Getting coal pricing right

In response to a query from the power ministry, an organisation shepherding a major use of coal, the coal ministry has reportedly ‘expressed its helplessness in giving the exact cost of production of coal from different blocks in the coal industry’ (Financial Express, April 9). This is also seen as a rebuff to the recent leaked CAG draft report. For a ministry that is the public interface of a major PSU undertaking, this is a extraordinary confession, if true.

The coal ministry has correctly stated that that geo-mining conditions, such as the size of the property, seam thickness, mineable reserves, whether the area is geologically disturbed and also the method of extraction of coal (open cast or underground mine), stripping ratio and kind of mechanisation, are the main cost determinants. It has also correctly stated that the nature and surface feature of land, the amount of rehabilitation and resettlement work and availability of infrastructure near the project site also alter costs. This second set of factors is easily measurable and hence can be disposed of at the outset.

The whole concept of an arms length relationship between a PSU and a ministry can be operationalised only if cost estimates are possible, as I remember from the PSU reform committees I worked in or chaired in the days of my youth as a public sector pricing czar. The power ministry was asking for this data according to the FE report for loading it on to the bid documents of private power projects. A bidder private manager is reportedly to have gleefully noted all this. The upshot is that while the factors the coal ministry has stated were present always for geology, the Government of India had done pioneering work on the estimation of coal mining costs and these reports are all in the public domain.

In my first job in the government in 1974, coal had been nationalised by the late Mohan Kumaramangalam and he had horrid stories of the coal mining companies, largely MNCs, exploiting nature and the economy and for almost a decade. Coal production was near constant before nationalisation. Coal India, NTPC and so on, were set up and Indian coal production went up in quantum jumps and was the reason India efficiently faced the first energy crisis for coal-substituted imported crude.

Coal pricing became an issue and the usual arguments—“we can’t do it!”—were toted out. Asked to price coal when I was BICP chief, we looked at what the big coal mining boys in the world were doing. It turned out the econometrics of coal mining costs had come of age. The Institute of Economic Growth’s Planning Unit knew it and so did the Institute of Mines at Dhanbad. But, of course, our politicians and bureaucrats don’t like domestic knowledge institutions.

Professor Gopal Kadekodi at the IEG estimated these models for the BICP and the factors he took into account with mine level data were seam thickness, depth, gradient, over-burden ratio, total dumper hours, scale of output, number of dumpers, man shifts, number of faces, and haulage distance. This was published in an IEG working paper in 1988. G Kadekodi and A Sharma estimated cost elasticities as these factors varied and so standard cost functions were available. I quoted him extensively in a book I wrote on Indian Development Planning and Policy published by World Institute of Development Economic Research at Helsinki. It met the market test and the second reprint is still around, so it can be easily read. Kadekodi is still around, and I am sure could guide work at Dharwad. Apart from settling the fate of future scams, this kind of work is important for the nation to pay the price of the real cost of its natural endowments. Coal India might want more of open cast mining, but prudence may need us to go down and that cost has to be paid. The point that Jairam Ramesh was making as environment minister, that the real costs of coal mining include environmental and rehab costs, is correct. These costs have to be paid. My argument is that this is scientifically doable.

A few years ago, at a TERI meeting on sustainable energy and water policies, the then adviser, energy in the Planning Commission was at length lamenting how the available coal pricing models everybody was using were wrong. When I told him that fact-based exercises were available and only needed updating, he said “sir, nobody does that kind of work anymore”. I don’t believe this, for it violates a basic Alagh Law that the next generation is smarter than mine. We only need to lead them there.