To announce linkage auction mechanism by June: Coal Secy

He also discussed the recently concluded coal auctions, in which a handful of mines were allocated directly to end users, and said five blocks have already started production and the rest will start soon.

The coal secretary further said that agreements with power companies during the auction made it clear power tariffs would not be revised higher, and commenting on reports that some companies are looking to seek legal recourse, said he was confident the arrangement would “withstand the test of examination”.

Finally, Swarup said the government was also working on bringing about the final wave of reform, in which coal would be allowed to be exploited by commercial mining companies, as opposed to Coal India and end users currently, and said he was hopeful it would come through this fiscal.

Below is the transcript of the interview on CNBC-TV18.

Sonia: Before talking about what the second round of reforms would be in the coal sector, just to get a little more details on the auction of the coal mines – what is the operational status currently of the mines that were auctioned, in the sense is the process of transfer of these mines done or has the production been interrupted in any way?

A: Yes, five mines have already started production. As you understand there is a lot of paper work and physical handing over of one mine to the other. It is taking a bit of time but next 15 days time the scheduled two mines should get going. The schedule three will take more time because a lot of groundwork will have to be done in terms of starting mining there. The schedule two mines, the mining already happening and five are already mining; rest of them will also start mining in due course.

Reema: Since we are discussing about the auctions gone by, you have been saying repeatedly and even on our own channel power producers cannot pass on the high fuel cost to the consumers but there are reports which suggest that the power firms may now contest them and their reading of the documents perhaps they believe that they will be able to pass on these high costs and now they have taken the legal route. What is the course of action now?

A: In a democratic country anyone can go and seek the legal route but we are very clear in our mind that I have been stating very loud and clear in each of my interviews in our writings, in our interactions we were very clear in our mind, the whole idea of having reverse auction was to bring the tariffs down. If someone wants to smuggle a variable cost as fixed cost obviously it will be the endeavour of the government not to allow that because we have been stating very clearly that the whole idea of the reverse auction was to bring the tariffs down.

Sonia: Of course they will go ahead and seek a legal recourse but if there is any surrendering of the blocks then what happens to those blocks first up and is there any penalty that these power producers will have to pay?

A: There is no penalty per se but the bank guarantees will be forfeited, they will be blacklisted for a year, they cannot bid further and then these blocks will be put to auction all over again in case they don’t fulfil the commitments that they have made.

Reema: Is this part absolutely clear in the documents because we know you have been saying it but the power producers obviously have another idea so if this does go to the higher authorities, the higher legal authorities, which way do you think the judicial system will swing?

A: Our view is that it will stand the test of any examination. It is there in the document, it is very clear in the document and we are pretty sure that it will test any examination.

Nigel: I have been following these auctions very closely. A quick question with regard to what is going on with the Gare Palma coal blocks. That is important because there are various media articles that today indicate that coal India will have to supply all that coal from what they mine from those particular blocks that have been cancelled to JSPL? Is there any truth? What is the status there? There were reports that were stating that JSPL had bid for some of the e-auction coal and that has been given to NTPC. What is going on on that front?

A: The whole issue is in the court of law and it will not be appropriate for me to comment. This is with regard to Gare Palma IV/2 and IV/3. The whole issue is been discussed in the court of law. For me to comment will be incorrect. Let the court take a call. Whatever be the decision of the court, we will follow it.

Nigel: Just to get some clarity, the coal that will be mined from there will that be e-auctioned, will that be sold, how exactly will that coal that will be mined by Coal India from the issued blocks, where will they go?

A: If I understand correctly, the issue in the court so far is the coal that was auctioned. How it will happen in future, court has not said anything. Coal India in its practice has two ways in which it disposes off coal. One is through linkages, which is granted through a standing linkage committee. The other is to e-auction. So either of these two mechanisms shall be followed by future auction -- what for future production of coal.

As far as the past e-auction of coal is concerned, that is something which is subjudice under the court of law and whatever will be the decision, we will follow it.

