PPP in Coal Mining: A lucrative Proposition or extension of MDO in mining!!

PPP in Coal MiningOut of a target of 574MTs of coal, India could only produce 557MTs of coal in 2012-13, though registering a growth of 3.3% over the previous year. Also on supply side, it could only supply 568Mts of coal out of a targeted 580MTs, registering a growth of 6.2% over its past year performance. If figures are any indication of performance, clearly CIL is an under performer and this is not the first instant when CIL has not performed according to expectation. Despite constant pulling by the coal ministry and pressure from consuming industries, CIL is unable to perform. The lone ranger in the coal industry enjoys a free run in coal production, supply and pricing front.

The monopoly will remain as government is in no mood for creating a competitive market for coal by allowing private investors in coal mining. The only contribution from private players comes from captive mining and in certain cases from MDO operations. Government in fact wants private players in the mining but in form of PPP and the objective is not yet clear whether government wants to retain its control over the partnership or shed away some of its control to the private players.

The concept of PPP is well established in India with infrastructure projects shaping up in the country through private participation under this route, mostly in road projects. Coal mining is completely different from road projects and it is interesting to see how the modalities are worked out in case of PPP participation in coal sector.

It is predicted that government would like the private party to do all the mining at its own cost in lieu of certain fees per output but the mine ownership will lie with the authority. The same concept is already in practice in case of MDO operations where in the MDO operator undertake development and operation of coal mine for delivering an agreed output annually on payment of a mining charge. It is not clear yet whether government would like to broaden the concept of MDO operations and increase its size through this model or actually it wants an equal participation and sharing from the private sector which have a say in this kind of arrangement.

The reasons outlined by the government to introduce PPP are 3 folds:

  1. Scaling up coal production at an accelerated pace
  2. Bringing in private capital to the sector and improve efficiency of operation to optimize life cycle cost and reduce mining expenditure
  3. Transferring risks to the private entity in lieu of certain commitments of payout on the basis of agreed output on capacity

The overall framework as Proposed:

  1. The authority is to prepare the project report covering geological structure, description of mine, coal handling arrangements, capital estimation etc and to hand over to prospective bidders.
  2. The concession period will be at least of 20 years with a further extension of 10 years.
  3. The obligation of the private part would be to finance, construct ,develop, operate and maintain the mine along with other associated services for excavation and delivery of coal.
  4. Coal washery construction might be included and it will be developed and maintained by the private party as per the provisions laid out.
  5. All activity with in mine premises to be controlled by the private party.
  6. The authority is to acquire land and bear all expenses of R&R activities.
  7. All clearances of forest and environmental shall be obtained by the authority
  8. Coal sampling to be done jointly before any supply take place.
  9. Mining plan to be adhered by the private part in letter and spirit, any amendments to be finalized in discussion with the authority.
  10. Safety and security would be the responsibility of the private party

On mining charge, the payment will be divided under two heads. Monthly fixed charges, a percentage of total project cost at the availability of equipments and mines for production and delivery and will be reduced on subsequent year of operation. Variable mining charge would be based on the discovered price through competitive bidding on per tonne basis including OB removal cost. On shortfall in delivery, variable charge will be reduced drastically.

A 2 stage bidding process is proposed. The first stage is to shortlist the prospective bidders on the basis of technical and financial strength and the second stage bid is to decide the prospect on the basis of lowest variable cost quoted. Standard procedure will be followed. The authority will provide investment support to the concessionaire in some equal installments which will cover around 40% of the total project cost as determined by the authority. The variable mining charge will be indexed to the WPI and other relevant indices to take account for inflation.

While the proposed guidelines for selecting PPP partner sounds logical, there is no mention of functioning of the partnership, its ownership and control over the project as such. The bidder may not be willing to work in isolation only taking maximum risks for a payout which is directly linked to the output capacity. There is no incentive to attract a private investor into the fray.

While comparing this model with MDO, there is no stark difference between these two models. As followed in CIL mines, partial outsourcing for removal of burden, hiring HEMMs are part of the MDO concept where in the contracts are awarded to 3 to 4 years and the capital cost is borne by the bidder. The total outsourcing model completely resembles to the proposed PPP framework where in mining operation like OB removal and coal extraction to the point of loading is being carried out by the bidder. This is done according to the approved project report of CIL or associated subsidiaries. In some cases also, R&R work is also outsourced to private agencies in lieu of certain facilitation cost on behalf of the authority ( Ex: Rajmahal OCP of ECL). For UG mining also, high end technology like continuous miner and high skill level works are being outsourced to third party. In some cases, total mining operation is being transferred to third party agency for a minimum guaranteed production output. These outsourcing works also yield good results apart from some contractual disputes.

In light of this, the proposed PPP model which is under discussion now should not treat the partner as a part time contractor. They will definitely ask for an ownership in terms of coal output/mining lease or assets deployed. The PPP model cannot be designed in isolation without taking the views of all stakeholders, particularly those who are going to be involved in mining operations. Only time will tell how the scenario unfolds in coal sector and whether government is willing to share some ownership in this much hyped partnership model.

*The views expressed in this article are solely those of enincon perspectives and do not necessarily represent those of Enincon LLP.

1 comments

Government of India have given permission to state companies like NTPC and SAIL to sell 10% of their production from captive mines to be sold at e-Auction plaform. The objective is to incentivise them to take serious effort to start production from their captive coal blocks. If this can be done for the state companies, why cant be this type of mechanism be allowed for private producers to produce from their respective coal blocks efficiently.

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