The rumours about the potential break-up of Coal India are "official" in the sense that they have been widely reported. It may well be true in that the new government is seriously contemplating this. However, it is also probably a "trial balloon" in some senses. The new government, more specifically the PM-elect, might want to know where the pitfalls could be in trying to chop up the coal monopoly.
As far as the economic rationale goes, breaking up CIL has always been a no-brainer. The company has a hammer-lock on the thermal coal sector, which means that it is crucial to the power supply chain. It is a persistent under-performer, leading to huge shortages that affect the power sector. It is absurd that India with its vast coal reserves would also be one of the world's largest coal importers and a large share of the blame must fall on CIL by definition.
As things stand, figuring out where the problems lie in the conglomerated behemoth is difficult. If various bits of CIL were broken up by region, it might give a handle on which set of mines under-perform and why. It would also make it easier to understand where there are distribution bottlenecks, and to allocate blame for non-delivery or late delivery of coal, either to the coal-producer, or to the Indian Railways. CIL could also be broken up by value chain into miners and distributors.
Many questions will remain even if this process is initiated. PSUs don't perform well in India and the new entities would remain "natural monopolies". The government, perhaps in conjunction with state governments, would undoubtedly retain control. That is not a recipe for efficiency.
In addition, unless the ministry of coal is wound up, there would be a Minister overseeing all the new entities, which means that operational autonomy would not be available. The pricing would also be subject to interference unless there was a radical change in the ministry's mode of operation.
There is also the matter of unionisation - CIL's unions are extremely unlikely to be happy at the prospect of a break-up and it's an open question if they can be persuaded to go along with any restructuring plan. To put it bluntly, efficiency in operations is likely to occur only if work force can be rationalised, or somehow deliver higher productivity/person.
Beyond this, all the ills of CIL are not necessarily due to CIL. There are often issues of missing road/ rail/ water linkages which make delivery of coal difficult. Improvements in transport infrastructure are not in CIL's hands. The power sector is also in bad shape and CIL suffers due to non-payment of dues and again, this differs state by state. Finally there is the big "E" of environmental clearances - this really needs review on multiple grounds.
The plans are all in the air, of course. Vast amounts of financing will be required to induct equipment, placate unions, etc. In order to make any restructuring of CIL work, the Centre would ideally need to review the transport linkages and carry out reforms in the power sector as well. It is a massive job to restructure CIL on its own, along with the associated issues of coal block allocation. It will probably require big-bang reforms of the entire power sector to make it work.
It would likely be a long-drawn-out process. Even if decisions about specific modalities were taken within the coming week, it would still take months to implement those decisions. Right now, the market has responded with joy to the prospect of a break-up. This is quite justifiable on the basis of the potential gains and the downstream benefits in the power sector.
But putting a sum-of-the-parts value to CIL is an impossibly subjective exercise at the moment. Until we know something about the concrete plans there is no way to value the entity. Investing here is a matter of faith. There should be net gains in the CIL share price. But the share price is also likely to see a lot of volatility as news and rumours filter out.
As far as the economic rationale goes, breaking up CIL has always been a no-brainer. The company has a hammer-lock on the thermal coal sector, which means that it is crucial to the power supply chain. It is a persistent under-performer, leading to huge shortages that affect the power sector. It is absurd that India with its vast coal reserves would also be one of the world's largest coal importers and a large share of the blame must fall on CIL by definition.
As things stand, figuring out where the problems lie in the conglomerated behemoth is difficult. If various bits of CIL were broken up by region, it might give a handle on which set of mines under-perform and why. It would also make it easier to understand where there are distribution bottlenecks, and to allocate blame for non-delivery or late delivery of coal, either to the coal-producer, or to the Indian Railways. CIL could also be broken up by value chain into miners and distributors.
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One suggested means of inducting partners would be to give equity stakes to various state governments in the new split up entities. There are also possibilities of selling of stakes to the public or to strategic investors, mine by mine. The auction of coal blocks was one of the biggest scandals of the UPA regime. Revising that process could in itself, be a confidence booster for the new government.
Many questions will remain even if this process is initiated. PSUs don't perform well in India and the new entities would remain "natural monopolies". The government, perhaps in conjunction with state governments, would undoubtedly retain control. That is not a recipe for efficiency.
In addition, unless the ministry of coal is wound up, there would be a Minister overseeing all the new entities, which means that operational autonomy would not be available. The pricing would also be subject to interference unless there was a radical change in the ministry's mode of operation.
There is also the matter of unionisation - CIL's unions are extremely unlikely to be happy at the prospect of a break-up and it's an open question if they can be persuaded to go along with any restructuring plan. To put it bluntly, efficiency in operations is likely to occur only if work force can be rationalised, or somehow deliver higher productivity/person.
Beyond this, all the ills of CIL are not necessarily due to CIL. There are often issues of missing road/ rail/ water linkages which make delivery of coal difficult. Improvements in transport infrastructure are not in CIL's hands. The power sector is also in bad shape and CIL suffers due to non-payment of dues and again, this differs state by state. Finally there is the big "E" of environmental clearances - this really needs review on multiple grounds.
The plans are all in the air, of course. Vast amounts of financing will be required to induct equipment, placate unions, etc. In order to make any restructuring of CIL work, the Centre would ideally need to review the transport linkages and carry out reforms in the power sector as well. It is a massive job to restructure CIL on its own, along with the associated issues of coal block allocation. It will probably require big-bang reforms of the entire power sector to make it work.
It would likely be a long-drawn-out process. Even if decisions about specific modalities were taken within the coming week, it would still take months to implement those decisions. Right now, the market has responded with joy to the prospect of a break-up. This is quite justifiable on the basis of the potential gains and the downstream benefits in the power sector.
But putting a sum-of-the-parts value to CIL is an impossibly subjective exercise at the moment. Until we know something about the concrete plans there is no way to value the entity. Investing here is a matter of faith. There should be net gains in the CIL share price. But the share price is also likely to see a lot of volatility as news and rumours filter out.