Coal truths

Editorial, The Hindu Business Line

Ineffective orders to Coal India to adhere to its fuel supply pacts with power producers only underscore the need for mining sector reforms.

(This article was published on May 15, 2012)

Power producers have reasons to be peeved over the terms of the fuel supply agreements (FSA) that they are now inking with Coal India Ltd (CIL). These are heavily loaded in the latter's favour. The FSAs commit CIL to supply at least 80 per cent of the total contracted quantity of coal. But the penalty – dreamed up by CIL itself – in the event of delivery shortfalls is so tiny, at 0.01 per cent, that it, in fact, incentivises default. Assuming the FSAs to cover 200 million tonnes (mt) and taking an average coal price of Rs 1,500 a tonne, a 0.01 per cent fine even in case of not a single tonne being supplied works out to just Rs 3 crore. This, for a company that, in 2010-11, reported post-tax profits of Rs 10,867 crore on net sales of Rs 50,234 crore! Moreover, this absurd penal clause is applicable only after three years of signing the FSA, and subject to force majeure provisions that even include breakdown of equipment and non-availability of spare parts. No wonder just 14 out of the 48 FSAs that were to have been signed by now have actually been inked.

All this raises questions about the effectiveness of the Prime Minister's Office (PMO) which had originally pushed CIL to enter into FSAs with all power plants that were to be commissioned before March 2015. When the CIL board failed to take a decision, a special Presidential directive was issued on April 3, ordering the company to sign FSAs with the 48 projects that came on steam between April 2009 and December 2011. Given the liberal penalty clauses in the FSA — that in effect absolve CIL from any responsibility to supply the committed quantities — it has, not surprisingly, found few takers among power developers, including the NTPC. In other words, all the PMO's efforts have come to naught.

To be fair to CIL, though, supplying even an additional 100 mt of coal — which is what the 26,000 MW capacity commissioned between April 2009 and December 2011 would require — will be a huge task. This is because the company's own output has been stuck at 430-435 mt in the last three years. If, in addition, the requirement of plants set up from 2011 are to be met — translating into another 100 mt or more — it would call for an unprecedented ramping up of production. That is probably beyond CIL's capacity, which is all the more reason to throw open commercial coal mining to new players, domestic and foreign. Having just two state-owned companies, CIL and Singareni Collieries, to produce all its coal is a luxury that a power-starved country cannot afford today. The current levels of coal imports, which crossed 100 mt against domestic output of 535 mt in 2011-12, are simply not sustainable. PMO directives cannot substitute for more meaningful mining sector reforms.