Centre's proposal for partial deallocation of coal blocks flawed

NEW DELHI: The Centre and a clutch of industry associations have pleaded with the Supreme Court not to deallocate 46 coal blocks that are already under production or are about to start production, but a closer look at their proposal to levy a penalty of Rs 295 per tonne on coal mined reveals several flaws.
When the apex court resumed hearings after declaring allocation of all 218 coal blocks since 1993 illegal, the government also recommended that power producers with captive coal blocks be allowed to henceforth sell power only through longterm power purchase agreements (PPA) and not in the merchant market.

However, the question arises as to whether the proposed penalty and the long-term PPA can redress the skewing of competitive advantage towards those with captive blocks, one of the biggest fallouts of the captive coal block approach followed by successive governments.

“The matter is sub judice,” said a spokesperson of Jindal Steel & Power, declining comment on the matter.

According to observers, though, there are three problems with the captive coal block approach. “Every block is different (in terms of the grade of coal and the relative ease of mining). And so, a common benchmark may not work,” said Dipesh Dipu, an associate professor at the Centre for Energy and Infrastructure Development at the Administrative Staff College of India.

Then there are other questions about the proposed penalty. Sudiep Shrivastava, one of the key lawyers who argued against the captive coal block allocations, said, “While Rs 295 might be a suitable penalty for the coal mined till now, for coal mined in the future, the penalty should not be Rs 295 per tonne. It should be linked to royalty – or to the existing price charged by (state-run miner) Coal India.”

Not only is a common proposed penalty an imperfect solution, the government has not suggested an equivalent requirement like long term PPAs for iron and steel players with coal blocks.

Shrivastava said, several of these 40 companies have been given far more coal than they need. For instance, Jayaswal Neco, which had an annual requirement of 2 million tonnes (MT) of coal, has been given a coal block (Gare Palma IV/4) with coal reserves of 125 MT. In contrast, Prakash Industries, now the subject of a CBI investigation like Jayaswal Neco, needed 1 MT a year but was given a block with 34 MT. Or take Electrosteel Castings. It needed 0.58 million tonnes a year but was given a block (Parbatpur) with geological reserves of 231 MT.

Turn to the state utilities given coal blocks and the suggestion against deallocation can create an even more complicated mess. These companies, Dipu said, given their poor record of developing captive mines, “depended on contract miners or mine developers and operators (MDOs)”.

These have been contentious models, Dipu said, adding, “The contractor is left wholly in charge of these blocks with very little supervision. And we know how much scope there is in coal for theft.”

Indeed, each of these state utilities in the list of 40 has outsourced mining to either Kolkata-headquartered EMTA or Adani Enterprises. For instance, while Damodar Valley Corporation has entered into an agreement with EMTA, Rajasthan Rajya Vidyut Utpadan Nigam has signed up with Adani Enterprises. These are 74:26 agreements where the state utility forms a joint venture or JV with the private company such that the JV company is in charge of mining. The private party holds a 74% stake in the JV company. These JV companies sell coal to the utility at a price that is linked not to the JV’s cost of mining but to the prevailing Coal India price. Now, in its judgement, the SC has declared another JV model, the 51:49 one where the state utility held 51% in the JV but management control vested with the private party, as illegal. This has raised another question about the 74:26 model. “If the 51:49 JV is illegal, then how can the 74:26 JV be legal?” asked Shrivastava.

That is not the only issue. Even if the court does not deallocate these 16 blocks, Shrivastava asked, “Who will mine? The PSU (public sector unit) has no capacity. So, even if you save these leases, what is the way forward?” Besides, he added, “Given that the lease is in the name of the PSU, are they in a position to pay Rs 295 per tonne of coal mined till now? If not, who will pay this Rs 295?”

In that sense, India has a chance to fix its inefficient and corruption-riddled coal sector. Indeed, even within the 40 blocks that started mining, Dipu said, several have not reached peak production – even though all of them were allotted in the 1990s and the early 2000s. “They did not have the expertise. They somehow developed their blocks after poaching people from Coal India. But somehow developing a block is not the same as scientific mining,” he said. Even auctions cannot fix this problem if end-users are allowed to participate. “What if a company finds that its erstwhile captive block has been acquired by a third party which refuses to supply to it?” asked Shrivastava.

According to Dipu, there should be full deallocation. Even if the country’s import bill on coal goes up for a couple of years, he said, India should take this time to create a more modern coal industry.