FOR OFFICIAL USE ONLY

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Repo". No. J'^111q Inrcia September 14, 1982 Industry Department South Asia Programs Department FOR OFFICIAL USE ONLY Document of the Wbrld Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS Currency Unit = Rupees (Rs) June 1966 to mid-december 1971 : US$1.00 = Rs 7.5 Re 1.00 = US$ Mid-December 1971 to end-june 1972: US$1.00 = Rs Re 1.00 = US$ After end-june 1972 : Floating Rate Spot Rate end-december 1980 : US$1.00 = Rs Rs 1.00 = US$0.126 Spot Rate end-december 1981 : US$1.00 = Rs Rs 1.00 = US$0.110 Spot Rate end-february 1982 : US$1.00 = Rs Re 1.00 = US$ WEIGHTS AND MEASURES All units are metric value, i.e., 1 ton = 2,205 lbs PRINCIPAL ABBREVIATIONS AND ACRONYMS BCCL = Bharat Coking Coal Ltd. BEML = Bharat Earth Movers Ltd. CCL = Central Coalfields Ltd. CFRI = Central Fuel Research Institute CIL = Coal India Ltd. CMPDI = Central Mine Planning and Design Institute CMRS = Central Mine Research Station ECL = Eastern Coalfields Ltd. GSI = Geological Survey of India IISCO = India Iron and Steel Company IR = Indian Railways MEC = Mineral Exploration Corporation NEC = North Eastern Coal Fields NTPC = National Thermal Power Company SCL = Singareni Collieries Company Ltd. TISCO = Tata Iron and Steel Company WCL = Western Coalfields Ltd. INDIAN FISCAL YEAR April 1 - March 31

3 FOR OFFICIAL USE ONLY INDIA COAL SECTOR SURVEY Table of Contents Page No. I. SUMMARY... 1 II. RESERVES AND EXPLORATION... 5 A. Coal Reserve Estimates... 5 B. Organization of Exploration Activities C. Operational Issues... 7 III. COAL PRODUCTION A. Production Performance B. Underground Mining C. Open Pit Mining D. Coal Beneficiation E. Employment and Productivity F. Operating Costs IV. TRANSPORTATION A. Recent Trends in Rail and Road Traffic and Loadings. 24 B. Causes of Decline in Rail Shipments C. Institutional Linkages Between Coal and the Railway Industry D. Outlook for Rail Transport of Coal V. COAL PRICES AND FINANCIAL PERFORMANCE A. Coal Price Structure B. The Relative Price of Coal C. Financial Performance D. Financial Position E. Pricing Issues and Financial Outlook VI. COAL CONSUMPTION AND DEMAND/SUPPLY PROSPECTS A. Consumption B. Coal Imports and Exports C. Demand Projections D. Coal Supply Prospects and Investment Requirements E. Production Projections F. Supply/Demand Balance and Prospects VII. SUMMARY OF RECOMMENDATIONS This document has a-restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

4 ANNEXES Page No. 3-1 Indigenous Manufacture of Mining Equipment CIL Washeries - Capacity Utilization and Yield Income Statements Summary Balance Sheets Income Statement -- Coal India (Overall) CIL and Subsidiaries - Summarized Balance Sheet CIL--Annual Capital Expenditures Estimated Project Cost and Statistics--Singrauli Open Pits Estimated Project Cost--Selected CIL Mines CIL Holding Company, Funds Remitted to Subsidiaries This Report was prepared following an IBRD mission to India to review the coal sector from October 20-November 15, The mission consisted of Mr. Z. Ecevit, Mrs. S. Sengupta, Mr. J.E. Strongman, (IBRD Economists) and Messrs. P. Dyson, K. Fordwor, A. Sharkey and C. Wardell (Consultants).

5 COAL SECTOR SURVEY Preamble This report presents the findings of a coal sector mission that visited India for four weeks in October/November An earlier draft was revised in early 1982 following a mission in October 1981 to incorporate the more recent statistical data then available. Developments since that time, including the coal price increase announced in June 1982, have not been incorporated in this paper. The Report presents a general review of the sector and highlights a number of issues identified by the mission as important to the future development of the coal industry. While the Report covers a broad range of issues, it does not attempt to provide a fully comprehensive coverage of this large, complex sector. Rather it focuses on a number of selected issues regarding coal exploration, production, investment, transportation, consumption and pricing in India to provide recommendations to guide future actions in the sector. For many of the issues, the analyses and recommendations presented here should be viewed as a starting point for further analysis and refinement rather than as a final, definitive statement.

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7 INDIA COAL SECTOR SURVEY I. SUMMARY 1.01 India is the world's seventh largest coal producer, with a coal production of million tons in 1980/81--nearly three times as large as any other developing country. Coal is essential to India's economic progress providing nearly 34% of India's estimated commercial energy consumption 1/ in 1980/81. India's coal reserves are large--over 80 billion tons of reserves and resources compared with about 6.5 billion tons of prognostic, recoverable hydrocarbon reserves. 2/ Coal is expected to play a critical role in providing a large share of commercial energy supplies for the next several decades This report addresses selected issues regarding the coal sector 3/ as part of the Annual Economic Report and as a contribution to overall Bank energy sector work in India. In particular, the report examines coal production and supply prospects and certain key issues relating to the coal supply/ demand balance, transportation, pricing, investment and finances as summarized in the following paragraphs The coal industry in India was nationalized in the early 1970s and the holding company, Coal India Ltd. (CIL) was established in 1975 along with its wholly-owned operating subsidiaries, Bharat Coking Coal Ltd. (BCCL), Central Coalfields Ltd. (CCL), Eastern Coalfields Ltd. (ECL), North Eastern Coalfields (NEC) 4/ and Western Coalfields Ltd. (WCL) and with the wholly-owned technical service group, Central Mine Planning and Design Institute (CMPDI). The Coal India Group accounted for 88% of India's coal production in 1980/81. The remainder was supplied by Singareni Collieries Company Ltd. (SCL)-9% and Tata Iron and Steel Company (TISCO)/Indian Iron and Steel Company (IISCO)-3% Following nationalization, coal production increased rapidly from 78.1 million tons in 1973/74 to 99.7 million tons in 1975/76 at which point production was plentiful relative to demand. Subsequently, however, production stagnated and fell behind demand, reaching only million tons in 1979/80. Production increased sharply in 1980/81 to million tons, but even so was still an estimated 10.0 million tons below estimated demand. From 1979/80 to 1980/81 pithead stocks of coal increased from 14 million tons to 16 million tons largely because of inadequate rail capacity for coal haulage which increased the severity of coal shortages Mining and operating conditions are very difficult for two of the col companies, namely BCCL and ECL. Both these companies operate mostly deep, 1/ In terms of coal equivalent. 2/ 1 ton of oil is equivalent to 2 tons of coal. 3/ This report does not address the lignite sector with a production and consumption of 3 million tons in 1980/81. 4/ This subsidiary has small mining operations, the complete statistics of which were not made available to the mission. Consequently, in some tables containing data for CIL subsidiaries, NEC is not mentioned.

8 - 2 - underground mines with difficult geological conditions, including thick seams, sandstone roofs, spontaneous combustion and gassiness. These difficulties have been accentuated in recent years by power and explosive shortages, absenteeism, general labor unrest and mine floodings. From 1975/76 to 1979/80, BCCL's production did not increase above about 20 million tpy and ECL suffered a decline from 26 million tpy to 20 million tpy. In 1980/81, both companies achieved small production increases--to 21.4 million tons for BCCL and 22.7 million tons for ECL In contrast, WCL and CCL face much easier operating conditions. WCL operates mostly shallow drift mines in better geological conditions, and suffers less from power shortages and labor unrest than the other companies. CCL operates mainly open pit mines which are not subject to geological difficulties or power shortages to the same extent as the underground mines. From 1975/ /81 production increased from 21 million tpy to 27 million tpy for CCL and 22 million tpy to 29 million tpy for WCL The initial CMPDI and Coal Department production plans called for a substantial increase in total industry coal production from 114 million tons in 1980/81 to 179 million tons by 1984/85. Coal demand was estimated at million tons indicating a shortfall of 5.3 million tons by the end of the Sixth Plan period. Subsequently, these targets for 1984/85 have been revised by the Planning Commission to 165 million tons production for all India and 168 million tons demand, indicating a shortfall of 3 million tons in 1984/ After analyzing the methodology and assumptions of the coal demand projections prepared by CMPDI and the Coal Department, the mission finds the Planning Commission's demand projections low, especially for the power sector. The unconstrained demand is likely to be around 175 million tpy in 1984/85 in the mission's estimate. By comparison, the mission estimates a maximum coal production of million tons in 1984/85, indicating a shortfall of around million tons The mission's production projection would be a significant achievement for the industry, even though it is much lower than the industry's target. Given the present state of project preparation and the overall financial, technical and managerial resources of the industry, a larger increase in production by 1984/85 is not realistic in the view of the mission. With present construction levels, many new projects are two to four years behind schedule. With a much enlarged investment program, continued slippage in construction schedules would seem inevitable While a number of actions are recommended to improve production from existing mines and the development of new mines, it is to be expected that economic growth in some sectors will be constrained by coal shortages for the next several years mostly due to rail transport bottlenecks. Therefore, rationing policies will need to be scrutinized to minimize overall efficiency losses to the economy The performance of the railways in carrying coal has deteriorated sharply in recent years. Despatches of coal and coke by rail have been

