The government will finally open up the coal sector with a large offer of over 200 blocks to commercial miners, and bidding for 40 blocks is likely to begin this financial year. According to the government, the 200 blocks being prepared for sale could produce as much as 400 million tonnes a year; if even a fraction of that is achieved, India’s coal import bill would be considerably reduced. It is worth noting that it would not be eliminated, since India has no real reserves of the coking coal needed by its iron and steel plants. But at least the 125 million tonnes of thermal coal that is imported might now be produced at domestic sources. This is a long overdue measure, and it is welcome that the government has finally moved to enable commercial mining of coal. The legal requirements were put in place four years ago, but the obvious follow-up of auctioning the blocks did not take place. As a result, India has been dependent for too long on two different sources of thermal coal — Coal India Ltd, a state monopoly which is plagued by bottlenecks and inefficiency; and captive mining, which has been surrounded by much controversy over the past decade. It is to be hoped that the auction of these coal blocks in tranches will open up the market for thermal coal properly.
The government needs to keep the lessons of the past in mind when it is designing these auctions. Extracting the maximum revenue possible is not necessarily a good idea from the point of view of overall welfare — past coal auctions may have revealed high prices, but also led to a great deal of coal being left in the ground because some blocks were under-exploited. There are other pitfalls of the auction process. For example, the rules of the game should be made amply clear in advance. They should not be changed at a later date, because this undermines the sanctity of the auction process. Renegotiating the terms of the auction after it has been concluded is similarly problematic. It can lead to legal challenges — and, if predicted, can lead to uneconomic bids being made by those players most confident of winning a renegotiation process.
The medium- and long-term dynamics of the coal sector should also play into the expectations and planning of the auction process. At the moment, there is an all-round economic slowdown, which will affect the prices being paid. It should also be clear that thermal power plants in particular are not quite the booming businesses they were a decade ago. Many are in danger of becoming stranded assets, and long-term power purchase agreements are capped at quite a low level, thanks to technological change and market forces. It is also very important to think carefully about how an expansion of thermal coal extraction capability can be financed. There is limited private sector or global capacity available in the sector. Many funders have turned away from it. It would be dangerous for a big new expansion of thermal coal capacity to be funded entirely by the state-owned banking sector, following an unwritten mandate to that effect by New Delhi. This would present the very real danger of future bad debts.
Source: Business Standard