6 AUG, 2012, M RAJSHEKHAR, ET BUREAU
NEW DELHI: Although current rules prohibit private players from acquiring mines to extract and sell coal in the open market, they have been using an innovative arrangement with state mining corporations to do the same.
Under this arrangement, the coal ministry awards a mine to a state mining corporation (SMC). The SMC, in turn, floats a joint venture (JV), in which it holds a majority stake as sweat equity, but makes no investment. A private player holds a minority stake, but brings in the entire investment and handles all operations.
If the contract terms are lopsided or if output is not monitored, such an arrangement lends itself to abuse, as the Karnataka Lokayukta exposed while investigating illegal iron-ore mining in the state. "The interest of Mysore Minerals (a state PSU that had entered into a JV) was compromised to deprive the PSU of the contractual entitlements, dividends and profits due to one-sided agreements, non-revision or sub-optimal revision of prices," it said.
Typically, in such a JV, three of the five directors on its board come from the SMC. But the entire operations team is from the private company. "There is a risk that the private company can mine as much as it likes," says an ex-employee of Coal India, speaking on the condition of anonymity. "It can give the SMC what it wants to show on its books and the rest is squared up outside the mine."
"We will keep tabs on the quality and quantity of coal mined," counters Prashant Dhabre, the chief accounts and finance officer of the Maharashtra State Mining Corporation (MSMC), which has three such JVs.
But a former chairman of Coal India, who did not want to be identified, feels a mere board presence won't ensure that. "When the government is also investing money in the block, that is when the nominees are more accountable," he says. "In this (JV) arrangement, they think they are safe as there is no actual loss being suffered by the government."
The allotment of mines to SMCs goes back to around 2005. "A lot of demand for coal comes from small projects," says PC Parakh, who was India's coal secretary between 2004 and 2005. "To meet demand in this end of the market, it was decided to allocate some coal blocks to SMCs and state electricity boards."
According to Parakh, SMCs, most of which lack capital and expertise to extract coal, were expected to appoint mine development organisations (MDOs). These are essentially contractors who worked on a cost-plus basis to extract coal for the SMCs, which, in turn, sold the output in the open market.
Between 2005 and 2009, when the coal ministry was the most active in giving mines for captive use, it was decided to allocate some blocks to SMCs for commercial mining. This, adds another former coal secretary, who wished to stay anonymous, was because Coal India, the state-owned monopoly, was struggling to meet demand and the Left parties had successfully opposed attempts by the government to amend the Coal Mine (Nationalisation) Act to allow private companies to also extract and sell coal commercially. Given that, he says, "the other way to increase coal production was to give some blocks to SMCs, who are allowed by law to do commercial mining."
MSMC, for example, bagged three coal blocks during this period. However, instead of extracting coal on its own through an MDO, MSMC signed JVs with three private companies: Lanco, Sunil Hi-Tech and Gupta Coal.
The private player holds 49 per cent in a JV, MSMC the rest. However, MSMC does not invest anything towards its 51 per cent, and holds it in the form of sweat equity. "This is a superior structure (for the government)," says R Ramakrishnan, CEO of aXYKno, a Nagpur-based mining consultancy that claims to have formulated this model. "It ensures more benefits to the government in terms of equity, upfront money through bidding, and better control and ownership."
Agrees Dhabre of MSMC. "We are a small company," he explains. "We have a budget of 14-15 crore. After staff salaries, we are left with no more than 6-7 crore, which is far lower than what is needed to develop three mines."
So, the private player makes all the investments and does all the work. Further, it also decides to whom it will sell the output and at what prices. MSMC, on its part, receives 51 per cent of the profits.
A former NTPC manager thinks the MDO model is better for an SMC than the JV model. In a 51:49 JV, he says, an SMC's inability to make an initial capital investment of about 200 crore - primarily on clearances, land acquisition and equipment - and an operating expenditure of about 300 crore is resulting in it foregoing a significant share of profits.
He breaks down the economics roughly for a mine with a projected capacity of 70 million tonnes, from which 2 million tonnes is extracted every year for the next 35 years. "It will spend 300 crore a year on operations," he says. Assuming coal prices of 5,000 a tonne, the JV earns revenues of 1,000 crore a year. Its operating profit is 700 crore (1,000-300). A 51 per cent share will entitle MSMC to about 350 crore. But its inability to cough up 500 crore at the outset means it is letting go of an equal amount.
In some instances, the entire output from such JVs is earmarked for a downstream project of the private partner, raising issues of arm's-length dealings. Take the case of a JV between Madhya Pradesh State Mining Corporation (MPSMC) and Jaiprakash Industries. Here, MPSMC will hold 30 per cent, Jaiprakash 51 per cent and other investors the rest. MPSMC will apply to the coal ministry for a block, the output from which will feed the Jaiprakash Group's power plant in Madhya Pradesh. Thus, the terms at which coal is sold become important. "Some of these companies extracting coal are looking for preferential treatment," says a former coal secretary, requesting anonymity.
