Update: Govt may allow foreign firms with domestic units to mine, sell coal

The government could allow commercial coal mining by foreign companies if they set up units in the country, opening the door for global giants like Rio Tinto to access the country's coal reserves, a source familiar with the matter said.

Prime Minister Narendra Modi's decision to open commercial coal mining to private players is a key step towards bringing order to the chaotic domestic power industry and ending the chronic blackouts that impede its economic rise.

Nearly a quarter of a century after the country embraced economic liberalisation, many businesses still rely on costly back-up generators for round-the-clock power and a third of its 1.2 billion people still lack access to electricity.

As of now, only domestic power, steel and cement companies can mine coal for their own consumption. Commercial mining is dominated by state-run Coal India (CIL).

However, now the government plans to allow companies like Rio Tinto India to mine coal commercially after it completes the auction of 74 coalfields for the exclusive consumption of power, cement and steel plants owned by domestic companies, said the source, who spoke on conditions of anonymity as he was not authorised to speak to the media.

In a 27-page executive order posted on the Coal Ministry's website on Wednesday, the government said any firm incorporated in the country may be allowed to mine coal for their own consumption or sale, ending a 42-year-old ban. The document did not make any direct reference to allowing foreign firms.

Rio Tinto India Managing Director Nik Senapati declined to comment on the matter.

Other foreign players that may show interest in the nation are BHP Billiton and US-based company Peabody.

A CIL official said it would be natural for the government to allow deep-pocketed foreign companies to mine coal, given the need to invest heavily in order to quickly raise output.

MODI'S REFORMS

Opening up the industry would ultimately boost production of coal, a raw material that generates three-fifths of the country's power supply, while piling pressure on CIL to produce more.

"This is a first step but a very important one," said Manish Aggarwal, head of KPMG's energy and natural resources practice in India.

"What the government is really saying is that we will focus on domestic coal and on renewables to meet our energy needs... India needs the latest technology, the latest equipment and international expertise if it is to raise coal production."

PM Modi prided himself on supplying uninterrupted electricity as the former chief minister of Gujarat, and repeating that feat at a national level is one of his priorities.

It will not be an easy task.

The country sits on the world's fifth-largest coal reserves, and yet state-owned CIL, which has enjoyed a monopoly on commercial mining, has consistently failed to meet the rising demand of the rapidly growing domestic economy.

Instead, wretched inefficiency has turned the country into the world's third-largest importer of coal.

In September, the Supreme Court cancelled 214 of the 218 coal block licences issued since 1993, after ruling that they were allocated illegally, in a case that has become emblematic of the dysfunctional nature of the industry.

The government will re-auction the mines to private firms within four months. For the first time, revenue from the concessions will be paid to the states where the blocks are located, creating an incentive to speed up project approvals.

"Modi wants to include incentives... By giving the opportunity to coal-rich states to earn royalties," said a retired bureaucrat who helped the Prime Minister tackle power shortages in Gujarat.

NEXT STEPS

Boosting the supply of energy is only half the problem, industry experts say, and Modi is expected to now push individual states to reform the rickety distribution model.

The country's installed energy generation - more than half of it powered by coal - has surged by 20 per cent in the last three years, and the peak power deficit fell to 5.1 per cent in June from 9 per cent in 2012, according to official data released by the government.

However, cash-strapped distributors, whose tariffs are capped and are facing rampant power theft, have invested little in new transmission lines. This implies that, for all the extra power generated, not enough is delivered to consumers.

"This is not a complete solution... Fixing the transmission and distribution side is equally critical," said Aggarwal.

(Reuters)