. Further, over the years Coal India has been extracting more and more coal by outsourcing work to private contractors. Between 2010-2011 and 2013-2014, the contractual expenses of Coal India jumped by 47.9% to Rs 7,812.71 crore. These expenses came in third after salaries and and provident fund expenses of employees.
A major part of coal is now extracted through outsourcing to private contractors. The private contractors don’t have to pay their employees as much as Coal India does to its workers, and hence coal is extracted at cheaper rates than it would be if employees were to do the job.
Over and above this, what is interesting is that some of the subsidiaries of Coal India, which have the least number of employees, produce most of its coal. Take the case of Mahanadi Coalfields Ltd. As on August 31, 2014, it employed
22,206 individuals or 6.5% of the total number of people working for Coal India. During the course of 2013-2014 it produced 114.34 million tonnes of coal or nearly one fourth of the coal that was mined by Coal India.
Or take the case of Northern Coalfields Ltd. The company employed 16,515 individuals as on August 31, 2014 or around 4.86% of the total number of people working for Coal India. In 2013-2014, it produced 72.11 million tonnes of coal or around 15.6% of the total coal produced by Coal India.
This is primarily because these companies have taken to outsourcing. Also, the coal mines of Northern Coalfields are highly mechanised. Now let’s compare this to Eastern Coalfields Ltd, which employs 70,191 individuals or around 20.7% of the Coal India total. In 2013-2014, it produced just 36.25 million tonnes or 7.8% of the coal produced by Coal India. The same was the case with Bharat Coking Coal, which employed 17% of total Coal India employees but produced only 7.4% of coal that was produced.
One reason for this is that a lot of mines run by Eastern Coalfields and Bharat Coking Coal are underground mines, where the technology used to mine coal is still very labour intensive.
Also, the trade unions are stronger in this part of the country (Eastern Coalfields is head-quartered at Sanctoria in West Bengal and Bharat Coking Coal at Dhanbad in Jharkhand, but right on the Bengal border) and that is another reason why these companies employ so many people to produce a minuscule amount of coal in comparison to other subsidiaries of Coal India.
Dasgupta feared that recent moves of the government were “a backdoor entry for taking over the entire coal sector by the private corporates”. But as far as coal mining is concerned that has already happened. Dasgupta and others of his ilk should have started protesting many years back. This protest has come too little too late. It is interesting nonetheless to observe that the contractual expenses of Eastern Coalfields have risen by 117% since 2009-2010.
Coal India has privatized a major part of coal mining and is reaping in tremendous benefits because of the same. As on March 31, 2014, it had cash and bank balances amounting to Rs 52,389.93 crore.
The number would have been greater than Rs 70,000 crore had the company not been forced to give a dividend of close to Rs 20,000 crore to the government to help control the fiscal deficit. The fiscal deficit is the difference between what a government earns and what it spends.
It needs to be pointed out that the country needs more coal right now than what is being produced. Despite having the fifth largest coal reserves in the world of 301.6 billion tonnes, India was the third largest importer of coal in 2013-2014 at 104.7 million tonnes. What this tells us is that Coal India, which produces most of the coal produced in the country, hasn’t been able to keep pace.
In fact as of last week 64 out of 103 power plants had a coal inventory of less than a week. Between 2010-2011 and 2013-2014, the rate of coal production of Coal India increased at a minuscule rate of 1.76% per year.
To conclude, it is important that India produces more coal. For this, the monopoly of Coal India needs to be broken and private players (including foreign players) need to be allowed to commercially mine coal.
As Dasgupta said allowing private players would “weaken” Coal India. That is precisely what needs to happen, for the country as a whole to produce more coal. The comparable example for this is what happened after private telecom players were allowed to offer services. Despite the scams and the controversies that have happened over the years, the tele-density increased big time. Why shouldn’t that happen in the coal sector as well? Maybe Dasgupta has an answer for that.

