Let everyone own a piece of coal

The government braces itself for yet another significant task of allotment of coal blocks, this time via an open competitive e-auction process. This is the time to flag some next mile issues that, with a little foresight and planning, could make the process not merely transparent and fair but also more in tune with accepted maxims of economic common sense.

We seek to analyse instruments that could make the result of allocation more broad based, more participatory, and more efficient. Coal is a natural resource and a national resource. It is created by nature. So, who should own it? Who should stand to benefit from its commercial exploitation?

It would be retrograde to suggest a retreat to the government-ownership paradigm that existed after the Coal Nationalisation Act of 1973, which produced sub-optimal results. The Coal Mines Special Provisions Ordinance promulgated recently is a welcome step to move away from the past legislative framework. The monolith Coal India Limited (CIL) and its subsidiaries are still struggling to supply coal users and the extant power coal supply crisis is essentially a hapless aftermath.

Equitable ownership Coal imports have surged to 168.4 million tonne (mt) in the last fiscal and are choking seaports; The Railways is having a tough time supplying rakes to logistic providers for inland imported coal supply. China imports 290mt coal and thanks to the domestic coal extraction impasse, we will surpass Chinaanytime soon. Of course, this is no achievement, given that India has the fourth largest coal reserves in the world.

As each of the 204 coal blocks in the country go under the hammer, a handful of companies will come to hold possession of these coal blocks. Thus ownership in the natural resource would remain restricted to a few private players, bringing in concomitant issues of monopolies.

Even while the ownership of coal block rests with a few big companies, what about the retail investors? They have investable resources and if anything, recent trends in India Market (stocks, savings in banks, post offices and now Kisan Vikas Patras) clearly show people want to invest in instruments that give good returns.

The idea of equity suggests that when ownership of a natural resource is being changed from government to private firms, every investor must get an opportunity to own it. Several mechanisms could bring about an element of shareholder democracy in the much constrained world of natural resource management.

Mutually beneficial In an IPO, 35 per cent of the issued capital has to be offered to retail investors. A similar model can work for coal auctions as well — a portion of the block can be reserved for retail investors. If the block is valued at Rs 1,000 crore, 10 per cent of it can go to retail investors. The block could be owned by a special purpose vehicle and it would mandatorily float scrip equivalent of Rs 100 crore in net asset value, which would be available for the retail investor and this scrip would be tradable.

This would result in an arrangement where the promoter will still take major commercial decisions on the utilisation of the coal blockwhile retail investors would stay invested in the national resource.

One could be unsure of retail investors’ appetite for such instruments, but if one was to go by the recent experience of oversubscription of infrastructure bonds, the appetite is nothing short of wholesome.

Alternatively, a holding company owning the coal block could be asked to increase the equity stake offered to retail investors. The holding company can be a listed or an unlisted entity.

In case it is not listed, the government may frame rules requiring compulsory listing and also apportioning a certain representation for retail investors. In case of a listed company, market regulator SEBI could require equity sale to increase the representation of retail investors. The above stated methodologies present a viable option to broad base natural resource ownership and generate a greater degree of awareness about resource ownership and its efficient utilisation.

Use domestic prices The recent failed auction for three coal blocks (Jhirki and Jhirki West, Andal Babusol and Tokisud ) where Indonesian coal prices (average of four international coal price indices) were used to arrive at the intrinsic value of the coal block is an apt example of auction process floundering due to unrealistic basis.

The reasons why bidders gave a cold shoulder were pretty plain. When upfront payment and production-linked payment were used as inputs in the coal price model, the cost of coal extraction worked out to be greater than the imported coal cost. The bidders therefore, did not want to undertake land acquisition, environmental/forest permit materialising risk only to find the landed cost of coal being in excess of imported coal, which they could have procured easily in these times of pit bottom international coal prices.

Therefore, to conduct a successful auction, it will be prudent to use domestic, Coal India notified prices so that the upfront payment and floor price are within the bounds of bidders’ expectations.

Eligibility issues Finally, it is time we realised that mining is a commercial venture after all. Rules that require any coal miner to be steel or cement producer first are woefully short-sighted. All mining is not captive mining, it shouldn’t be. Companies should play on their core competencies. The resource based view of strategic management may not advocate upstream integration of steel/cement/power producers as mining firms.

Another word of caution at this point is that vertical integration creates a fertile bed for cartelisation. We wilfully nip innovations in mining technology in the bud when we force uninterested steel/cement/power producers to do a job they aren’t best capable of.

The authors advocate that since the government is interested in commercial mining in near future, the present day captive mine owners be given adequate flexibility to transfer the resource to its most commercial viable destination. This would help steel/cement/power firms to gain in business performance. Not doing so may deter the most desired players from participating in this process.

Any company bidding for a block will eventually structure its finance to leverage funds from banks. Commercial banks are also the only holy cows government looks to for financing substantial part of its infrastructure funding requirement. As government goes out prospecting banks to finance smart cities and high speed rail, retail participation in coal block ownership would also lessen bankers’ woes as part of what would have been debt gets converted to equity.

Broad-basing ownership will also lead to diversification of risk. On the other hand, if the project reaps windfall gains, the fruits of labour would be enjoyed by a wider audience.

Kumarum is an IAS officer, Deepak is a consultant with EY and Bhattacharyya is faculty, NITIE. The views are personal

COMMENT NOW