Observers looking to gauge the seriousness of the UPAs reform and disinvestment efforts should pay particularly close attention to developments at Coal India Limited (CIL). In particular,recent comments by new Minister for Coal Sriprakash Jaiswal as well as CILs head,Partha Bhattacharyya,indicate that long-delayed fundamental reforms may finally be in the offing.
Indias coal ministry and CIL have already undergone much more reform in the past few years than has often been acknowledged. There have been significant gains in openness,transparency and productivity However,as comments made in recent days by senior officials indicate,the pace of reforms must increase. (Both Jaiswal and Bhattacharyya have publicly indicated that the government hopes to make a 5-10 per cent stake sale in CIL within the next year.)
While these are the strongest signals yet about the possibility of bringing market discipline to CILs operations,disinvestment should not be considered a foregone conclusion. Bills doing so have been stuck in the Lok Sabha for almost a decade now,blocked by legislators with a vested interest in the status quo. But the current severe coal shortage,and UPA-IIs fresh mandate,might change that. Few companies are more crucial than CIL; having personally acted as his own coal minister for part of UPA-I,after Shibu Soren was forced out,Manmohan Singh is well aware of the necessity of continuing structural reforms within the sector and of their broader importance.
In many ways,it is an ideal time in CILs corporate history to sell a public stake: structural reforms that saw it shed well above one lakh employees over the past several years led CIL,a loss-maker for decades,to substantial recent profits (expected to be Rs 500 crore this year). In part due to its recent successes it was declared a Navratna company in October of last year,allowing it greater operational flexibility and thus making it considerably more appealing to capital markets. In addition,substantial management reforms and the utilisation of outsourcing in many mining operations made it considerably more efficient and effective.
Ultimately,a public share sale would impose much-needed discipline,which could lead to further performance improvements even if the state continues to own the vast majority of the company. A model for such a development can be seen in entities such as Gujarat Mineral Development Corporation (GMDC),a majority state-owned mining company that has seen continuous performance improvements and steady profits with high gross margins since going public. While GMDC is still restricted to a degree by government rules,it runs much more like a private enterprise and has achieved excellent performance metrics.
Interestingly,Bhattacharyya has also suggested offering equity stakes in the partially-privatised CIL in exchange for land for families displaced by mining operations. Given that land continues to be the central constraint on coal development in India,this could provide an interesting synergy of interests. Similarly,profit-sharing or labour-owned equity stakes in a new CIL (a suggestion recently floated by Jaiswal) could considerably help in an industry where labour-management strife has been intense. Profits were just Rs 96 crore in the wake of a new wage agreement in 2008-2009 that substantially hiked wages from Rs 5,000 crore in the previous year; still,maintaining profitability with a dramatically increased wage structure is an indication that the company is now on much firmer footing than it has been at any time in the recent past.
Other key sectoral reforms are being discussed. Reform of the way captive mining blocks are handed out (moving from an allocation to an auction system) should lessen potential corruption and cronyism. Theres also the possibility of changing laws to allow in international mining companies. Neither move will have a dramatic near-term effect on supply,but both would be important steps to ensuring substantially increased long-term production.
Of course,while the promises of a new day ahead seem enticing,long-time watchers of the sector will certainly maintain a healthy scepticism as they wait to see which of these proposed reforms survives the political process. Indias economic growth is heavily dependent on the successful reform of the coal sector. Initial statements by senior officials indicate that the UPA is aware of the necessity of reform and eager to act. The success or failure of their efforts will tell us a great deal about the future prospects not just for reform of the coal sector,but for reform and disinvestment of state-owned enterprises throughout the Indian economy.
Jeremy Carl is a Research Fellow at the Freeman Spogli Institute of International Studies at Stanford University,where his work focuses on Indiaexpress@expressindia.com
