India’s attempts to open up coal have been hit by scams, green law violations and even covid-19. Will it take off?
Muted demand for coal due to an economic slump means that auction prices may be depressed. States are already complaining about a possible drop in royalty revenue
The government’s latest round of coal-block auctions was all set to kick off on 19 October. It would have, for the first time, allowed commercial and even foreign players to mine coal. However, on 14 October, in an unexpected move, the Centre announced yet another delay in the process. The government will announce the revised schedule “shortly" for the latest auctions, which would, when they happen, become the first following the complete deregulation of the sector.
India has been auctioning coal blocks since 2015. All in the 10 rounds so far were for captive use by steel, cement, aluminium and power producers. The coming round is the first in which mines are being offered for commercial mining too. Further, these auctions would be the first to be open to foreign-owned mining corporations, following the government allowing 100% foreign direct investment (FDI) in commercial coal mining in 2019.
Except, the response has been underwhelming and there are several reasons to be measured in expectation. None of the big foreign miners like BHP, Glencore and Peabody are participating, and domestic companies dominate the list of bidders. No bids have been received for 15 of the 38 coal blocks that are up for auction, continuing the trend of tepid participation.
Muted demand for coal due to the economic shock resulting from the covid-19 pandemic means auction prices may be depressed. There is also a change in the auction design and the basis for royalty payments: from a fixed sum of ₹150 per tonne of coal sold to a revenue-sharing model, starting from 4%. Several analysts have estimated that this provision, albeit friendly to bidders, might result in a lower floor price, and, hence, a lower auctioned price and lower revenue for the government.
Regulation to deregulation
India has the world’s fifth-largest known coal reserves, or nearly 10% of global reserves, and is the world’s second-largest producer. But much of this is inferior “non-coking coal".
Coal remains crucial to India’s domestic energy security. In 2019, India imported 235 million tonnes (mt) of coal, against a total domestic production of 728 mt. China, which has marginally higher reserves, produced nearly five times the amount of coal in 2019. To understand India’s limitations in coal production, it is important to view it in the context of the country’s complex history when it comes to coal regulation.
Coal has always been a highly regulated resource in India. In 1973, its mining was nationalized, with all existing mines coming under the ambit of government-owned Coal India Ltd (CIL). A virtual monopoly was created. All consumers of coal were to procure from CIL at a “notified price" determined by the Centre.
Mining was de-regularized in the 1990s, with companies in select industries such as power, steel, cement and aluminium getting licences to mine coal for “captive use"—for use as raw material in their industries. Yet CIL has continued to dominate production, with a nearly 80% share.
Between 1993 and 2011, 194 coal blocks, with geological reserves of 44 billion tonnes were allocated to private and government parties for captive use. These companies were exempt from paying royalties since the mining was not for commercial use. A financial audit by the Comptroller and Auditor General of India (CAG) in 2012 estimated that the benefit to private allottees was up to ₹1.86 trillion for opencast coal mines in this period. The CAG report added that the government could have tapped some of this financial benefit by allowing competitive bidding.
In 2014, the Supreme Court ruled the process of discretionary allocation of coal blocks was illegal, and cancelled allocation of 214 blocks. In 2015, the BJP-led government, which had campaigned vigorously on the issue of corruption in coal mines, introduced the Coal Mines (Special Provisions) Act, 2015, allowing competitive bidding for the mines. But participation was restricted to companies in select industries
The Centre notified 204 of the de-allocated mines, and earmarked 110 blocks for the first round of auctions, with total geographical reserves of 23.8 billion tonnes. The first three rounds of coal auctions followed in 2015, with 33 blocks bid out and another 17 allotted to government companies in the power sector. Hindalco, Jaypee Cement and JSW Steel were among those that secured blocks in these auctions.
A total of 10 auctions for captive coal use were held from 2015 to 2020. However, with declining active participation from captive coal users and the government struggling to raise revenues from coal, the government revisited its policy of captive use. This March, in an attempt to boost domestic coal production and in order to restrict imports, the government allowed commercial mining operations—the mined coal can be sold anywhere and to anyone in the world. In August, 100% FDI was allowed, removing the last significant vestige of regulation in the coal mining industry.
The current round of auctions goes back to June, when the ministry of coal announced the first round of commercial mining auctions for 41 coal blocks. Technical bids were to be submitted by 18 August. Three blocks were dropped due to environmental concerns. That left 38 blocks, led by Madhya Pradesh (12 blocks), followed by Jharkhand, Odisha and Chhattisgarh (see Chart 1).
Due to a tepid initial response, the deadline for technical bids was extended till 29 September. While there was great initial enthusiasm around the concept of commercial auctions, the timing of the exercise—in the midst of a pandemic—has been questioned. In July, the government of Jharkhand had filed a suit in the Supreme Court against the central government, alleging that the announcement of the auctions was made “unilaterally" without consulting it.