9 - 3 - declining due to increased wagon detentions and breakdowns, inadequate investment in rolling stock, capacity constraints in terms of line saturation, work stoppages and law and order problems. A number of steps are being implemented to improve the railways performance including line electrication, improved operating information and telecommunication systems, introduction of medium range locomotives and financing of construction of high capacity wagons for bulk materials including coal. These various improvements will require several years to take effect and the economics of other modes of coal transport, e.g. coastal and river shipping and slurry pipelines should be investigated. It is likely that transportation difficulties will exacerbate the gap between coal supply and demand for the next several years Coal prices are set by the Government on an administered basis. While, as a matter of policy, coal prices are intended to at least cover production costs, with capital expenditure funds being provided from central public investment funds, in practice prices have not been sufficient to cover operating costs and CIL has suffered losses which have been especially severe for BCCL and ECL. As a result of Government policies regarding pricing and financing, CIL is dependent on the Government not only1 or capital expenditure funds but also for financing cash losses in recent years. This practice is placing a severe burden on the financial resources of the Government. Further, coal prices are set well below economic efficiency prices and do not signal consumers the true economic value of the fuel they consume. Higher energy prices would help promote economy and efficiency in energy usage in addition to mobilizing resources for investment and encouraging increased production A coal pricing policy must ensure that three important concerns are addressed within the context of the Indian economy, as follows: (i) coal prices must correctly signal to users the value of the coal being consumed; (ii) coal prices must be suitable for making sound economic investment decisions; and (iii) coal prices must generate sufficient funds to facilitate efficient, cost conscious operations for existing mines so that CIL and its subsidiary companies can operate in a financially viable manner. In order to satisfy these concerns, the mission have proposed a two-tier coal pricing system consisting of a "consumer" price which would be paid by consumers and which would be used to evaluate investment decisions and a "producer" price for coal producers. The "consumer" price would be based on the pricing principlepursued in the petroleum sector, i.e., market prices approximating border prices. The "consumer" price for different grades of coking and thermal coal would be set at the minehead, based on an estimated fob export value, less adjustment for internal transportation and handling costs. The "producer" price would be the average minehead price to be received by the coal producers. It is proposed that the "producer" price should be set on the principle of providing sufficient funds to cover operating costs given certain minimum, agreed upon standards of efficiency plus a surplus sufficient to meet the capital expenditure requirements necessary for replacement purposes to maintain production capacity at existing mines. However, given inherent differences in production costs among subsidiaries of CIL, a single producer price would undermine the financial viability of high cost producers, i.e., BCCL and ECL. To ensure financial viability as well as cost-conscious

10 management in individual subsidiaries, it is further proposed that subsidiaryspecific "producer" prices are introduced. Accordingly, each subsidiary would have two separate prices: one would be the average "producer" price based on the operating costs and replacement investment requirements for the industry as a whole, the other would be an "internal" subsidiary-specific price based on efficient production costs and legitimate replacement needs within the subsidiary. For each subsidiary the difference between receipts based on the average "producer" price and receipts based on its specific "internal" price would be debited or credited to a retention fund maintained by CIL. Thus funds from the subsidiaries with lower production costs given agreed upon operating efficiencies (i.e., CCL and WCL) would be made available to the subsidiaries with the higher production costs at agreed upon efficiencies (i.e., BCCL and ECL) The remainder of the report addresses coal reserves and exploration (Chapter II), coal production (Chapter III), coal transportation (Chapter IV), coal pricing and financial performance (Chapter V) and coal consumption and demand/supply prospects (Chapter VI). The report concludes with a summary of recommendations (Chapter VII).

11 II. RESERVES AND EXPLORATION A. Coal Reserve Estimates 2.01 During the last ten years, various coal reserve evaluations have been undertaken or have been the subject of an update by the Geological Survey of India (GSI), a Government Task Force, Coal India and a Working Group on Energy Policy. Total (proved, indicated and inferred) reserves in coal seams greater than 1.2 meters (m) thick and at depths less than 600 m have been assessed at 85.4 billion tons and reserves in seams greater than 0.5 m thick and to depths of 1200 m have been reported at approximately 112 billion tons 1/ The total coal reserves in the CIL coalfields of the subsidiary companies (ECL, CCL, BCCL and WCL) of Coal India are reported by CIL to be 91 billion tons. This total reserve estimate of CIL is broken down into proved, indicated and inferred reserves, by grade and subsidiary company as shown in the table on the next page The CIL Reserves Table indicates 24 billion tons of proved reserves and an additional 67 billion tons indicated and inferred reserves. Proved reserves comprise some 5.5 billion tons prime coking coal, 4 billion tons medium coking coal, 1.25 billion tons semi-coking coal and 13.5 billion tons non-coking coal. Some 75% of total reserves are non-coking coal. The reserve estimate has not been broken down into coal to be recovered by open pit or underground methods The reserves estimated are 'in-situ' reserves. Considerations of "recoverable reserves", as far as open pit mining is concerned, would require identification of nominal losses at the top and bottom of each coal seam and dilution. As far as underground mining is concerned, the percentage of extraction could be as low as 25-30% by area and even less by volume if only a certain vertical section of a thick seam were mined. Washery recovery factors have been estimated at 65% for coking coals. In relation to the estimate of 5.5 billion tons of proved prime coking coal, it could be expected that 30-35% would be recoverable after consideration of the recovery factors for mining and coal washing. B. Organization of Exploration Activities 2.05 Exploration responsibilities are divided between the GSI and CMPDI. The GSI is responsible for regional prospecting/reserves assessment, CMPDI for detailed exploration and mine feasibility reports. The GSI has a coal wing, responsible for coal exploration, with about 50 geologists whose work is funded from federal sources. Their main task is the exploration of coal reserves at depths of m. Also, there are plans to commence drill programs to depths of 2,000 m in the near future, following the delivery of new equipment. 1/ Report of the Working Group on Energy Policy, 1979.

12 CIL Coal Reserves /a (million tons) Grade Company Proved Indicated Inferred Total Prime coking /b ECL - - BCCL 5, , CCL WCL Totals 5, , Medium /c ECL coking CCL 2, , , , BCCL 1, , WCL Totals 3, , , , Semi-coking ECL , , CCL 1, , , BCCL WCL Totals 1, , , Non-coking ECL 3, , , , CCL 6, , , , BCCL , , , WCL 3, , , , Totals 13, , , , Grand Total 24, , , , /a These reserve estimates exclude all shale partings/bands thicker than 1 meter that could be selectively mined. /b Up to 18% ash. /c 18-35% ash. Source: CIL CMPDI prove up coalfields for mine feasibility work. The immediate objective of CIL is to have exploration completed on all projects likely to be required for production in the next ten years. In this way, it would be easily ahead of the lead time for new open pit mines and would have some leeway for new underground projects. So far, this objective has not been achieved and exploration is complete only on some of the projects to be developed up to about 1987/88.

13 2.07 CMPDI has a staff of 200 geologists actually employed in coal exploration. In addition, drilling is sub-contracted by CMPDI] to the Mineral Exploration Corporation (MEC), a state entity reporting to the Ministry of Steel. CMPDI is familiar with all modern exploration technologies and the overall standard of exploration is high. The exploration reports prepared by CMPDI and MEC are of high quality, but the effectiveness of CMPDI's exploration activity is limited by three operational issues--the method of selection of blocks for exploration, drilling productivity, and coal quality analyses. These are discussed in the following section. C. Operational Issues 1. Selection of Blocks for Drilling 2.08 CMPDI selects coal blocks for detailed investigation using demand projections (by region and grade) and knowledge of coalfields suitable for detailed investigation provided by GSI or from CMPDI's own files. Preference is generally given to potential open pit (as opposed to underground) projects and to areas with good infrastructure. With regard to the selection of specific blocks for drilling within an identified coal bearing area, less emphasis should be placed on local infrastructure and more emphasis should be given to other economic considerations such as mining conditions or the quality of coal, especially for different grades of non-coking coal. For example, in the Singrauli coalfields in CCL, detailed exploration of blocks has been strongly influenced by ease of access, despite the fact that GSI drilling has indicated more distant blocks of better quality coal. Consequently, feasibility studies and subsequent mine development have taken place in areas with poorer coal quality or potentially more difficult mining conditions than exist in blocks which have not yet been, or are only just being, explored. In order to give the highest development priority to the coal blocks with the greatest economic potential, it is recommended that increased emphasis be given to expected mining conditions and coal quality in the selection of coal blocks for proving-up. 2. Drilling Productivity 2.09 In October 1980, there were about 230 drills engaged in coal exploration in India. These are divided between the GSI, CIL (CMPDI and MEC), and SCL as follows: India - Drills in Use for Coal Exploration GSI 50 CMPDI 50 MEC 100 SCL 30 Source: Mission estimates. It is anticipated that around 300,000 m of drilling will be completed this year using these drills. This represents a production rate of less than 150 m per drill per month. This is substantiated by the productivity of MEC drilling which has fallen from 250 m per drill per month to 140 m per drill per

14 month over the past ten years. These drilling rates are low by international standards and have potentially serious consequences since CMPDI is behind on its objective of completing exploration on all projects required for production in the next ten years The low drilling productivity is associated with low drill availability. For example, MEC reports that its drill availability is only 20% of the time that a drill is on a drill set-up. By comparison, contract drill companies, when bidding for work, usually estimate a drill availability in excess of 90%. Problems cited by drilling personnel include long repair times, shortage of spare parts, water shortages, difficult drill site access, labor problems and old equipment. Many of these difficulties could be alleviated by improved practical management of field work. One area of particular importance is unnecessarily long delays in repairs to equipment due to the limited authority of field staff to authorize repairs. Field program supervisors have to obtain authorization to make expenditures exceeding Rs 2,000 (US$220). This can take several days, even for relatively minor repairs. Furthermore, while in theory the workshops of the local mines are available for repairs, in practice they are reported to be heavily overloaded so that repairs have to wait or authorization be obtained for the work to be carried out by private operators A second important area is that a lack of incentive for the drill crews is contributing to the poor drilling productivity. There is, at present, no bonus payment scheme for good performance and the crews are generally unconcerned about productivity. Moreover, this lack of concern appears to permeate management. MEC states that it loses money on its coal drilling because the contract price was set in CMPDI invoices the companies on a cost-plus basis for exploration so they, too, have little incentive to increase productivity. Although the age and type of the equipment was cited by CMPDI as a reason for poor performance, a competently run program should be able to achieve measurably higher productivity with existing equipment. In order for CMPDI's exploration objectives to be achieved, it is recommended that an analysis be undertaken of the causes of low drill crew productivity and that corrective action be taken to increase this to international levels. 3. Coal Quality 2.12 Coal analyses are made by the Central Fuel Research Institute (CFRI) at laboratories at seven coal survey centers at Jharia, Raniganj, Ranchi, Bilaspur, Nagpur, Jorhar and Jammu. There is a shortage of laboratory capacity for coal testing and analyses relative to the requirements of the exploration program and the schedule of new projects coming on stream. As a result, coal testing must take place on a basis of selective sampling and only selected coal intersections are laboratory tested. This sampling and testing can only be termed as approximate and will lead to an imprecise specification of coal constituents and calorific value and consumer misconception regarding coal quality. Further difficulties arise regarding coal specification because in the testing procedures that are used, heating value, ash content and moisture are measured on an "air dried" basis. However, this is not an accurate representation of coal quality "as received" by consumers. Historically some larger consumers have been able to convert the "air dried" data to a useful

15 - 9 - value in their own terms. However, exact and detailed coal quality investigations are vital to new consumers especially the new super thermal plants where power plant performance is dependent on, among other factors, accurate specification of coal feed quality The impression gained is that the coal producers tend to consider that they are doing the best they can, given their available facilities, and that they therefore view coal quality and beneficiation to improve quality as consumer problems. In practice, the producer faces relatively minor cost penalties for deterioration in coal quality. Yet the costs to the consumer and the economy at large for a mismatch between boiler design and coal quality feed may be very substantial--especially in the case of the super thermal power plants. In the view of the mission, "the best that can be done" is not an adequate justification for the shortcomings of the present facilities and procedures. It is therefore recommended that a review be undertaken of the coal testing facilities and procedures required by the overall coal exploration and development program and corrective action be formulated to provide adequate facilities and satisfactory procedures for coal testing, including, if necessary, short term international assistance to overcome the shortfall in present domestic capabilities.

