Will CIL’s IPO lead to revolutionary transformation of the coal sector?
The long awaited Initial Public Offer (IPO) of India’s largest Coal producer, Coal India Limited, is finally ready to descend on Dalal Street next week (November 4th). The IPO has waited for more than two years to get an official nod and its last minute details including its Red Herring Prospectus on the roll.
This IPO can clearly be seen in India as the next big development in the country’s most important energy resource – coal. The offer, which is slated in an attractive price band of Rs 225- 245 per share, is certainly worth a lot more, considering that annual demand for coal is expected to rise by at least 11 per cent due to increasing demand for power, 75 per cent of which is generated from coal. India, which faces a peak hour power deficit of nearly 14 per cent (with some cities facing a power shortage of upto 8 to 10 hours a day), plans to triple generation capacity over the next decade, and so this is certainly a very smart move by the government.
From a strategic perspective, in terms of global interest in investments in coal mines in India, the IPO makes a lot of sense. Though 60 per cent of the coal produced is consumed by State-owned National Thermal Power Corporation (NTPC), and is of questionable quality, one can expect many more foreign players to enter the coal sector in the near future, as the Coal India IPO makes the Indian coal sector significantly more attractive.
This brings us to the very pertinent question of whether the IPO and consequently the increased number of collaborations with foreign private companies – would catalyse a long overdue transformation in the Indian coal sector in terms of lower costs for supplies, greater productivity and therefore higher returns. Moreover, will it spell an overall clean up of the sector in terms of government policy, reforms and legislation?
A possible ‘clean up’ in the coal sector in India revolves around three vital factors – namely structural reforms and environmental clearances.
The coal sector, unfortunately, despite being the oldest industry and also the most important energy resource, is also the only one that has not seen the benefits of the 1991 liberalization reforms. Still caught in a socialistic black hole, trade unions and other organizations within the sector have impeded rationalization and privatization of any kind. Though some corporate giants, such as the Tatas and the Ambanis have set foot in the sector of late, they face enormous structural challenges. Therefore, one of the main breakthroughs that one could but wish to see with CIL’s public offer is that it helps to catalyse structural reforms in this rather black and smoky sector.
There could soon be a positive development on some of the main obstacles in the coal industry – the basic economics of selling coal produced from underground mines, which was a losing proposition from the very beginning, and in tackling the issue of quality of India coal, known to have a high ash content. Greater investment and involvement of foreign players could help to tackle these issues and rejuvenate the coal industry. With the coal ministry enthusiastically trying to attract foreign and private sector participation in the coal sector, it is hoped that one would see a more robust public private partnership in eradicating the most basic hindrances in coal production. The construction of washeries (machinery used to wash the coal, thereby reducing ash content), and locating them closer to the existing mines, thereby saving on transportation costs, could very well be one of the many reforms that can be brought about with more private players coming in. With potential investors from Indonesia and Australia among other countries interested in this sector, this situation could see a significant change.
Regarding environmental clearances, the situation in the coal mining sector, especially open pit mines, is that they are far from having got a nod to carry on their operations from the environment ministry.
This also brings us to the question of energy security, i.e., reposing our faith in domestic coal supplies in the years to come while taking appropriate measures to curb imports not only of coal but all other fuels. Indian coal imports today stand at about 81 million tones and are expected to rise to about 100 million tones this year, second only to China, according Partha Bhattacharya, the CIL chairperson.
It is more than evident that to achieve its medium term objectives of bridging the ever increasing fuel deficit in the country, the ministry will have to undertake projects that pertain to investment in R&D and for exploiting coal-bed methane (CBM) of deep seated coal reserves. With increased FDI in the sector, this rather expensive endeavor could possibly be realized. The right kind of policy framework, taking the socio-economic and political scenarios of coal rich areas into account, could form the basis for the increased exploitation of coal resources which are still waiting to be accessed in many regions in India.
This is not to say that coal imports will completely stop and that India will be absolutely self sufficient in coal production. But with the Coal India IPO, the bureaucratic monopoly will be kept in control to a great extent. It may take longer than expected considering the sector has the least number of private players. The government should bring in privatization in order to increase both quality and production and curb the sometimes unnecessarily high imports. Keeping this situation as a backdrop, the public offer of Coal India is certainly a milestone in the history of India’s coal sector and will hopefully encourage the formation of a more well-rounded and technologically efficient sector.
