India’s Quest for Coal Stalls as Red Tape Kills Mining Takeovers

By Editors: Larry Reibstein - May 4, 2012
BLOOMBERG
India’s quest for natural resources to power its growing economy and compete with China has met the enemy: Its own red tape.

Thwarted by lengthy bureaucratic delays for approvals, Indian state companies have lost out on or walked away from at least seven purchases of overseas coal and mining assets in the last two years, data compiled by Bloomberg show. They have completed just a single overseas deal between them in that time.

In one would-be deal, International Coal Ventures Ltd., a venture of state-owned companies, had to run a gauntlet of seven ministries and a committee, called the Empowered Committee of Secretaries, to seek approval to buy a coal mine in Australia, two people with knowledge of the matter said. The company is still awaiting a sign-off after four months, as the overseeing committee hasn’t met for three months to discuss the $300 million deal. The delay has cost International Coal its status as exclusive bidder for the mine, owned by Aquila Resources Ltd., said one of the people.

“We have found ourselves struggling in the global arena,” said Sanjeev Krishna, an executive director at PricewaterhouseCoopers LLP in Mumbai who focuses on mergers and private equity. State-controlled companies “have suffered as a result of not having the independence to make these acquisitions.”

Trailing China

The balky approval process highlights the challenge facing Prime Minister Manmohan Singh as he jostles with China for resources needed to reduce India’s reliance on imported coal, copper and other raw materials. Chinese companies have completed $21 billion of overseas acquisitions of coal and mining assets in the past two years, more than four times the value of India’s deals, including private purchases, according to data compiled by Bloomberg.

India’s domestic coal production, which fires more than half of its power generation, is falling behind demand. In five years, the country will need 981 million metric tons annually compared with output of 715 million tons, the government estimates. Environmental restrictions and approval delays have stymied efforts to expand production.

To offset the gap this year, India may import more than 118 million tons of coal, a volume that would see it overtake China as the world’s biggest buyer, according to Daniel Hynes, a director of commodity research at Citigroup Inc. in Sydney.

Projects Delayed

The scarcity is hampering India’s ability to fuel power generation and steel-making capacity. Companies have already delayed a total of $36 billion of power-plant projects planned for the next five years, according to the Association of Power Producers. It blames a lack of coal from state-owned Coal India Ltd., which accounts for more than 80 percent of India’s output of the fuel, and higher prices of imported coal.

At risk is India’s economic growth, which already trails that of China. Singh wants to accelerate economic output, most recently at a three-year low of 6.9 percent, to an average 9 percent annually in the next five years. Meeting that target is unlikely, the Asian Development Bank said in an April report, citing in part “bottlenecks relating to fuel and power shortages.”

The shortages exist even though privately owned Indian companies, unencumbered by the need for state approvals, have been snapping up coal assets. In September, GVK Group, controlled by billionaire GV Krishna Reddy, agreed to pay $1.2 billion to acquire coal projects from Australia’s Hancock Prospecting Pty.

By contrast, four state-owned companies -- Coal India, NMDC Ltd. (COAL), National Aluminium Co. (NACL) and Steel Authority of India Ltd. (SAIL) - - can point to only one purchase among them: A $20 million deal by NMDC, India’s largest iron ore producer, in December to buy a 50 percent stake in Australia’s Legacy Iron Ore Ltd., according to data compiled by Bloomberg.

Late Approval

More typical is NMDC’s failure in 2011 to purchase a Siberian coal deposit from Russian billionaire Mikhail Prokhorov -- a deal that would have added 363 million metric tons of reserves. The company got beat out partly because government approval took a year, a person with knowledge of the matter said. Energy trader Gunvor Group Ltd., based in Cyprus, and Volga Resources of Luxembourg won the deal.

Coal India, 90 percent owned by the government, last year entered talks to buy a 30 percent stake in PT Golden Energy Mines from Indonesia’s Sinar Mas Group. The government gave approval for the deal in October -- two months after privately owned Indian rival GMR Energy Ltd. had agreed to buy the asset, said former Coal India Chairman Nirmal Chandra Jha, who retired in January.

$19 Billion Cash

Money isn’t the issue. The four state-owned companies hold a combined $19 billion of cash and equivalents. Instead, executives at state-owned companies are reluctant to push ahead with acquisitions abroad because they fear getting penalized by the government should deals go wrong, said Rana Som, who retired as chairman of NMDC (NMDC) in December, in an April 2 telephone interview from New Delhi.

“In my opinion, the problems in acquisitions of overseas assets are not external, but internal,” Som said. “There is a lack of courage and conviction on the part of decision makers to go ahead.”

Officials at Coal India, Steel Authority, NMDC and National Aluminum either declined to comment or didn’t respond to calls and e-mails. Requests for comment from India’s finance ministry went unanswered.

‘Policy Paralysis’

India has taken steps to speed up deals, prodded by the country’s industrialists, including Tata Group Chairman Ratan Tata, who met with Singh in January. State-run companies were granted greater powers to acquire coal, oil and other mineral assets without first consulting the government.

“Availability of raw material is a prerequisite not only for the growth of the manufacturing sector, but for the economy as a whole,” Information and Broadcasting Minister Ambika Soni said, citing a decision taken by the Cabinet of Ministers in October.

The easing was the latest twist in India’s official policy. In March 2010 the government said it was considering raising a sovereign wealth fund to help state companies compete for overseas energy assets. The fund has yet to be created. In December 2010, Coal Minister Sriprakash Jaiswal said buying coal mines was a “top priority,” later traveling to Europe to seek coal assets and mining technology. Then in September last year, Jaiswal changed course and said Coal India, the world’s largest producer of the commodity, should focus on boosting domestic production rather than on overseas purchases.

“There has been a policy paralysis in the government in the past six to eight months,” said Krishna of PwC. “It’s the heavy-footedness by the Indian government that caused some of these challenges.”