By Sharmila Bellur —
Coal India Limited (CIL), the single largest coal producer in the world, is one of India’s coveted state-owned companies. Fittingly it is called a Maharatna (meaning most precious jewel), a title conferred by the Indian government to select companies with the potential to become global giants. Born out of the nationalization of private coal companies in 1975, as of 2016, CIL and its eight subsidiaries (seven wholly-owned coal producing subsidiary companies and one mine planning and consultancy company) produce 84 percent of India’s coal, and supply coal to 98 out of 101 coal-based thermal power plants in India. Earlier this month, Reuters published an internal document discussing a proposal to break up CIL into seven parts to make it more competitive and efficient, and a more attractive prospect for divestment. Thus CIL looks set to come full circle: broken-up and privatized for the very reasons it was monopolized and nationalized in the first place. Despite the traction for renewables in India, the country is and will continue to be dependent on coal. With India’s growth plans and energy independence in the balance, the future course of CIL is a high-stakes decision.
Coal mining in India has been carried out for over two centuries by private as well as public enterprises. Under the pretext of meeting the demands of steel industry, adopting better mining techniques, and improving working conditions of labor, India’s government nationalized all private coal mines between 1971 and 1973, creating a government monopoly on coal mining (private companies can mine coal only for their own consumption). Since 1973, CIL has seen good and bad times: there has been increased output alongside erosion of profits up until 1995 when its financial position became so dire that it had to be bailed out by the Indian government. Post-1995, the prices for certain types of coal were deregulated and there was an infusion of funds from development agencies and foreign investment. In 2015-16, the company saw net profit of about 4 percent, production growth of 9 percent, and a decline in India’s coal import bill. But, CIL is now facing a different kind of crisis.
India has the fifth-largest coal reserves in the world. However, red tape, strikes, protests against land acquisition, and delays in obtaining environmental approvals have kept coal supply far below demand, making India the third-largest coal importer in the world. With a monopoly over mining and sale of coal in the open market, CIL has little incentive to ramp-up production to meet the demands of India’s power-hungry economy. Despite CIL’s low incentives India plans to turn to coal to meet its energy needs. The International Energy Agency’s coal forecasts for India from 2016-2021 show that India’s demand for coal will grow by 5 percent each year for the next five years before it plateaus. At the same time, India will seek to meet its renewable energy goals and combat the downsides of coal – air pollution and climate change implications. While the variable quality of India’s coal makes imports necessary for the steel industry, India can produce coal internally to meet the needs of the power sector, which makes a compelling case for restructuring if it will improve CIL’s productivity. Thus, for the second time in the last two years, a proposal to restructure CIL is making the rounds.
The foremost reason for breaking up CIL is that smaller companies will be more manageable. With over 330,000 employees, CIL is the second largest employer in the country. It is hampered by organizational lethargy and political and bureaucratic interference. The company’s size could restrict its ability to exploit 3 billion tons of known coal reserves spread across 13 Indian states. Breaking up CIL is also considered a necessary preliminary step for the government to meet its target of divesting an additional 10 percent of its shares, which will bring its holding down from 79.65 percent to 69.65 percent. Given CIL’s capitalization of $28 billion, a 10 percent divestment could bring in $2.8 billion in investment and human capital from the private sector to CIL. Yet the path to restructuring has several barriers. In 2014, within months of the Modi government coming into power, a proposal was floated to breakup CIL and open it up for foreign investment. The proposal was opposed by CIL employees and was shelved to protect the new government from getting derailed. Any plans to restructure will be met with resistance from the 350,000-member union who fear downsizing and job cuts. The political implications of a break-up for state elections next year and the national election in 2019 may make restructuring a non-starter.
It might be possible for Modi to win the union’s support for restructuring by showing that a more efficient CIL would make the organization more profitable, create opportunity, and generate new jobs. However, with India incentivizing investment in renewables, the attractiveness of the sector for private companies, restructured or not, is unknown. Moreover, private companies could encounter even higher obstacles to land acquisition, without the government’s power of eminent domain. In dealing with the trade-off between maintaining CIL as it is and restructuring it, Prime Minister Modi’s support for a break up and his Minister of Power’s opposition to the idea are also worth noting. India’s transition toward renewables as they achieve grid parity with coal without subsidies, and the decreasing cost of coal-based energy generation will also affect the decision. Whether the Indian government will act to encourage this race to lowest-cost between coal and renewables, and how it will reconcile with India’s climate change goals, will define Prime Minister Modi’s legacy in the energy sector and shape India’s economic future.