16 III. COAL PRODUCTION A. Production Performance 3.01 From 1950/ /81, coal production in India increased from 35.0 million tons to million tons. Production has been largely from underground mines, but the proportion of open pit production, which generally offers lower costs and greater potential for large scale production than underground mining, increased from 13.7% to 37.4% over the period. India--Annual Coal Production by Mining Method 1950/ /8i (million tons) Average Annual Growth Rate % 1950/ / /81 /a 50/51 69/70 mill. t % mill. t % mill. t % -69/70-80/81 Underground Open Pit Total /a estimated. Sources: Statistics of Mines in India, Vol. I, Coal; Department of Coal The increase in open pit production was much larger for CCL than any of the other producers. In 1980/81, open pit operations accounted for 74% of CCL's production but only 22-30% for the other producers as shown below: India--Mix of Underground/Open-Pit Mining Production 1980/81 (million tons) Underground Open Pit Production Production Total mill. t % mill. t % mill. t X BCCL CCL ECL WCL NEC Total CIL SCL TISCO/IISCO Total India Source: CIL Annual Report, 1980/81; Department of Coal.

17 CIL presently accounts for about 89% of total production, the remainder being provided by SCL (9%) and TISCO/IISCO (3%). In the late 1970s, production increased steadily for CCL, WCL and SCL, but declined for TISCO/IISCO and ECL as follows: India--Coal Production Trends 1975/ / / /81 Annual Average Growth (%) mill. t % mill. t % 1975/ /81 BCCL CCL ECL (2.81) WCL NEC Sub-Total CIL SCL TISCO/IISCO Total Source: CIL Annual Report 1980/ The production decline in BCCL and ECL was due to a variety of factors including difficult geological conditions, power shortages and labor unrest. These two producers operate mines located in the older coalfields in Bihar and West Bengal. Over 74% of their production is from underground mines and less than 26% from open pit mines. Physical, geological and mining conditions in these fields are among the most difficult in India. Mining operations have been disrupted in recent years by severe rains and floods, and by power and explosive shortages. Labor relationships are poor and there is a long history of labor unrest and law and order problems. Strikes and absenteeism have been especially severe in recent years. CIL estimates that these various factors resulted in a loss of production of over 10 million tons for these two companies in 1980/81, including 5.4 million tons due to power outages and 4.4 million tons due to absenteeism. A program of installing captive, small (20-40 MW) minesite generating units has been proposed to deal with the power shortages and attempts are being made to improve labor relations and reduce absenteeism and strikes. In view of the importance of these factors for production performance it is recommended that high priority be given to the provision of adequate power supplies and to identifying and implementing measures to reduce absenteeism and strikes About 22% of CIL's production is coking coal. The remainder is thermal coal. BCCL is the only CIL source of prime coking coal; CCL is the major source of medium coking coals and ECL and WCL are the largest suppliers of superior non-coking coals, as shown below:

18 CIL--Coal Production by Grade-1980/81 /a (million tons) ECL BCCL CCL WCL TOTAL _ Prime Coking Medium Coking Semi-Coking Superior Non-Coking /b /a 43.9 Inferior Non-Coking /c Total /a /a Includes 0.61 million tons from NEC, all of which was superior non-coking coal. lb less than 24% ash /c more than 24% ash Source: CIL Annual Report, 1980/81. B. Underground Mining 3.06 Underground mining accounted for 63% of Indian coal production in 1980/81. Compared to the major underground coal producing countries in the world, the degree of mechanization in Indian underground coal mines is very low. CIL estimates that over 96% of underground mining in India is by manual room (bord) and pillar methods and less than 4% by mechanized methods. The manual techniques involve loosening coal at the face by hand-picking or drilling/blasting. Loading of the coal is by hand into baskets which are carried to small ( ton) mine cars. Only 1.2% of underground coal mining is by mechanized room and pillar, involving solid blasting or blasting after undercutting the coal, with loading by gathering arm loader, bucket loader or scraper loader. Underground extraction by longwall presently accounts for less than 2.5% of production. Some of the longwalls are supported by hydraulic or friction props with link bars and the coal loosened by solid blasting. Other longwalls are similarly supported, but have mechanized coal extraction by shearer. Only two longwalls (both at Monadih), are equipped with selfadvancing powered supports. These have yet to become fully operational due to various difficulties, including long delayed delivery of ventilation equipment and inadequate roadway development work. Improvement is expected following the introduction of new roadheaders. Coal loading on longwalls is either directly by shearer or by hand shovel onto a face conveyor. Underground transportation is predominantly by rope haulage either direct or endless rope. The use of belt conveyors is slowly increasing. Coal is brought to the surface either via shafts (40%) or cross-measure drifts (60%). Access via "in-seam" drivage is rare The Indian coal producers are faced by difficult geological conditions for underground mining including sandstone roofs, thick seams, spontaneous combustion and gassiness. There are no ready solutions to the mining difficulties resulting from these conditions and research is needed or is being undertaken to find solutions. The India coal strata consist of 75% sandstones and

19 % shales. The high proportion of sandstone makes the roofs very hard to cave when extracting the coal. If the roofs cannot be caved, either the coal that is removed must be replaced by some other material, generally sand (known as sand stowing) or else coal exploitation will be severely limited. But the stowing process is slow and expensive and large quantities of sand are required Roof caving difficulties are compounded since over 60% (67.2 billion tons) of India's coal reserves are in seams of four meters or more thick, often in multi-seam formation. Such thicknesses make total extraction extremely difficult and costly using conventional mining methods. Hydraulic mining, using high pressure water jets, has been successfully applied in Canada and the USSR, but the general hardness of India's coal appears to preclude the method other than in isolated cases. Alternative experimental approaches such as the French "souterrage" and Japanese "multi-lift" longwall systems for thick coal seam recovery have not generally been operationally able to meet projected production and productivity levels and have been variable in their predictability in those respects The mining of the thick seams by room and pillar methods has resulted in coal seams being "honeycombed." There is an estimated 3 billion tons of coal left standing in pillars. At this time, no known practical technology exists for recovering such pillars. Given the high density, up to 26 seams within the coal bearing strata, the coal in the pillars must be totally extracted, either with complete caving or by being solidly stowed with sand or other inert material, in order to avoid subsequent difficulties of mining in overlying and underlying coal seams. With the strong, difficult-to-cave, sandstone roofs, complete caving is not practical and the stowing method is necessary Much of the coal in India's reserve base is prone to spontaneous combustion. Partial extraction methods and leaving coal in the goaf greatly increase the risk of heating and eventual fire. Spontaneous combustion is a major problem in thick seam mining and can preclude the use of multi-lift longwall as the extraction method. An associated problem is that some seams are very gassy. There are currently twenty Indian mines yielding in excess of ten cubic meters of methane per ton of coal mined and this number can be expected to increase as the deeper measures are penetrated. Such mines require careful attention to assure the safety of operations CMPDI is conducting in-mine demonstrations and trials into several of these problems. Current research includes field study of strata behavior, surface subsidence effects, roof and floor convergence and the behavior of roof supports in known conditions. Laboratory work includes the study of rock behavior in scale models. Caveability of the strata is being observed on all the existing (20 or so) longwall faces and work is proceeding on developing a "caveability" index which it is hoped will better determine support requirements for longwall faces. The Central Mine Research Station (CMRS) in Dhanbad, a research body which is responsible to the Council of Scientific and Industrial Research, also conducts research and development into problems of health, safety and mining technology, including problems of rock mechanics, caving, spontaneous combustion, gas detection and roof control. Much of the work of CMRS consists of approval testing of equipment and explosives (often

20 duplicating testing already done overseas) and developing items such as mechanical props, ropes, chains, switchgear, etc., for eventual manufacture in India. While there is the usual dedication found in such establishments, the work is being done largely in isolation from the producing sector of the industry and thus is not necessarily addressing the most important issues. It is recommended that linkages be improved between the coal industry and CMRS so that CMRS priorities are more closely related to important operating issues, such as improving underground extraction techniques for thick seams, de-pillaring, sandstone roofs, caveability, spontaneous combustion and de-gassing. CMRS and industry officials need to keep abreast of worldwide technology in order to avoid duplication of research effort. C. Open Pit Mining 1. Mining Methods 3.12 Open pit mining accounted for about 37% of Indian coal production in 1980/81. The extent of mechanization in coal open pits in India is high. Mechanized excavation of coal is undertaken by shovel and dump truck almost without exception. Overburden removal in 1979/80 was 87% by shovel/dump truck and 13% by dragline. Locally, and particularly in ECL where surface unconsolidated deposits are thick enough, scrapers are utilized to remove this surface material. Due to the hardness of the strata no overburden is removable without blasting and no conditions suitable for excavation by bucket wheel excavators were observed. 1/ Over 70% qf shovels in use are 4.6 m Russian electric shovels. There are also 8 m shovels which are matched with 35 ton and 50 ton diesel dump trucks respectively. These units, which are mostly imported from the USSR or are manufactured in India based on the USSR design, are smaller than equipment in general use in industrialized countries or in Indian iron ore mining where 19 cubic yard shovels and 120 ton dump trucks are used. Draglines in use include relaiively old, smaller units. 3 Recent additions to the dragline fleet are 10 m bucket/60 m boom and 15 m bucket/90 m boom. Mines are presently being planned which will utilize largsr sized equipment including shovels in the m range, draglines with 24 m bucket/90 m boom and dump trucks of 85 tons and larger. Ancillary operations are undertaken by 220 and 275 HP bulldozers, and drills in use for blast holes are 160 mm (coal) and 250 mm (overburden) The majority of open pit mines operate a 3-shift, 6-day/week, 300 days per year, but a few still work a 2-shift system. For planning, 4176 hours (58% of available hours) are assumed annually for a 3-shift system, which is supported by open pit experience in India. These operating hours are somewhat lower than those found for similar operations in industrialized countries where effective operating hours would typically be in the range of hours annually. Factors affecting equipment availability are discussed in paras / Bucket wheel excavations are used at Neyvelli Mines, where about 3 million tons lignite was extracted in 1980/81. As noted in footnote, page 1, lignite was not included in this study.

