Is the government undermining its own Coal Mines Act for the profit of private companies?

A lack of government scrutiny has enabled private companies to enter India's coal industry and effectively replace the joint-venture model that the Supreme Court struck down as illegal in a landmark 2014 judgment. Daniel Berehulak/Getty Images
03 October, 2018

In his campaign for the 2014 Lok Sabha elections, Narendra Modi promised to introduce reforms in the coal industry as a crucial part of his development agenda. In September that year, the Supreme Court passed a landmark verdict cancelling nearly all existing permissions for the captive mining of coal blocks. The verdict halted what had come to be known as the Coalgate scam—one of the biggest scandals that contributed to the fall of the United Progressive Alliance government. The court censured the government of India and its public-sector companies for forming joint ventures with private companies, which allowed the latter to pocket benefits of mining the allotted coal for free. It stated: “[It] is expected that the Government will not deal with the natural resources that belong to the country as if they belong to a few individuals who can fritter them away at their sweet will.” In total, 214 coal block allocations were nullified, including all joint ventures.

The 2014 Supreme Court verdict set the ground for fresh legislation and reform in the coal industry. The next year, the National Democratic Alliance enacted two key legislations to introduce these changes—the Coal Mines (Special Provision) Act and the Mines and Minerals Development Regulation Act. The coal ministry’s press statement boasted that the year would be written in “golden letters in the annals of history.” The Coal Mines Act stipulated that the blocks that had earlier had their allotments cancelled would now be distributed either through auctions to private and public firms, or through direct allotment to public-sector companies.

Three years since the Coal Mines Act was introduced, its implementation hangs under a serious cloud. Documents obtained through right-to-information applications reveal that the coal ministry does not possess copies of current agreements between public-sector undertaking and their private partners. This lack of government scrutiny has led to a prevailing practice that effectively replicates the joint-venture model that the Supreme Court struck down as illegal. As a result, the profiteering by private firms continues unabated in the coal sector due to ineffective implementation of the 2014 judgement and subsequent law.

Since the introduction of the Coal Mines Act, approximately 27 percent of the total coal blocks were allocated through the auction route while close to 84 percent of the total estimated coal reserves were directly allocated to public-sector companies. In case of the auctioned coal blocks, after the first two rounds of auctions Prime Minister Narendra Modi had said that the “fetching of over Rs 2 lakh crore from auction of just 33 coal blocks has shown that policy-driven governance can rid the system of corruption.” However, according to an August 2018 report of a parliamentary standing committee on coal and steel, the revenue generated from coal auctions during the current government’s tenure stood at Rs 5,399 crore as of April this year. A Business Standard report published the next month calculated the revenue generated till June to be Rs 5,684 crore—just 3 percent of what Modi claimed.

Among the public-sector undertakings that were allocated coal blocks, most of them appointed private companies as “mine developer cum operators,” or MDOs, which are responsible for, among others aspects, developing, maintaining and operating the mine. Such agreements between PSUs and MDOs are not subject to any oversight from the centre or coal ministry, and private companies refuse to disclose the terms of their agreements. This lack of transparency is in complete contravention of the Supreme Court’s 2014 judgment and the legislation that followed it.

The problem is two-fold: almost 75 percent of blocks assigned via the direct-allocation route have been tendered to PSUs with limited or nil coal-mining experience, and these PSUs, in turn, have entered into agreements with MDOs that unjustly benefit the private partners. Most of these PSUs have signed or are in the process of signing MDO agreements with private companies. At present, there are 16 known MDO agreements in place for 21 coal blocks. The PSUs that are a part of these agreements include public-sector companies such as the Rajasthan Rajya Vidyut Utpadan Nigam Limited, Chhattisgarh State Power Generation Company Limited, Punjab State Power Corporation Limited, and the West Bengal Power Development Corporation Limited. Being state-run power corporations, most of these companies have little experience in coal mining.

The Coal Mines Act uses the phrase “mining contractor,” but does not say anything about MDOs. The concept of an MDO is not recognised in any law governing the Indian coal industry. The law only permits a company to bring in an outside party to help it develop a mine if that party is a contractor, not an MDO, in the project. The difference between the two is stark.

A mining contractor’s scope of activity is restricted to mining coal from the block and delivering it to the location of the end-use project run by the PSU. The contractor is paid a mining fee and a transportation costs for these services. According to tenders issued by state governments—which own power-generating PSUs—, MDOs have been made responsible for primary investment in mining projects, for planning, developing and operating mines, and for delivering coal at a “competitive price.” In effect, this results in PSUs paying the market price of coal—because they have to pay MDOs for the mining service in addition to the entire cost of coal—for receiving coal from blocks allotted to them. The entire system of allocating coal blocks to power-generating PSUs was created so that they could cut out private middle-men and pass on the resulting savings to consumers.

“The concept of MDO is alien to the new act,” Sudiep Shrivatsava, one of the petitioners in the case before the Supreme Court in which it passed the 2014 verdict, told me. “This is an act which was brought to implement the 2014 SC judgment. How can the same act and subordinate rules allow such MDOs, which are contrary to the judgment itself? If an MDO is empowered to acquire land on the PSU’s behalf and get environmental clearances, can they still be called a contractor?”

