Coal India is no villain

S. Narsing Rao, the Chairman of the world’s largest coal producing company Coal India Limited (CIL) is not a happy man. He has been pushed into a corner – and rather unfairly, it would seem – by the Competition Commission of India, the Centre and state governments and a clutch of power utilities.

The CCI, in December 2013, has slapped a penalty of more than Rs 1,700 crore on CIL, allegedly because CIL’s fuel supply agreement (FSA) with power utilities smacked of abuse of dominant status.

The CCI acted on a complaint which alleged that the CIL need not pay a penalty if it fails to supply coal on time, even as a buyer of coal would have to cough up the same for failing to lift the coal on time. The FSA is a lopsided agreement, it was observed.

However, the issue here is that the FSA is unfair on CIL as well, and has been thrust upon it by the government.

In fact, it would appear that the governments have been so concerned about securing power utilities the coal they need that they did not adequately consider whether the CIL is at all in a position to meet these requirements.

The Centre, in effect, foisted an FSA model on CIL that seemed quite unreasonable in view of the ground realities.

Hence, CIL will challenge the CCI ruling, by arguing that FSAs have been thrust upon it by the government.

It is not perturbed by the penalty amount, which amounts to 3 per cent of its cash reserves. What it will effectively contest is the coal allocation policy itself.

The government has overlooked the fact that CIL’s production for the past several years has been consistently hit by slippages vis-a-vis targets. The CIL took 33 years, from 1975 to 2008, to increase production by 290 million tonnes, from 75 mt to 365 mt.

Now, there is a demand on it to step up production by 225 mt in five years to meet the increased coal requirement of the power sector!

The Cabinet Committee on Economic Affairs had earlier approved coal supplies to thermal power plants with a total capacity of 78,000 MW during the period between January 2009 and April 2015.

Within these, there are 24 thermal power plants, which qualify for supplies under the ‘coal tapering linkage policy’.

Under this policy, power units which were issued coal blocks that, however, could not be developed for environmental reasons were assured coal supplies for three years.

In the last week of December, the government added nine more power plants to the list of 24 which would qualify for tapering linkage, owing to their running into environmental problems. Given this policy backdrop, it is obvious that CIL is under pressure from various quarters, including the Power Ministry, to be flexible in the supply of coal.

There are powerful people in government whose hearts bleed for these plants. But what about CIL’s production problems?

The diktat to rescue power plants places an additional burden on CIL. FSAs require CIL production to grow at 10 per cent annually, whereas the actual rate of growth is four to five per cent.

The demand-supply gap, estimated at around 150 to 200 million tonnes annually, is bridged through imports. In fact, CIL’s maiden bid to import five million tonnes did not succeed.

CIL also faces some intractable operational problems: an uncooperative workforce, and the power of road transport contractors who control the transport of coal from the pithead to the nearest railhead. In most cases the state governments are mute spectators. The writ of the Coal Bhavan, the Kolkata-based headquarters of CIL, does not run at the field-level.

The limited availability of railway rakes in the peak season and the slow progress of new rail projects in coal-rich areas makes the transportation bottleneck all the worse.

There are problems in getting environment clearances for new mining projects, and in completing land acquisition and eviction and rehabilitation of people occupying lands identified for coal mining.

The pace of modernisation in mining operations, business processes, procurement, procedures and strategic planning is tardy due to reasons beyond CIL’s control.

The CIL Chairman’s pique is understandable. He is only trying to say that all problems cannot be laid on CIL’s door.

The crux of the problem is that the government’s coal policy is muddled. The allocation of coal blocks to private sector plants did not yield the desired results, if anything it has invited CBI inquiry and kicked up a lot of political dust.

Even the production from blocks allocated to state-owned power companies too leaves much to be desired.

The country’s largest state-owned thermal power company, it is said, has coal blocks with reserves running to billions of tonnes, but with no production taking place.

In such a situation, two developments might come as a relief to CIL.

First, the slackening demand for coal of some of the state electricity boards. The zonal railways serving these boards would often complain of idling of coal rakes for want of traffic.

But then the SEBs were not always to blame, as they would often find it cheaper to buy electricity from neighbouring private power companies rather than produce it themselves.

Reports have it that several SEBs have decided to ink long-term power purchase agreements with private power generating firms.

Another mitigating factor could be the shortfall in power generation capacity, in relation to the target.

As per the FSAs, CIL is supposed to meet the coal requirement for 78,000 MW of new capacity to be created within the next couple of years. The actual addition to capacity, it is estimated, might be much less.

That would reduce the CIL Chairman’s sense of pique. .