Tripling Coal Production in India: How do we get there?

Brookings India organised a panel discussion on Tripling Coal Production in India: How do we get there? on Friday 24 April at the India Habitat Centre. The panel was moderated by Vikram Mehta, Chairman, Brookings India. Panellists included: Anil Swarup, Secretary, Ministry of Coal; Partha Bhattacharyya, Former Chairman, Coal India Limited; and Vivek Sahai, Former Chairman, Railway Board.

The current government roadmap is for tripling coal production, from a little over 500 million tons per annum, to 1500 within 5 years. Today, the vast majority comes from Coal India Limited, the mega PSU, and of the 1000 million tons growth, half is targeted from Coal India Limited, and half from new entrants, who have received coal blocks during the successful coal auctions. The short term focus is on logistical and institutional improvements (especially involving states and railways) to improve outputs, though over time, commercial coal mining can come in as well.

Highlights of the discussion (including based on extensive Q&A):

[A more complete narrative of the discussions is available here ]

• There are two sets of growth of 500 million tons envisaged. From the private sector, it is hoped it shall be straightforward since the capacity is for higher, and 42 mines are or were producing already. For Coal India, this is a harder task, increasing production growth by an order of magnitude compared to the historical 1-3% of the past.
• One of main challenges isn’t just coal production, but logistics. Coal at the pit-head isn’t good enough. This relatively short distance, sometimes 20-30 km is an Achilles Heel of the system.
• In addition to more rail and freight capacity, there are upgrades, some technological, required for loading and unloading, including a holistic look at new designs such as BBORN. However, today, even if end-users say they will pay for these, the issue is these would come back empty, or be sent elsewhere, to complete a “circuit”. Technological improvements are also required for local environmental quality, including water sprinklers in open cast mines that don’t produce mud, which impacts local communities.
• To overcome logistical bottlenecks, the government is now entering into JVs with the states and railways. Much of the new enthusiasm from states is because coal auction revenues will go to them. We also have far better coordination than ever before, which is why coal is no longer the bottleneck for users, esp. power plants.
• CIL’s production (the bulk of India’s) is lower than China’s when normalized for size of reserves. The main reason for this was a shortfall in adding in new players, and even new technologies. The “end-user” model, as opposed to coal mining specialist model of private participation, hasn’t worked anywhere in the world, and has not (yet) worked in India.
• Some 92% of mining is open-cast (surface) mining, ostensibly for financial reasons, but only 75% of resources are near the surface. At some point, this will catch up, and India will have to think of improved underground mining.
• Today, environmental protection isn’t just lip service, it is now part of an officer’s KRA (Key Results Area evaluation). In addition, we now use satellite data to verify environmental restoration. While this was partly useful for satisfying investors, it is now part of the standard operating procedures.
• As of now, the government priorities are on sequencing changes in the coal sector. We are not saying we won’t get to private (commercial) mining, but that it would not be the immediate focus. For now, increasing Coal India production and adding in private participation for captive or specific (end-user) needs is the priority.
• Restructuring or reorganizing Coal India Limited has been discussed in many circles. The government is not averse to doing so down the road, but a proper analysis and logic for this is required. Restructuring for restructuring sake isn’t a good enough driver.
• Over time, the government can gradually divest greater stakes in CIL, and, more importantly, allow private mining and CIL mining to co-exsit, just like how the advent of private banks like ICICI and Axis didn’t mean de-nationalization of SBI.
• Underground mining didn’t grow as the economics are far inferior to surface mining costs. However, today’s differential, which could be several-fold, isn’t a fair comparison since we haven’t invested in the rights skills, technology, etc.
• There are immense possibilities available to improve logistics, both getting coal to the rail-head (e.g., conveyer belts) as well as loading/unloading, such as BBORN. Some of the challenges aren’t technological but one of pricing and institutions (e.g., these come back empty).
• In addition to concerns on HR and people within CIL, we need to increase our focus on local communities. One model, like in Jharkhand, is to put monies from coal in a special fund instead of the general exchequer. This might allow more focus on development.
• Are Indian reserves as estimated? While it is true that India follows a different methodology (“ISP”) for assessing reserves, India’s methodology may be better suited for its geology. Regardless, over time it may need to also undertake the global methodology (JORC).
• Probably the major elephant in the room regarding the current auctions as well as overall is the power sector, the major consumer of coal. There are a lot of worries that the reverse auctions for power were “too successful”, i.e., with zero or negative net bids for coal. The government clarified and re-clarified, one cannot pass on coal (fuel) input savings into fixed costs. All reductions are for lower power prices for consumers. Companies bid, for both sets (power and general), of their free will, with their eyes wide open.
• There is a roadmap by the government, which converted the Supreme Court ruling into an opportunity, and eventually we shall get private commercial mining. There are lots of possibilities, and many improvements (especially in logistics, technology, etc.) to be done.

Observations (post-event, going beyond the above highlights):

• There is an urgent need to bring power producers into the conversation. “Right or wrong” is a misleading if not inappropriate lens for the bids for coal for power plants. The more important questions are what now – what are the implications for actual supply of coal (and power)?
• If we treat bidding prices as one of caveat emptor, are there policy implications of this? If a producer doesn’t produce coal, is it simply an issue of lost deposits, or are there other implications?
• How well do we expect the “end-user” mining model to work? It hasn’t worked much elsewhere in the world.
• What is the role and relevance of imports? While one goal is to reduce or even eliminate imports, what happens either if domestic supply isn’t sufficient, or if global prices are low enough to warrant imports?
• What are other modes of changing the institutional structure beyond just traditional private participation (commercial mining) and also divestment in Coal India Limited? It must be noted that there is a fair amount of sub-contracting to private players even by Coal India Limited today.
• While the government has chosen on an approach of gradualism (called “titration” in the discussions), is there a limit to such an approach?
• How do we foster in innovation (in institutions, and logistics, beyond just mining technology)? Is the challenge of L1, discussed at length, the only bottleneck, in which case perhaps improved specifications might be required? However, “improved specifications” is something available to all entities today – what else might be needed?
• What supply-chain innovations might be quick-wins for the government and other stakeholders to consider, esp. vis-à-vis railways?
• Can we properly grade, incentivize production for, price, clean-up (washing) and transport different qualities of coal?