Govt. fiat will not ease coal shortage in short-term: Fitch

A Presidential Directive requiring state-owned Coal India Limited (CIL) to sign fuel supply agreements (FSAs) with independent power producers will do little to relieve domestic coal shortages in the near-term, Fitch Ratings says. Over the long-term, the directive could resolve some of the bottlenecks preventing higher coal production, although this will also require further action from the government. If CIL fails to increase its output to the desired levels, it will face penalties.

The FSAs signed under this directive will initially have little effect on domestic coal supply as the reasons for lower output — infrastructure bottlenecks, lack of environmental clearances, problems in land acquisition, high rainfall and labour — need long-term solutions.

The rating agency felt that over the long-term, FSAs signed under the Presidential Directive could help overcome some of the bottlenecks and improve the long-term availability of coal. However, much of the initiative will depend on the government finding a solution to environmental restrictions that prevent extraction of coal lying under forests. It will also depend on the size of fines that could be levied against CIL.

Import of coal by CIL to meet its enhanced supply obligations will be an option but pricing of such coal will need to be worked out. A key minority shareholder of CIL is also likely to contest the directive, fearing the negative impact binding supply commitments could have on CIL's contingent liability.

This would shift the action to the legal arena and at the same time highlight the constraints faced by Indian power producers in their efforts to secure fuel supplies and put into perspective the limitations on the options available to the government.

The rating agency said that the Indian power sector received strong investor interest during 2008-2010 and this presidential directive was part of the government's efforts to save that investment from going bad. Although improvements in coal supply over the medium- to long-term could help save investments that were recently completed or are in the pipeline, fresh investments in the coal-fired power generation sector are likely to remain subdued.