Competition Issues Related to the Coal Sector of India

In India, the process of coal mining started in the year 1774, and till now also, coal tends to be the highest dependable for steel and power industry. In spite of being the fourth largest producer of coal and having fifth largest reserves, India is not able to satisfy the growing demand of the coal and the low quality even makes the condition worse, making India fall for imports of coal, especially for the steel industry.

Coal being the most important fossil fuel for the Indian industry is not only an essential for the steel and power sectors, but also for chemical, fertilizers, cement, paper, and several medium and small-scale industries are dependent upon coal for their productions.

The coal mining process had initially been a playground for the private sector, but after independence, the government took control over it and till the date, it had been a public enterprise controlled, managed and supervised by the Coal India Limited (CIL).

Coal industry, being one of the 8 basic industries in India, is suffering from problems, both at the demand as well as the supply side, which are:

Supply Side Factors:

• Quality of ash is poor with high ash and moisture content.
• Coking coal is very scarce.
• coal mining suffers from many hurdles like, tribal resistance, domination, environmental clearance, etc.
• Use of poor technology is causing high amounts of wastages.

Demand Side Factors:

• domestic demand is shrinking as the main buyers, i.e., power companies are suffering losses due to non-recovery.
• increase in carbon cess has increased the cost of coal.
• with an amendment to the Coal Act, there is an oversupply of coal in the market.

The main problems in using coal in various sectors are basically two-fold. The first one is that, India has large coal deficits, which costs tonnes of dollars to the Indian economy. and the second one being, that even after spending such huge costs of imports, at last, we are damaging the environment to such an extent, that its revival would be not an easy task, as it seems to be. Therefore, not only for the betterment of the economy but the environment also, India, being the signatory to various Environmental Conventions, should try and shift its basis from coal to other renewable resources as its fuel.

Not only this, the level of power plants in India is way behind the International output generations, where even after having a sufficiently good amount of coal, these plants are not able to work efficiently and effectively. And the focus is only on the increment in numbers of such plants and not the actual problem- i.e., fixing the problems in the existing plants and then focuses on the optimum utilization of such plants. This will not only ensure increase in demand, but also supply the coal, at affordable prices.

NITI Aayog- the government’s policy think tank came up with a policy, for stalling it for the past 2 years, to break up the seven subsidiaries of CIL, suggesting that the prices of the fossil fuel’s market price should be dependent upon the competition in the area of coal mining. NITI Aayog suggested the unbundling of CIL subsidiaries as there was an absence of coal market in India, and the traverse cost of electricity tariff was making coal mining inefficient. This step was also a direct hit on the knee for the public sector industries which are not that transparent in fixing and maintaining the prices of the coal in the industry- as this would make them directly accountable to the other players in the same market.

The study on “Competition in India’s Energy Sector” as commissioned to The Energy and Research Institute (TERI), with the overall objective to assess the competition issues in India’s energy sector comprising of electricity, oil & gas and coal sectors. The study explained that in India, there is a limited competition in the energy sector; private participation and investment is very limited and below the expected level; and these sectors are completely dominated by the state-owned public enterprises. Reasons for limited participation can be broadly summarised due to: structural issues, policy and regulatory issues, barriers to entry, lack of level playing field, abuse of dominant position and institutional issues.

Production of coal has been natural governmental monopoly from the late 1950s and its 90% of production has been coming from CIL and its subsidiaries. And, Captive Mining was introduced as a policy measure in 1993, which was channelled to attract private entities in this sector. But, till now, this measure has not yielded that results which it was planned to do.

The restructuring of CIL to a monopoly to smaller entities was essential to bring competition between themselves and hence regulating competition in the entire sector. And because of this competition, the entities brought more transparency, accountability, monitoring, control, better policy execution and most important law and order issues were managed.