The article originally appeared on www.FirstBiz.com on Oct 22, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Dear Modi govt, ordinance on coal blocks won’t help much, privatisation will

coal

Vivek Kaul

The coal sector in India is in a mess. Yesterday, the government started the process to set it right. It plans to promulgate an ordinance to start with. This ordinance will give the government the power to e-auction coal blocks. The Supreme Court in a decision given in September 2014 had cancelled the allocation of 204 out of the 218 blocks that various governments since 1993 had allocated to companies for captive consumption.
The blocks had been allocated to several companies so that they could use the coal produced in the production of cement, power, aluminium, steel etc. The Supreme Court deemed the process of allocation to be suffering from the
“vice of arbitrariness” and cancelled these blocks.
These blocks will now be auctioned. As finance minister Arun Jaitley said yesterday “
As far as the private sector is concerned, the actual users of coal in the cement, steel and power sectors who apply for a certain number of coal mines will be put in the pool and there would be an e-auction. A sufficient and adequate number of mines would be put so that actual users go back with the mines.”
This is a good step given that it makes the entire process transparent instead of the arbitrary manner in which coal blocks were allocated through the earlier screening committee method. Further, the system of allocation of coal blocks for free through the screening committee method was discriminatory. It offered a huge premium to companies which managed to get a free coal block, in comparison to ones that did not.
Nevertheless it is important that auctions are designed properly.
Earlier this year the government tried to auction a few coal blocks and found no takers. Take the case of the Jhirki west coal block. The auction for this block had a fixed price of Rs 177 crore. Over and above this a minimum price of Rs 2,902 per tonne needed to be paid. Then there was the cost of excavating coal and getting the block up and running.
Once these factors were taken into count the total cost worked out at Rs 8,000 per tonne. The block had low quality coking coal. And at this price good quality coking coal could be imported from Australia. Given this, it is not surprising that the government found no takers for the block. Hence, it is important that the auctions be designed properly.
Further, 42 out of the 218 coal blocks whose allocation has been cancelled are already operational.
The ordinance will allow the transfer of land from companies which own these cancelled mines to the companies which emerge as the winning bidder in the e-auction.
A committee will decide on the price of land.
Interestingly, a PTI report points that “Sources said successful bidders in the fresh auction of coal blocks along with the land and plant standing on it would be liable to pay the earlier allottees the cost of the land and the plant along with 12 per cent annual interest on the amount that was originally invested for purchasing the land and setting up plant.”
This process needs to be handled with care. Many of the companies which were allotted coal blocks are basically crony capitalists and may try to come up with trumped up estimates of the cost of land and plant. Also, in case of mines that are operational, a certain amount of coal has already been mined. This will have to be taken into account so that the prospective bidders in the auction know the amount of coal they can hope to mine, and can accordingly come up with a bid price.
In fact, the companies which were allocated coal blocks had to use the coal produced for captive consumption only. Hence, if a coal block had been allocated to a power plant, the coal produced needed to be passed on to the power plant. Any excess coal had to be handed over to the local subsidiary of the government owned Coal India Ltd.
Nonetheless there have been a spate of media reports suggesting that the excess coal that was produced was being sold in the open market.
As a report in The Economic Times points out “What happened to the surplus coal extracted? In some cases, illegally mined coal has found its way to places like the coal mandi near Varanasi.”
This factor will also have to be taken into account before the auction. And it is here that the things can get a little tricky because some companies have mined more coal than they have actually reported.
