Supreme Court

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)

Lessons from Coalgate and Naveen Jindal: It is important to save capitalism from capitalists

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010

Vivek Kaul

 

In an interview to NDTV, Naveen Jindal , chairman of Jindal Steel and Power, and Congress politician said that his company would not be able to pay the fine imposed by the Supreme Court. “We will not be able to pay it..because we have not made a provision for it,” Jindal said.
Jindal also told the television channel that the Supreme Court decision “was a ‘setback’ for companies which have mined coal for the past 20 years to generate power and make steel, and now been told that what they are doing is illegal, while they have been creating wealth for the country.”
In a decision on September 24, 2014, the Supreme Court had cancelled 204 out of the 218 coal blocks allocated by the government since 1993. The coal blocks were allocated for free for captive mining. Companies which were given these blocks could use the coal to produce power, iron and steel, aluminium, cement etc. The Court has also fined companies at the rate of Rs 295 per tonne for all the coal that they have produced till date and will continue producing till March 31, 2015, when they need to hand over their mines to the government.
Jindal was the biggest beneficiary of the captive coal block allotments, having been given nine blocks in all. Given this, things he has said in the NDTV interview need to be looked at closely.
The first thing Jindal talks about are “companies which have mined coal for twenty years.”
No company has been mining coal for twenty years. Provisional coal statistics released by the Coal Controller Organisation, which is a part of the coal ministry, shows that coal was first mined by the captive coal blocks only in 1997-98. Also, during this year a minuscule amount of 0.71 million tonnes of coal was produced by these mines. The production crossed 10 million tonnes of coal only in 2004-2005, when these blocks produced 10.11 million tonnes. Hence, serious production from these coal mines has happened only for 10 years and not 20 years as Jindal points out. This was primarily because between 1993 and 2002 only 15 blocks had been allocated to private companies.
This maybe nitpicking, nonetheless it is an important factual point to make given the sensitivity of the issue. In Jindal Steel and Power’s case the Gare Palma IV coal block has been operational from February 1999. This coal mine produced 6 million tonnes of coal in 2013-2014 and is expected to produce a similar amount in 2014-2015.
Further, just because something has been happening for many years, doesn’t mean it is right, even though it may have been government policy. The coal blocks were allocated based on the recommendations of an inter ministerial screening committee. The committee was set up in July 1992 and the coal secretary was its chairman.
As Vinod Rai writes in Not Just an Accountant—The Diary of the Nation’s Conscience Keeper “This committee was to scrutinize applications for captive mining and allocate coal blocks for development, subject to statutes governing coal mining, following which the coal minister would approve the allotment…The screening committee is expected to asses applications based on parameters such as the techno-economic feasibility of the end-use project, status of preparedness to set up the end-use project, past track record in executing projects, financial and technical capabilities of applicant companies and the recommendations of the concerned state governments and ministries.”
The committee was supposed to look at each application based on these criteria and then make a decision of who to allot the coal block to. But that doesn’t seem to have happened. As the Supreme Court judgement dated August 25, 2014, clearly points out “The entire exercise of allocation through Screening Committee route thus appears to suffer from the vice of arbitrariness and not following any objective criteria in determining as to who is to be selected or who is not to be selected.”
The judgement further points out that “there is no evaluation of merit and no inter se comparison of the applicants. No chart of evaluation was prepared. The determination of the Screening Committee is apparently subjective as the minutes of the Screening Committee meetings do not show that selection was made after proper assessment. The project preparedness, track record etc., of the applicant company were not objectively kept in view.”
Further, the guidelines that the Screening Committee was supposed to follow did not contain “any objective criterion for determining the merits of the applicants.” “As a matter of fact, no consistent or uniform norms were applied by the Screening Committee to ensure that there was no unfair distribution of coal in the hands of the applicants.” The Supreme Court came to this conclusion after studying the minutes of the Screening Committee meetings.