21 Production from the principal excavating items is assumed, for planning purposes, as follows: Annual Overburden Removal of Shovels and Draglines (million bank cubic meters) Shovel Overburden Removal 4.6 m m 1.20 Dragline 10 m3/60 m m3/60 m m /60 m 3.60 Source: CIL The production estimates for the shovels are representative of outputs from shovels in other countries, operating in comparable physical/geological environments, but the dragline production estimates are somewhat lower than other countries--partly because of a high degree of re-handling operations, as discussed in the next section. 2. Operational Issues (a) Dragline Re-handling 3.15 At certain open pit operations, dragline boom lengths do not enable direct casting to be achieved, and a degree of re-handling is necessary, either by re-positioning the dragline, or by utilizing another dragline or draglines in tandem. Taking this concept to its limit, draglines working in tandem can, by intermediate re-positioning of one or more of the draglines, cope with overburden removal in multi-seam operations. This is being undertaken at Umrer mine in WCL, for example. As the percentage of re-handled overburden and the time lost in re-positioning drag lines increases, so the economic advantage of dragline systems vis-a-vis truck and shovel systems is reduced. Economic reviews by CMPDI have shown that draglines still maintain cost advantages over truck/shovel operations, even up to 70% re-handling. Detailed analysis of the basis and assumptions of these calculations was not undertaken by the mission. Caution is necessary with dragline systems that involve intermediate re-casting of over-burden over coaling faces. In order to ensure the most economic operation of draglines, it is recommended that an in-depth technical/economic/ financial review be undertaken of dragline versus truck/shovel mining methods relative to overburden removal by multi-handling dragline operation and that sensitivity analyses be made of the effect of a major breakdown of any particular dragline on the relative economics of the different types of excavating equipment.

22 (b) Equipment Availability and Utilization 3.16 Equipment availability factors vary between CIL operating companies and are generally below international standards particularly with respect to dump trucks. This latter fact is attributed to difficulties in obtaining spare parts and relatively long downtime periods for repair and maintenance. Poor haul road maintenance is also a contributing factor--graders are notable in their absence. In order to improve dump truck availability, it is recommended that greater effort be placed on the haul road preparation and maintenance by the utilization of graders. At certain mines, fragmentation after blasting is not ideal and is a matter of experimentation with a consequent reduction in shovel utilization. Present practices lean to heavily charged, larger diameter holes at relatively wide centers. It is recommended that studies be undertaken of the relative economics of smaller diameter, lower charged holes at closer centers to identify possible fragmentation improvement that may lead to improvements in shovel/dump truck utilization The Government has an established policy of encouraging indigenous manufacture of heavy earth-moving and other mining equipment with close foreign collaboration. A table of equipment items, indigenous manufacturers and collaborating companies is given in Annex 3-1. In addition, certain items are imported, such as draglines, ton djmp trucks that are beyond the present domestic manufacturing capacity, 8 m shovels (from USSR) and 250 mm overburden drill rigs (from USSR) The standard of manufacture of mining equipment in use in India is reported to be high and spare parts for routine and preventive maintenance are available. But it is reported that, due to heavy demands for more equipment, indigenous manufacturers are giving attention to increasing capacity for manufacturing original equipment at the expense of having adequate spare parts stocks. In order to ensure an adequate supply of spare parts, it is recommended that the forecasting of spare part requirements be improved and that there be greater coordination between CIL, the equipment manufacturers and the Government regarding the provision of adequate spare parts supply There is also a serious problem of imported spare parts availability especially for engine and transmission parts for dump trucks manufactured under license from WABCO by the Bharat Earth Movers Limited (BEML). These dump trucks have engines and transmissions manufactured by Cummins and Allison respectively, from whom spare parts must be obtained directly. Despite importing extensive quantities of heavy earth-moving machinery, CIL seems to have little bargaining power with overseas manufacturers for better representation and spare parts availability. BEML are either unable, or are not giving enough attention, to placing pressure on WABCO (and thus Cummins and Allison) for better representation and spare parts availability in India. As both Cummins and Allison tend to be "dealer oriented" (i.e., tend to react only when a dealer applies pressure for supplies and spare parts), it is recommended that BEML, the Government and CIL should strongly press Cummins and Allison regarding adequate availability of imported equipment and spares and also give consideration to setting up bonded warehouses in India rather than Singapore which is presently used.

23 D. Coal Beneficiation 3.20 Indian coals exhibit relatively high ash contents. Slightly over half of Indian thermal coal production has an ash content of more than 24% and coking coal production is almost evenly split between prime coking coal with up to 18% ash content and medium coking coal with 18-35% ash content. At present, coal beneficiation is limited to the washing of coking coals and some hand deshaling of non-coking coals. In future, plant requirements may necessitate a careful examination of the economics of washing non-coking coals, especially for super thermal power plants. 1. Coking Coal 3.21 The washeries generally produce three products: clean coking coal, middlings and rejects. The clean coking coal has an ash content reduced to levels (16-18%) acceptable to the steel industry; middlings, although high in ash and moisture, are fed to power stations; and rejects are discarded Total washery capacity is million tons per year run of mine (ROM) coal of which only 0.40 million tons are used for non-coking coal. Of the coking washery capacity, million tons are owned and operated by the subsidiaries of CIL (6 prime coking coal washeries of million tons capacity under BCCL and 4 medium coking coal washeries with 9.31 million tons capacity with CCL). The steel plants themselves account for the balance of 5.88 million tons of capacity (4 washeries). One more washery is operated at Durgapur for the merchant coke ovens It is a matter of growing concern that washery performance in terms of capacity utilization, yield and production of clean coal in the recent past has deteriorated as shown below and Annex 3-2. CIL - Washeries Selected Indicators 1976/ / / /80 I. Production (clean coal in m tons) II. Utilization of Capacity (ROM coal as % rated capacity) III. Yield (washed coal as % of raw coal) Source: CIL. The factors contributing to a decline in the production of clean coal were twofold. In the first instance, washery operations as reflected in fast declining utilization ratios indicate a smaller throughput of raw coal. Since there is no evidence of any overall decline in the movement of raw coal to the washeries, the reduced throughput was a consequence of inadequate power

24 availability and frequent trippings in the Bengal-Bihar area. In fact, some of these washeries, particularly in BCCL, were operating at above 80% of the rated capacity in 1975/ /77, when power was available in adequate quantities. A second factor accounting for a further fall in the production of clean coal was the rapid deterioration in the feedstock quality itself with ash content increasing by 3-4% in some instances, resulting primarily from concentration of mining in certain coal seams in the Jharia coalfield in recent years. Increased ash content not only placed a higher load on the technological capacity of the washeries, reducing the recovery yield correspondingly; but also contributed to a higher ash content in washed coal of over 20% in most of the BCCL washeries. The rise in ash content is a matter of concern to the steel sector which is already blending low ash imported coking coal with domestic supplies in the ratio of 1:7 to keep the ash content within the acceptable margin of 20%. Quality of Raw Coal Feed and Washed Coal (measured in terms of % ash content) Washed Coal as Analyzed by Washery Raw Coal Feed to the Washeries Steel Plants 79/80 78/79 77/78 76/77 79/80 78/79 77/78 76/77 Dugda-I Dugda-II Bhojudih Patherdih Kargali Kathara Sawang Gidi Source: CIL At present, four additional coking coal washeries are under various stages of implementation. These are expected to contribute another 6.11 million tons to annual washery capacity. Three of these washeries are in medium grades--the Monidih washery with a capacity of 2 million tons per year would, however, be in prime coking coal grade. 2. Non-Coking Coal 3.25 Recent experience of the thermal power stations shows that the direct use of ROM coal feed has resulted in excessive wear and tear and damage to the entire mechanical system because of the high ash content and presence of abrasive naturals such as silica, alumina and pyrites. In particular, boiler pressure parts, fuel piping and induced draft fans have been affected. Furthermore, with the gradual depletion of the higher grade reserves and the rapid expansion of thermal power generation which will utilize low grade coals, it is evident that future increases in output would be predominantly in inferior grades. The problem of deteriorating ROM coal

25 quality is accentuated by the choice of mining technique employed. Opencast mining with its accompanying problem of overburden removal invariably results in the extraction of some dirt and shale and seam partings together with the coal. With mechanization, this problem is increased, the average ROM product frequently has an ash content 3-5% higher than in the seams The question of benefication of non-coking coal has been engaging the attention of the government for some time. A working group consisting of representatives of Coal India Limited (CIL), Central Electricity Authority (CEA), Bharat Heavy Electricals Limited (BHEL) and the Ministry of Energy brought out a report titled "Study on the Techno-Economics of Beneficiation of Coal for Thermal Power Stations," March 1978, followed by another report (1980), jointly produced by the National Productivity Council and NTPC on "Cost Benefit Analysis for Use of Beneficiation Coal in Larger Thermal Power Stations." The broad conclusions were that beneficiation designed to reduce ash content from 40% to 26% would lead to substantial improvement in the operation and maintenance of power stations There is at present only one operating washery for non-coking coal (Norozabad in WCL) with an annual capacity of 400 thousand tons of raw coal input. A larger washery with a capacity of 3 million tons has been planned for construction at Jhingurdah. In addition, 10 more washeries projects have been identified, which could provide another million tons of capacity Central Fuel Research Institute (CFRI) is responsible for coal core testing; research on resource quality; coal conversion; coal beneficiation; coal carbonization; coal combustion and gasification; catalysis and coal tar hydrocarbons; and coal science and products from coal. CFRI has investigated, on a pilot plant basis, improved technologies for upgrading coking coal yield from washeries on a two-product basis (coking coal and rejects); fluidized bed combustion of high ash coals as an alternative to beneficiation of non-coking coal; and mechanical de-shaling operations undertaken at certain mines. Action is being taken by CIL to analyze the pii.ot plant schemes and assess their industrial application, but so far no project reports with economic and financial analyses to consider future applications of coal beneficiation technology have been prepared. Due to the relatively limited indigenous coking coal supplies and the relatively high ash contents of non-coking coals, such applications are of importance for the future and it is recommended that CFRI's research program be thoroughly reviewed to identify further appropriate follow-up activities to the pilot plant schemes. E. Employment and Productivity 3.29 In 1980/81, the coal mining sector in India provided employment for an estimated 699,000 personnel, including about 614,000 at CIL and 65,000 at SCL, with an estimated output per manshift (OMS) for all India of 0.71 tons as shown below:

