Is the coal issue put in cold storage?

The fuel supply agreements signed between Coal India and power producers envisages a penalty ranging from 5% to 40% if CIL fails to deliver less than 80% of the annual contracted supply. However, chances are that the penalty clause will undergo many changes to become fair and equitable to one and all

We are at the fag end of the monsoon season and actual shortfall in rainfall appears to have gone down to about 7%, much better than the originally projected 15%-19% earlier. Some areas had absolute dry spells while in the north-eastern sector heavy rains brought landslides and floods, resulting in loss of life and damage to crops.

 

On the coal production front, Coal India (CIL) is estimated to have lost about 5 million tonnes (MT), due to heavy rains, as against 26 MT during 2011-12 period.  CIL, in the first half of the current year, has recorded an 8.5% growth and it expects to increase production by 230 MT during 2012-13 with various projects on hand.

 

According to the annual report released by CIL, it had started with 147 projects on hand, at the end of the Eleventh Plan period, as at the end of 2011-12, but only 80 had received both environmental and forest clearances. Permit delays continue to be stumbling blocks and this year, heavy rains also played havoc in production.

 

In the meantime, the Inter-Ministerial Group (IMG) is expected to recommence its work and will start examining 29 government coal block holders from the list of 59, to whom show-cause notices had been issued by the coal ministry earlier.

 

Although 289 companies had been allocated coal blocks between 1993 and 2011, only 30 of them have been able to commence production with others stuck with issues relating to clearances.

 

The proposal by the Central Electricity Authority (CEA) for Coal India to supply about 20 MT of imported coal at subsidized rates to independent power producers has not been found acceptable to the seven independent directors of Coal India, who felt that this would lead to inherent loss in the transaction at the cost of the exchequer. They had rightfully stated that CIL must act as a profit-oriented enterprise.

 

It may be recalled that the question of FSAs (Fuel Supply Agreements) has been a hotly debated subject.  Under this, at the trigger point of 80% of annual contracted quantity, CIL will pay penalty for non-delivery ranging from 5% to 40%.

 

To read a summary report on Coalgate being a big loss for shareholders of coal companies, click here.

 

The “magnificent seven” independent directors of CIL have reiterated that this mechanism will go against the spirit of the Presidential directive to protect the commercial interests of CIL and have warned both—the coal ministry and CIL—that the CEA’s proposal would be at the cost of the exchequer. Although 29 FSAs have been signed, it appears most likely when this issue is finally settled, chances are that the penalty clause for non-delivery of the ‘contracted’ quantity will undergo many changes to become fair and equitable to one and all, and protect the ultimate consumer—the “aam aadmi!”

 

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US. He can be contacted at [email protected].)

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