NEW DELHI: Although current rules prohibit private players from acquiring mines to extract and sell coal in the open market, they have been using an innovative arrangement with state mining corporations to do the same.
Under this arrangement, the coal ministry awards a mine to a state mining corporation (SMC). The SMC, in turn, floats a joint venture (JV), in which it holds a majority stake as sweat equity, but makes no investment. A private player holds a minority stake, but brings in the entire investment and handles all operations.
If the contract terms are lopsided or if output is not monitored, such an arrangement lends itself to abuse, as the Karnataka Lokayukta exposed while investigating illegal iron-ore mining in the state. "The interest of Mysore Minerals (a state PSU that had entered into a JV) was compromised to deprive the PSU of the contractual entitlements, dividends and profits due to one-sided agreements, non-revision or sub-optimal revision of prices," it said.
Typically, in such a JV, three of the five directors on its board come from the SMC. But the entire operations team is from the private company. "There is a risk that the private company can mine as much as it likes," says an ex-employee of Coal India, speaking on the condition of anonymity. "It can give the SMC what it wants to show on its books and the rest is squared up outside the mine."
"We will keep tabs on the quality and quantity of coal mined," counters Prashant Dhabre, the chief accounts and finance officer of the Maharashtra State Mining Corporation (MSMC), which has three such JVs.
But a former chairman of Coal India, who did not want to be identified, feels a mere board presence won't ensure that. "When the government is also investing money in the block, that is when the nominees are more accountable," he says. "In this (JV) arrangement, they think they are safe as there is no actual loss being suffered by the government."
The allotment of mines to SMCs goes back to around 2005. "A lot of demand for coal comes from small projects," says PC Parakh, who was India's coal secretary between 2004 and 2005. "To meet demand in this end of the market, it was decided to allocate some coal blocks to SMCs and state electricity boards."
According to Parakh, SMCs, most of which lack capital and expertise to extract coal, were expected to appoint mine development organisations (MDOs). These are essentially contractors who worked on a cost-plus basis to extract coal for the SMCs, which, in turn, sold the output in the open market.
Between 2005 and 2009, when the coal ministry was the most active in giving mines for captive use, it was decided to allocate some blocks to SMCs for commercial mining. This, adds another former coal secretary, who wished to stay anonymous, was because Coal India, the state-owned monopoly, was struggling to meet demand and the Left parties had successfully opposed attempts by the government to amend the Coal Mine (Nationalisation) Act to allow private companies to also extract and sell coal commercially. Given that, he says, "the other way to increase coal production was to give some blocks to SMCs, who are allowed by law to do commercial mining."
MSMC, for example, bagged three coal blocks during this period. However, instead of extracting coal on its own through an MDO, MSMC signed JVs with three private companies: Lanco, Sunil Hi-Tech and Gupta Coal.
The private player holds 49 per cent in a JV, MSMC the rest. However, MSMC does not invest anything towards its 51 per cent, and holds it in the form of sweat equity. "This is a superior structure (for the government)," says R Ramakrishnan, CEO of aXYKno, a Nagpur-based mining consultancy that claims to have formulated this model. "It ensures more benefits to the government in terms of equity, upfront money through bidding, and better control and ownership."
Agrees Dhabre of MSMC. "We are a small company," he explains. "We have a budget of 14-15 crore. After staff salaries, we are left with no more than 6-7 crore, which is far lower than what is needed to develop three mines."
So, the private player makes all the investments and does all the work. Further, it also decides to whom it will sell the output and at what prices. MSMC, on its part, receives 51 per cent of the profits.
A former NTPC manager thinks the MDO model is better for an SMC than the JV model. In a 51:49 JV, he says, an SMC's inability to make an initial capital investment of about 200 crore - primarily on clearances, land acquisition and equipment - and an operating expenditure of about 300 crore is resulting in it foregoing a significant share of profits.
He breaks down the economics roughly for a mine with a projected capacity of 70 million tonnes, from which 2 million tonnes is extracted every year for the next 35 years. "It will spend 300 crore a year on operations," he says. Assuming coal prices of 5,000 a tonne, the JV earns revenues of 1,000 crore a year. Its operating profit is 700 crore (1,000-300). A 51 per cent share will entitle MSMC to about 350 crore. But its inability to cough up 500 crore at the outset means it is letting go of an equal amount.
In some instances, the entire output from such JVs is earmarked for a downstream project of the private partner, raising issues of arm's-length dealings. Take the case of a JV between Madhya Pradesh State Mining Corporation (MPSMC) and Jaiprakash Industries. Here, MPSMC will hold 30 per cent, Jaiprakash 51 per cent and other investors the rest. MPSMC will apply to the coal ministry for a block, the output from which will feed the Jaiprakash Group's power plant in Madhya Pradesh. Thus, the terms at which coal is sold become important. "Some of these companies extracting coal are looking for preferential treatment," says a former coal secretary, requesting anonymity.
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