Apr 03, 2012 10:20 AM IST | Source:

Reserves untapped in India's 'land of coal'

"Welcome to the land of coal," says a billboard greeting passengers arriving at the airport in Ranchi, the capital of India's eastern state of Jharkhand.

"Welcome to the land of coal," says a billboard greeting passengers arriving at the airport in Ranchi, the capital of India's eastern state of Jharkhand.

Surrounded by one of the nation's largest deposits of coal, the city resting on the top of a valley 1,000 feet above sea level is indeed a gateway to the natural resource.

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Shyam Kumar, a local businessman who rents four-wheel drive vehicles mainly to mining executives, says that "everyone in the state depends on coal". Indeed the lives of 1.2bn people in India depend, at least partly, on the extraction of the commodity, as it fuels more than half of the country's power generation and is vital to maintaining economic growth in Asia's third-largest economy.

A sizeable portion is mined by state-owned Coal India but large chunks remain untapped, hidden underneath dense forest areas. To exploit these vast reserves, over the past decade India has allocated large coal blocks - areas beneath which the natural resource lies - to private companies in an effort to spark investment and boost production.

This process is now the subject of intense scrutiny after a report from the country's national auditor revealed that little progress had been made in extracting the black rock since 2004, when scores of blocks were sold to private groups. The auditor calculated that the sell-off of these assets could have lost the country as much as USD 210bn in potential revenues. It also claimed that some private groups received "undue benefits" from the sales.

Areas such as Karanpura, 90km north of Ranchi and home to about 20% of India's 60bn tonnes of proven coal reserves, have become the latest frontier for miners.

Jindal Power, one of India's largest energy groups, acquired a coal block in the region in 2008 to fuel its power stations in the state, but the area which spreads across 8 sq km is still in the same condition it was four years ago: craggy and lifeless. Its plan to develop the mine was delayed initially by difficulties in buying land and then by a government decision to designate the area as a "no-go" zone in 2010 for environmental reasons.

Rajesh Ganjhu, a farmer living in Karanpura, says that the local community is willing to sell their farm land but in exchange they want job security and community development. "50% of the village has sold its land to them [Jindal's] but they have not kept their promises [of providing us a contract]," says Mr Ganjhu. "We want a job card [guarantee of employment], resettlement and a hospital ? we won't sell the rest until they do that."

Naveen Ojha, a field manager for Jindal at the Rohne coal block, who the Financial Times encountered discussing land matters with villagers, refused to disclose details of the negotiation on the acquisition of the land. Jindal did not respond to queries related to the Rohne block.

But Jindal is not alone. As of March 31 2011, out of 194 mining projects allocated to India's public and private sector companies, including conglomerates such as Reliance ADAG, Essar and the Tata Group, only 28 had been developed, according to the Comptroller and Auditor General of India.

Several companies face the risk of losing their blocks, after the CAG accused the government of forgoing USD 210bn by selling coal assets too cheaply on a first come, first served basis and blamed private groups for failing to develop the blocks awarded to them.

The coal assets were sold for between USD 2m and USD 10m a block depending on the size, according to analysts with knowledge of these transactions. Some claim the prices should have been several hundred million dollars. The government argues that the prices were set low to encourage investment in power generation and disputes the CAG's findings.

A closer look at the situation on the ground suggests this is less a story about brazen corruption, than a bungled approach to industrial development that is rapidly condemning India - the third-largest coal producer in the world, but also the third-largest importer - to a dark future.

On average it takes between eight and 10 years from the day a block is allocated to the day it produces coal in India, say experts. That is significantly longer compared with China, Australia and Indonesia where it takes a maximum of four years to start production.

"While this process [to acquire land and obtain environmental clearances] takes up to a year in neighbouring China, in India it can take anywhere between three and four years," says Rahul Modi, analyst at Derivium Securities, a Mumbai-based broker.

Analysts say that given these constraints, there is little scope for companies to benefit from the cheaply obtained coal blocks. They argue that reform of land purchase legislation and the introduction of new mining laws are required to kick-start the coal industry.

"The 'windfall gains' mentioned in the CAG report are overblown," says Mr Modi. "The coal was to be mined only for captive purposes with restricted end use in the production of power, steel and cement."

The CAG recommended the government introduce an auction system for allocating any new blocks. However, analysts think that few companies would participate if the cost of assets were to increase, given the underlying risk of bureaucratic delays.

"The issue should not be how these assets are allocated, the issue is that India needs more coal, [and] unless we figure out a quick solution we will have to import more expensive coal," says Arvind Mahajan. head of natural resources for KPMG in India

Unless India finds a solution to speed up production and unearth the billions of tonnes of coal hidden below its thick forests, Ranchi's airport might be forced to find a new welcome sign.

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