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Business News/ Opinion / It’s time to get the coal sector out of the pits
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It’s time to get the coal sector out of the pits

Opening commercial mining to domestic and foreign private entities will make open-cast mines more efficient and promote underground mining

The government has allowed the e-auction of coal blocks, which would help private firms in the steel, power and cement sectors through captive use of mines. Photo: BloombergPremium
The government has allowed the e-auction of coal blocks, which would help private firms in the steel, power and cement sectors through captive use of mines. Photo: Bloomberg

The government has an albatross hung around its neck—a huge power deficit fuelled by a persistent coal shortage—as it moves to steer India back to the path of high growth. Official data show that power projects worth over 36,000 crore with a total generation capacity of 7,230MW are stuck due to the coal shortage.

And as if things could not get more challenging, the apex court has cancelled more than 200 coal blocks allocated between 1993 and 2010. But the government is moving past the controversy. Recently, it allowed the e-auction of coal blocks, which would help private firms in the steel, power and cement sectors through captive use of mines.

This is a welcome step that should be part of a wider series of urgent, bold and long-term solutions that include allowing the entry of private entities, including foreign, into commercial mining—a measure the government is considering and should act on with some alacrity. It will increase competition and enhance efficiencies in the sector.

Look East, selectively

China’s largely successful strategy around coal offers lessons from which India can cherry-pick. Between 2005 and 2013, China ramped up thermal coal production from 2.3 billion tonnes to 3.6 billion tonnes (see figure 1). This was done while consolidating smaller coal mines to improve efficiency, resulting in average mine productivity soaring almost three-fold (see figure 2).

Though China relies on coal for around 70% of its energy consumption, it is fast reducing its dependence by focusing on hydro, gas, nuclear and renewable energy sources. The US Energy Information Administration expects the share of coal in China’s energy mix to fall to about 55% by 2040.

China has also maintained focus on underground mining, which results in less pollution than open cast mining. Underground mining currently accounts for around 90% of China’s total coal production; for India, the figure is about 10%.

That’s not all. China pushed towards a more competitive market and moved to decontrol coal pricing, encouraging state-owned companies to achieve best cost practices and add large capacities.

However, it still remains the world’s top coal importer.

India can learn from such practices only if they are part of a bold vision and decisive national leadership. Having worked with governments and coal players in India and abroad, we suggest the following to bring a step change in India’s coal sector.

Towards a free market: The government’s plan to sell a 10% stake in Coal India Ltd in the coming weeks is welcome. However, the private sector’s role in coal mining remains restricted to captive mining, nearly a quarter of a century after India’s economic reforms started. Opening commercial mining to domestic and foreign private entities will make open-cast mines more efficient and promote underground mining.

But the government will attract private interest only if it brings about transparent bidding for coal blocks, lays out a risk-and-reward mechanism and easily understood environmental norms, and ensures faster clearances. The optimising and scaling of the mine developer and operator (MDO) framework, and allowing outsourcing of mining projects to third parties, can also provide a good starting point.

Build CIL 2.0: Coal India Ltd (CIL) lags international peers in productivity despite having a high proportion of open-cast mines. Selectively upgrading tools, equipment, processes, systems and performance-linked incentives for employees will significantly improve operational efficiency.

Strategically, Coal India’s operating model should be revamped by defining clear criteria for evaluating projects and then ensuring optimal utilization of carefully selected projects. In addition, restructuring Coal India’s manpower to make its subsidiaries more operationally efficient—a step under consideration—will be key to building CIL 2.0.

Negotiate as India Inc.: By negotiating in the international coal market as a single entity, India can leverage its scale as a major coal importer and get best prices while ensuring reliable long-term supply. International Coal Ventures Pvt. Ltd, a joint venture comprising of state-run behemoths set up to secure coal assets outside India, has been relatively dormant since its inception in 2009 despite its recent acquisition of a coal mine in Mozambique.

What India needs is an empowered body to represent pan-India coal requirements, on the lines of Japan Coal Development Co. Ltd (JCD). JCD was set up in 1980 to negotiate long-term volume contracts for imports and invest in overseas coal assets to secure a stable coal supply for Japan at best prices.

System efficiency to address productivity losses: Optimising power plant footprints and rationalization of coal linkages will require more pit-head plants or power plants in coastal areas directly fed by imported coal. This will save transportation costs and reduce supply delays. Such plants call for development of ultra-high voltage transmission lines to transfer power. In addition, India needs to address the infrastructure mess around coal. According to Coal India, its output suffers as much as a 300 metric tonnes loss annually due to inadequate rail infrastructure.

India needs these reforms and more if it is to drag its ailing coal sector out of the pits and reboot its power sector.

Amit Sinha is a partner at Bain and Company and leads its India Industrial Goods and Services practice, specializing in power. Deepak Jain is a principal in the same practice at Bain. Both are based in New Delhi.

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Published: 28 Oct 2014, 12:18 AM IST
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