26 India--Coal Mining Employment and Productivity 1950/ / / /81 Production (million tons) Employment (thousands) Productivity (tons per manshift) Source: Statistics of Mines in India, Vol. I, Coal, 1976; CIL Annual Report 1980/ There were major differences in the output per manshift for the different companies in 1980/81. CCL and WCL had an OMS of 1.04 and 0.91 respectively, whereas it was only for ECL, NEC and BCCL as shown below: CIL--Comparison of Underground and Open-Pit Productivity 1980/81 by Company (tons per manshift) Underground Open Pit Average BCCL CCL ECL WCL NEC CIL Average Source: CIL Annual Reoort, 1980/81. BCCL, CCL and ECL all had OMS for underground operations around 0.5 for 1980/81. WCL had higher OMS of 0.75 which is largely attributable to a predominance of shallow drift mines, as opposed to deeper shaft mines for the other companies, and to a lower degree of power interruptions and labor unrest The low OMS figures for ECL and BCCL partly reflect over-manning due to difficulties in laying off excess workers because of strong opposition from the labor unions to redundancies and also because of a long established practice, especially in Bihar and West Bengal, of providing employment as a condition of land acquisition for coal mining purposes. When land is acquired for coal mining in these states, employment for the displaced families/previous owners, averaging one job per acre, is necessary as part of the compensation There is a wide range of productivity variation within each company and even within individual mining areas. For example, in 1977/78, the OMS for ECL underground mines had variations in the range of , with 70%

27 of the mines in the range of In view of the range of these figures, it is recommended that minimum labor efficiency standards be established for different mining areas and improvements be undertaken at below standard mines to bring them up to the minimum standards Underground coal mine productivity levels in India are low by international standards and reflect the absence in India of highly mechanized operations. In European coalfields, underground coal mining productivity levels (in tons per manshift) are typified by France and Germany (2.8), Poland (3.0) and the United Kingdom ( ). In the USA, Australia and South Africa, underground coal mine productivities would typically be in the range of 8-12 tons per manshift because of advantageous physical/geological environments, particularly suited for low manpower, and highly mechanized room and pillar, continuous miner operations, which yield maximum equipment productivity. Future mechanization in India, in both room and pillar and longwall operations, will lead to productivity increases, probably approaching European standards. However, because of the relatively low cost of labor in India, the economic incentives to replace labor with capital are lower and it cannot be expected that Indian underground mining operations will achieve the same productivities as European Present day productivity in Indian open pit coal mines is low by any standards. Productivities for future larger scale open pit with some standardization on larger equipment sizes show healthy increases toward 10 tons per manshift, but even so are still lower than truck/shovel productivities in industrialized countries where tons per manshift is common. In large lignite open pits in Europe, 50 tons per manshift might be exceeded. F. Operating Costs 3.35 CIL's average cash operating costs per ton increased from Rs 67.4 per ton in 1976/77 to Rs per ton in 1980/81. The increases were almost double for ECL and BCCL vis-a-vis CCL and WCL, as a result of which ECL and BCCL had cash operating costs in 1980/81 nearly 50% higher than CCL and WCL. CIL--Increase in Unit Cash Operating Costs by Company 1976/ /81 /a (Rs per ton) 1976/ /81 increase BCCL CCL ECL WCL NEC CIL (Average) /a Includes salaries and wages, overheads, stores, etc.; excludes all financial charges. Source: CIL Headquarters.

28 Labor is a critical element of CIL's operating cost, accounting for nearly 70%, as shown below: CIL--Breakdown of Cash Operating Costs 1980/ /81 Rs per ton % Salaries and wages Overheads Stores Power Transportation of coal and sand Other costs less misc. receipts Total Operating Costs Source: CIL Headquarters Labor costs per ton of production for BCCL and ECL are nearly double those of CCL and WCL as shown below: CIL--Productivity and Labor Costs by Company 1980/81 OMS 1980/81 (tons per manshift) Labor Costs (Rs per ton) BCCL CCL ECL WCL Source: CIL Headquarters The wage rates are broadly similar between the companies, indicating that the cost differences are the result of the different mining conditions and operating efficiencies. While some improvement in the costs for ECL and BCCL can be expected, to the extent that power supplies might improve and absenteeism can be reduced, it must be expected that they will continue to be higher than CCL, due to a much lower proportion of open pit mining, and higher than WCL, due to more difficult geological conditions and over-manning problems In WCL, including financial charges for depreciation and interest, production costs for open pit mines vary from less than Rs 40 per ton for the most highly mechanized mines with low stripping ratios to Rs 80 per ton or above for manual mines. The range of costs for mechanized mines depends

29 on whether the operations are single seam or double seam, the overburden/coal ratio and the age of the shovels and dumpers--some equipment is 20 years old and operates at only 50% of the availability of newer equipment. Production costs (including financial charges) for underground mines vary from Rs 80 per ton for mines which are either very shallow or which have high mechanization of coal mining and underground coal haulage, to Rs 200 per ton or more for manual mines with a very low OMS ( tons per manshift) with difficult mining conditions, power interruptions, labor unrest and highly labor intensive coal handling from the face to the surface The significant cost advantages of open pit mining vis-a-vis underground mining are illustrated by the table below, which also indicates the very wide cost range that occurs for underground mines within an individual company and its various mining regions. WCL--Comparison of Open Pit and Underground Production Costs for May-September 1980 Area Open Pit Number of Mines Underground Number of Mines (Rs per ton) (Rs per ton) Nagpur Wardha Korba Pathakhera Pench Kanhan Ib Valley Jhahrakhand Bisrampur Kurasia Sohagpur WCL Range Source: WCL Given the nature of mining operations, a broad distribution of unit costs between different mines is to be expected. However, the range of costs in the table above is far greater than might reasonably be expected and action is needed to bring the highest cost mines more in line with the other mines. It should be noted that although table is for WCL only, there is little doubt that this situation exists for the other producers as well.

30 IV. TRANSPORTATION A. Recent Trends in Rail and Road Traffic and Loadings 4.01 In India, coal is transported primarily by rail (70%), followed by roadways (25%) and, to a very limited extent, by coastal barges and ropeways. Since major coalfields are concentrated in the central and eastern part of the country, coal has to be transported long distances for many consumers. In 1980/81, the average traffic haulage distance for coal was 566 km. The coal demand for the southern states is met almost entirely from the Singareni coalfields of Andhra Pradesh, while Coal India meets the demand of the rest of the country. Coal producers in India are only responsible for the transportation of coal from the collieries to the sidings. The railways and road transporters assume the responsibility of transportation and delivery of coal to consumers after loading In the past eight years originating freight traffic of the Indian railways accounting for coal and coal products has generally been in the region of 34-35% of the total commodity freight traffic moved by the railways. In absolute terms, coal tonnage moved by the railways increased steadily from 62.1 million tons in 1973/74 to 83.9 million tons in 1977/78. Thereafter, a downward trend began, with tonnage moved declining to 77.9 million tons by 1978/79 and further declining to 75.9 million tons in 1979/80. Due to improvements in wagon loading in the second half of 1980/81, tonnage moved increased to about 78 million tons, but this was considerably lower than the requirement of 84.5 million tons for the year. About 30% of the projected coal traffic in 1980/81 would be for the power sector, and this share is expected to increase to 40% by 1984/85. Movement of coal for the steel plants and railways each constituted about 20% of the total movement in coal as shown below: India--Coal Traffic by Railways 1973/ /81 (million tons) Power Total Total Coal Share Steel Houses & Coal Railway of Total Actuals Plants Washeries Railways Others Traffic Traffic Traffic (%) 1973/ / / / / / / /81 /a /a Provisional Source: Department of Coal Underlying the recent decline in coal traffic is a similar decline in wagon loading. At an all-india level, the daily wagon loading rate increased from 9,277 wagons in 1975/76 to 9,731 wagons in 1977/78. In the next two

31 years the loading rate declined sharply from 9,025 wagons in 1978/79 to 8,721 in 1979/80. During 1980/81 daily wagon loadings showed a moderate recovery and reached 8,915. Available data for the first six months of 1981/82 indicate that the 1980/81 levels are being sustained. India--Daily Coal Wagon Loading (Wagons per day) 1975/ / / / / /81 All-India 9,277 9,448 9,731 9,025 8,721 8,915 SCL & Others 1,320 1,278 1,352 1,485 1,561 1,507 CIL 7,957 8,170 8,379 7,540 7,160 7,308 of which ECL 2,254 2,311 2,281 1,832 1,642 1,695 BCCL 2,168 2,354 2,426 2,118 1,947 1,855 CCL 1,623 1,660 1,706 1,672 1,646 1,769 WCL 1,860 1,791 1,909 1,863 1,882 1,941 NEC Source: Department of Coal The decline in loading rates reflected the reduced availability of railway wagons, on the one hand, and increased detentions, on the other. 1/ Detentions for CIL alone increased from 861 wagons in 1976/77 to 1,020 wagons in 1977/78 and 1,091 wagons in 1978/79. Detentions have been subsequently reduced to 808 in 1980/81. For CIL, the highest detentions occurred in BCCL as follows: CIL--Detentions of Wagons (Wagons) 1975/ / / / /81 ECL BCCL CCL WCL Total CIL 861 1,021 l, Source: Department of Coal. 1/ Detention is described as the process of keeping wagons in the railway sidings for a longer period than scheduled. It occurs in situations where the collieries are unable to load the rakes within the prescribed free loading time so that the pilot guard leaves the rake behind, marking the wagons as "detained," returning only for the next scheduled visit. It also occurs when a rake arrives at a siding with insufficient coal so that it has to be left behind until such time that coal arrives and is loaded.

32 Loading statistics indicate that--with the possible exception of power and railways--almost every major consuming sector suffered. Even in the power sector, the scale of loading was insufficient compared to its requirements, particularly for newly installed capacity in the western region. India--Railways Sector-wide Loading (Figures in four-wheeler wagons/day) Sector 1976/ / / / /81 Steel (including 2,490 2,538 2,406 2,335 2,307 washeries) Power Houses 2,441 2,545 2,583 2,871 3,253 Loco 1,591 1,612 1,481 1,498 1,445 Soft Coke Hard Coke Brick Burning Cement Textiles Others 1,436 1,491 1,406 1,180 1,091 Total 9,448 9,731 9,025 8,721 8,915 Source: Department of Coal The deterioration in the railways' performance affected CIL more harshly than the SCL mines. Dispatches from the subsidiaries of CIL accounted for about 84% of the total all-india dispatches. In absolute terms, the volume of coal moved from the coalfields of CIL declined from million tons in 1977/78 to million tons in 1980/81. The share of rail transport, accordingly, fell from 76% in 1975/76 to 74% in 1977/78 and 63% in 1980/81. Tonnage moved by road increased from million tons in 1975/76 to million tons by 1977/78 and million in 1980/81. Road transportation contributed to 29% of the total dispatches from CIL in 1980/81 compared to 18% in 1975/76. The balance of 8% came from beltways, ropeways, etc. India--Dispatches of Raw Coal and Coke (in million tons) 1975/ / / / / /81 All-India CIL of which (rail) (59.81) (61.60) (63.03) (57.31) (54.83) (56.35) (road) (13.38) (13.23) (16.36) (18.05) (23.33) (26.04) (belt) ( 1.25) ( 1.39) ( 1.39) ( 1.53) ( 1.53) ( 2.05) (ropeways) ( 1.87) ( 2.13) ( 1.96) ( 2.19) ( 2.43) ( 2.72) (other) ( 1.69) ( 1.94) ( 1.98) ( 2.21) ( 2.11) ( 1.94) Soturce: Department of Coal.