The government plans to hand over the money generated through the auctions to the state in which the block is located. This is an excellent move, given that the permissions at the state level take a lot of time for a coal mine to get operational. With states being made a part of the process, they have some incentive in not creating hurdles in the production of coal, as has been the case in the past.
Interestingly, Jaitley also said that coal mining will be opened up for the private sector. Currently only Coal India Ltd is allowed to do excavate and sell coal to end users. As Jaitley put it “There will be an enabling provision for the future where under rules which are framed for commercial users of mines could also be decided by the Central government. This would lead to an optimal utilisation of the natural resource.”
This will call for the amendment of the Coal Mines (Nationalization) Act of 1973.
India currently has a
total of 301.6 billion tonnes of coal reserves. Despite having the fifth largest coal reserves in the world, India is the third largest importer of coal having imported around 104.7 million tonnes in 2013-2014. These imports cost around $20 billion a year, as per Jaitley.
Given this, it is a no-brainer to suggest that India needs to produce more coal.
During the year 2010-2011, Coal India produced around 431.26 million tonnes of coal. In 2013-2014, it produced 462.42 million tonnes. Hence, the production of coal has increased at the rate of a minuscule 1.76% per year.
Coal India produces a bulk of India’s coal. And it is obvious that it has been unable to increase its rate of production over the years. Given this, more companies need to be allowed to excavate coal. Taking that into account, the decision of the government to open coal mining to the private sector is a good one.
As former coal secretary PC Parakh writes in his book
Crusader or Conspirator—Coalgate and Other Truths : “Had we opened up coal mining to private sector for commercial mining, along with power sector, in the early 1990s, we would by now have at least half a dozen large coal mining companies in the private sector. This is what happened in the telecom sector. The country would not be facing huge shortage of coal and large outgo of foreign exchange on import of coal.”
Also, production of coal for captive use is not the most optimum way to go about the whole thing.
As Partha Bhattacharya, former chairman of Coal India, wrote in a column in The Indian Express “Captive end-users mining coal is not optimal. Nor is it known to have succeeded elsewhere in the world. Coal-mining has its own challenges and needs core competence, which the end-users are unlikely to possess.”
Given this, allowing private companies into commercial coal mining is required.
The first thing opening up of the sector will do is to create some competition for Coal India and hopefully improve its productivity.  
As Swaminathan Aiyar pointed out in a recent column in The Economic Times “In Australia, collieries produce 75 tones per manshift (of eight hours) in open-cast mines and 40 tonnes per manshift in underground mines. Coal India averages barely 7 tonnes and 0.8 tonnes respectively…Coal India’s machines work 15 hours per day , against 22 hours per day in efficient mines.”
Nevertheless, there are a few issues that need to be highlighted here. First and foremost no date has been set for allowing private commercial mining of coal.
As Parakh told The Times of India “I won’t say it is a big ticket reform…There is no timeline. This was an opportunity to come clean on the coal sector and allow commercial mining.” And that hasn’t happened.
Further, no foreign companies will be allowed to carry out commercial mining of coal. This is where things get tricky. The expertise in India to set up and run a coal mine is limited to Coal India. If only Indian companies are allowed to commercially mine coal, they will end up poaching people from Coal India to run their mines. Hence, is important that we allow international companies to enter this sector. If this happens, these companies can bring in their technology and in the process hopefully improve India’s low coal productivity.
Also, this is likely to keep the crony capitalism in India under some control. As Raghuram Rajan and Luigi Zingales write in
Saving Capitalism from the Capitalists The most effective way to reduce the power of incumbents to affect legislation is to keep domestic markets open to international competition…Openness creates competitions from outsiders—outsiders that incumbents cannot control through political means.”
To conclude, the government has done well to address the issues plaguing the coal sector in India. Nevertheless, given the mess that the coal sector is in, a lot more needed to be done.