Interestingly, the Comptroller and Auditor General(CAG) had come to a similar conclusion when it had audited the procedure for allotment of coal locks in mid 2011. As Rai points out “The process that the committee actually followed was not really clear from the records. All that the records showed was that the committee met, deliberated and merely recorded the name of the block allotted to a company, and the state where the end-use plant existed. It is left to the reader to decide if transparency was a victim and, if so, how audit erred in pointing out this lacuna.”
The problem was that even if the Screening Committee wanted to follow objective criteria, at times it was simply not possible. Former coal secretary P C Parakh (who took over as coal secretary in the second week of March 2004) explains this in Crusader or Conspirator—Coalgate and Other Truths “By the time I took charge of the ministry, the number of applicants for each block had increased considerably although still in single digits. I found a number of applicants fulfilling the criteria specified for allocation of each block on offer. This made objective selection extremely difficult.”
In fact in the years to come the situation became much worse as more and more companies applied for coal blocks. As Parakh writes “According to CAG’s report, 108 applications were received for Rampia and Dip Side of Rampia Block [names of two coal blocks]. I found it difficult to make an objective selection when the number of applicants was in single digits. How could the Screening Committee take objective decisions when the number of applicants per block had run into three digits?”
Parakh to his credit realized pretty early that the Screening Committee method of allotment wasn’t working. In fact, in his book Parakh goes on to list several reasons on why giving away coal blocks free for captive mining by companies just did not make sense. By giving away coal blocks for free, companies which had no experience in coal mining were getting into a totally unrelated field. The government had no way of monitoring whether the captive mine was being used for captive use. Or was the company, which had got the coal block, selling the coal it was producing in the open market and thus “promoting corruption and black money”. Further, the system of allocation of coal blocks for free was discriminatory. It offered a huge premium to companies which managed to get a free coal block, in comparison to ones that did not.
Hence, Parakh proposed to Manmohan Singh(who had taken over as coal minister) in August 2004 that coal blocks should be allotted through the competitive bidding route. Before he did this Parakh had even called an open discussion of all the stakeholders in June 2004.
The stakeholders included the business lobbies FICCI, CII and Assocham, other ministries whose companies had applied for coal blocks and private companies.
Parakh points out that most invitees were not in favour of competitive bidding of coal blocks. As he puts it “not many participants were enthusiastic about open bidding. Their main argument was that the cost of coal to be mined would go up if coal blocks were auctioned.”
Parakh suggests that assuming that business men bidding for coal blocks (if such a process were to be introduced) would drive up the price of coal to astronomical levels is suggesting that they are stupid. As he writes “Participants at open auctions are hard-headed businessmen with an acute sense of profitability. They do not make irrationally high bids. The price at which coal from CIL[Coal India Ltd] was available would automatically put a cap on the bid amount.”
The industry ultimately resisted open bidding simply because until then they had been getting coal blocks for free. And if something is available for free why pay for it. “To an extent, it was a reflection of corporate India’s aversion to transparency,” writes Parakh.
Nevertheless on August 20, 2004, Manmohan Singh approved allocation of coal blocks through the competitive bidding route. Immediately after this a number of letters written by MPs opposing competitive bidding started coming in. As Parakh writes “This included one from Mr Naveen Jindal who had considerable interest in coal mining.”
This is when Dasari Narayana Rao, the famous Telgu film director, who was the minister of state for coal. entered the scene. As Rai points out in his book “Rao, observed that any change in the procedure for the allocation of coal blocks would invite further delay in allocation.”
As Rao wrote while submitting the file to Manmohan Singh: “It is difficult to agree with the view that Screening Committee cannot ensure transparent decision-making. This alone was not adequate ground for switching over to a new mechanism, particularly when the interests of core infrastructure areas are involved.”
On March 25, 2005, Manmohan Singh “recorded the approval of the cabinet note seeking sanction of the competitive bidding system,” Rai points out. But Rao still did not give up and kept talking about the “cost implications” of the competitive bidding system of allocation of coal blocks. He finally succeeded and on July 25, 2005, it was decided that the coal ministry would continue to allot coal to blocks through the Screening Committee route.
