Post coal block auction, industry at crossroads - ICC PwC study

Post coal block auction, industry at crossroads - ICC PwC study

New Delhi 23 September 2015: The recent reforms in the Coal Mines Special Provisions Act and the Mines and Minerals (Development and Regulation) Amendment Act (MMDR) are a step in the right direction. However there is still a need to streamline approval and development processes to further propel the growth of the coal sector.

It is evident from the fact that after over 2-3 decades, CIL was able to open new mines while even Schedule II coal blocks, auctioned in the beginning of the year, are yet to be operationalised fully. The key issue that winning bidders are facing is delay in the grant of all clearances and approvals that were expected to be granted as soon as the blocks were taken over by them.

The challenge now lies in developing these mines at efficient cost and maximising the recovery of resources following robust bidding which has resulted in a higher fixed commitment. Sectoral reforms so far in licensing and ownership are fundamentally transformational, but in order to deliver real value, a wide range of procedural improvements which are still an irritant and roadblock, are needed.

These observations are part of the PwC and ICC report - Coal block auction: A win or a winner’s curse?

Kameswara Rao, Leader Energy Utilities and Mining PwC India said “Subsequent to winning the coal blocks, the new owners face a challenge in restarting operations within their budgeted capital outlay, improving productivity to lower operating costs, and ensuring full compliance with various regulatory and other requirements. Globally, mining players have been successful in achieving this, under more challenging policy and market conditions. Learning from these experiences and practices will help companies succeed in the emerging competitive mining industry.”

The main differences for the stakeholders between the new and the old allocation process are:

  • The state governments secure higher economic returns in form of additional premium as opposed to largely royalties, and an early development of mines and commencement of operations. The local communities also benefit from clearly defined local development funding linked to mining operations.
  • An overall economic benefit to the industry arising from bidders valuing a combination of efficiency gains from mining operations, logistics, and end-use benefit. Instead of mining costs passing on to the end customers previously, the efficiency gains are now shared with them.
  • The allocation earlier was made on the basis of need and suitability and the end-users who did not have much say in the award. In the auction process, bidders base their decisions on their corporate strategy, competitive position, and the costs. Further, state support is extended in form of defined timelines for grant of clearances and approvals.

As per Shiv Siddhant Kaul, President Indian Chamber of Commerce, “As the auctions progress, we will suggest that the coal blocks having large reserves (greater than 100 MTPA and with annual production more than 3 MTPA) should be brought in for auction to sustain the raw material requirement of large integrated steel plants (ISPs). Putting more number of coal blocks in the upcoming auctions shall in a way only benefit end users. At the same time, a large number of coal fields earmarked for captive mining are notified under the Coal Bearing Areas (Acquisition and Development) Act, or CBA. This may also be denotified to speed up groundwork.”

With the freshly allocated blocks, the challenge is to sustain the basics—production, cost and safety measures. Some of the key areas of focus that a new allocatee will need to appreciate and adhere to are:

  • Selection of suitable mining contractors is a must because the strategies considered for bidding would be successful only if the blocks are developed in an efficient manner.
  • A planned approach to project development is needed to ensure precise evaluation of the key milestones to be achieved.
  • Adoption and improving the processes across the mining value chain will help in establishing best safety standards.
  • It is necessary to adopt best practices and perform a timely review of the various value chains from the development stage through operational stages, which will help in maintaining the viability of projects.
  • A robust data monitoring system needs to be implemented to ensure smooth flow of information from the top management level to the operator level.
  • Adequate training measures need to be adopted to develop skilled manpower and mineral specific professionals.
  • Post allocation due diligence is required in getting all the necessary approvals and clearances.
  • Companies need to be prepared for the various risks involved, which can derail a project. Identification, clear classification of the risks and appropriate measures must be in place in case of any probable impacts.

The focus has shifted not only to improving production but also to cost-cutting measures, manpower selectivity, best equipment maintenance practices, process checks and controls, etc. These measures have helped some of the major global players in surviving in the challenging mining environment.

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Founded in 1925, ICC—the leading and only national chamber of commerce operating from Kolkata—is one of the most proactive and forward-looking chambers in the country today. Its membership spans some of the most prominent industrial groups in India. ICC is the founder-member of FICCI, the apex body of business and industry in India. Its forte is its ability to anticipate the needs of the future, respond to challenges and prepare stakeholders in the economy to benefit from these changes and opportunities. Set up by a group of pioneering industrialists led by Mr G D Birla, ICC was closely associated with the Indian Freedom Movement, as the first organised voice of the indigenous Indian industry. Several of the distinguished industry leaders in India, such as Mr B M Birla, Sir Ardeshir Dalal, Sir Badridas Goenka, Mr S P Jain, Lala Karam Chand Thapar, Mr Russi Mody, Mr Ashok Jain and Mr Sanjiv Goenka, have led ICC as its president. Currently, Mr Shiv Siddhant Kaul is the chamber’s president.

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