The article originally appeared on www.FirstBiz.com on Oct 21, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Side effects of SC’s coal block verdict: 6 issues the govt will have to solve quickly

coal

Vivek Kaul

In a landmark decision yesterday, the Supreme Court cancelled majority of the 218 coal blocks that were handed out free by the various governments since 1993 for captive mining.
The Coal Mines (Nationalisation) Act 1973 was amended in June 1993, allowing companies which were in the business of producing power and iron and steel, to own coal mines for their captive use. Hence, the coal that these companies produced in these mines was to be used to feed into the production of power, iron and steel etc.
This amendment was used to allot coal blocks for free to private and public sector companies to the condition that the coal produced was used for captive mining. The Supreme Court judged the process of allocation of these coal block to be suffering “from the vice of arbitrariness”. Hence, it cancelled a majority of the allocations.
But these cancellations will have several repercussions in the days and months to come. I discuss these repercussions here:

1) Currently 40 out of the 218 coal blocks that were allocated produce coal. The Supreme Court has cancelled all these allocations except one mine belonging to SAIL and two mines which feed coal into Sasan Power, which is an ultra mega power project. Data from the ministry of coal suggests that these mines are likely to produce around 52.9 million tonnes of coal during this financial year (April 1, 2014 to March 31, 2015).
Of this, the mines that have not been cancelled are likely to produce around 2.07 million tonnes of coal. This means that the cancelled coal mines will produce around 50.83 million tonnes of coal during the course of this financial year. The Supreme Court in its judgement yesterday said “
we make it clear that the cancellation will take effect only after six months from today, which is with effect from 31st March, 2015.”
So what happens from April 1, 2015? As yesterday’s judgement points out “The Central Government is confident, as submitted by the learned Attorney General, that the CIL[Coal India Ltd can fill the void and take things forward.” Hence, Coal India is likely to operate these mines after the cancellation comes into effect.
This as I had explained
in a previous piece has its own set of challenges. Coal India is a for profit enterprise and hence, it needs to be figured out who will bear the cost of operation during the period Coal India runs these mines. Further, will it be allowed to keep the profits it makes during the period it operates the mines?
Also, the government will have to figure out how to transfer these mines. As Ashok Khuarana, director of the Association of Independent Power Producers told The Economic Times “It is not yet clear how the operational mines would be transferred…If Coal India is taking over the mines, they ought to take over the liabilities too otherwise it would jeopardise the lenders.”
As mentioned earlier these mines are captive mines which supply to other units primarily producing coal and power. Hence, during the period Coal India takes over these mines it will have to make arrangements for transporting coal from the mine to the unit where it will be used. These arrangements need to be figured out.

