Kolkata: The world’s biggest coal miner, state-owned Coal India Ltd (CIL), will select joint venture (JV) partners for reviving its 18 abandoned mines through a unique tender to be floated within a month, under which bidders will be ranked on the basis of their assessment of the revenue potential and the cost of producing coal from these mines.

For the first time, the Indian government is going to allow foreign players to start mining coal in India through JVs with CIL. From 13 firms that had evinced interest in partnering it, CIL has shortlisted 10 global miners and metals firms for bidding for its 18 abandoned mines, which have a combined coal reserve of 1.6 billion tonnes. CIL refused to name the bidders because it has signed a confidentiality agreement with them.

Smart move: Coal India chairman Partha S. Bhattacharyya. Indranil Bhoumik / Mint

Under the unique tender, which has been finalized in consultation with its potential partners, CIL will ask the bidders to evaluate the worth of its mines on the basis of their revenue potential, and to assess the cost of restarting and extracting coal from these mines for 10 years. Based on these assessments, CIL will select for each mine the bidder that commits to extract coal at the cheapest cost.

“The tender is dovetailed to suit the requirements of the situation," said CIL chairman Partha S. Bhattacharyya. “It would have taken us years to evaluate the worth of these mines. But those who are going to bid for these mines can do it much faster… They would be given four months to submit their bids." CIL would select a partner for each mine within two-three months of receiving the bids, he added.

Listen to Partha Bhattacharyya talk about the company’s tender

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“It is a smart way of auctioning the mines," said Bhaswar Moitra, professor of economics at Kolkata’s Jadavpur University. “It is impossible for the government to efficiently assess the capacity of these mines and the level of technical efficiency of the bidders. But the bidders have much better information on these (than CIL). However, I am not sure this kind of an auction fully eliminates the possibility of tacit collusion among the bidders."

CIL has included interesting checks and balances to make sure the tender document is watertight, according to Bhattacharyya.

“To make sure that bidders didn’t overstate the revenue potential of a mine, CIL is going to impose a steep penalty on its partner (in a mine) if production trails projections by more than 5%. Similarly, we are going to pay bonuses to the operator if production exceeds commitments made by it at the time of bidding," he said.

Under this kind of an auction, technology becomes the deciding factor. “It is the quality of technology that will not only determine the production potential of each mine, but also the cost of production," said Bhattacharyya.

CIL will gain access to a lot of high-end technology for underground mining by partnering global miners, and this, in turn, will strengthen its chances of securing and exploiting coal assets outside India.

One of the key features of the tender is that CIL has capped the long-term production cost at these mines at 90% of the “current notified price of coal"—or the CIL-determined price of coal, according to Bhattacharyya. Bids that peg long-term cost of mining at more than 90% of the current notified price are not going to be considered at all.

“Most underground mines in India are unprofitable. They are not mechanized, and do not recover the cost of production by selling coal at the notified price," he said. “But by capping the cost of extraction (at the abandoned mines) at 90% of the current price of coal, CIL has made sure that the minimum return from these mines is 10%."

Moitra, however, feels CIL could have set a tighter cap on production cost. “The notified price of coal is a function of inefficiencies in coal production in India. Because of better technology, it shouldn’t be difficult for these global players to reduce production cost by a much bigger margin."

But Bhattacharyya disagrees. “CIL produces 400 million tonnes of coal (a year) and sells it at half the international price. Yet we are viable, which means there is hardly any inefficiency in coal production in India," he said.

He admitted underground mines in India were not run efficiently because they had not been mechanized. “The 18 underground mines that are going to be converted into joint ventures would be mechanized, and that alone would result in substantial reduction in cost of mining."