In May 2014 the enforcement directorate slapped money laundering charges against Rao and Jindal. As the PTI reported “The agency, according to sources, has framed the charges after it found multi-layered transactions between the firms owned by Jindal to Rao’s firms based in Hyderabad and “illegal money” was routed for alleged favours given for the allocation of coal firms to Jindal.”
Interestingly Jindal told NDTV that “one of the Jindal companies had lent money to an unrelated company, which in turn invested in a company in which the Mr Rao had a controlling stake.”
Given this, the situation is not as simplistic as Jindal tried to project in his NDTV interview. Also, between the Supreme Court and the CAG it has been clearly established that the Screening Committee route to allot coal blocks was not transparent at all and companies which got coal blocks benefited from this lack of transparency. Given this, it led to the Supreme Court cancelling 204 out of the 218 blocks that had been allocated, including coal mines which were already under operation.
Jindal in his interview also told NDTV that his company won’t be able to pay the fine imposed by the Supreme Court because they hadn’t made a provision for it. The Supreme Court has fined the companies already operating coal blocks Rs 295 per tonne for all the coal that they have produced till now and all the coal they will continue to produce till March 31, 2015, when they need to hand over the mines back to the government. This in a way took care of what Parakh termed as discriminatory. As he writes “The [Screening Committee] system of allocation of captive [coal] blocks offers huge advantage to industries that get coal blocks over those who are not able to get coal blocks.”
Edelweiss Securities estimates that Jindal Steel and Power will have to pay a fine of close to Rs 3000 crore. While the company may not have made a provision to pay the fine, it needs to be pointed out that as on March 31, 2014, the company had a balance sheet size of Rs 74,072.1 crore. Its reserves and surplus amounted to Rs 22,519 crore. It had cash and bank balances of Rs 1,015.28 crore. Further, in the last two financial years it has made a total profit of Rs 4820.5 crore.
Also, let’s calculate the financial benefit arising out of the Gare Palma IV coal block which as pointed out earlier has been operational from February 1999. This coal mine produced 6 million tonnes of coal in 2013-2014 and is expected to produce a similar amount in 2014-2015.
A research report brought out by Kotak Institutional Equities suggests that it costs Rs 600-800 per tonne to produce captive coal. In comparison, it costs Rs 3,500 per tonne to import coal. Hence, imported coal is four to five times more expensive than captive coal.
So the cost of producing 12 million tonnes of coal over a two year period at the upper end cost of Rs 800 per tonne would have been Rs 960 crore. Along with a fine of Rs 295 per tonne this amounts to Rs 1314 crore. Consider the other possibility of importing coal at Rs 3500 per tonne. This would have cost the company Rs 4200 crore. The difference between these two numbers comes to Rs 2886 crore. This calculation just takes the last two years into account. Nevertheless the mine has been functioning for close to 15 years now.
The total fine that the company needs to pay amounts to around Rs 3000 crore. Hence, even after it pays the fine the company would have managed to save a lot of money over the years because it got the coal block for free through a process which wasn’t transparent at all.
In fact, Jindal isn’t the only one protesting. The pink papers over the last few days have been full of quotes criticizing the Supreme Court’s decision to cancel the coal block allocations. But when a process has not been transparent for 20 years, it needs to be cancelled. And when this happens, there are bound to be repercussions, which the incumbents won’t like.
As the American author Upton Sinclair once wrote “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!” The corporates and their lobbies who are coming out against the Supreme Court’s decision are a good example of this.
It needs to be pointed out here that only 40 out of 218 coal blocks are currently operational. Companies, given that they had got blocks for free, seemed to be in no hurry to start production. That wouldn’t have been the case, had they paid for it in the first place.
To conclude, it is worth quoting what Raghuram Rajan and Luigi Zingales write in Saving Capitalism from the Capitalists “Since a person may be powerful because of his past accomplishments or inheritance rather than his current abilities, the powerful have a reason to fear markets…Those in power – the incumbents – prefer to stay in power.” Jindal clearly would have liked that.
The article originally appeared on www.FirstBiz.com on Sep 28, 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)