33 The growing importance of road transportation in the movement of coal and other associated products such as washed coal, hard coke and middlings, was equally evident in the years 1976/77 to 1979/80. Road dispatches of washed coal doubled to a level of 79,000 tons (i.e., over 10% of the total dispatches) in 1979/80 and declined slightl-y' to 76,000 in 1980/81. -Inc-reases of a higher magnitude occurred in road dispatches of hard coke and middlings. CIL--Dispatches by Road 1976/ /80 ('000 tons) 1976/ / / / /81 Washed Coal Soft Coke 1,751 1,657 1,444 1,540 1,652 Hard Coke Middlings ,320 1,207 1,226 Raw Coal (CIL) 10,887 13,832 15,128 20,265 22,699 of which ECL (3,858) (3,991) (3,343) (3,785) (4,282) BCCL (3,005) (4,264) (4,622) (4,859) (5,332) CCL (2,004) (2,879) (3,953) (5,852) (6,643) WCL (1,872) (2,541) (3,062) (5,607) (6,250) NEC ( 148) ( 157) ( 148) ( 162) ( 192) Source: Department of Coal Within the subsidiaries of CIL, the increase in dispatches of raw coal by road was spread unevenly. In the CCL and WCL coalfields, which were making the highest contributions to output in the past few years, an almost threefold increase occurred in road dispatches. The combined share of these two companies in the total road dispatches of raw coal by CIL was 57% in 1980/81 as compared to 36% in 1976/77. B. Causes of Decline in Rail Shipments 4.09 The factors that have led to the coal transport bottleneck have been related to the overall deterioration in the performance of the Indian Railways, and certain loading difficulties on the part of the producers. Inadequate investment in rolling stock, adverse effects of changes in rail traffic patterns, work stoppages, declining productivity of railways staff, and law and order problems in the areas served by the Eastern Railways are among the reasons that have contributed to the drop in the Indian Railways' performance. Although some marked improvement has been noticed since the last quarter of 1980/81 due to the introduction of several innovations in operations and better labor relations, Indian Railways is unable to meet the demand for coal transport as evidenced by the continuing movement of coal by roads and rising pithead stocks Four areas deserve special attention: detentions, operational management of rolling stock, inadequacy of existing stock of wagons and pilot guards, and capacity constraints in terms of line saturation.

34 Detentions These result from difficulties associated with the loading of coal and inadequate coordination between the railways and the coal producers regarding the arrival of coal rakes (i.e. sets of coal wagons). The loading difficulties relate to labor factors and to internal transport difficulties at the collieries. The labor related factors include extent of dependence on mechanical loading, worker productivity, uneasy law and order which encourages absenteeism and limited daylight working hours at collieries. In recent years, mechanized loading has been introduced in the form of payloaders/mini coal handling plants (150 tons per hour) and coal handling plants of large capacity (600 tons per hour). WCL loading facilities are totally mechanized. CCL has some 80% mechanical loading and ECL and BCCL (non-coking) 35% and 25% respectively. Increased mechanization, combined with appropriate planning and management of coal loading operations, could considerably ease detentions by reducing the impact of low worker productivity, absenteeism and limited daylight working hours on loading efficiency at BCCL and ECL Mechanization of loading facilities presents a sociological problem in that manual labor is available for loading and becomes more readily available as additional manual labor is freed by increasing mechanization in mines. The objective of reaching production targets by mechanizing and coordinating facilities must be allowed to override sociological problems, otherwise the latter becomes responsible for the deficiency. The introduction of "merrygo-round" rail links for new super thermal power stations will demand high speed mechanized loading facilities. It is recommended that mechanized loading projects be planned and implemented as a matter of priority for existing loading points in ECL and BCCL and for all linkages to new super thermal power projects Detentions also occur due to the failure of the coal companies to transport adequate quantities of coal from the pitheads to the sidings where road transport is required. This movement is adversely affected by poor road condition within the collieries and intermittent shortages of diesel fuel. In order to minimize detentions due to shortages of coal at the sidings, it is recommended that roads linking collieries to railways be expanded and upgraded and measures taken to ensure that the fuel required is available. 2. Railways: Operational Shortcomings 4.14 The amount of time allowed by the railways for loading each rake ("free" loading) appears to be inadequate. With rationalization and larger yards, rake sizes have been steadily increasing, but railways have essentially kept loading times unchanged. At present, all four wheeler wagons supplied piecemeal or in rakes up to ten box wagons, are allowed five hours. A slightly greater time--6 hours--is allowed for rakes of boxes, and 8 hours for 20 boxes and above. The distribution is inequitable and with rationalization and increasing allotment of rakes of 20 boxes and above (up to 35 boxes) the rakes cannot be loaded in the allotted time. The problem is accentuated as the railways insist on detaining a full rake unless all the boxes are loaded. "Free" loading time is not extended if defective wagons, needing repair are supplied, or dirty wagons arrive which require cleaning by the colliery staff.

35 Detentions also occur in the absence of a specific schedule for supplies of wagons. Wagons can be supplied at any time between 6 a.m. and 10 p.m. There is no assurance that wagons will be supplied at least once a day. After a lapse of two to three days--when workers may be waiting --three rakes might arrive in succession, overstretching loading facilities with consequent detentions. Covered wagons periodically arrive at sidings which are mechanized. Furthermore, failure in supplying wagons in the sequence of steam and slack, as required by the screening plants of the collieries, leads to unavoidable detentions. Improved coordination between the railways and the collieries and resolution of conflicts in operational rules is crucial to easing the problem of wagon detentions Changes in the pattern of traffic flow, increased traffic load, demoralization arising from the deterioration in the law and order situation and increasing "sickness" (breakdowns) of existing rolling stock appear to have contributed to declining managerial efficiency in the administration of rolling stock, and an increase in the average turn-around time of wagons from 13 days in 1976/77 to 16 days in 1980/ Factors contributing to increased traffic load stem largely from the structural changes which have occurred in the traffic flow pattern and, to some extent, can also be traced to the stress placed on the railways in 1977/78 during the dock worker strikes at Singareni, and the Bihar/Bengal floods. Other factors, more difficult to quantify, have been the overall slackening in discipline and demoralization in the management cadre of the railways, and increasing "sickness" of wagons. There is no firm estimate of the extent of sickness but it is generally reported to be in the region of 10% of the rolling stock--almost twice the admissible limit. The causes of sickness are a deterioration in maintenance and shortage of spare parts. The railways attribute power shortages as the most important constraint in better functioning of maintenance workshops Limited accretions to rolling stocks over recent years have also contributed to inadequate availability of railway services. It is likely that severe shortfalls in rolling stock procurement will continue during the Sixth-Plan which envisages the acquisition of 780 new locomotives of various types, 5,680 coaches and 100,000 wagons. Meeting the full traffic demand by 1984/85 and starting to reduce the backlog of investment (retirement of overaged rolling stock, shop modernization, etc.), with an assumed level of efficiency as good as the best level achieved in the 1970s, would require about three times as many locomotives and coaches, and over two times as many wagons. Domestic wagon building capacity is estimated at 25,000 units per year. A full utilization of this capacity would produce enough wagons to meet the Plan target, but not enough to satisfy the demand forecast. In 1980/81, Indian Railways acquired 192 locomotives, 794 coaches and 12,064 wagons, all short of Plan targets except wagons. Although actual 1981/82 figures are not available, estimates indicate that acquisitions will meet the Plan targets. But unless annual allocations are increased to compensate for cost escalation, meeting the Plan targets will be increasingly difficult. As Plan targets themselves are below estimated requirements, these shortfalls would imply a worsening of capacity shortages, and through a failure to replace and modernize the aged or outdated assets, would limit the scope for future efficiency improvements.

36 - 30n 4. Capacity Constraints 4.19 Evidence of capacity constraints in terms of line saturation is more difficult to establish. However, such constraints are clearly anticipated in the near future as traffic increases to projected levels and additions are made to rolling stocks. Several sections have been identified where capacity constraints could pose serious transportation difficulties. Traffic projections indicate that substantial increases will be required in the railway infrastructure (loading facilities at sidings, pilot and yard facilities, line capacities, etc.) in the Bengal/Bihar fields. New line capacities would also have to be established to carry more coal out of the Bengal/Bihar fields. The construction of the Raniganj-Bankura Branch line would allow for greater movement to the south and east via Kharagpur, since the existing route has reached saturation limits. Similarly, capacity would have to be augmented in the line between Singrauli and Katni to allow for the westward movement of Singrauli coal; the facilities at the Katni junction would also require strengthening. At a modest estimate, an additional 100 km of new railway lines are required to be constructed in 6 sections to establish major linkages between developing coal mines and power plants. These include linking the Karola Road to Jayant (39 km), Hirdagarh to Damua, Chainpur to Pindra (20 km) and Mohuamilan to Pinderkom block (16 km). C. Institutional Linkages Between Coal and the Railway Industry 4.20 Apart from the Standing Linkage Committees for cement and steel, there are virtually no institutional linkages between the two mammoth public sector organizations, one of which has a virtual monopoly in production and the other in the bulk of distribution. The railways appear to lhave overriding authority in determining the priority in movement to consumers, and in this they are guided by the Railway's Rationalization Rules, which limit the choice of movement for the consumers. In this situation the producer companies are unable to assist consumers even in emergency cases where a factory is on the verge of closure. In recent years, however, the areas of conflict, particularly with regard to the Operational and Commercial Rules of the Railways, and also the need to ensure the coordinated development of new lines to be associated with mine planning in the interests of implementing new linkages, point out the need for closer institutional ties between the railways and the coal industry. Of course, in the past, committees on transportation have always taken into consideration the views of the coal producing companies on various matters affecting them. Thus, Coal India, as the major coal producing company, submitted separate memoranda both to the B.D. Pande Committee on National Transport Policy and to the Rail Tariff Enquiry Committee headed by H. K. Parajappe Apart from this, the major producing companies have, in the recent past, deputed marketing officers to maintain detailed liaison with the traffic superintendents of the railways concerned to ensure that offers are given to the railways at least three days in advance and are reprogrammed subsequently in the last 24 hours prior to allotment. In their dealings with the railways the colliery managers face certain problems of communication. One of the suggestions submitted to the National Transport Policy Committee was that Coal India should be permitted to share the telecommunication circuit specially set up by the railways, so that they could assist in the day-to-day operation of wagon allocation by indicating the collieries with adequate stocks, and the availability of labor at any given time.

