Business Standard

Ordinance doesn't solve coal sector's core problems

Genuine reform in the coal sector, especially opening it up to commercial mining, has been postponed

Shishir Asthana Mumbai
There is good news and bad news in the proposed ordinance for the coal sector. The good news is that the government has moved with speed in announcing a transparent mechanism to allot mines to private players and directly allotting mines to public sector ones. The bad news is that reforms in the coal sector, especially opening it up to commercial mining, have been kicked down the road to be decided at a later date.
 
What the government has done cannot be termed ‘reforms’. They have provided an action plan to re-allocate the 214 coal blocks that have been cancelled by the Supreme Court last month to various companies since 1993. Government has only provided an alternate plan to re-allocate the coal blocks, which was the least they could have done.
 
 
But the speed at which it was done needs to be appreciated. In fixing a timeline of 3-4 months for clearing the ‘mess left by the UPA government’, finance minister Arun Jaitley said that the move will solve dual goals of providing employment and enhancing the manufacturing sector.
 
While the government’s move has been along expected lines, both India Inc. and analysts have been positively surprised by the speed of the move. Sushil Maroo, CEO of Essar Energy has been quoted in Business Standard as saying "This was expected after the SC verdict. The best part is that the government came out with new norms so quickly. We have to still find out about the details of the blocks which will be put out for auction. This shows the government's resolve to sort issues quickly."
 
However, saying that the announcement is the start of the reform process is far from the truth. Former Coal Secretary PC Parakh in an interview to CNBC said “I am disappointed that commercial mining was not allowed. It is a half-hearted attempt at reforming the energy sector.” He further pointed out that allowing qualified mining companies -- especially foreign ones who possess advanced technologies and know-how -- would have led to proper utilization of resources and allowed scaling up of production.
 
Raising similar concerns, Ashok Khurana, director general, Association of Power Producers, said. "This is not a big change, Coal India's monopoly's remains the same. And coal production remains with captive miners, many of which are not qualified miners." 
 
Though analysts are bullish on the government’s move, some questions are being raised. JP Morgan in a report said that the key positive is that state-owned companies would not be part of the auctions as they would be allocated coal blocks (and thus reduce the numbers bidders), while a negative is the absence of Right of First Refusal, which is more important for the producing coal blocks.
 
JP Morgan also adds that state-owned companies such as NTPC would be allocated coal mines based on their end-use plants, this does reduce competition and more importantly addresses the issue of the impact on power tariffs, which are covered under the power purchase agreement (PPA). However, whether the state companies would have to pay anything extra towards the cost of the mine is unclear. Also, says JP Morgan there is no clarity if the previous allocates would be reimbursed for any of the investments made in the coal mines, and we would await the ordinance for more details.
 
As for banks, who have had to bear the brunt of the coal sector fiasco, SBI Chairman’s Arundhati Bhattacharya’s statement suggests that clarity is still required. "It is too early to say how it would affect our loan book, since it will depend on reserve price for the e-auction, whether it matches our forecasts on cash flow," she said. A higher reserve price would impact the profitability and cash flow of the project as earlier estimates have been based on allocation of mines for free. 
 

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First Published: Oct 21 2014 | 5:55 PM IST

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