Coalgate: Why govt needs to plan for repercussions from SC’s final decision

coalVivek Kaul

More than a week back, the Supreme Court declared 218 coal blocks allocations made to private sector and public sector companies since 1993 as illegal. These blocks were allocated by the government over the years through the screening committee route.
The Court found the process of allocation of these blocks to be suffering “from the vice of arbitrariness”. Hence, it went ahead and deemed them to be illegal. On September 9, 2014, it reserved its final decision on the matter.
The attorney general Mukul Rohatgi told the Court that the “illegal allocations must go”. Nevertheless, he also requested that the Court could consider saving 40 coal mines which were already producing coal and six blocks which were on the verge of starting production. “Only a pocket of some 46 units can be saved,” Rohatgi told the Court.
The mines already in operation are expected to produce 53 million tonnes in 2014-2015, or around 9% of the country’s total coal production of around 590 million tonnes. The blocks allocated by the government through the screening committee route are for captive use. Hence, the company owning a mine is allowed to use the coal that it produces for the production of power or steel or cement. Any extra production that is not used needs to be handed over to the local subsidiary of Coal India Ltd.
A report in the Business Standard points out that the coal being produced in the 40 mines already in operation was being used to produce “26,000 Mw of power output and 12 million tonnes of steel.” Hence, it is in the interest of the nation that these mines need to continue production, even after the licenses issued to them are cancelled.
It will not be easy to replace this production by importing coal. 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 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.
And that explains to a large extent why Rohatgi told the Court that these mines need to be saved.
The question to ask here is why are some coal blocks been producing coal and others are not? The straightforward answer is that these blocks were allocated earlier than others and as a result commenced mining coal faster. As Senior counsel Dushyant Dave, appearing for one of the private parties, told the court that if the Court were to distinguish between 46 mines already producing coal or on the verge of producing it and other mines, it “distorts the level playing field”.
The Court will have to keep this factor in mind while making the final decision. If the Court decides to cancel all the coal-blocks then the government needs to ensure that the production in the mines already under operation does not stop. In order to do this Rohatgi suggested to the Court that if all the blocks are cancelled then Coal India should be allowed to operate the mines already under operation. Or the companies which own the block currently should be allowed to operate till the government auctions the mine.
Allowing Coal India to operate seems like a good idea on paper. Nevertheless, a few issues need to be figured out first to help Coal India seamlessly takeover these mines, once their licenses are cancelled. 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? What if it makes losses on these mines?
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.
Coal India’s production target for 2014-2015 stands at 507 million tonnes. As mentioned earlier, the 40 captive mines already under operation are likely to produce 53 million tonnes in this financial year. This amounts to around 10.5% of Coal India’s production. Hence, the number of employees that Coal India would have to depute to these mines would be a significant number. Given this, if the government is serious about this option, it should start with the groundwork on this front without waiting for the final decision from the Supreme Court. This can help save time and ensure that the production of coal continues.
Over and above this, companies which have been operating the mines have already invested a significant amount of money into these mines. If these mines are taken away from them, it is bound to put financial pressure on them and in turn, on banks which have loaned money to these companies. Nevertheless, if justice is to be delivered, this is something that cannot be avoided.
To conclude, the government needs to start working on a plan on how it will keep the production of coal going, if the Supreme Court decides to cancel all blocks that were allocated through the screening committee route.
The article originally appeared at www.firstbiz.com on September 11, 2014

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

Power crisis won’t be solved anytime soon: Why it’s difficult to turnaround the coal sector