Further, Coal India will have to transfer its own employees to run these mines. Again, a lot of manpower in coal-mines is statutory and cannot be just transferred overnight, until a replacement is found. Given this, it is important that the Coal Ministry and Coal India work in tandem over the next six months to have an actionable plan in place to take over the mines and continue producing coal.
2) It is very important that production in these coal mines is not stopped at any point of time. As pointed out earlier these mines are expected to produce around 50.83 million tonnes during the course of this financial year. This is around 8.6% of the total coal expected to be produced in India during this financial year. It is not an insignificant number by any stretch of imagination.
If Coal India doesn’t get around to producing coal in these mines starting from April 1, 2015, the power, iron and steel, cement and aluminium plants that these coal mines feed into, will have to import coal. There are several problems in importing coal. First and foremost imported coal is costlier. A research report brought out by Kotak Institutional Equities suggests that it costs Rs 600-800 per tonne to produce captive coal. In comparison, the e-auction price of coal sold by Coal India is Rs 2,200 per tonne. And it costs Rs 3,500 per tonne to import coal. Hence, imported coal is four to five times more expensive than captive coal.
Also, it is most likely that companies which have operational coal mines which feed into their power and iron and steel plants, will have to import coal. They may not be able to buy it from Coal India because Coal India already has prior commitments in place and may not be able to fulfil their coal needs.
As Crisil Research points out in a report titled
De-allocation of operating coal mines to severely impact metal players “Players who have operational coal blocks will witness a sharp decline in profitability post 2014-15, as they would have to substitute captive coal with imported coal which is about four times more expensive (as Coal India may not supply domestic coal to these players given its FSA[Fuel Supply Agreement] commitments to the power sector).”
Further, these companies will also have to pay a fine of Rs 295 per tonne for all the coal that they have produced till date and will continue to produce until March 31, 2015.
As I had explained in a piece yesterday, the cost of this fine will come to a little over Rs 10,000 crore.
3) Also, importing coal in a huge quantity will not be easy.
Our ports will have a tough time handling this additional quantity of coal that will have to be imported. Over and above that, the Indian Railways is not exactly geared to be able to transport this “extra” coal from the ports to different parts of the country where it is required. The added infrastructure that will be required to handle the additional imports cannot be created overnight. Further, sourcing more than 50 million tonnes of coal from the international market will not be easy, and will push up the international price of coal. India imported nearly 171 million tonnes of coal in 2013-2014 (April 1, 2013 to March 31, 2014). This went up by around 18% in comparison to 2012-2013 (April 1, 2012 to March 31,2013).
4) Imported coal will also mean that the cost of production of power will go up for companies which had been using captive coal supply. Hence, it is important that Coal India takes over these mines smoothly and continues producing coal.
A recent report in the Business Standard points out that the coal being produced in the mines already in operation was being used to produce “26,000 Mw of power output and 12 million tonnes of steel.”
5) Banks will also come under pressure because of the allocation of coal blocks being cancelled. A straight forward reason is that companies have spent money in getting these mines up and running. Now with the mines being taken away it is bound to put pressure on banks, as companies may not be able to continue servicing these loans. A report published by Enam Securities estimates that in total,n banks have loaned out about Rs 37,000 crore to the mining sector. Coal mines form around half of this lending. This amounts to around 0.6% of the total loans given by banks. Prima facie this does not sound like a big number but things could turn out to be much worse. “While this figure on [coal] mines seems low, the impact could be much greater, as it will impact power plants dependent on these mines,” Enam Securities pointed out.

A report in the Business Standard points out that “According to brokerage firm Anand Rathi Financial Services, the Supreme Court order will hit Andhra Bank the hardest, as the power sector accounts for 13.4 per cent of its total industry loan book.” This is followed by UCO Bank which has an exposure of 13.1 per cent of its total industry loan bank.
6) The government is likely to auction the coal blocks after it takes them over starting April 1, 2015. Interestingly, analysts are expecting that companies which have lost coal mines will bid aggressively in this auctions. As Crisil Research points out “
We expect players whose blocks are de-allocated to bid aggressively to retain their blocks, given the operational advantages such as proximity to end-use plants, quality of coal and consequent equipment configuration. Moreover, competition from other players operating in the vicinity of these blocks will also be very high as these are operational mines and the cost of imported coal is also higher.”
This will mean a windfall for the government if the auctions are designed well.
To conclude, there will be a lot of repercussions from yesterday’s decision on coalgate by the Supreme Court. The government will have to move fast in order to limit damage.
The article appeared originally on www.Firstbiz.com on Sep 26, 2014.
(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Why protest? With Rs 52,000 cr cash, Coal India has already been privatised