37 D. Outlook for Rail Transport of Coal 4.22 Indian Railways' capacity to meet the future traffic demand will depend on the size of the future investment in railways and, to a larger extent, on improvements in operational efficiency. The Plan allocation for Railways is considerably higher than actual investment in , and represents a reversal of past trends. However, given the expected increase in demand for railway traffic and the backlog of replacement and modernization, it is to be expected that the Plan allocation of Rs 51 billion for will be insufficient. Major investment shortfalls are likely in areas of rolling stock, workshops and line capacity Among others, the most important steps to be taken to deal with the rail transport problems faced by the coal industry are: (a) introduction of a medium range locomotive; (b) arrangement for a study to improve terminal operation and techniques for handling bulk commodities; (c) financing of wheels and axles, and materials and components for construction of high capacity wagons for movement of coal; and (d) acquisition and installation of modern operating information system and telecommunication. The proposed improvements in the information and telecommunication system are estimated to have greater benefits for coal traffic than any other railway traffic, and the introduction of a medium range locomotive is primarily aimed at the railway's coalfield operations, which are greatly hampered by operation of steam traction on the so-called "coal pilots." 4.24 But these various improvement will require gestation periods of several years and progress is likely to be felt at the earliest by the second half of the 1980s--and only if strenuous efforts at addressing these various fronts are made simultaneously. In the absence of immediate possibilities for increased improvement in the performance of the railways, steps need to be taken in developing alternative means of coal transport (for example expanded coastal and river shipping), as well as in improving efficiency in transport of coal from collieries to sidings, loading and distribution. It is therefore recommended that there be a reassessment of the economic viability of other modes of coal transportation, especially coastal and river shipping and slurry pipelines A study was undertaken in 1976 to ascertain the feasibility of carrying coal from the Bengal-Bihar belt through Haldia port by sea to Madras, Tuticorin, Pondicherry, Bombay and Porbundar. At that time, the expansion of coastal shipping was rejected on the grounds that inland transport of coal was more economic. Given the current bottlenecks in the development of additional rail capacity and the growing cost of coal shortages to the economy in general, the coastal shipping alternative deserves further attention. In the area of inland transport, there is also some scope for movement by barges along the main riverways. With the development of the Rajmahal coalfields, movement along the Ganges up to Allahabad could be possible For the longer term, coal slurry pipelines are also a potentially important transportation alternative for large volumes of coal over long distances. The construction of a slurry pipeline from CCL coalfields to

38 Gujarat has engaged the serious attention of CIL and the GOI, and a project report has recently been prepared on the subject. However, apart from the question of economic justification, technical problems--as well as availability of water and power needed to move coal--will require further investigation The establishment of central coal stockpiles to cut down on the average railway traffic load for coal has been examined by the Government in the past and found favorable. However, not much headway was made, primarily due to the lack of a sponsor to push the projects. Neither the railways nor the coal companies have been anxious to undertake the ownership and management responsibilities. This is an area which warrants further study and closer cooperation between the coal producers, the railways and the Central and state governments Finally, given the existing bottlenecks in coal transport and the absence of an early solution to the bottlenecks, the spatial distribution of future thermal power, steel and cement plants will require greater scrutiny and planning than before to slow down the growth of coal transport demand.

39 V. COAL PRICES AND FINANCIAL PERFORMANCE A. Coal Price Structure 5.01 Coal prices have been administered by the Government since 1941, except for a seven year period between 1967 and In principle, the pithead price of coal has been based on industry-wide average cost of production and differentiated between grades of coal according to ash content or useful heat value. Since nationalization of non-coking coal mines in 1973, the coal prices have been revised on four occasions: (i) in April 1974, based on the recommendation of the Inter-Ministerial Committee (known as Fernandes Committee); (ii) in July 1975, based on the Interim Report of the Chakraborty Committee; (iii) in July 1979; and (iv) in February The Fernandes Committee price recommendations were based on average cost of production for the whole sector, excluding interest on debt, but including a 10% return on capital. The Government accepted the recommended price increase in April 1974, but rejected the proposed 10% return on capital from the average cost estimate. The Chakraborty Committee price recommendations (May 1975) were based on estimated average cost of production in 1975/76, excluding interest on short-term, non-plan loans (i.e., loans to cover losses), but allowing for return of 5% on equity. However, price revisions announced by the Government in July 1975 did not allow for return on equity as well as depreciation. Although price contingencies of Rs 1.21 to 1.49 per ton were built into the cost estimates for the fiscal year 1975/76, actual increase in production costs--mostly due to increases in dearness allowances--surpassed the price contingency even before the end of the year. The gap between average cost of production and price increased from Rs 10.2 per ton in 1976/77 to Rs 28.7 per ton in 1978/79. The July 1979 price revision was based on actual average cost of production for the fiscal year 1978/79 plus Re 1 per ton to cover likely increases in average cost of production during 1979/80. While price revision allowed for a 10% return on capital, Rs 2.87 per ton was deducted to reflect cost savings due to a moratorium on interest on non-plan loans. The February 1981 price adjustment raised non-coking coal prices between 20-30% and coking coal prices between 27-34%. This price increase aimed only at meeting the average operating cost of the sector plus depreciation and interest and did not provide for any significant return on capital. The CIL projections based on February 1981 price adjustment indicate a small surplus (Rs 406 million) over operating costs in fiscal 1981/82. However, a Rs million loss is estimated for 1982/83 unless a further price adjustment is made during the year As the foregoing review of past price adjustments indicates, coal prices have generally been set below average cost of production due to one or a combination of the following: (i) exclusion of return on capital and/or depreciation from average cost of production estimates; and (ii) inadequate allowance for increases in cost of inputs between price adjustments that varied from one to four years. This pricing policy coupled with the operating difficulties described in Chapter III, not unexpectedly, has led to large losses by CIL (para 5.12).

40 Coal prices at the pithead vary with quality. In the existing grading system, non-coking coal is divided into seven grades based on useful heat value. The useful heat value is derived from the gross calorific value determined in accordance with a prescribed formula where a penalty for different percentages of ash and moisture is imposed. The following Table lists the grading specifications and pithead prices fixed by the Department of Coal on February 14, 1981 which vary from Rs 48 per ton for lowest quality (1,300-2,400 kcal/kg) run-of-mine coal to Rs 168 per ton for highest quality (>6,200 kcal/kg) steam coal: India--Non-Coking Coal Pithead Prices Useful Heat Value Price per Ton (Rs) (kilo calories per Steam Coal Slack Coal Run of Mine Grade kilogram) and Rubble and Rubble Coal A >6, B 5,600-6, C 4,940-5, D 4,200-4, E 3,360-4, F 2,400-3, G 1,300-2, Note: (a) Useful Heat Value is defined by the following formula: HV = 8, (A+M) where HV = Useful Heat Value in Kcal/Kg, A = Ash content in % M, = Moisture content in %. (b) Pithead prices include loading and other handling costs. they are free on rail (FOR) prices. Therefore, Source: Department of Coal Coking coals are divided into two categories: coking and semicoking. Coking coal is further divided into six grades based on ash content varying from less than 15% to 35%. Semi-coking coals are "blendable" coking coals. They are divided into two grades based on percentage of ash content plus percentage of moisture content. Current pithead (i.e. unwashed coal) prices for different grades of coking coal varying from Rs 151 per ton for Washery Grade IV coking coal (28-35% ash) to Rs 193 for Steel Grade I coking coal (>15% ash) are shown in the following table:

41 India--Coking Coal Pithead Prices Price per Ton (Rs) Steam Coal Slack Run of Mine Grade % Ash Content and Rubble Coal Coal Steel Grade I < Steel Grade II Washery Grade I Washery Grade II Washery Grade III Washery Grade IV Semi-Coking Coal Pithead Prices Price per Ton (Rs) Steam Coal Slack Run of Mine Grade % Ash Content and Rubble Coal Coal Semi-coking I < Semi-coking II Source: Department of Coal Delivered price of coal to the consumer is determined by the pithead prices plus transportation, taxes and duties. Coal is transported long distances in India because coalfields are concentrated in the eastern part of the country. The average length of haul for non-coking coal delivered by rail is about 700 kilometers on which rail freight is around Rs 60 per ton. Therefore, the share of transportation cost in total delivered price of non-coking coal is generally high and could reach as much as 50%-80% for low grade steam coal at distances beyond 700 kilometers. Since major steel plants are located close to coalfields, the average length of haul for coking coal delivered by rail is much shorter. Due to constraints on existing lines, wagon shortages and an overall decline in the efficiency of railways, the share of road transport in total coal dispatches has increased rapidly from 18% in 1975/76 to 29% in 1980/81. Consumers relatively close to the coalfields are now willing to pay the current average road transport rate of Rs 2.5 per ton per kilometer to ensure adequate coal supplies Royalty payments, local cesses and excise duties add up to about Rs 9.76 per ton for non-coking and Rs per ton for coking coal. The relative shares of royalty, excise duty, local cesses and Central and State taxes in the delivered price of coal are given below:

42 India--Coal Taxes and Royalty Payments Royalty Payments /a Rs /ton Coal Mines Welfare Organization Cess Rescue Cess Stowing Excise Duty Non-coking coal Coking coal Sales Tax Central State Local Cesses /b Rs.75/ton Rs.03/ton Rs 1.65/ton Rs 2.40/ton 4% of pithead price 8% of pithead price 60% of royalty /a Royalty per ton of coal varies according to grade of coal. /b This is an average figure: Bihar, West Bengal, Orissa and Andhra Pradesh governments levy cesses varying from 40% to 100% of royalty per ton of coal. Madhya Pradesh and Maharashtra governments do not levy cesses. Source: CIL. B. The Relative Price of Coal 5.08 The movement of delive-red coal prices over time can be approximated by the Wholesale Price Index (WPI) of coal and analyzed by relating these prices to price movements in other fuels and non-primary goods as shown in the following table:

43 India--WPI of Coal, Electricity, Mineral Oils and Non-Primary Goods- (Index Units: 1970/71 = 100) WPI of WPI of Non- WPI of WPI of Mineral Primary Relative Coal Electricity Oils /b Goods /c Price of Coal (1) (2) (3) (4) (1)/(4) 1971/ / / / / / / / / / /a End of period figures. /b Includes kerosene, gasoline, diesel oil, aviation spirit, lubricating oil and furnace oil. /c Primary commodities are excluded in order to eliminate price fluctuations that may be attributable to weather conditions. Source: GOI, Central Statistical Organization While increases in coal prices were close to or below price increases in other primary fuels and overall inflation before 1975/76, coal prices have increased much faster than both electricity prices and overall inflation in the last five years. The increase in the relative price of coal is explained primarily by substantial improvements in wages after the nationalization of the sector, leading to a significant gap between the opportunity cost of mine labor and its average wage cost. Since the Indian coal mining is labor intensive--wages and salaries account for 67% of total costs of CIL--its impact on average cost of production and subsequent price increases has been substantial. The extensive reorganization and upgrading of coal mines and equipment immediately after nationalization has also escalated cost of production and contributed to the sharp price increase in 1975/ Despite the recent increase in the price of coal in India, Indian coal is priced well below coal traded internationally. Based on minehead prices plus estimated transportation and port costs, an estimated fob export price for Indian non-coking coal (6,200 kcal/kg 1/, 0.6% sulfur and 16% ash) would have been US$21.50 per ton in October 1979 and US$26.20 per ton following the price increase in February This price was somewhat lower in 1979 than prices for comparable quality coal from major exporters such as Australia, 1/ Equivalent to 11,200 btu/lb.