Sonia: One of the biggest issues has not been the coal itself but the availability of rakes for the evacuation of coal. When we spoke to you the last time you had indicated a lot of work is being done on that front and 200 rakes are available for evacuation, can you tell us how has that situation progressed and how much will you increase the rake quantity to?

A: It has increased. We have had a very intensive dialogue with the railways. Apart from the commitment of railways with regard to around 230 odd rakes that are supposed to be presently made available, we are looking at another 200 odd rakes that Coal India will buy and will add to the existing coal rake capacity that we have. But this will happen over the next four-five years. We have already entered into an arrangement with railways.

Coal India board has decided to place orders for 30 rakes with the railways. So the rake augmentation will begin in the few months time, we will have rakes beyond the number of rakes that have already been committed by railways. So the dialogue has been pretty positive and railway ministry has been very forthcoming in terms of assisting us or helping us in terms of evacuation of coal.

This has become even more important as you may have read somewhere that the coal production is increasing at a rate which was unprecedented. This year already in a month and a half, we are growing at the rate of around 11.6 percent. Last year 32 million growth was more than cumulative growth in the previous four years. So you are absolutely correct, the problem would be evacuation of coal and fortunately because of all the cooperation that we are getting from the Railway ministry it should not be a problem in the months to follow.

Sonia: It is heartening to hear that there will be an additional 200 odd rakes that you will be deploying but what will be the investment made by Coal India in these rakes?

A: The capex this year that Coal India has kept is about Rs 6,000 crore and it will depend on how and when the orders get placed and accordingly money should not be a problem with Coal India as it has reserve of more than Rs 50,000 crore, so money is not the issue. It was basically working out the logistics to get the coal out away from these mines.

Reema: One of the achievements of the year gone by as you pointed out has been the improvement in the production of Coal India. What is the growth target that you are setting out for FY16 in terms of Coal India’s production? Will it sustain at this 11.6-11.7 percent that you clocked in the early part?

A: It shall because we are looking at 550 million tonne this year going by the rate that we are going, we should be able to achieve the target.

Nigel: A check with regard to what are the outstanding dues to Coal India. I believe now it is close to about Rs 10,000 crore. What is happening on that front?

A: The last that I saw was around Rs 8,000 crore. We are taking up with those entities to see how money could come back to Coal India.

Nigel: I was reading a couple of news articles which were stating that the employee cost is going to come down and it is going to come down in a big way. I have seen a five year plan etc. Is there any truth in that and if that happens then Coal India’s margins and profitability etc will improve by a big way because employee cost constitutes more than 50 percent of Coal India’s total cost of production. So is there a possibility, do you have a roadmap in terms of bringing down the employee cost?

A: Actually what is happening in Coal India is most of the recruitment had happened more than 30 years ago, a lot of attrition is happening in terms of people retiring and young people joining in Coal India. So the employee liability or the money that gets paid to employees would be much lesser than a retiring employee. So in that sense the cost will come down.

On next page: Read about the government's decision to announce auction mechanism for coal linkages.

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Sonia: Let us talk about the next set of reforms that we could expect from the government. After the success of the coal mine auction, when can we expect a mechanism to be put in place for the auctioning of coal linkages and what could the quantity be of the coal available for linkages both for the regulated and the unregulated sectors?

A: The government did set up a committee which looked into the report that was submitted by SBI Caps in terms of auctioning of coal linkages. The report has been submitted to the government and it is being examined. Broadly what we are looking at is fulfilling two-fold objectives.

Number one, ensuring that the entities that are giving these linkages, the selection thereof is in a very objective and transparent manner and the determination is of price also happens through market mechanism rather than someone arbitrarily determining at what price should this coal be supplied. These are the two primary objectives that we are looking at.

The coal gets supplied to two broad segments. One is the regulated sector which power gate should use and the other is the unregulated sector. In the regulated sector there is not much of a problem because in any case, the cheap coal that gets supplied by Coal India, the benefit gets passed on through a power purchase agreement (PPA) in the tariff itself.

