Government ordinance for e-auction of coal blocks opens door for commercial mining by private players

NEW DELHI: The government has taken a significant but cautious step towards ending state monopoly on coal with an ordinance that enables commercial mining by private companies in future, without denting the operations of Coal India that was set up when the sector was nationalised four decades ago. In the first round, blocks would be auctioned to companies that will use the coal for firing power, steel and cement plants, said Coal, Power & Renewable Energy Minister Piyush Goyal. The government will offer different blocks to these sectors and expects companies that lost coal blocks would be able to acquire mines through a transparent e-auction in 3-4 months which Finance Minister Arun Jaitley said will "clean up the mess created by the UPA government since 2005".
The decision marks the continued burst of big-ticket energy reforms that the Modi government has launched after elections in Maharashtra and Haryana. On Saturday, it decontrolled diesel prices and took the longawaited decision on the controversial issue of natural gas pricing. Officials are also working overtime to finalise steps to help stranded gas-fired power plants by pooling imported liquefied natural gas with cheaper domestic supply.

The decisions are expected to revive the distressed energy sector and help banks which faced the risk of a huge jump in non-performing assets. The government has also withdrawn the Bill introduced in 2000 in Rajya Sabha to allow commercial coal mining, and will introduce a fresh Bill.

SBI Chairman Arundhati Bhattacharya welcomed the announcements. "It is a positive news and we needed to clear this mess as quickly as possible. And the government has taken the bull by the horn. We expect investments to get back to the drawing board. We hope the timeline is maintained and the process is done as quickly as possible."
"It is too early to say how it would affect our loan book, since it will depend on reserve price for the e-auction whether it matches our forecasts on cash flow," SBI Chairman Arundhati Bhattacharya said. Coal India unions said they were comfortable with the announcements as of now, but would oppose the move tooth and nail if the government actually turns to the enabling provision and allows private commercial mining.

The government sought to understate that part of the ordinance, which will allow the private sector sell coal in the open market — a situation that is forbidden under the nationalisation laws in the sector. It said the ordinance did not amount to "denationalisation". It also announced that all the proceeds of the auction will go to states such as Odisha, West Bengal, Jharkhand and Chhattisgarh, a provision that will give a lot of cash to these states and win their support.

"The proposals appear a cautious first step to a future, potentially bolder plan that denationalisation suggests. The limitation of end-use and keeping commercial mining rights for a future time suggest this," said Kameswara Rao, leader at consulting firm PwC for energy, utilities and mining. He said transfer of proceeds to the states is a masterstroke and would incentivise state governments to expedite clearances and support the projects.

Analysts and industry officials broadly welcomed the decision, which can significantly boost coal output, fire stranded power stations and cut the embarrassingly high amount of coal imports for a country that has one of the biggest reserves in the world.

"There was a lot of uncertainty over how quickly it will be handled. But the transition appears speedy and the blocks will not be nationalised but be given out to private players, which will increase efficiency. It will help domestic supply positively and bring down the high cost of imports. The big problem was with the power sector as a lot of projects were coming on stream but there was a big question mark on the fuel supply. That the allocation will be made in a transparent manner through auctions is also a revenue-positive for the government," said Abheek Barua, consultant at ICRIER.

"It is a very positive move for the economy. It is good to start on a clean slate and (in a) transparent manner and sorting out of the coal issue was very critical and will provide momentum to the reforms process and give a boost to country’s manufacturing," said DK Joshi, chief economist, Crisil.