coalVivek Kaul

In a column in The Indian Express published on September 9, 2014, Neelkanth Mishra, India Equity Strategist for Credit Suisse pointed out that “a large number of your power plants are running with less than four days worth of coal inventory…Even a flash strike would cripple India, let alone a prolonged confrontation.”
This when India has the third largest coal reserves in the world. Despite the enormous reserves we are unable to produce enough coal to meet the demand. During this financial year the demand for coal is expected to be at expected to be at 787 million tonnes. The supply is expected to be at 590 million tonnes.
The government of India had expected this rise in demand and in 1993 decided to give out coal blocks to public sector as well as private sector companies. The idea was that these companies will also produce coal and the country would have enough coal to meet the demand. These coal blocks had geological reserves amounting to 44.8 billion tonnes.
A bulk of these mines were given out starting in 2004, after the Congress led United Progressive Alliance came to power. The Screening Committee route which was used to give away these blocks was deemed to be fairly arbitrary by the Supreme Court in a recent judgement: “The entire exercise of allocation through Screening Committee route…appears to suffer from the vice of arbitrariness and not following any objective criteria in determining as to who is to be selected or who is not to be selected. There is no evaluation of merit and no inter se comparison of the applicants. No chart of evaluation was prepared. The determination of the Screening Committee is apparently subjective as the minutes of the Screening Committee meetings do not show that selection was made after proper assessment. The project preparedness, track record etc., of the applicant company were not objectively kept in view.”
Given this, the Supreme Court deemed these allotments to be “illegal”.
On September 8, 2014, the government told the Supreme Court, that it had no objection if all the 218 coal blocks that were allocated through this route to the public sector as well as private sector companies are cancelled. Around 31 coal blocks that had been allocated currently produce coal.
At close to 53 million tonnes in 2014-2015, these blocks will produce around 9% of the country’s total coal production of around 590 million tonnes. If the licenses given to these blocks are cancelled, there will be a huge coal shortage. In a previous piece I had estimated that importing this coal from Indonesia will cost around Rs 17,300 crore, pushing up the power tariffs further.
One suggestion that has been put forward is that the government owned Coal India Ltd should take over the functioning these coal mines and ensure that the production does not stop. This seems to be a sensible thing to do, once the intricacies of who gets to keep the profits made from the coal being mined out of these mines, is decided.
Further, these coal blocks are likely to be auctioned in the days to come. As the PTI reports “According to sources, the Ministry of Power and Coal is planning to auction the blocks, allocation of which may be scrapped by the apex court, by the end of the fiscal. “The entire process of coal block auction will take at least 6 months,” the source said.””
While theoretically this sounds the best way forward, auctions may not be so easy to carry out. The Coal Block Auction draft guidelines were released on April 4, 2011. And nothing has happened since then. One reason obviously is the lack of work culture that prevailed during the previous Congress led UPA government. But there is more to it than just that.
As Neelkanth Mishra of Credit Suisse wrote in a research note released in March 2014 “The government has been planning to conduct coal block auctions for close to three years now (see link), but despite repeated pronouncements of it being a few weeks/months away, there has been little progress. In our view, the challenge is inadequate prospecting—the ministry may be apprehensive of the winning private bidder in an auction managing to increase reserves estimates within a short time frame. Such a development would create negative press and possibly trigger anti-corruption investigations. Thus, blocks are unlikely to be auctioned till reserves have been updated.”
This needs to be explained in a little more detail. The Geological Survey of India first carries out what is known as promotional drilling. This gives sort of a quick and dirty estimate of the total amount of coal reserves in a block. It is followed by detailed drilling carried out majorly by the Central Mine Planning Design Institute(CMPDI), one of the subsidiaries of Coal India. The Mineral Exploration Corporation also chips in. This round of drilling gives an exact estimate of the quantity of coal in the blocks along with other characteristics like quality, depth, gradient of coal seams, the ash content, volatile matter, water content etc. These parameters are used to prepare the proect report.
CMPDI currently is understaffed to carry out this exercise quickly enough. Experts believe that in order to carry out this exercise completely, it will take many years. Also, without a proper estimate of the amount of coal that can be mined out of a block, it is risky for the government to auction the block, given that it could later lead to litigation. Hence, it is important this exercise be completed properly. The mining of coal from these blocks can take a few more years after the completion of this exercise. Estimates suggest that it takes 10-12 years to get a coal mine going.
In fact, this mess could have been avoided if the coal blocks would have been allotted through competitive bidding, from the very beginning. In August 2004, PC Parakh had proposed to Manmohan Singh (who had taken over as coal minister after Shibu Soren resigned) that the allocation of coal blocks should be done through competitive bidding.
In fact, even before Manmohan Singh had taken over as coal minister from Soren, Parekh had called for open house discussion of the stakeholders in June 2004. This included the business lobbies FICCI, CII and Assocham. Several other ministries whose companies had applied for coal blocks were invited. So were private companies.
Parakh writes that most of the invitees were not in favour of competitive bidding for coal blocks. As he writes in Crusader or Conspirator—Coalgate and Other Truths “not many participants were enthus
iastic about open bidding. Their main argument was that the cost of coal to be mined would go up if coal blocks were auctioned.”
Due to this and other reasons, the coal sector has landed up in a huge mess. And given the lack of supply of coal, power plants are not working to their full capacity. “Plant load factors for thermal power plants have been plummeting, and would be below 60% (i.e. going back to levels seen in the mid-1990s) if one includes capacity completed but not commissioned,” writes Mishra.
It is unlikely that the coal production and hence, power production are going to go up dramatically any time soon. The least that the government can do is to prevent further damage and act quickly to get the sector up and running, over the next five years that it is in power.

The article originally appeared on www.Firstbiz.com on September 10, 2014.

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