Privatisation of coal historic, but could be bumpy ride

The recent decision by the Union cabinet to denationalise the coal industry is historic and exemplifies shrinking state control over industrial sectors. Over the past three decades, India has reconfigured itself through privatisation, with a corresponding change in the legislative framework, unlocking a new phase of Capitalist expansion and innovation.

The coal industry was predominantly driven by the private sector after Independence, until the Indira Gandhi government decided to transfer all coal holdings to Coal India through the Coal Mines (Nationalisation) Act, 1973. The move was aimed at ensuring increased production and emphasis was on the extraction of coal from new projects.

India has an estimated 300 billion tonnes of coal reserves and 70% of its power requirement is met by this sector. The demand for coal for both industry and power generation had far outstripped coal production and this mismatch necessitated a major policy revamp. In 1976, the law was amended to allow the market principle to gradually set in.

The private iron and steel companies were allowed to have their own captive mines. In 1992, the central government opened the mines up for private electricity producers. The private producers of cement were also added to that list in 1996 and captive mining was opened up to 100% FDI under the automatic route in 2006. Coal gasification and liquefaction were further notified as specified end-uses in July 2007.

Holding privatisation as inescapable, the government plans to invite more domestic and foreign investment and improved technological know-how into the coal sector to reduce our dependence on imports. It hinges on a two-pronged strategy: shares of Coal India will be sold gradually to private companies, and the private sector will be allowed to mine for its own use as well as to sell to others. As the sector reluctantly embraces market forces, resistance and inherent tensions will show up from the trade unions.

It is expected that this sector will have a transformative impact by infusing competitiveness, reducing the cost of mining. Coal-bearing states like Odisha, Jharkhand, West Bengal, Chhattisgarh and Madhya Pradesh will benefit in terms of revenue and job-creation.

With the amendment of the Coal Mines (Nationalisation) Act in 1993 and allowing private sector participation in captive coal mining for generation of power, washing of coal and other end-uses, the sector headed for a big leap towards privatisation. During that period, too, the industry was in dire need of coal, but the public sector Coal India Limited (CIL) was unable to augment production. It was felt that the private sector would change that situation, but the policy failed miserably.

In March 2012, the Comptroller and Auditor General (CAG) of India report indicted the government for allocating coal blocks in an inefficient manner, resulting in windfall gains to some favoured firms. This report resulted in a huge public outcry, and experts questioned the need for private sector involvement in the industry.

The matter went to the Supreme Court by way of some PILs and, in September 2014, the apex court cancelled the allocation of 204 coal mines to public and private players. In 2015, the NDA government brought in the Coal Mines Special Provision Act to overcome the judicial hurdle and open up coal to the private sector.

No panacea

The nation has not forgotten the recent 'Coalgate' and iron ore mining scams due to systemic failure. Apparently, the inherent regulatory framework is quite susceptible and crying for a transformation. The government, without resorting to any course correction, is trying to use the surrogate route to introduce the private sector into coal mining. Any reform in the sector must identify and separate the coal mining companies from power-producing companies.

The focus must be on strategising a framework to make the coal sector more competitive, rather than giving a free hand to private players, which are purely profit driven. The dismal performance by the captive coal mining companies breeds suspicion about the policy. In fact, the policy itself is not bad,  but the lacunae in enforcing safeguards in policy pave the way for corruption and proves to be a boon for non-serious players.

It is hoped that the situation will improve with the involvement of private players, but the players taking part in the process should not game it, especially by way of cartelisation. Further, the role of the state governments and screening committee in allocation has not been above board hence they are not free from suspicion. We cannot presume that the same kind of irregularities and corruption as occurred under the UPA government will not recur.

The inference is, therefore, that the competence of the private sector may not be better than that of state-run CIL, and incompetence tag to the CIL is uncharitable given the problems it faces in mining.

Privatisation may be dubbed the harbinger of institutional and social change, but inefficiency, excessive bureaucracy and corruption are writ large in the system. Coal being a strategic energy source, its production needs to be planned in line with the sustainability principle. In such a situation, the efforts by the government to privatise the sector might fail miserably. No doubt, the private sector is better managed and maybe professionally run, but the temptation to wholly privatise the sector by undermining Coal India could imbalance the sector.

The cascading effects of an excessive profit motive, which is inherent in all capitalistic society, needs to be checked somewhere with proper policy intervention. The future performance of private companies in coal sector is still under a cloud. The proposed policy changes have the potential to create a chaotic situation like the post-demonetisation phase, endangering the energy security of the nation.

(The writer is an advocate, Supreme Court of India)