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Wednesday, 01 August 2012 00:57
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Some critical questions remain in Coal India case

 

Probably the best example of India’s self-inflicted policy paralysis is what’s happening in the coal sector, a move that thankfully has been brought closer to an end with Coal India Ltd’s (CIL) board finally agreeing to sign fuel supply agreements (FSAs) for 50,000 MW of power plants and to include a guarantee clause with penalties in case CIL is not able to meet at least 80% of the coal demand of these plants. The penalty clause on these FSAs, sadly, has still not been agreed upon and will be the subject of another CIL board meeting later this month. As has been pointed out before, even if CIL needed to import coal to meet its commitments under the FSAs, the price was always going to be borne by someone else. Earlier, this would have been the buyer, now the PMO has said coal prices are to be pooled, which means buyers of the cheaper local coal will have to pay a bit extra—all CIL’s board needed to say was that it wanted a legal guarantee that pooled pricing would be accepted by everyone, but it decided to make heavy weather of it.

Similarly, CIL’s board was naturally reluctant to import coal for its FSAs since importing coal is not its core competence—besides, there could be delays due to the limited capacity of ports to handle the traffic or the inability of the Railways to transport this coal to buyers. Once again, the solution was a simple one, to get a government agency like MMTC to take over the import functions, but CIL’s board didn’t make this argument. The big question now, however, is whether MMTC will offer to take on legally enforceable fines in case there are delays in importing coal—unless it does, bankers are unlikely to grant loans to power firms. This is the issue the PMO should have dealt with when it got involved in the issue some months ago. It’s still not too late.

 

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