As a state with massive geological reserves and one that has borne the brunt of extensive mining, the Jharkhand government highlighted that six of the nine blocks up for auction fall within Fifth Schedule areas. Such areas are protected for scheduled tribes, and they provide significant autonomy.
Further, the suit argued that depressed demand for coal due to the ongoing economic slowdown would lead to lower prices accruing to the state. In coal mining, states are entitled to royalty revenues from coal reserves within their borders, while revenues accrue to the Centre through various tax levies. In 2018-19, Jharkhand earned about ₹6,000 crore in mining revenues. This constituted about 72% of its non-tax revenues and over 10% of its total revenue receipts.
The apprehensions of the Jharkhand government seem to have a basis. In spite of the extension in deadline, no bids have been received for 15 of the 38 mines. In spite of foreign companies being allowed, global mining majors have given these auctions a miss. Therefore, the government’s stated objective of inviting global technical expertise in the sector has not come to fruition.
There are 42 entities that have put in 76 bids for 23 blocks. Of these, 13 have bid for more than one block (see Chart 2). While a majority of the bidding companies are specialized mining corporations, there are also steel, aluminium and power companies in the fray.
The Adani Group, which includes its four subsidiaries, accounts for nearly one-sixth of all bids submitted and has bid for 11 of the 23 mines up for auction. To prevent cartelization, the terms of the auction clearly specify that a company and its subsidiaries cannot bid for the same block. However, if all Adani Group companies secure their respective blocks, a significant number of new mines will be under the ambit of one conglomerate.
The auction will be held in two rounds: technical round and financial round. The financial bid, which was to kick off from 19 October, but now stands postponed, comprises of two further rounds: the initial price offer (IPO) and the final price offer (FPO).
In the first round, for each block, the IPO of technically qualified bidders would be opened and ranked in descending order, with the lowest-ranked bid eliminated. The remaining qualified bidders shall be eligible to participate in the electronic auction and submit their FPO. To be eligible for the IPO, the firm is required to quote a bid above the “floor price".
For the latest auction, a change in the basis of the floor price has been a big talking point. A revenue-sharing model has replaced a fixed royalty amount. Previously, the floor price was a fixed royalty of ₹150 per tonne, and bidders contested by bidding upwards of this. This time around, the floor price is fixed at 4% of the annual revenue realised from the coal mine. Forward bids would be accepted in multiples of 1% of the revenue share till 10% revenue share. Thereafter, bids would be accepted in multiples of 0.5% of the revenue share.
This change from fixed royalty to variable royalty gives miners protection from fluctuations in prices. Global coal prices have fluctuated sharply over the past two decades, surging from less than $50 per tonne in 2000 to over $160 in 2008. However, they have cooled significantly since the start of this decade, and have largely remained below $100. Over the past year, coal prices have taken a hammering due to the pandemic and are currently around $60.
The revenue share will be determined on the basis of a formula issued by the coal ministry. Analysts say, given current prices and grades of coal most prevalent in India, a 4% floor price is expected to result in a lower floor price than the previous norm of ₹150 per tonne.
If the lower floor price extends to the final price, it will make the auctions relatively more attractive to companies. However, states, which bear the brunt of the negative consequences of coal mining such as pollution and a loss of forest cover, will realise lesser revenues. This has become a bone of contention for states, who allege that the Centre seems to be prioritizing a boost in coal production rather than revenue maximization for states. There are also apprehensions that the shift to commercial mining might result in greater trading and speculation of an essential resource that is crucial to India’s energy security.
A 2015 report by consultancy PricewaterhouseCoopers on the coal block auctions that year highlighted how several companies bid aggressively in order to secure access to coal. “A lot will depend on how efficiently and quickly these blocks can be developed to justify the nature of winning bid prices," the report said.
There are also environmental considerations. The initial list of 41 coal blocks included five in the densely-forested region of Hasdeo Arand in Chhattisgarh. While three have been dropped due to vehement objections from the state government, two have been retained.
With renewable energy becoming an increasingly viable option, the massive environmental consequences of coal mining, in addition to the air pollution due to the burning of coal, brings into question the motivation to increase the country’s coal production.
However, the reality is that coal remains crucial to India’s energy security. Data from the International Energy Agency shows that as of August 2020, 61.3% of India’s electricity was generated by coal, as compared to 30.1% by renewables. As the new auctions usher in a new regime in India’s complex history of coal mining, the full implications on both production and revenues realised will be keenly watched.
Arjun Srinivas is with www.howindialives.com, a database and search engine for public data
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