Modi exploring breakup of Coal India, opening up sector

Prime minister-elect Narendra Modi is exploring breaking up state behemoth Coal India Ltd(COAL.NS) and

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opening up the sector to foreign investment to boost output and cut imports, said two sources with knowledge of the matter.

Red tape, strikes, protests against land acquisition and delays in obtaining environmental approvals have kept coal output far below demand, making India the world's No.3 importer even though it sits on the fifth-largest reserves.

Modi wants to fix the coal sector quickly to ensure unbroken electricity supply across the country, as in his home state of Gujarat where manufacturing has flourished. Coal generates more than half of India's power and is the cheapest form of energy.

Any reform will begin with Coal India, as it accounts for 80 percent of India's total coal output, said a source at Modi's Bharatiya Janata Party (BJP). The world's largest coal mining company has failed to meet its output targets for years.

"The story is about Coal India, whose productivity as we all know has been poor," said the source, a member of the BJP's economic policy team.

"What we have in mind is bringing changes inside-out in the company within a stipulated time period."

There is a possibility of converting various units of Coal India into independent companies, and making respective state governments equity holders to help speed up land acquisition and other such processes, a top Coal India official said.

Credit Suisse analysts Neelkanth Mishra and Ravi Shankar wrote in a May 19 note that disappointing domestic coal output is one of the main reasons for the slowdown in India's investment cycle. Raising coal volumes is likely to be a top priority for the new government, they added.

"The only meaningful solution, though much harder to implement, is to either break Coal India up, and divide ownership of its subsidiaries among the states where they operate, or in some way introduce an incentive structure so that the respective state governments participate in the growth of coal mining in their states," they wrote.

Sources say that no big-bang steps should be expected immediately as lot of consultation is still going on. But the thumping victory for Modi will make decision making easier.

FOREIGN INVESTMENT

Apart from using modern mining technologies to boost efficiencies and convert "challenging mines into modern mines", the government will also explore international private-sector partnership in a significant way, said the BJP source.

Another idea under consideration would be to auction coal blocks through open tenders, as India already does for oil and gas deposits.

The officials from BJP and Coal India said that many global miners are keen to invest in India's coal sector.

"India is a coal superpower, both in terms of production and consumption - foreign interest is natural," the BJP official said.

India's coal production in the 11 months through February was 497.2 million tonnes, according to data from the Ministry of Mines. Output was 557.8 million in the whole of 2012/13.

Research firm OreTeam says that according to its data, India imported 158.8 million tonnes of coal in 2013/14.

The Ministry of Coal said in February that imports hit 145.8 million in 2012/13, with more than half of that coming from Indonesia. Australia, South Africa and the United States are India's other main suppliers.

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