Controversy is now raging in the relatively low profile and unglamorous coal industry. The Presidential directive asking public sector monopoly, Coal India, to sign fuel supply agreements (FSA) with power producers has not gone down well with a large private shareholder.
The Children's Investment Fund (TCI), which owns a little over one per cent of Coal India's shares, has threatened legal action against the government because it feels that the FSAs will lead to enormous loss of profits for the company. TCI says it is ‘furious' because the government is depriving “CIL — and by extension the Indian public — of $20 billion of profits per annum selling at below market rates.”
The government, for its part, says that it has to do this to ensure that new thermal generation stations coming on stream are not starved of fuel. If Coal India does not sign FSAs, these stations, adding up to 50,000 MW of cumulative capacity would be stranded.
So, where does justice lie? Is it right for the government to arm-twist a public sector company that is listed on the stock market into doing something that is not in its interest? Or is TCI wrong in questioning the government over an action in public interest and in a company that it majority owns?
No easy answer
Public interest is supreme and it overrides everything else in policymaking. By this token, the government is justified in forcing Coal India to sign the FSAs because it needs to ensure adequate power supply to consumers at affordable prices. From an economic perspective, there is a multiplier effect when industries consume the cheap power to produce goods at optimal costs setting off a virtuous chain across the economy.
Besides, the government, as owner of nine out of every ten shares in Coal India, has the right to run the company to suit its interests. Of course, it can be argued that this is wrong from a governance perspective as Coal India is a listed company that also has private shareholders but the counter-argument is that TCI was aware of the risk when it invested in the company. Again, the option to sell its holdings and exit Coal India is always open to TCI, if it feels its rights are being trodden over. This is one side of the argument.
The same concept of public interest can be used to argue for the opposite as well. Is public interest also not served when mineral resources are exploited and supplied at the best possible prices linked to the market? Coal India was, after all, set up with public money and the coal resources that it exploits belongs to the citizens of this country. Isn't the government, and by extension the public, losing money when Coal India sells its precious commodity at subsidised prices? How is public interest served when Coal India sells cheap to private power producers who may not necessarily pass on the benefit to consumers? This is a straight transfer of wealth from public to private hands.
Rich, yet poor
The arguments, as one can see, are complex and buried in these are some practical issues that Coal India faces. It is true that coal output has shown no increase in the last three years. And lack of funds is not the cause for this; Coal India is, after all, one of the richest companies in the land with a net worth of Rs.33,314 crore (approx. $6.6 billion) and cash balance of Rs.45,862 crore (approx. $9.17 billion) as of March 31, 2011. With a roaring 62 per cent growth in net profits to Rs.10,774 crore in the first nine months of 2011-12, the cash balance and net worth can only have grown bigger in 2011-12.
So what prevents Coal India from realising its destiny? Quite simply, government policy. The environmental policy and no-go areas for mining have ensured that the company cannot expand its mining activity. Clearances have not been forthcoming for new projects. So how is it fair to now arm-twist the company into meeting unrealistic targets?
The contentious clauses in the government directive relate to the price and the minimum supply level of 80 per cent, not meeting which will lead to penalties on the coal major. It is indeed unfair to set such high levels of minimum supply requirements after tying down the company from expanding its mines. It is also not fair for the government to direct that Coal India should bridge any gaps in supply through imports by absorbing the higher prices. Why should the company subsidise power producers, public or private? We are all witness to what such ‘subsidy-economics' is doing to the oil companies.
The new Chairman of Coal India, S. Narsing Rao, has rightly said that any demand for higher supplies can only work to the company's advantage. But this is subject to the caveat that it is not at subsidised prices and there are no penalties for failing to meet unnaturally high levels of minimum supplies. The public may love cheap power but public interest will be better served by ensuring that a critical infrastructure company is not run to the ground. This might benefit private shareholders such as TCI but that is only incidental.
