Coal India8217;s fast train to oblivion

By March next year, when the ministry of railways does its final numbers, it will find that it earned more in carting coal during the full...

By March next year, when the ministry of railways does its final numbers, it will find that it earned more in carting coal during the full year than it did from ferrying passengers across the country receipts from coal are expected to be Rs 10,628 crore as against Rs 10,148 crore from passenger traffic. So what8217;s this got to do with Coal India Limited8217;s decision last fortnight to cancel the second phase of a World Bank loan of around 250 million, and also put off a related loan of another 100 million or so from the Japanese government? Quite a lot, actually. Just read on.

You see, the two phases of the World Bank and Japanese loan would have added 34 million tonnes to Coal India8217;s capacity, but that was desirable only when demand by 2002 was estimated to be 303 million tonnes. Today, Coal India thinks it will be around 282 million tonnes, and is hard-pressed to utilise even the extra capacity created from the Phase A loan. And the railways are the main culprit behind Coal India8217;s present plight. But more of that later.

One of Coal India8217;s major worries today is the sharp inroads being made by imported coal, primarily the non-coking type used by power plants. From a mere 7.32 million tones in 1993-94, imports have shot up to 17.22 in 1998-99. A large part of this is because Coal India8217;s coal is both expensive and of poor quality. As against its pithead prices of 48 a tonne, Australian coal costs around 35. Add to this, the fact that the ash content of Coal India8217;s coal can even be as high as 33 per cent, on the basis of energy-equivalent, imported coal works out to much less than Coal India8217;s.

A lot of this has to do with Coal India8217;s inefficiency. The gross calorific value or the energy that can be generated by burning the coal of Coal India8217;s supplies have gone down from 5,900 kcal per kg in 1961 to 3,400 kcal in 1997-98. And while its productivity has gone up around three times in the last 20 years, at 2.01 tonnes per manshift, this compares poorly with an average of 53.59 in the US and 13.36 in the UK. Many of its subsidiaries such as Bharat Coking Coal Limited and Eastern Coal Fields are sick, and are dragging down the entire company with them.

And if that isn8217;t bad enough, here8217;s the clincher, that will ensure Coal India may become a BIFR case over the next few years. Producing the coal, you see, isn8217;t good enough, it has to be delivered, generally to power stations which burn it to produce energy. Well, today, it is cheaper to ship coal from South Africa, Indonesia or Australia to the west coast of India and south India than it is to move it by rail from Eastern or Central India. It is twice as expensive to move coal from Eastern/Central India to the west coast than to ship it from South Africa, two-and-a-half times more than from Indonesia and a third more expensive than shipping it from Australia.

That8217;s just the freight, on a simple tonnage basis. If you adjust this for the fact that Coal India8217;s coal has a lower calorific value and has a large ash content, then the difference is even more stark. According to a study done by the Controller General of Accounts in the Ministry of Finance, for 13 power plants all over the country, only for one Maharashtra State Electricity Board8217;s plant in Nasik 8211; is Coal India more economical!

You see, the traditional policy of the railways under successive ministers has been to subsidise passengers by over-charging massively on freight goods while Nitish Kumar did try to reverse this somewhat, the honourable didi from West Bengal has gone back to the old policy. On a rough calculation, the railways over-charge coal by a whopping Rs 4,700 crore per annum if you take the iron and steel, and petroleum sectors as well, the railways overcharge them a total of over Rs 8,000 crore! According to a World Bank study in 1995, rail freight rates in India on a purchasing power parity basis were three times the US rates, and one-and-a-half times the Chinese rates with annual freight hikes, the situation today is far worse.

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As a per cent of Coal India8217;s gross sales, this additional freight cost is around a fourth. In other words, if the railways did not over-charge coal, the delivered cost of Coal India8217;s coal would be down by a fourth. Put another way, the cost of rail freight equals the cost of power-grade coal at 450 km at distances above this, the railway freight starts exceeding the basic cost of the coal itself. Given the kind of distance that most power plants are from coal pitheads, that means that up to half of Coal India8217;s coal could become uncompetitive because of freight rates alone.

If you go by the projections made by Coal India in 1996, around the time it was being given sops for financial restructuring the second time since 1992 the company will make profits of around Rs 600 to 700 crore per year, for the next decade. But given the fall in its profitability and demand already, this is clearly nothing more than wishful thinking. Thanks to its own inefficiency, and the freight policies of Mamata Bannerji8217;s railways, Coal India8217;s on a fast train to oblivion.