The Coal Mine Auction Explained - All You Need to Know
The Indian Government is currently conducting the first-ever commercial auction of its coal mines. Recently, you may have also read that listed companies have won the right to operate these mines. What could have made the Government take such a big step in opening up coal to private players? How will the private companies benefit from it? What will happen to Coal India? Let us dive deep and understand how this process would work.
A Brief History of Our Coal Industry
Our country has been truly blessed with some of the greatest resources known to man. And, one such important and highly useful resource is coal. We have a long history with coal mining that dates back to the 1770s. The British East India Company was one of the first enterprises to tap into the coal industry. In the 1900s, there was a great demand for coal during the World Wars. As we know, it was used to power steam engines in Indian Railways even into the 1990s.
After Independence, the coal mining sector was largely supported by the Five-Year Development Plans of the Central Government. Technological improvements were also introduced in order to increase the efficiency of coal production.
There was a dark side to coal mining as well. In the 1970s, it had been found that many private players were adopting unscientific mining practices. The workers were highly exploited with poor work conditions. This became a matter of great concern for the Indian Government. Under the Indira Gandhi administration in the 1970s, it was decided that coal mines will be nationalised. They introduced the Coal Mines (Nationalisation) Act in 1973. In two main phases, operations of most private coal mines were handed over to the state governments. To increase the overall operational efficiency of the coal sector, Coal India Limited (CIL) was established in 1975.
Is the Coal Industry Declining in India?
Let us take a look at some important figures surrounding the coal industry. India has the fifth-largest coal reserves in the world. In 2019, it was estimated that the country had reserves amounting to 106 billion tonnes. The states such as Jharkhand, Chhattisgarh, Odisha, and Telangana have the largest deposits of coal. India is also the second-largest producer of coal, after China. It is the main source of electricity generation in our country and accounts for more than 70% of the total domestic supply. Coal India Limited contributes around 82% of the total coal production in India. This listed firm has also turned out to be the largest coal-producing company in the world.
Despite these very impressive figures, the coal industry in India has been declining. Even though we have a high reserve of coal, we are actually importing coal from other countries. Over the last few years, it has been estimated that India is importing around 240 million tonnes of coal per year. And, the cost of acquiring this coal has been valued at Rs 1.7 lakh crore.
The main requirement for India is coking coal, which is a key raw material that is used in the production of steel. It has been found that the availability of high-quality coking coal is limited in our country, and is almost entirely imported. These are very shocking expenses for a country that has been boasting about its coal reserves for decades. Due to all these reasons, there was no option for the Government, than to introduce concrete steps to discover new reserves and improve domestic production.
The Coal Mine Auction
The government has now realized that the coal industry should receive another massive boost. Earlier this year, the central government announced plans to open up the country’s coal reserves (mines/blocks) to the private sector. Under the Atmanirbhar Bharat Abhiyan, around 41 coal mines (or coal blocks) will be auctioned off to companies that have a previous history of mining activities. The main priority is to ensure that we limit the import of coal from other countries and become self-sufficient in coal production.
These auctions invite participants to place bids on the coal mines that are located in different parts of the country. Successful bidders will receive leasing rights for a specific period, from the state governments. The important fact to be noted here is that it would be the first time that private players are allowed to mine coal for commercial purposes, without any restrictions on its end-use. The private companies can also sell the produced coal to other entities.
The earlier mechanism worked in such a way that companies had to pay a fixed amount of Rs 150 per tonne of coal produced, to the government. Now, as per the specified rules for the takeover, private companies will only have to share a percentage of their sales revenue (from coal production) with the government. The final bid that a private company makes in the auction would be the percentage of their revenue that will be shared with the government. What this means is that higher the percentage of revenue a company is willing to offer the government (in the auction), higher are the chances of them winning a particular coal block/mine.
Will Coal India be Affected?
We learned that Coal India Limited (CIL) accounts for 82% of India’s coal production. With the introduction of the coal auctions, the government has removed the monopoly status of Coal India. However, it was only an unwritten rule that Coal India would be the dominant entity in the coal industry. The lockdown restrictions amidst the Covid-19 pandemic had also caused negative effects for the company. The company’s total production activities had declined by more than 25% this year. It has been facing issues concerning its cash reserves, which means that the company has not been able to obtain cash for its short-term needs. They were also found to be one of the biggest polluters in the country. All these factors have led to the downfall of the company.
Since Coal India is currently not efficient in its operations, some competition from private players will help the industry utilise India's core resources to its fullest.
The auction of 41 coal blocks was launched by Prime Minister Narendra Modi in June 2020. However, it received very little interest from private players during the initial stages. This led the government to reduce the number of coal mines for auction to 38. In September, the Coal Ministry announced that it had received 76 bids from various private companies for only 23 coal mines. The remaining coal mines/blocks did not receive any bids. Interestingly, it was reported that the Adani Group placed the highest number of bids as compared to other private companies. They had placed a bid on 12 coal mines.
On 3rd November, reports came flying about stating that listed companies such as Vedanta and Hindalco had placed the winning bids for acquiring the coal mines. This means that they will be among the first private sector companies to operate coal mines in India with no restrictions on its end-use. Vedanta Ltd has placed the winning bid for the Radhikapur West Coal Block in Odisha. Hindalco has won the right to operate the Chakla Coal Block in Jharkhand. Other companies such as Aurobindo Realty and Infrastructure Pvt Ltd. and JMS Mining Pvt Ltd have also won bids for coal mines in Maharashtra. It certainly seems that the auctioning process of coal mines has seen great demand from many private players.
This new initiative by the government is all set to provide major support to improve the production of coal in India. It is surely of vital importance that we become self-sufficient in this field and cut high import costs. However, some important questions arise here- is the government too late to make these changes? Or, were all these steps necessary in the current scenario?
Our country is currently seeing a shift towards renewable energy sources. The cost of producing power through cleaner sources has become less expensive. This could be one reason why most companies stayed away from placing bids on the coal mines. Another factor to be considered is the health factors surrounding coal mining in India. Most people from villages that have coal mines are facing respiratory issues. All these make us wonder if the government is making the right decision to hand over coal mining operations to the private entities. A system could be kept in place wherein the companies are monitored and held accountable for their actions.
As the auction process goes on, we can see that more publicly-traded companies have won the rights to the coal mines spread across the country. Let us wait and watch for the final results and announcements that will be made in the coming days.