From a distance it’s like something out of a film noir—a dark and forbidding landscape, with a few faint reddish lights flickering through the haze. As we draw closer, I see that these lights are actually fires, though they don’t serve to lighten the gloomy November night. I’m at the Kujama coal mine in Jharkhand’s Dhanbad district. This is one of the 81 mines belonging to Bharat Coking Coal, a mining company that’s part of public sector Coal India (down six places on the Fortune India 500). The Bharat Coking Coal officials have come here to check on the progress of a new mining operation.
I expect to see the huge shovels, excavators, and dumper trucks typical of such open-cast coal mines. Instead, I see a huge tanker pouring hundreds of gallons of water into the ground. Steam billows, and it’s difficult to breathe in all the heat. The officials explain that the Jharkhand coal belt is notorious for seam fires, or fires because of coal self combusting. But this is also the country’s richest belt of coking coal. There are several ways of mining in such areas, all of them dangerous, but the method Bharat Coking finds most effective is to quench the fires with water and start mining as soon as the area cools to 60 degree Celsius. The miners have eight hours to get the coal; any longer and the fires could re-start. It sounds extremely risky—and indeed it is.
Kujama is perhaps the world’s most dangerous mine because of the highly combustible nature of the coal; any friction sets off the fires, I’m told, including a slight breeze. (The first coal fire in this region was reported in 1914, say officials.) Yet, on any given day, it’s a hive of activity, with soot-covered workers in hard hats and knee-high boots picking their way through red-hot boulders, and staying out of the way of huge shovels and dumpers piled high with coal or debris.
Someone’s got to do this job. India’s demand for coal is around 730 million tonnes a year, going up at an average of 6% a year. Coal India, which is responsible for 82% of the country’s production, mines a mere 462 million tonnes a year; private mines account for another 40 million tonnes. Now consider this: India has proved reserves of 310 billion tonnes of coal. (Proved reserves are measured, while probable reserves are estimates of coal reserves.) That’s enough to meet domestic needs for the next 100 years, even if demand grows at 7% annually.
With demand that’s a fraction of the available coal, we should be exporting coal. Instead, last year, coal imports touched 171 million tonnes, an 18% increase over the previous year. The International Energy Agency, a global authority on energy, in its 2012 report on coal, says that while India’s demand for coal outstripped that of the U.S., “this surge in coal consumption is not matched by production growth from domestic mines .... Coal India, India’s largest coal producer and the single-largest coal producing company in the world, is not likely to significantly improve its operational efficiency. As a result, imports are projected to grow faster than in any other country.”
In many ways Coal India’s problems represent all that’s wrong with the public sector—unwieldy, inflexible, and unproductive. A child of nationalisation, it’s a textbook case of populism trumping business interests. It generates employment, sure, but the cost is far steeper than the benefits.
Some history will help put this in context. Till the early 1970s, coal mines in India were owned by the government; private companies took long-term mining leases, which allowed them to mine and use (and sell) the coal in return for a fee. The government of the day, under Prime Minister Indira Gandhi, believed that the mining companies were not producing enough. This, coupled with reports of rampant labour exploitation, made the government take over all mines: By 1973, 711 coal mines except the captive mines belonging to Indian Iron & Steel Company (later amalgamated with Steel Authority of India), Tata Iron and Steel Company (now Tata Steel), and Damodar Valley Corporation, were nationalised. The government set up Bharat Coking Coal and Coal Mines Authority to run the coking coal and non-coking coal mines, respectively. In 1975, it set up Coal India as an umbrella organisation under the Ministry of Coal to run these two companies.
Coal India’s empire grew to cover eight mining companies and the Central Mine Planning and Design Institute; the eight companies, apart from Bharat Coking Coal, are Eastern Coalfields; Central Coalfields; South Eastern Coalfields; Western Coalfields; Northern Coalfields; Mahanadi Coalfields; and Coal India Africana (based in Mozambique). Till the early 1990s, the government essentially underwrote these companies by allocating funds in the annual budgets. But when this support was withdrawn post liberalisation, Coal India allowed these companies to cross-subsidise each other. For example, if Bharat Coking Coal consistently underperformed and declared losses, and Mahanadi Coalfields was profitable, the profits were used to paper over the losses. So, there was really no incentive to produce, and no penalty for failing. (That also means a profitable company could well see merit in functioning independently rather than have its profits wiped out by a non-performing fellow company.)