In the case of the coal sector of India, the legislation restricts the entry of any entity and confers exclusive rights, by statutorily limiting the production of coal to government companies. In fact, the Coal Mines Nationalisation Act, 1973 creates and maintains a monopoly in the favour of government companies, where the Act does not confer the monopoly over one company, but in reality, there is no competition between government companies. Similarly, the law discriminates on the grounds of auction which is the only thing available to the private sector, but whose allotment lies in the hands and wishes of the government companies.

The biggest flaw, however, is that all the auctions have been for captive mining, where no independent or merchant miner of coal can bid. These auctions are in continuation of the earlier flawed policies of awarding the captive mines without bringing in the specialised mining players who can compete with CIL to create an active market for the fuel. By scrapping CIL’s monopoly on merchant mining and by introducing specialized miners- both local as well as foreign, this could have resulted in the increase in FDI and better market conditions.

Though private entities are allowed to do captive mining under the purview of the Act, but is this even a fair playfield for them? What captive mining does is to induce inefficiency as a producer of steel, aluminium, cement or power and in all probabilities, a far than efficient miner, is allotted mines of coals, leaving behind the experts of this field, thus, leading to inefficiency. Therefore, captive mining is a double curse for the coal sector as well as the Indian economy, in toto. This lowers the value added in coal mining and robs the government of taxes.

The next question that arises is, then why did government opt for captive mining than merchant mining? There can be two reasons for this, first one being that the political class is reluctant to give up the power of patronage that CIL’s continued monopoly and resultant premium on getting a coal linkage or allocation of the right coal mine vests in and is enjoyed by CIL. And the second could be that, the government is frightened of taking on the Unions in CIL that oppose breaking up of the monopoly.

Yet, a lot of undeserved benefits are flown towards the allottees of the captive mining, which is not dependent upon the methods of allocation of coal mines. But, the best way out to clean the coal is to prohibit captive mining, allotment of the mines to the experts, whoever provides a larger share to the government and also regulate the working of the mines to ensure safety standards. In short, merchant mining is the only way out for the government to come out of all the dilemmas relating to this sector.

Up to the year 2000, the price fixing in the coal sector was individually enjoyed by the government. But, after this the responsibility has been shifted upon CIL and SCCL, which has never been efficient, and market driven, and is guided by the Ministry of Coal. There have been recent talks in order to introduce price reforms in the sector, but it will be useless unless there is a market with multiple producers, each having the power to influence prices, but limited to an extent. As the presence of a large monopoly producer has not allowed the sector to reap the maximum benefits of price deregulation.

The impact of the monopolistic market structure has exponentially increased due to the absence of an independent regulatory oversight. As the presence of such independent regulator is important to boost the investment in the sector, create a level playing field, introduction of competitive price regulations, and to govern allocation of blocks, approve mines, etc. While the need for such an independent regulator has been felt from a long time, but was addressed in the year 2012, by the introduction of the Coal Regulatory Authority Bill.

The government at present, is laying a lot of stress upon involving private players to undertake mining on behalf of CIL, as it is clear that CIL does not have capacity to meet the current and projected energy demand of India and that the greater involvement of the private sector is inevitable and necessary at the moment. The focus is on the MDO (mining, development and operations) Model, wherein the private sector undertakes the mining operations, while the ownership and sale rests with the CIL. Given the present situation, it becomes necessary to focus on introducing a series of policy reforms which corrects the impediments that are observed in introducing competition in the sector. And with the change in dynamics, the role of government needs to be appraised from being the operator to a facilitator that creates enabling policies for the private investments to flow in.

 The government’s objectives of minimizing disruption in production, enhancing revenue for states, reducing consumer electricity tariffs and deepening competition in the sector have clearly not been met out. In addition, there are concerns about transparency in the allocations and legal and regulatory ambiguities. It is thus, true to conclude that the allocation of coal blocks is not an “universally hailed success” as claimed by the government. This, along with the likely reduced demand for coal going ahead, should give the government a pause as it forges ahead with another round of auctions and major new initiatives like commercial mining.