“The state PSUs are actually acting as shell companies, and the MDO arrangement is a back-door entry to privatisation,” Priyanshu Gupta told me. Gupta is a researcher, and a member of the Chhattisgarh Bachao Andolan—an alliance of roughly two dozen civic groups including people’s movements and trade unions. In a July article published in the Economic and Political Weekly, Gupta and Anuj Goyal, another CBA member, wrote, “The risk-return profile of coal mining through the MDO route is what attracts private players.” They explained that “mining operations by government companies are commercially more lucrative as they do not need to pay high prices. Instead, the royalty payments are restricted to Rs 100 per tonne of coal extracted. The developmental risks and upfront payment are borne by government companies.”

For instance, the tender issued by the Chhattisgarh State Power Generation Company Limited for the Gare Pelma Sector III mine, in May 2015, said, “MDO will make majority of the investment in the mining project and undertake all the activities necessary for planning development, operation of coal mine to supply and deliver coal to CSGPCL at its delivery point at competitive price.” According to Shrivatsava, this approach effectively transfers the coal block to a private company without any auction. The private company then sells coal from the block back to the public-sector company. “Instead of coal ‘sales’ they are saying ‘supply,’ but it is actually sale.” Shrivatsava added that lower-grade coal sifted out while processing raw coal from the mine—known in the industry as “middlings” and “rejects”—is also handed over to the MDOs. This coal is still commercially valuable, and accounts for “22 to 35 percent ... of coal mined,” Shrivastava explained. This new PSU-MDO model, and the scale of the benefits it allows to private partners, has been allowed to flourish because of the coal ministry’s failure to scrutinise agreements between private and state-run companies. The Coal Mines Act categorically directs companies allotted coal blocks to inform the central or state governments about engaging any contractor for developing a mine. The act states: “In case the coal mine is developed through contractors in relation to coal mining operation shall be through competitive bidding process and the allottee company shall inform the state government concerned, the central government, and the nominated authority about the engagement of such contractors and the terms and conditions of such engagement, as soon as it is finalised.”

A model allotment agreement prepared by the central government also clearly states that a duly signed copy of an agreement between a PSU and a mining contractor must be submitted to the nominated authority—a secretary with the coal ministry—within 15 business days of the execution of an agreement. Since the Coal Mines Act was passed, a total of 89 blocks have been reallocated and 59 coal mines have been directly allocated to PSUs.

The coal ministry has admitted in writing that, in an inexplicable lapse, it does not possess copies of any of the agreements between PSUs and MDOs. In response to an RTI application filed by Anuj Goyal, the CBA member, the coal ministry wrote on 24 August 2018 that is does not have any MDO agreements in its possession, and that it had sent a letter on 17 August to all state governments asking for copies of their respective agreements with MDOs.

PSUs have refused to provide information on MDOs even after repeated RTI requests and appeals. Activists with the Chhattisgarh Bachao Andolan have filed 34 RTI applications with the coal ministry, 13 state governments, the Damodar Valley Corporation, which is jointly owned by the centre, and West Bengal and Jharkhand governments and the THDC India Limited, a company jointly owned by the central government and the Uttar Pradesh government. According to responses to these applications, which I gained access to, state departments exercising jurisdiction over mining activities replied that they did not have copies of any MDO agreements, and that the PSUs concerned had refused to share any information on their MDOs.

For instance, in a May 2018 response regarding MDOs for the Khagra Joydev and Tubed mines, the Damodar Valley Corporation stated, “The copy of mine developer cum operator agreement is a confidential and voluminous document. As such, this cannot be shared.” Similarly, the Telangana State Power Generation Corporation Limited replied in May 2018 that its agreement with AMR India “is exempted from furnishing under the RTI Act” because the information in it is “related to commercial confidence and trade secrets which may harm the intellectual interest of the company.” The company also argued that the agreement “has been prepared by experts by investing lot of man hours and ... incurs huge amount towards fee for expert opinion.”

Coalgate 2.0,” an investigative story published by The Caravan in March 2018, revealed that a joint venture between Rajasthan Rajya Vidyut Utpadan Nigam Limited and Adani Enterprises Limited, the flagship company of the Adani Group, continues to operate on the basis of agreements that pre-date the Supreme Court ruling. In an RTI response in June 2018, RRVUNL also claimed that the details of its MDO agreement with Adani Enterprises Limited “contains technical and commercial confident information.” As a result, RRVUNL added, it “is unable to provide these … as the same may severely damage the business interest of the MDO who are third party.” RRVUNL had shared copies of mining agreement for Parsa East and Kete Basan, and the Parsa and Kete Extension blocks in June 2018, but after removing all the technical and commercial terms of the contract.

Piyush Goyal, the coal minister, stated in the Rajya Sabha on 10 August that “the provisions of Right to Information Act, 2005, and disclosure requirements specified in model contract agreement are applicable” to MDO agreements.By refusing to divulge details about MDO agreements, PSUs are flouting the coal minister’s statement in parliament.

Correction: A previous version of this article incorrectly mentioned in one instance that the phrase "mining contractor" is not used in the Coal Mines Act. This has been corrected to reflect that the act speaks of mining contractors, but not MDOs. The Caravan regrets the error.