With liberalisation in 1991, many sectors were opened to private players, and many of these needed assured fuel supply. Coal India was in no shape to meet the extra demand, and imports were too expensive. So, the government set up a committee, of which Coal India was a part, to allocate mines with sufficient reserves to companies in industries that demanded coal as fuel. These included iron and steel manufacturers, sponge iron plants, cement factories, power producers, and the like. These manufacturers were allocated mines on condition that all the coal would be used in the factory itself. The companies were not allowed to sell the coal in the open market, and depending on the size of the mine allocated, the end use of the fuel, and other parameters, paid a fee to the government.
All seemed well, till the Comptroller and Auditor General’s (CAG) office, in one of its periodic surveys of public sector businesses, found anomalies in the allocation of mines. The CAG report says the government could have made Rs 1,86,000 crore more, had the coal blocks been auctioned instead of allocated in a highly non-transparent way. The scandal, promptly dubbed Coalgate, shook the government, and Coal India suddenly found itself in the crosshairs. Based on the CAG report, the Supreme Court suspended 214 coal blocks allocated to various private players.
One of the most plausible theories floating around then was that the court would give the blocks to Coal India. With absolutely no competition and with more mines (more than 70 of the 214 mines were ready to mine), the state-run giant would have become unassailable. Except, of course, this didn’t happen. The Supreme Court, instead, in a second ruling, charged the coal ministry and Coal India to auction the 214 blocks in a transparent way.
Two other things happened around the same time that could make or break Coal India. The first was the election of a new government, which is determined to provide ‘power for all by 2020’. Coal India has been told to up its game and produce enough coal to meet power producers’ demands. That’s roughly 1 billion tonnes a year by 2019.
The second potential game changer is the introduction of the Coal Mines (Special Provisions) Ordinance, which is being discussed in the Rajya Sabha. The ordinance proposes allowing private players to sell coal in the open market, as well as use it for captive consumption.
Also factor in the news that the government is planning to divest a further 10% of its holding. (Coal India went public in 2010, when the government sold 10%, raising Rs 15,200 crore.) A report in the Financial Times says that investor roadshows for this new sale are likely to begin soon. “The sale is being accelerated despite a number of potential problems facing Coal India, the world’s largest miner by output, including the fact that the position of chairman, the organisation’s most senior executive, is currently vacant,” says the report.
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Clearly, Coal India is at a critical point in its existence. If it is unable to ramp up production, it’s not going to be able to take on competition. And that could mean the end of the 40-year-old giant. It has a few options open still. One, Coal India gets lean, mean, and efficient, making it a worthy competitor to global companies such as Pearson and BHP Billiton. (While Coal India may produce more than these companies, it is a far less efficient producer.) Two, the government divests its stake and privatises Coal India. Three (and this is increasingly gaining credence in some government circles), the government spins off the companies under Coal India as separate, profitable entities.
There’s enough precedence to show how badly government-owned monopolies perform under pressure. One of the biggest failures of nationalisation is Air India. A senior consultant who tracks civil aviation, says, on condition of anonymity, that the current crisis in Air India is the result of “political and bureaucratic bosses, who have run the airline like a personal principality for years now”. He goes on to call the merger of Air India and Indian Airlines in 2007 an “unmitigated disaster”. Today, Air India needs Rs 33,000 crore just to keep it in the air. There’s also fellow PSU, Bharat Sanchar Nigam, which was the undisputed ruler of the country’s telecom space—until privatisation. Today, Bharat Sanchar Nigam is a peripheral player, if that.
Like with Air India Coal India has been the only player in its industry for too long and does not know what to do with competition. On the surface at least, competition should not be a problem. After all, Coal India still controls the largest, and most profitable, coal fields in the country. Today, it operates 429 mines, of which 237 are underground, 166 open cast, and 26 are mixed mines.
Theoretically, producing a billion tonnes a year should be a breeze. But practically, Coal India is plagued by a host of problems, including a bloated workforce, adamant labour unions, resettlement and rehabilitation, antiquated technology, and no rail and poor road connectivity from the mines. At the same time, it faces the very real possibility of being broken up or privatised, unless it proves itself.
There are no domestic mining companies big enough to worry Coal India, and foreign players are unlikely to enter unless they are given large enough blocks (yielding 50 million to 100 million tonnes a year) and allowed to sell to multiple buyers. Partho Bhattacharya, a former chairman of Coal India, says the one reason foreign companies could come to India is because of the low cost of labour.
But as Coal India’s own experience shows, cheap labour is one thing; managing that labour quite another. The company was set up with two objectives: improving coal production and providing employment. It has met the second objective well: With 3,39,769 employees, it is the country’s largest employer next to the railways. However, that has done little to productivity, which languishes below 500 million tonnes a year, yielding sales of Rs 68,810 crore as of FY14. Compare that with London-listed Glencore Xstrata, one of the biggest mining companies in the world with more than 150 sites covering copper, nickel, zinc/lead, alloys, alumina, and iron ore, in addition to coal. Last year, it produced 138.1 million tonnes of coal, fetching sales of over $10 billion [Rs 61,830 crore]. Its employee strength: 1,30,000.