The CCI in the CIL’s case of 2017, after a lot of discussions and proceedings, conducted by it, stated that the CIL and its subsidiaries are liable for abusing its dominant position under S. 4(2)(a)(i), of the Competition Act, 2002, for imposing unfair/ discriminatory conditions in Fuel Supply Agreements (FSAs) with the power producers for supply of non-coking coal. While the previous orders ordered a penalty of 3% of the average turnover over the last 3 years, the CCI in its new order, reduced the amount to 1%. This was done on account of CIL’s efforts to improve conditions in the FSAs especially with respect to sampling. The court noted that these efforts were not limited to the duration of the proceedings before the CCI, but also during the proceedings at the COMPAT.

COMPAT upheld the order of CCI, observing that the Director General’s finding that the relevant market was the production and sale of coal for thermal power generation in India, which had been approved by the CCI, was correct.

It was undisputed that the CIL and its subsidiaries had a monopoly over the production and supply of coal to various consumers. Therefore, the CCI’s findings that the appellants were in a dominant position in the relevant market were legally correct and did not call for interference. COMPAT also held that the CCI’s conclusions regarding the facets of abuse of dominant position were based on sound reasoning. Thus, the COMPAT dismissed the appeal.

Thus, to conclude about the status of the coal sector in India, initially this sector was nationalised in the years 1971-1973, the reason being that the private entities were not able to modernise and increase the production to meet national demand and to meet the norms related to the working conditions, payment of wages, health, safety, etc. The problems were reported despite the presence of the then existing legal and regulatory authorities.

However, even after 40 years of nationalization, the country is still confronted with the problems of widening demand-supply gap, deteriorating quality and inefficiencies in production. The socio-environmental conditions around mining continue to deteriorate and the reason stems from ineffective enforcements, inadequate capacities of regulatory body, flaws in institutional structure, information deficits, etc.

The only exception has been the worker’s welfare and working conditions in mines, which have improved with time.

The step then taken for nationalization, was the best option or not, holds no relevance as of now, but what is important now is that, that the public sector now is incapable to meet the growing demand for energy, because of which private entities are being looked upon, despite the fact that they are being called up by the way of contracting, where the ownership and control vests with the government companies. And, in the absence of robust policy measures to introduce competition and to bring transparency, there is a doubt that the government is let go off their monopoly in this sector. Opening the sector for the private players is the only option to save from the future crisis and it will also help in improving the conditions with time. For doing so The Coal Nationalisation (Amendment) Bill, 2000 needs to be presented again in both the houses of Parliament so as to open up the barriers of the coal sector for the private players and by doing this, the monopoly regime of CIL in mining and selling coal would come to an end which will attract competition and, in turn, increase coal production in the country significantly and bridge the wide gap between demand and supply.

large coal blocks should be auctioned, allowing both, foreign as well as national companies, as this would result in maximum exploration of the block and will further lead to efficiency in the mining process. This will be fruitful in all the spheres, as to frame the laws, its implantation, profit motive will increase incentives, easy to reach equilibrium- where the demand will equate to the supply, use of new and advanced technology, employment generation, better and high amount of wages and hence, overall development of the sector.

Yet, there are negatives attached to this idea that, the entry of private players will affect the poor and will also lead to corruption. But, while looking at the present scenario, the best alternative available is to liberalize the sector, as the results in other previously nationalized sectors which were later on liberalized are better than what was planned, while liberalizing them.

Thus, given the current situation, it becomes imperative to restructure the sector by removing the current policy biases that work against introducing competition in the sector and strengthening the regulatory and enforcement mechanisms so that the coal needs of the country are met without hampering environment and social sustainability.

Keeping the above mentioned points in its mind, Centre on 20th Feb, 2018, has announced to open the sector for private entities, whether national or foreign, for which a procedure has also been worked upon, which is an “ascending forward auction”- a two-stage online auction, where at the first step, a technical bid has to be raised, and at the second, a financial bid with the initial and final price offers is to be raised. The highest bidder will be the Preferred Bidder and it will be open to utilise the block to its maximum, after paying the amount to the respective State Government. And there will be no restrictions on the use and sale of the coal so mined.