Coal news and updates

In what could add a fresh twist to the ongoing investigation into the allocation of coal blocks, it now appears that coal-mining contracts struck by some joint ventures (JVs) set up by state public sector units (SPSUs) and private sector companies were inflated, resulting in a higher than industry average payout on the coal mined. Not only does it entail infractions of corporate governance standards, the higher coal price has meant that power companies using these inputs have ended up charging customers higher tariffs in instances where the fuel costs are a pass-through to end users. While government officials declined to talk on the subject, several analysts, experts and advisors to these JVs that Mint spoke to confirmed the trend. These contracts, also referred as mine developer and operator (MDOs) contracts, were allegedly skewed in favour of the private companies. There was no standardized documentation of the contract; the qualification criteria were tweaked to restrict bidders. No benchmarking was done for the coal’s production cost, resulting in such contracts being awarded at rates far higher than the industry average. Also, since the fuel price was a pass-through in the electricity tariff for some of the companies, the JV and the private partner profited at the expense of consumers. The new revelations come in the backdrop of the Supreme Court ruling that all coal block allocations between 1993 and 2010 were illegal. The apex court also took exception to SPSUs entering JVs with private companies and handing over mining operations to the latter as they were in violation of the existing mining laws of the country. “There are three basic issues: First, why the state governments or (their entities) were given blocks without an undertaking that they would mine the coal themselves and use it?. Second, has the transfer-pricing mechanism been fair in the case of all the coal blocks wherever the entity to which the coal mine was awarded and coal user is not same? And finally, was there any benchmarking done for production cost on the basis of strip ratio, terrain and state of existing infrastructure?” said a Mumbai-based analyst requesting anonymity due to the sensitive nature of the information. The ratio of waste material to what one is extracting is known as stripping ratio in mining parlance. Interestingly, the government has proposed to the court that 46 coal mines (40 functional) with attached power and steel plants could be conditionally exempted from deallocation, wherein these mines would pay Rs.295 per tonne of coal they’ve used to recompense the loss caused to the exchequer and sign long-term power purchase agreements. The case will be taken up on 9 September for a likely final decision. “In absence of any standard template for appointment of MDOs, we saw several state mining companies entering into unholy alliances with private sector companies through JVs. These JVs then tendered out MDOs through an opaque bidding process with favourable conditions to appoint related parties. In some cases, the coal excavated was linked to Coal India Ltd’s prices (which are higher than captive coal mine prices) and sold to benefit the JV and the MDO,” said a partner at one of the big four consulting firms, who also didn’t want to be identified. The apex court’s decision to declare the allocations illegal has sent ripples through the metals, mining and power sectors, and also through banks that had loaned money for mining and power projects. “It is clear even in many cases among those 46 blocks which the coal ministry has identified as ones where production has either started or about to begin soon that there was no robust framework to see that there is no loss to exchequer. There are examples where private companies formed joint ventures with government companies to win a coal block and awarded the mining rights to another group entity. It is obvious that more layers you put between a mine and end use, more expensive the end product would be and less beneficial it would be for the common good,” added the Mumbai-based analyst quoted above. Of India’s installed power generation capacity of 250,257 megawatts (MW), 60%, or 149,178.39MW, is coal-based. The production of coal has been unable to match the growing demand for fuel in a country where the power sector consumes nearly 78% of the domestic output of the mineral. “It was often the case that the MDO contracts were awarded at rates which were far higher than the prevalent mining rates in the country. For example if the rate was Rs.400 per tonne, some of these MDOs have been awarded at Rs.2,000 per tonne. This was a pass-through, which raked in enormous profits,” said a senior coal mining expert requesting anonymity. While India’s power generation capacity grew by 60% over the last five years, coal production only grew by around 6%. The country mined 532 million tonnes (mt) in 2009-10, 533 mt in 2010-11 and 540 mt in 2011-12. Production was 557 mt in 2012-13 and 564 mt in 2013-14. “My suggestion is that MDO should be structured on basis of scope and delivery, with indexation for prices outside control (e.g., diesel and explosives), and should not be linked to coal or mineral prices. That would be consistent with the spirit of the law,” said Kameswara Rao, who heads the energy, utility and mining practice at consultancy PricewaterhouseCoopers (PwC) India. The 163-page ruling delivered by the Supreme Court said: “(I)n the joint venture agreements between the state PSUs and the private companies, mining operations have been given to private company,” drawing a reference to the Chhattisgarh Mineral Development Corp. (CMDC) and Madhya Pradesh State Mining Corp. Ltd. “This modus operandi has virtually defeated the legislative policy in the CMN Act and winning and mining of coal mines has resultantly gone in the hands of private companies for commercial use,” the order said. CMN Act is short for the Coal Mines (Nationalisation) Act, 1973. Interpreting the CMN Act, the court held that only the central government or a central public sector undertaking or a corporation owned or managed by the central government can undertake coal mining. As a result, the judgement concluded that state governments and state public sector undertakings have no role in mining coal for commercial use; it struck down a 2001 circular that permitted states to undertake mining. However, analysts favour of the MDO model. “Coal MDO is a proven model in many global mining countries like Indonesia and Australia. It encourages adoption of efficient mining techniques and capabilities by MDO contractors which may not necessarily be available with coal asset owners. This in turn can drive higher productivity and cost efficiencies, which is generally lacking in the Indian mining sector,” said Abhishek Poddar, a partner at consulting firm AT Kearney. “Many Indian companies and foreign contractors are eagerly looking at building large portfolio in the coal MDO space. However, for this to translate into real investments on the ground, it is critical that associated policies and practices in terms of selection of contractors, land acquisition, regulatory clearances etc are streamlined,” Poddar added. On 18 March 2008, Mint first reported significant irregularities in the Union government’s award of coal blocks. “The MDOs are essentially services contracts, and so can be structured in several different ways. For example, they may be differentiated in the scope of services (typically, all development and operations, but some include land acquisition, beneficiation, etc.), or in terms of how returns are structured (typically, per tonne of output),” PwC’s Rao said.

 

 

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