Coal India forced to sacrifice commercial interests

Coal India forced to sacrifice commercial interests

The recent order by the Competition Commission of India slapping a penalty of Rs 1,773 crore on Coal India Ltd for abusing its monopoly position may prove an embarrassment for the center. The competition panel said the coal major incorporated one-sided clauses in the fuel supply agreements (FSAs) it signed for projects aimed at generating 78,000 MW of power, following a Presidential directive in April 2012.

Forced deals
While Coal India is preparing to contest the CCI order, CIL Chairman S. Narsing Rao says that far from monopolistic practices, it is forced to take undue contractual obligations, sacrificing commercial interests. “I want to know what is CIL’s business model,” he told Business Line.Rao has a simple question: “Did we sign the FSAs at our free will? We can drive at 60 kmph. But you are forcing us to drive at 120 kmph and then penalising us for the eventual failure? What kind of business proposal is this?”The issue is that of the 78,000-MW FSAs to be implemented between April 2009 and March 2017. If all the power plants come up on scheduled, CIL may end up paying penalty for not meeting contractual obligations. This is because it may not be able to meet even the lowered level of supplies it had agreed to for the new projects.The reason lies in policy. The Centre first set demand projections and then asked CIL to step up production by 7.5 per cent a year from 435 million tonnes (mt) in 2012 to 615 mt in March 2017, up nearly 10 per cent from the initial target of 556 mt.

The company argues that the target was raised without considering the many legal and social hurdles involved in land acquisition as well as forest and environment clearances. Coal production has grown only 4 per cent a year, on an average, and faster growth requires structural changes. During the working group presentations, some MPs questioned whether the projections were practical, but that did not give CIL any reprieve and it had to sign the agreements. CIL can draw comfort that only 60,000 MW (out of 78,000 MW) of power capacity will be in place by March 2017.

Rao’s views can be compared with petitions filed by the UK-based The Children’s Investment Fund (TCI), a foreign institutional investor, that accused CIL of sacrificing Rs 2,15,000 crore of profits between 2010 and 2012 by keeping prices artificially low. The CCI, however, overruled CIL’s claim that its cheap pricing regime does not reflect monopolistic practices.

The Commission held that the prices of domestic and imported coal cannot be compared due to varying market specifications (such as raw or washed coal). Rao points out that CIL sells 3,800 kilocalorie raw coal at Rs 900 a tonne with taxes. “Even if you beneficiate it, the price is half the global price. You call it monopolistic business practices?” 

Source Business Line (thehindubusinessline.com)