coal

Vivek Kaul

The trade unions which represent the workers of Coal India Ltd, which produces most of the coal mined in India, are against the government’s recent decision to sell 10% stake in the company. They have even threatened to go on strike. This is primarily because they are against even a partial privatisation of what is still largely a government owned company.
The surprising thing though is that the back-door privatisation of Coal India has more or less already happened. Allow me to elaborate.
As on March 31, 2014, the company had a cash and bank balance of Rs 52,390 crore. This despite having paid the government a dividend of Rs 18,317.5 crore during the course of the year.
The question is how has the company been able to generate so much cash over the years? For this one has to look at some of the subsidiaries of Coal India. Take the case of Mahanadi Coalfield, the company earned a total revenue of Rs 12,033 crore during 2013-2014. On this it made an operating profit of Rs 5429.08 crore. This means an operating margin of a whopping 45.1%. Interestingly, the company had an operating margin of 51.3% in 2012-2013. This kind of margin is unheard of in government owned companies.
The company employs a little over 22,000 employees and produced 110.4 million tonnes of coal, which worked out to around 23.9% of the total coal produced by Coal India during the year.
Let’s take the case of another subsidiary, the Northern Coalfields Ltd. The company earned a total revenue of Rs 9303.88 crore. It earned an operating profit of Rs 3731.85 crore. This means an operating margin of 40.1%. This is a tad low in comparison to the operating margin of 54.2% that the company had earned in 2012-2013. The company produces around 14.8% of the total coal produced by Coal India and employees a little over 16,500 people.
The numbers clearly suggest that these two subsidiaries are fairly efficiently run. What is the secret behind that? In case of Mahanadi Coalfields a substantial amount of coal mining is outsourced to contractors. This helps the company mine coal at a very low cost as it helps keep employee costs low.
The coal mines of Northern Coalfields are highly mechanized. This along with outsourcing helps the company keep costs low and hence, generate a high operating margin. The profit generated by these two companies over the years has helped Coal India to push up its cash and bank balance to greater than Rs 50,000 crore. Interestingly, as on March 31, 2013, the cash and bank balance of the company had stood at Rs 62,236 crore. This fell after the company was forced to give a dividend of Rs 18,317.5 crore to the government.
It is interesting to compare the performance of Mahanadi Coalfields and Northern Coalfields with some of the older subsidiaries of Coal India like the Eastern Coalfields and Bharat Coking Coal, which operate largely in West Bengal and Jharkhand.
Eastern Coalfields employees more than 70,000 people, the highest among all the Coal India subsidiaries. It produces just 36.1 million tonnes or around 7.8% of the total coal produced by Coal India. Along similar lines, Bharat Coking Coal employees around 58,000 people and produces just 32.6 million tonnes or a little over 7% of the total coal produced by Coal India.
Employee cost forms a huge cost for both these companies and hence, the operating margins are a lower at 18% and 30.8%. One reason for the high employee cost is the fact that a lot of the mines operated by these companies are underground mines, where the technology used to mine coal is still very labour intensive.
Also, the trade unions are stronger in this party of the country and that is another reason why these companies employ so many people to produce a minuscule amount of coal in comparison to other subsidiaries of Coal India. It is interesting nonetheless to observe that the contractual expenses of Eastern Coalfields have risen by 117% since 2009-2010.
The broad level data for Coal India also shows a similar trend. The contractual expenses for the company stood at Rs 7812.71 crore for 2013-2014, a rise of around 48% from 2010-2011. What this clearly suggests is that Coal India is contracting out more and more of its work and that has helped the company. The annual report of the company points out that the contractual expenses have increased mainly due increased volume of contractual operations. This is one of the major reasons which has helped the company push its net profit from Rs 4696.1 crore in 2010-11 to Rs 15,008.5 crore in 2013-2014. And this in turn has translated into a huge hoard of cash.
To conclude, the latest annual report of the company does not give out any number to the proportion of the total coal, mined by the contractors. Nevertheless, people who follow the sector closely suggest that a substantial part of the coal being mined by Coal India is now through outsourcing. What this clearly shows is that the company has been privatised through the back-door, despite the resistance of the labour unions.
The article was originally published on Sep 22, 2014 on www.Firstbiz.com
(Vivek Kaul is the author of
Easy Money trilogy. He tweets @kaul_vivek)

