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Will breaking up Coal India Limited lead to efficiency and competition?

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Inherent and structural differences mean simply breaking up CIL will not unleash meaningful competition, not unless the system is willing to bear a high spread in coal prices. Location matters enormously, and coal ends up being a not very liquid commodity (no pun intended).

 

Coal India Limited Cover

Newspaper reports have spoken about breaking up Coal India Limited (CIL), the world’s largest coal miner, to unleash efficiency, raise production, and raise cash for the government (which still owns 70.96% of CIL). Separating CIL subsidiaries is not a new idea, having been floated in 2017 before. Leaving aside political considerations, including worries about unions (i.e., “can this be done?”), the real issues are structural, institutional, and regulatory. The view to break up CIL is to end its de-facto monopoly (producing almost 85% of domestic production), and unleash efficiency, perhaps through competition. Unfortunately, the differences between subsidiaries aren’t just stark, they are structural or legacy, and predominantly outside the hands of management, including based on geo-technical differences. Locational issues are also critical, making coal across diverse mines much less fungible. Any policies that fail to reflect system-level effects and underlying issues might result in minimal change, but could also lead to huge price spreads across subsidiaries, something end-users (like power plants) will have to bear. In the worst case, such changes these may even lead to loss of production.

Coal is vital for India’s development, providing about half of India’s primary energy. Coal is over three quarters of electricity generation in the country, especially factoring in captive power generation. In terms of coal supply, CIL is the dominant coal miner in the country, an order of magnitude higher than the second-largest producer. Unofficial estimates for FY’18-19 show that CIL made up 83% of domestic production and 63% of total coal supply (in tonnes), with imports of coal making up for insufficient domestic production (Figure 1). India imports coal due to several reasons, including higher landed costs of domestic coal at distant locations (exacerbated by high railways transportation costs), better quality of imported coal and lower ash content, selected power plant boilers being designed to a particular quality of imported coal, and a lack of domestic coking coal production (for the steel sector). It is important to look at rising coal imports in India with an awareness that not all coal imports are avoidable.

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