COMMERCIAL MINING OF COAL
From regulated and monolithic to open market-driven competitive segment
Better late than never! The Government seems to be looking at commercial coal mining once again, as apparent from a reading of the draft coal block allocation rules awaiting notification under the MMDR Act. Currently, the draft is open for public to opine. The aim, among others, is to allot/auction coal blocks for sale of coal commercially, in addition to captive end users. This change in policy, if properly defined and pursued, has the potential to create a competitive and matured market for coal production and sale by multiple players, as is the case with every other developed coal producing country. Achieving this purpose will transform the coal sector from a regulated monolithic to an open market driven competitive segment. Given the crucial role being played by the sector, notwithstanding the renewable buzz, such transformation is long overdue and much desired. It is, therefore, important to evaluate the ability of the draft rules to deliver the required transformation of the coal sector and urgently address the following challenges:
Substantial coal based capacities idling due to inadequate or nil coal supply.
Monopoly in coal production leading to inadequate focus on coal quality. Production operations far from optimal:
1. Utilisation of HEMM of 3000 to 4000 hours/annum is far less than global best practice of 6000 to 6500 hours/annum
2. Thrust on mechanised underground mining is minimal, resulting in coal production from this segment being less than 5%. This is highly skewed since coal deposits at depths of over 300 meters, extractable only by mechanised underground operations is over 20%.
Most operations includ- ing environmental management are not aligned to global best practices. Land restoration to original form is the global best practice. Indian open cast mines, at the best, end up creating a biologically reclaimed forest on a OB dump on one side leaving a crater on the other. The land post-mining is often unfit for normal use.
The grade and GCV of coal received at consumer end is more often lower than invoiced grade/gcv. In cases where the consumer is not eligible to third party sampling and analysis, he pays higher as per invoice. The third party sampling/analysis through CIMFR is rather nascent and the outcome yet to be seen.
Meeting the above challenges in the coal sector will require creating formidable players capable of competing with the PSU coal companies. Hence, restricting auction of coal blocks for commercial sale to a handful of domestic companies (not of competing size) is unlikely to bring the desired outcome. To realise the full potential benefit of opening up the coal sector, it is imperative to bring in global coal miners either directly or at least as partners to domestic bidders. The FDI guidelines may have to be revisited if necessary to encourage and enable direct participation of such companies in the bidding process. The poor state of development of the coal blocks handed down last year to a few State Governments for commercial mining vindicates the above position. In the backdrop of the foregoing, the draft rules fall short of requirement. The following modifications are recommended:
The rules for auction of coal blocks for commercial sale may be formulated and issued separately from either direct allotment of blocks or auction for end use instead of issuing a common set of rules.
The blocks for commercial sale must be large enough to interest global companies. Block size exceeding 1 bn t to support a 50 mtpa mine for 20 years should be the floor size.
Securing coal blocks of large size in sufficient numbers will require merger of adjacent coal blocks created earlier under the mandate for auction among end users. The dismal aggregate performance of the end users in general for over two decades clearly calls for taking this measure to encourage commercial mining and discourage mining by end users. It may be appreciated that natural coal blocks, surrounded by non-coal bearing areas had to be artificially split into smaller blocks commensurate to the requirement of individual end users. These ‘sub blocks’ are often separated by coal walls leading to sterilisation of significant coal deposits. Also smaller deposits hinder deployment of large size machines, leading quite often to sub optimal mining. Lastly, the practice of allowing end users mine their coal fails to recognise core competence in mining as a prerequisite. Unsurprisingly, this model has not been adopted in general, in most coal producing countries to meet the demand supply gap of coal.
The number of large coal blocks suitable for commercial mining may be increased subsequently by allowing consortia of large exploration and mining companies to explore and prove coal reserves in unexplored and partially explored large deposits. The consortia may be identified through a transparent EOI process with the proviso that in the event of timely completion of the work leading to JORC certification of the reserves, it shall be eligible to the Right of First Refusal (ROFR) for allotment of the block for mining through auction besides reimbursement of the cost, including reasonable return, incurred for exploring the block.
The underlying principle of declaring preferred bidder based on the highest bid received from among technically qualified bidders fails to value appropriately the core competence and experience in carrying out mining with global best practices. It treats all bidders beyond the threshold of technical eligibility as ‘equals’, much to the disadvantage of large global companies and to the advantage of domestic companies with mining practices falling substantially short of global standards. The process of evaluation of bids of technically qualified bidders therefore needs to be modified by providing higher weightage to demonstrated core competence and proven experience of mining with best practices. This can be achieved by adopting the tested QCBS model (Quality & Cost Based System) for bid evaluation with ‘Quality’ meaning demonstrated core competence and proven experience of mining with best practices carrying a weightage of 70-80% and offered bid price a much lower weightage of 20-30%. The process can be applied with highest levels of transparency to identify the preferred bidder with objectivity, enhancing greatly the probability of successful development of the coal blocks in due course.
Modification of the Coal Blocks Allocation Rules and other related policy documents incorporatinwg the foregoing thoughts will eventually yield a sound, competitive and matured coal sector which the Nation amply deserves. Most importantly, it will provide the much needed commercial incentive for Coal India Ltd to pull up its socks and enhance efficiency in every aspect of its operations.
(Views are strictly personal.)
Restricting auction of coal blocks for commercial sale to a handful of domestic companies (not of competing size) is unlikely to bring the desired outcome. To realise the full potential benefit of opening up the coal sector, it is imperative to bring in global coal miners either directly or at least as partners to domestic bidders