Coal block scam: Government has to ensure coal linkage to end-use projects, says credit rating agency

The Supreme Court verdict that cancelled all but four coal blocks allocated since 1993 will bring the much-needed transparency in the sector, but the government will have to take immediate steps to ensure fuel linkage to operational end-use projects, says India Ratings. The apex court has scrapped the allocation of 214 out of 218 coal blocks to various companies since 1993 terming it as "fatally flawed".

"The judgement would bring in the much-needed transparency in the sector, which has been marred with non-transparent ad-hoc allocations. The government will have to play a pivotal role in the resolution of coal supplies linked to operational end use projects (EUP)," the credit rating agency said.

Though this may boost investments in the sector and lower India's dependence on imported coal, leading to energy security, the government must act promptly to ensure minimal operational disruption for the existing operational projects to further build investor confidence, it said.

India Ratings has suggested three possibilities which could mitigate the impact of the de-allocation for operational EUPs.

Firstly, the government could consider assigning coal linkages to EUPs through Coal India, secondly, if the cost economics of the EUP allow, the developers could look at sourcing imported coal and lastly, fast track auctioning of the de-allocated mines could alleviate the concerns.

In case of the first possibility, the agency said that as the ability to obtain coal linkage from CIL remains limited as it is struggling to increase its output, the state-run coal producer will prefer to supply to the existing plants to avoid penalty due to under-supply.

"These EUPs would try to bid aggressively in the auction to regain the same mines. However, the amount paid to get these mines through the auction route would alter the project economics. The outcome could also be a mix of these three possibilities," India Ratings said. 

The government is contemplating constituting an inter- ministerial panel to decide the future course of action with regard to coal permits that have been quashed, sources said.
The court has refrained from immediate de-allocation of the operational captive coal blocks (CCBs) with linked EUP and has allowed a breathing period of six months ending March 31 next year to developers.

The court has also imposed a levy of Rs 295 per tonne for coal extracted by the developers till date. "There is possibility of the government considering means to provide coal through the linkage route for operational plants if captive coal blocks were to be de-allocated. Till March 2015, these operational projects would have to develop an interim arrangement to source coal through government support," the agency said.

According to India Ratings, mine allottees with non- operational CCBs will face the risk of investments towards mine development as well as EUP being written down. "Once the CCB auction begins, there remains limited possibility for the same mine to be re-allocated to the respective developer. Therefore, the investment made towards the mine will largely have to be written off, in the absence of any compensation from the new bidder of the said mine. Additionally, the investments made in EUP could be written off if the developer is unsuccessful in bidding for mines under auction mechanism or imported coal does not support economical operations of the EUP," India Ratings said.