Why protest? With Rs 52,000 cr cash, Coal India has already been privatised

coal

Vivek Kaul

The trade unions which represent the workers of Coal India Ltd, which produces most of the coal mined in India, are against the government’s recent decision to sell 10% stake in the company. They have even threatened to go on strike. This is primarily because they are against even a partial privatisation of what is still largely a government owned company.
The surprising thing though is that the back-door privatisation of Coal India has more or less already happened. Allow me to elaborate.
As on March 31, 2014, the company had a cash and bank balance of Rs 52,390 crore. This despite having paid the government a dividend of Rs 18,317.5 crore during the course of the year.
The question is how has the company been able to generate so much cash over the years? For this one has to look at some of the subsidiaries of Coal India. Take the case of Mahanadi Coalfield, the company earned a total revenue of Rs 12,033 crore during 2013-2014. On this it made an operating profit of Rs 5429.08 crore. This means an operating margin of a whopping 45.1%. Interestingly, the company had an operating margin of 51.3% in 2012-2013. This kind of margin is unheard of in government owned companies.
The company employs a little over 22,000 employees and produced 110.4 million tonnes of coal, which worked out to around 23.9% of the total coal produced by Coal India during the year.
Let’s take the case of another subsidiary, the Northern Coalfields Ltd. The company earned a total revenue of Rs 9303.88 crore. It earned an operating profit of Rs 3731.85 crore. This means an operating margin of 40.1%. This is a tad low in comparison to the operating margin of 54.2% that the company had earned in 2012-2013. The company produces around 14.8% of the total coal produced by Coal India and employees a little over 16,500 people.
The numbers clearly suggest that these two subsidiaries are fairly efficiently run. What is the secret behind that? In case of Mahanadi Coalfields a substantial amount of coal mining is outsourced to contractors. This helps the company mine coal at a very low cost as it helps keep employee costs low.
The coal mines of Northern Coalfields are highly mechanized. This along with outsourcing helps the company keep costs low and hence, generate a high operating margin. The profit generated by these two companies over the years has helped Coal India to push up its cash and bank balance to greater than Rs 50,000 crore. Interestingly, as on March 31, 2013, the cash and bank balance of the company had stood at Rs 62,236 crore. This fell after the company was forced to give a dividend of Rs 18,317.5 crore to the government.
It is interesting to compare the performance of Mahanadi Coalfields and Northern Coalfields with some of the older subsidiaries of Coal India like the Eastern Coalfields and Bharat Coking Coal, which operate largely in West Bengal and Jharkhand.
Eastern Coalfields employees more than 70,000 people, the highest among all the Coal India subsidiaries. It produces just 36.1 million tonnes or around 7.8% of the total coal produced by Coal India. Along similar lines, Bharat Coking Coal employees around 58,000 people and produces just 32.6 million tonnes or a little over 7% of the total coal produced by Coal India.
Employee cost forms a huge cost for both these companies and hence, the operating margins are a lower at 18% and 30.8%. One reason for the high employee cost is the fact that a lot of the mines operated by these companies are underground mines, where the technology used to mine coal is still very labour intensive.
Also, the trade unions are stronger in this party of the country and that is another reason why these companies employ so many people to produce a minuscule amount of coal in comparison to other subsidiaries of Coal India. It is interesting nonetheless to observe that the contractual expenses of Eastern Coalfields have risen by 117% since 2009-2010.
The broad level data for Coal India also shows a similar trend. The contractual expenses for the company stood at Rs 7812.71 crore for 2013-2014, a rise of around 48% from 2010-2011. What this clearly suggests is that Coal India is contracting out more and more of its work and that has helped the company. The annual report of the company points out that the contractual expenses have increased mainly due increased volume of contractual operations. This is one of the major reasons which has helped the company push its net profit from Rs 4696.1 crore in 2010-11 to Rs 15,008.5 crore in 2013-2014. And this in turn has translated into a huge hoard of cash.
To conclude, the latest annual report of the company does not give out any number to the proportion of the total coal, mined by the contractors. Nevertheless, people who follow the sector closely suggest that a substantial part of the coal being mined by Coal India is now through outsourcing. What this clearly shows is that the company has been privatised through the back-door, despite the resistance of the labour unions.
The article was originally published on Sep 22, 2014 on www.Firstbiz.com
(Vivek Kaul is the author of
Easy Money trilogy. He tweets @kaul_vivek)