To complicate matters, the company carries the cross of five different labour unions, although in its response to the November 24 strike call given by the unions against the proposed divestment (a single day’s strike is said to cost over Rs 200 crore), it showed it’s possible to play one off against another. One of the unions is said to be affiliated with the ruling BJP, and when the strike call was given, the government is said to have leaned on this union, which announced that it would not participate. A couple of days later, the strike was called off.
An ageing cadre (average age: 50) also hamstrings productivity. Add to that the small army of unskilled workers who are on the rolls because they gave up their smallholdings to Coal India. The company can’t get rid of them because of India’s labour laws.
Archaic mining methods are a further drag. Expensive machinery that global mining companies use for at least 6,000 hours a year is used for barely 3,000 here.
Coal India can learn from a great turnaround story within its fold: Bharat Coking Coal consistently made losses from the time it was set up. The big reason was again an unwieldy workforce (300,000 soon after nationalisation). The company was under the Board for Industrial and Financial Reconstruction (BIFR), the home for sick companies. As part of its restructuring, it pruned its workforce to 54,000, which paved the way for modernisation and mechanisation. Bharat Coking managed to come out of BIFR in 2005-06, and has become the most profitable of Coal India’s subsidiaries.
Tapas Kumar Lahiry, Bharat Coking Coal’s chairman and managing director, took over in 2008, and under him, the company has become a laboratory of innovation in mining, in areas like mechanised underground mining, ecological restoration, and rehabilitation and resettlement of people living in coal-bearing areas. A senior Bharat Coking Coal official says that it’s as if Lahiry is intent on undoing the negative perceptions that plague Coal India.
Meanwhile, in a bid to improve productivity (especially of the underground mines), Lahiry has contracted Bharat Coking Coal mines to mining consortia led by foreign companies. He has awarded the contract of the 100-year-old Moonidih mine (near Dhanbad) to a consortium led by Zhengzhou Coal Mining Machinery of China. Another part of the mine has been given to a German consortium. In both cases, Bharat Coking Coal has set a production target that the contractors will have to meet.
Coal India will have to learn to be equally nimble and adaptive. Most important, it will have to deal with the coal mafia, which is involved in the theft of coal from open mines (often done with the help of the unions) and its sale in the open market at exorbitant rates. Bharat Coking Coal managed to get around this by instituting transparent e-auctions. Coal India officials, from throwaway remarks in the media over the past few years, refuse to acknowledge the problem; so there’s little chance of fixing it.
Changes on so many fronts need strong leadership, and Coal India has been headless for some months now. There has been nobody pushing its case in the coal ministry. That also means there has been nobody helping to set prices. Only recently, the Public Enterprises Selection Board, which is responsible for all management hires at PSUs, named Sutirtha Bhattacharya (CMD of Singareni Collieries) as chairman. By hiring a person who has run a profit-making company, the government seems to have learnt from its Air India saga, where bureaucrats had been shoehorned into positions they were unsuited for.
Coal Ministry officials (who spoke on condition of anonymity) say the real challenge will be meeting the production targets. Even if it is able to convince workers that a 10% divestment means little, most of its produce will come from labour-intensive open-cast mines like Kujama; only 8% of India’s coal comes from underground mines. The open-cast method involves laying waste to huge tracts of land; the mines are wide, rather than deep, and expansion is horizontal. That also calls for land and forest clearances from state governments. Bhattacharya blames delays in these clearances for a large part of Coal India’s poor performance. Underground mining is far less land- and resource-intensive, though it calls for more mechanisation and technology. Lahiry adds that Coal India’s entry into underground mining was inordinately delayed as its subsidiaries found open-cast mines easier and cheaper.
A.K. Dubey, acting chairman of Coal India, in the annual report for 2013-14, says the company can produce 651 million tonnes a year by FY17 by enhancing drilling, fast-tracking land acquisition, and resolving resettlement issues.
Bhattacharya, meanwhile, says the government has adopted a calibrated approach to opening up the sector, while ensuring that the immediate crisis doesn’t have an adverse impact. He defends Coal India’s performance till now, saying that the company “provides 54% of the nation’s energy, produces coal at 50% of the global price, still continues to be profitable and pays Rs 10,000 crore to the government every year in terms of taxes, dividends, etc., despite working under such constraints”. It remains to be seen whether a government pushing the bar will be content with that defence.