Open acreage coal mining will create level-playing field for investors

Opening the coal sector to private and foreign participation, a landmark reform initiated by the Narendra Modi government, marked the end of coal nationalisation and dubious captive mining era.

In future, blocks will be awarded without any end-use restrictions.

However, this may not trigger a rush for investments in the coal sector.

This is partly because, India was too late in opening the sector and, thereby, missed the era of coal rush that ended last decade.

During that period, ground conditions for mining became more challenging in India, due to environmental and land acquisition-related concerns, impacting the potential return on investment.

To add to the problems, the government is in the mood to auction the same blocks that were once created for captive use. This might help speed up the process.

But on the flip side, these blocks are too small to attract global miners which have access to modern technology.

A better option would be to delimit the blocks and introduce open acreage system, as in the oil and gas sector, allowing bidders to decide on the size and kind of mines.

For long-term gains, the government should insist on introducing modern practices, which are clearly lacking in the coal sector.

Much-needed reforms

India’s socialist legacy had a telling impact on the coal sector. Nearly 45 years since nationalisation in 1975, the coal industry is no match to China that denationalised the sector in 1978.

In 1980, China (381 million tonnes) was producing three times more coal than India (127 mt).

According to Global energy statistical yearbook, China produced 4.5 times more coal than India in 2018. With China restricting production in recent years, this number has come down substantially in recent years as the country restricted production.

The performance of India’s coal sector will look paler, given the vast availability of opencast reserves closer (within 300 m) to the surface, which are easier to mine.

Nearly 94 per cent of Coal India’s (CIL) production, which was 83 per cent of the national output of 730 mt (2018-19), came from opencast mines. China, on the other hand, produces 86 per cent coal from deep underground reserves, the US 40 per cent and Australia 20 per cent.

India has 25 per cent underground reserves, which were neglected for want of technology. More than half CIL’s production comes from small contractor-operated mines that thrive on compromised technology and labour-cost arbitrage.

Given that coal reserves are concentrated in heavily forested zones compared with China or Australia, the disproportionate focus on low-cost opencast mining has sharper implications for the environment. Roughly 3,000 hectares of land is plundered annually, at the current level of production.

From better mining practices to workers’ rights, none of the promises of nationalisation was fulfilled.

Two-thirds of the combined production of the state sector (including CIL and Singareni Collieries), come from approximately 39,000 contractual workers earning peanuts.

The benefits of nationalisation go to three lakh unionised regular employees.

Costly delay

With coal mining being opened up now, the new entrants have to compete with the state sector, which follow too many wrong practices.

Globally, the rush for setting up coal power plants is over. The fast-changing technologies in the renewables sector are impacting the price dynamics of energy commodities. This is, in turn, having an impact on the return on investment in a coal mine.

Environmental concerns are on the rise. Lopsided focus on opencast mining and concentration of majority reserves in four States add to the risk.

Any mass movement akin to the flare up on land issues in the last decade can upset the industry.

Land availability, a concern

The biggest concern is land. For a country where two-thirds of the population is dependent on land and the population-density is 10 times that of the US and 2.5 times that of China, the share of arable land (to total land) is three times higher than in the US or China.

The pressure on land will become more intense in the days to come, as population increases. Net-net, land acquisition would be costlier and more difficult.

Land acquisition became exorbitantly costly in India following the introduction of the new Act in 2013.

According to CIL’s internal assessment, its new projects are not viable at the current prices. But it is managing, thanks to the availability of legacy assets. New entrants will not have this advantage.

Change of strategy

While opening up the sector is the right step, a change in strategy is required to create a level-playing field for investors, failing which India will be willy-nilly at the mercy of a similar group of companies that are mining on behalf of the state sector.

Open acreage is a right tool to give investors the freedom to innovate. Currently, a set of laws require miners to acquire surface area.

With the right policy environment, foreign investors may be encouraged to go for underground mining as part of long-term sustainability of the industry.

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