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Back To Square One: PPP Model Mooted For Coal Mining

It was always going to be this way!

After the discrepancies of coal block allocation were brought to light following the CAG report which in turn prompted the ongoing CBI investigations, coal - mainstay of India's energy - has become a hot potato with no official willing to sanction clearances or allocate new blocks. The scam and subsequent ban on mining as well as de-allocation of blocks has damaged businesses across the board.

But following years of production deficits, the Indian government will now seek public-private partnerships (NYSE:PPP) in the coal sector to boost domestic production. Even after several failed attempt in reviving defunct mines, it seems Ministry of Coal still wants to tread on the same path. Ministry of Coal has galvanized producer Coal India Limited (NASDAQ:CIL) to rope in private mining companies to revive defunct coal mines, and to complete the process by March 2014.

According to the Ministry, this would mark a significant step in permitting private domestic and foreign coal mines - in a sector reserved for government miners - through private-public-partnership (PPP) based on common model concession (NYSE:MCA) agreements. As per directive from the Ministry, CIL would have to invite private miners and get the defunct mines operational within definite timelines. Planning Commission has been quite vocal on the issue for several months now and its officials believe since Coal India is struggling to meet domestic requirement, it is best to involve private players, who will produce faster and cheaper coal.

Under existing law, private enterprises may mine for coal under captive consumption contracts issued by the government, but the scheme's restrictive measures have limited private participation in the program. Currently, the Coal Mines Act (1973) only allows captive consumption by private entities, so the bill must be amended before the government can solicit PPPs.

The new model will allow private enterprises to enter into a partnership with the Indian government, granting these enterprises access to the country's mines. While control of the mines and coal will remain with the government, the private enterprises will be paid a mining charge based on the amount of coal retrieved, which will incentivize greater production.

The gap between demand and availability of coal in the country is expected to rise every year. As per the XII Plan, the estimated demand of coal will rise to 980 MT by 2016-17 and 1373 MT by 2021-22 while the supply of domestic coal is expected to be 795 MT by 2016-17 and 1102 MT by 2021-22. Under current conditions, the plan forecasts production to reach 795 million tons by that time, still leaving a large deficit that must be imported or met through growth in the sector.

There is a general sentiment among India Inc that the Government is clearly buoyed by the recent surge in the Index of Industrial Production (IIP), which grew by 2 per cent in September 2013 showing increase in growth from 0.4% growth recorded in August 2013. The Indices of Industrial Production for the mining and electricity sectors for the month of September 2013 recorded growth of 3.3% and 12.9%, respectively as compared to September 2012. Electricity generation increased by 12.9% growth in September and a cumulative growth of 5.9% during April-September.
Despite the debatable aspect of these IIP numbers, one thing is absolutely clear that policy makers are trying every method available in the 'coal book' to augment country's coal production.

If I had to point to a segment of the natural resources sector with the lowest investor sentiment right now, it might well be coal. Years of corruption and a bureaucracy as thick as pea soup have hobbled production of the country's mineral riches -- natural gas, iron ore and especially thermal coal. A consequence of this was that India has struggled to grow its domestic coal production -- at a time when demand from its burgeoning power sector is surging. Policy makers have again turned their eyes towards private sector and are calling for infusion of latest technology, which could pep up production to meet the rising needs of various sectors. As much as there is a need for PPP in coal mining, this could very well turn out be a last throw of the dice for de-regulation of coal sector.

To sum it up there is a "dire need to revamp the entire coal sector in the country".