India: Is the Government Serious About Reforms in the Coal Sector?
June 12, 2020 - Creating a domestic market for coal free from the clutches of State-owned monopoly Coal India Ltd (CIL) is a stated objective of the Modi government. But is the government serious about it? The notification for linkage swapping issued by the Coal Ministry on June 8, doesn’t inspire confidence.
The basic idea behind the notification is noble. During command economy days, when rail freight was equivalent irrespective of the distance, linkages to CIL coal were granted indiscriminately, leading to a situation where users were sourcing fuel from far off places.
After the Modi government came to power, it swapped some of the linkages granted to the regulated power sector — which run on a cost-plus tariff regime – mostly owned by State-governments. It freed railway capacity and created scope for reduction of tariff.
The government now wants to extend this to the entire industry, including independent power producers (IPPs) which own owning nearly half of the generation capacity in India, and other users of thermal coal like steel, cement, aluminum etc, who sell their produce in a competitive market.
Ideally, this would have helped logistics efficiency in India, bringing in savings to the economy in terms of optimization of transport capacities and creating scope for better margin and/or drop in product prices. But, the government wanted more.
Rerun of Command Economy
The government wanted to ensure that the rejig doesn’t reduce revenues to existing players like CIL and Railways, and that electricity consumers gain too. The end result is a rerun of the command economy methodology, wherein the government calculates how many radios or cycles Indians should buy.
As per the notification, two willing consumers of CIL and its smaller peer, Singareni Collieries (SSC), will decide upon the transport cost saving potential. Only railway costs will be taken into consideration, meaning those opting for multi-modal logistics cannot participate.
The calculation should be backed by tangible proofs and be submitted in a yet-to-be-created portal. All users of the portal will have access to those business details. A committee with powers to seek additional details will take a final view on cost savings.
Clearly, the committee is not in the business of believing the willing partners. They can cross-check details with other such claims before taking a view, and their decision is binding.
There are many tariffs for CIL fuel, depending on consumers, subsidiary and the mode of their purchase.
Steel, cement etc get fuel at a 20 per cent higher price than the regulated power sector. Within the power sector, different IPPs pay different prices depending on whether they had power purchase agreement or not. Western Coalfields Ltd (WCL) charges higher prices than other CIL subsidiaries to justify inefficient mining geology.
All this was done in the past to ensure that an inefficient monopoly keeps doling out high salaries to its permanent employees — who contribute less than half of total sales (the rest is outsourced) — and still show profit growth. The notification wants to protect it so consumers of WCL coal cannot apply for swap.
But that’s not all. Having undergone so much scrutiny, the consumers will not gain anything. Electricity generators have to pass on the benefits to their buyers, ie distribution utilities (Discoms). This means PPAs (or contractual agreements for power supply) will be changed on a post-facto basis and at the rate decided by the committee.
Steel, cement, fertilizers etc that operate in the open market have to pass on the benefit to Indian Railways. Why? The notification is silent on this, but the only plausible reason could be to protect railway revenues.
Reform or “Micro-Management”?
“It’s madness,” said an official who participated in the inter-ministerial group discussions last year when the notification was under preparation.
“We held several meetings with the steel sector and other users. No one was interested and logically so. Why should a company take the trouble of revealing its business details for the gain of Discoms or railways?”
Views are the same cutting across industry. “It’s a fine piece of bureaucratic work reviving the memory of command economy. In the garb of reforms, they are into micro management of issues,” said a very senior power sector official.
He is clear that the command economy legacy of fuel linkages and open market trade of fuel cannot go together. The job at hand is to dismantle the entire structure. Fuel should be sold on the proposed trading platform at prices benchmarked against index and through different term instruments without any bias.
The reform in the coal sector demands identical reforms in power tariff. The 2016 Economic Survey pointed out multiplicity of tariff as a stumbling block. The 2006 tariff policy that mandated competitive bidding-based PPA by 2011, is implemented only for the private sector.
“The existing fuel and electricity tariff structures are built on command economy fundamentals and are replaced by simpler exchange-based pricing systems that will ensure competition and transparency. Coal is the single largest revenue earner for railways. But they treat it as a cash cow. These systems must go,” he said.
Good suggestions indeed. But who will listen?