PPP In Coal Sector: A Positive Sign

The Maharatna PSU Coal India has again missed the production target of 413 Million tonnes that it had set for the first 11 months of the current fiscal. The company produced 398 million tonnes of coal in this period. The coal off-take for the same period was 419 MT against the target of 425 MT. Last year too, the coal major missed the annual production target of 447 MT. This stagnating coal supply in the country has been a main issue which has led the government to announce a public private partnership policy framework (PPP) in the coal sector in the Union Budget 2013.

While the sector is in dire need of coal, Coal India's poor performance has led many companies to import coal, especially from Indonesia and Australia. This has resulted in a huge rise in the coal imports. According to reports, Indonesia and Australia account for over 50% of the total coal imports by India. The hefty rise in the coal demand has seen coal prices on an uptrend in the last two years.

Some of the Indian companies with power generation projects had bought equity stakes in mining projects in Indonesia. This comprises of companies like Adani Enterprises, Reliance Power, Tata Power etc. The Indonesian government in September 2011, benchmarked the coal prices to the international prices which impacted these companies in a big way. After this, the coal prices increased to an uncomfortable level taking a toll on the profitability of these companies. The Indonesian government in yet another decision has begun to reduce the low quality coal exports. This includes the coal of the Gross Calorific value below 5300 Kcal. This will further impact the power companies.

After sensing trouble in power generation, these companies are still generating good cash flows for the companies due to the high volumes as well as good prices. This will however change soon. The Indonesian government is now expected to limit coal exports to the tune of 25% of the total coal output. This will put the equity investments of Indian companies at stake.

If the Indian companies import the high GCV coal, capping of exports will be very crucial as that will not solely meet the domestic demand. Even if it does, these companies will run in losses before the operating level and hence it may not be a viable option. Australian coal will also become costlier as Indonesia will cap the exports. This means that Indian companies will end up as losers again. The equity investments of these companies will also be at stake.

Considering these changes in the international coal market, the PPP in coal sector would prove to be a good alternative to the power sector as it will help in improving the stagnating domestic coal production.

After the budget announcement, international coal mining majors such as BHP Billiton and Rio Tinto have shown an interest in the Indian coal sector. These mining giants will bring superior technology in the country and therefore one can expect a helping hand to the power sector. A few Indian private companies are also expected to form a PPP with Coal India.

Experts, however, are of the opinion that such partnerships would come in effect if there is part partnership of the coal mines. The private companies would also demand preferential coal linkages for their projects which may create some corporate governance issues in such partnerships.

Rio Tinto had already put a proposal to develop and produce coal from few abandoned underground coal mines of Coal India. This was denied on the grounds that the company has never developed any abandoned coal mine. Such cracks in policies however may hold companies from investing in the Indian coal sector.

If the policy hurdles are broken, the Indian Coal sector may look better. The surging coal demand will be a good opportunity for private companies to diversify their business operations. The sector however needs some real work and not mere announcements.