Coal news and updates

CIL faces hurdles as contractors back out over diesel pricing

April 30: Coal India Ltd (CIL), which missed its 2013-14 coal production target of 582 million tons by a huge margin of 20 mt due to multiple reasons, may face difficulty in achieving its 2014-15 target of 507 mt as well because of its inability to compensate contractors for increased cost of diesel, feel industry sources.

"Till now, CIL's constraints lay in getting timely environmental and forestry clearances apart from loading issues, but it has started facing a new problem from August 2013 due to the central government's directive, asking all large users of diesel to purchase the fuel at bulk rates, which is much higher compared to the retail rates," the sources said.

In September 2012, the government had introduced a bulk pricing mechanism in order to cut the subsidy bill, because of which there was significant increase in diesel prices for bulk consumers. The difference in bulk and retail prices was to the extent of about Rs 20 per litre.

This means that if the retail price of diesel is Rs 60 per litre, the bulk price would be around Rs 80 per litre.

"A number of big and small contractors have backed out of their agreements with CIL subsidiaries like ECL, SECL and NCL and have stopped overburden (OB) removal work because they are not being compensated for purchasing diesel at bulk prices and this may severely affect CIL's coal production in the coming months," the sources said.

"Till March 2014, senior officials of subsidiary companies could somehow influence contractors to continue with OB and mining activities but now they have completely stopped work till there is a solution to the problem," sources added.

"If OB work is not as per target and coal is not exposed for mining, production will naturally get affected," a senior CIL official said.

A top official of the company accepted that bulk diesel pricing is indeed affecting the company's production strategy.

"One major problem, which affected us marginally last year but is rather severe now, is diesel. The central government has created a major problem for us and we do not know how to handle this," the official confirmed. 

"We don't know how to follow this policy as there is retail and bulk price difference of about Rs 10-12 per litre. Till September 2012, there was no concept of retail and bulk pricing for diesel as there was only one price and the contract for OB removal with private contractors was based on that," the official said.

"As per the contract, whenever there is an increase in price, we have to give that additional price to the contractor. But for that our basis was the nearest retail price as otherwise there would be 5-10 paise difference from place to place. As we have to have one price, our condition was that the price of diesel should be nearest to the retail rate," the official added. 

The official further said the basis for fixing the rate to the nearest retail price was not intentional.

Explaining the point, the official said, for example, mining or OB removal is being done in a particular area in a district in West Bengal for which different outlets in that district may be charging different prices. In order to fix a price for the contractor, the company considers the price of the nearest outlet where mining is being done.

"This method was being carried out smoothly. However, when the government introduced the bulk pricing mechanism, the contractors started creating problems, saying CIL is paying only the retail equivalent price whereas they are buying diesel at the bulk price," the official said.

"The problem is that we cannot change the contract midway as that would lead to several problems like a CVO enquiry. In fact, some of the small contractors have actually run away. They can't really afford to lose Rs 10 per litre on diesel cost which works out to around Rs 9 per cubic metre," the official added. 

In August last year, the difference came down to around Rs 5 per litre between bulk pricing and retail pricing, but increased gradually and is currently at around Rs 10.75 per litre. 

CIL is excavating around 3.5 million cubic metres of overburden, which means its daily consumption of diesel is close to 25 lakh litres a day or 2.5 million litres a day. 

"This is a major problem. After awarding a contract we cannot change it as it will become a major vigilance issue," a CIL director said.

"We know that we are not supposed to buy in the retail market, but how do I modify the contract after the award. Secondly, assuming that we take a risk and modify the existing contract, some of the contractors can buy in retail and it cannot be ruled out. That would be another scandal because then that fellow/contractor would be making Rs 10 per litre," the director said. 

"If we change the clause, we have to do it for everybody," the director said.

"Last year also we had faced this problem, but our managers had somehow convinced the contractors to keep working till March 31. I don't know what they said, but now suddenly the OB removal has come down because of that," the director added. 

"We cannot increase the price as per rule. Even if we want to, some contractors may buy diesel at the retail rate and bill us for bulk which may make many whisper that we knowingly allowed them to increase prices," the director said. 

"If we can't solve it then it is going to have a serious impact on our production targets this year as well. The contractor will not do the OB removal work because he will incur losses. A genuine requirement is around 0.9 litre of diesel for every 1 cubic metre of OB removal and going by the current price differential it amounts to an extra cost of Rs 9 per litre or per cubic metre of OB removal," he said.

The official further explained that if a contractor has taken a contract at about Rs 70-Rs 75 per cubic metre of OB removal in which the profit component is definitely included, by purchasing diesel in bulk and not from retail, he loses Rs 9 per cubic metre, which means he is not making a profit, but incurring losses.

"I do not think any contractor will be having a profit of Rs 9 per cubic metre of OB removal," the director felt.

Asked what is the production scenario as of April 30, the director said, "It is not bad as of now as we are producing around 1.3 million tons of coal per day. We are around 96% of our target at present, but there will be serious implication later. If OB removal does not take place now, then coal will not come later on. Even now coal is not coming because of slow progress in OB removal because of the diesel issue." 

Asked how the company plans to address the issue, the director said, "We are exploring a couple of options like buying diesel departmentally and distributing to contractors, but before that we have to check the implications of doing so on our taxes etc." 

The director said the matter was discussed at the recent board meeting, but it is feared there might be the possibility of misuse of this (buying departmentally and distributing to contractors).