In the unregulated sector, there is an issue because the entities get cheaper coal from Coal India and the final product, the price thereof is determined through a market mechanism. So, the margin gets taken by the entities that are producing. It is in that context that we are very seriously contemplating as to how we come up with the mechanism through which we can determine the price of coal that gets supplied to these entities in a transparent manner.

We are attempting to workout a system by June 30. We may take another month or so. This is something which we are discussing very intensively and we will come out with a formulation soon.

Reema: What would be the tenure of the linkage that you think would be ideal?

A: That is also being discussed right now. Various options are being considered whether it is for two-three or five years. The reason is that we want to provide some sort of an assurance to the person who bids for these linkages in terms of availability of coal for a period of time so that they can price the product accordingly. So, that is something which is being discussed. We have not directly frozen on what would be the timeframe but we will certainly keep a timeframe that they feel comfortable with.

Sonia: Have you narrowed down on any sort of mechanism that will be put into place? I know it is early days yet, but the pricing, the bidding was so aggressive in the previous auction and now you have Central Electricity Regulatory Commission (CERC) disallowing the passage of fixed costs, etc. So, it would make a lot of these power producers a bit nervous. In terms of auction of linkages, any kind of mechanism for pricing in place?

A: As I said these are all in the domain of discussion these days. We are taking all these factors into account but let me clarify the auction that we are talking of are not in terms of the fuel supply agreements (FSAs) that already been signed because that is a commitment that government had already made for the regulated sector. Incase of unregulated sector the situation is different.

Nigel: In terms of e-auction volume, now there is no cap for this year, right from Coal India?

A: This is by and large determined by Coal India. If I remember correctly it is somewhere between 7.5-10 percent of the production.

Nigel: There is a lot of talk that for the last couple of years there has been no price increase from Coal India. So though global prices have come down and still Coal India’s prices are at steep discount to global prices. If in case Coal India increases prices we could see those power tariffs that we are looking to keep under control, certainly that as well could move higher?

A: Coal pricing decision is taken by Coal India.

Sonia: In the month of March the Parliament passed the Coal Mine Special Provision Bill that provides the opening up of commercial coal mining. I want to understand from you whether any headway has been made in the auction process of the commercial coal mining. You had indicated earlier to us that it will take place in FY16. So any timeline on when commercial coal mining will begin officially?

A: A lot of groundwork needs to be done. As you would understand there is something new that is going to happen in this country and we do not want to fall flat, suddenly jump into something and then people start discovering that this is right and that is wrong.

We are having a workshop, Federation of Indian Chambers of Commerce and Industry (FICCI) is organising a workshop next month wherein all the nuances shall be discussed and once they are done, we will take a call when to go in for commercial auction but certainly it is on the platter.

Sonia: Have any of the coal blocks that will be put up for this auction been identified or is it too early for that as well?

A: That process is going on simultaneously. We do not have to wait to for the process to be finalised for identification of blocks. Number of activities happen simultaneously and when they converge and when things are in shape we do make that announcement.

Reema: Apart from commercial mining as well as auctioning of coal linkages, any other reforms that the ministry is targeting in FY16?

A: Our hands are full. We are also looking though at rationalisation of linkages – that’s another job that we have been doing in order to save on unnecessary transportation cost and protect the environment – that’s another major development that is happening.

First round of rationalisation of linkages has already happened which will result in saving of about Rs 1,100 crore per annum. The second round is underway. This is slightly more complex as compared to the next round and as we go on to the third round it will become even more complex as more and more players will have to be consulted before a decision gets taken.

Sonia: Once commercial coal mining begins in this fiscal, whenever it does, any indication of how much this will help increase coal supply?

A: The entire exercise that we are doing whether in terms of coal block auction or linkages auction or augmenting the production by Coal India is basically to augment coal production in the country.

Because my personal view and also the view of the ministry is that once we have production increase the way we want it to be increased, a lot of problems regarding coal will vanish. We won’t be sitting and discussing these issues.

We are looking at about 1.5 billion tonne by 2020 – that’s a huge ask but we are working towards it and it is consuming a lot of our time.