44 South Africa, Poland, and USA. Since 1979, the price differential has become very large due to rapid international coal price increases as shown below: International Spot Steam Coal Prices /a /b FOB Value Specifications (US$/metric ton) October June February March Country/Port Btu/lb Sulfur Ash Australia Newcastle/ Port Kembla 12,000 < Poland Gdansk/ Swinoujscie 11, /c /c South Africa Richards Bay 11, /c /c /c USA Baltimore 12, /c /a Price quotes are for spot sales, defined as single shipments or volumes to be delivered within one year. /b Slight variations in specification may occur. /c Contract quote Penalty/Premium Provision Btu/lb deviation: + or -30 to 50c per 100 Btu/lb of stated specs. Sulfur deviation: + or -30 to 80c per 0.1% sulfur of stated specs. Source: Coal Week, October 22, 1979 and June 23, Coal Week International, January 28, 1981 and March 3, C. Financial Performance 1. Financial Structure and Reporting 5.11 Each of the five major subsidiaries of CIL--(BCCL, CCL, ECL, WCL and CMPDI)--prepares its own audited annual income statements and balance sheets. Although these subsidiary companies are 100% owned by CIL, they are separate entities from a legal and taxation standpoint. Consequently, instead of producing a consolidated income statement and balance sheet, the audited CIL accounts include only the headquarters operations and the NEC operations. The CIL Financial Department provided summary Income Statements and Balance Sheets for the past five years for each company, i.e., from 1976/77 to 1980/81 as shown in Annexes 5-1 and 5-2. In addition, CIL prepares a combined income statement for all its subsidiary producing companies which broadly represents a consolidated income statement for the group as a whole--although it includes some intercompany charges and payments (Annex 5-3).

45 CIL Group Profitability 5.12 As a group of companies, CIL did not make an operating profit until 1980/81. For the five year period 1976/77 to 1980/81, the CIL group had cumulative operating losses of Rs 624 million and total losses of Rs 5,839 million, including interest and depreciation, as shown below: CIL--Selected Financial Indicators 1976/77 to 1980/81 (Rs Millions) 1976/ / / / /81 5 Year Total Total Revenues 5, , , , , ,431.9 Operating Costs 5, , , , , ,055.4 Operating Profits/Losses (90.6) (484.2) (1,216.7) (141.1) (1,026.9) (623.5) Depreciation ,713.0 Interest ,502.5 Profit/Loss (863.2) (1,377.8) (2,379.3) ( 881.7) (337.0) (5,839.0) Source: CIL Financial Statements 5.13 Sales realizations per ton of coal declined very slightly between 1976/ /79, whereas average operating costs increased by 19%. As a result, 1978/79 was the CIL group's worst financial year when there was an average loss of Rs 28.7 per ton. The CIL group's financial performance improved considerably in the following year--1979/80--as a result of a 50.2% increase in unit sales realizations, largely due to the May 1979 coal price increases (para 5.02). Even so, unit sales realizations still did not cover cash operating costs. The situation further improved in 1980/81 when total losses were reduced to Rs 3.6 per ton following a 19.8% increase in sales realization, as shown below: CIL--Average Loss Per Ton of Net Saleable Coal (Rs per ton) 1976/ / / / /81 Average Sales Realization Operating Costs Financial Charges /a Total Costs Average Loss Net Saleable Coal (Million Tons) /a Interest and Depreciation Source: CIL Financial Statements.

46 Financial Performance of Individual CIL Subsidiaries 5.14 CIL's losses were not distributed evenly between the various subsidiaries. Over the five year period, 1976/77 to 1980/81, BCCL and ECL accounted for almost all of CIL's cumulative losses as follows: CIL Subsidiaries--Cumulative Profits and Losses 1976/77 to 1980/81 (Rs Millions) Company 1976/77 to 1980/81 % BCCL (2,420.5) 39.4 CCL (13.8) ECL (3,573.9) 58.2 WCL ( 887.9) 14.4 NEC (115.9) 1.9 CMPDI 2.5 (0.1) CIL Group (6,145.2) Source: CIL Financial Statements 5.15 The price increases of May 1979 and February 1981 helped improve the financial performance of the four CIL subsidiaries but even so both CCL and ECL continue to suffer large losses as shown below: CIL--Selected Income Statement Items 1979/80 (Rs Millions) BCCL CCL ECL WCL NEC CIL Total Total Revenues 2, , , , ,300.3 Operating Costs 2, , , , ,273.4 Operating Profit/Loss (159.5) 1,314.6 (567.9) (8.8) 1,026.9 Interest Depreciation Profit/Loss (439.4) (912.0) (197.8) (17.1) (337.0) Source: CIL Financial Statements 5.16 The large losses of ECL and BCCL were the result of much higher operating costs than CCL or WCL. In 1980/81, BCCL and ECL each had cash operating expenses, excluding interest charges, of about Rs 136 and Rs 154 per ton, respectively, compared with about Rs 75 and Rs 88 per ton for CCL and WCL, respectively.

47 CIL Subsidiaries--Unit Revenues and Costs 1980/81 (Rs per ton) BCCL CCL ECL WCL NEC CIL Total Average Sales Realization Average Operating Expenses Operating Profit/Loss ( 7.9) 48.8 (27.0) 17.9 (14.6) 11.0 Source: Derived from CIL Financial Statements As discussed in detail in Section III (para 3.37), the major cause for the difference in operating costs lies in labor costs which were Rs 89.9 per ton and Rs per ton for BCCL and ECL respectively, compared with Rs 46.2 per ton and Rs 55.6 per ton for CCL and WCL (para 3.37). The higher labor costs for BCCL and ECL are due to differences in various factors including mining conditions, power availability, labor unrest and absenteeism. The differences in average sales realizations largely reflect the different grades of coal being produced by the various companies With the present pricing structure, CCL and WCL are both viable operations, although CCL is much more profitable because of higher grades of coal. For the future, as production expands and (especially for CCL) as the new open pit mines come into operation, their financial performance should further improve. But this is not so for BCCL and ECL. While some improvement may be expected in future to the extent that the labor absenteeism can be reduced and uninterrupted power supplies can be obtained, the geological conditions dictate that their production costs will continue to be substantially higher than CCL and WCL. Thus, unless the coal pricing system is adjusted to reflect their higher costs, BCCL and ECL will inevitably have a significantly poorer financial performance than CCL and WCL. D. Financial Position 1. CIL Financial Position 5.19 Because of the large operating losses of recent years, the CIL group of companies has been able to continue to operate only through the provision of otherwise unplanned Government funds to cover financial charges and losses. In the five years from 1976/77 to 1980/81, the Government provided Rs 16.8 billion to CIL of which Rs 4.6 billion was non-plan support as shown below to cover the financial gap due to previous losses.

48 CIL Holding Company--Sources and Uses of Funds 1976/77 to 1980/81 Sources Rs Million % Uses Rs Million % Payment to Commissioner of payments From Government: Loan Repayment Plan Support 11, to Government 2, Non-Plan Support 4, Interest payments Subsidy for sand to Government 1, stowing Total to Government 3, , Remittances to Sub- From bank-overdraft (158.6) (0.9) sidiary companies 12, Advance Equipment Total Sources 16, Purchases CIL Headquarters Operations Total Uses 16, Source: CIL Financial Statements Approximately half of the Plan support received from the Government was in the form of equity and half was loaned. All of the Non-Plan support was loaned. The Plan support of Rs 11.7 billion almost exactly matched the capital expenditures for the period. 2. CIL Subsidiary Companies - Financial Position 5.21 The Balance Sheets for the four major coal mining subsidiaries are summarized below 1/: 1/ Balance sheets are available for CIL and its subsidiaries for the financial year 1980/81 which ended March 31, 1981 as shown in Annex 5-2.

49 BCCL, CCL, ECL, WCL - Balance Sheets Selected Items at 3/31/81 (Rs Millions) ECL BCCL CCL WCL ASSETS Current Assets 1, , , ,195.6 Loans & Advances 1, , Net Fixed Assets 2, , , ,289.2 Total Assets 4, , , ,414.8 LIABILITIES Total Current Liabilities 1, , ,087.1 Debts to Government Debts to CIL & Subsidiaries 4, , , ,951.5 Debts to Bank & Other Total Debt 4, , , ,955.1 Share Capital 1, , , Reserve Accumulated Losses (3,606.0) (2,937.5) (781.0) (936.7) Total Equity (2,560.2) 1,266.2 (2,235.1) (627.4) Total Equity & Liabilities 4, , , ,414.8 Source: CIL Headquarters In aggregate, the balance sheets of these four subsidiaries represents an unsound financial picture with a negative equity situation, due to the accumulated losses exceeding the subscribed capital and reserves. The accumulated losses of the four CIL subsidiaries at March 31, 1981 were at Rs 6,699 million and the total debt of the companies at Rs 17,779 million As previously noted, however, balance sheets must be analyzed in the knowledge that coal prices have been set by the government in recent years at levels which have generally not been sufficient to cover the operating costs of the companies. Further, all of the funds provided by CIL to the subsidiaries for capital expenditures and to make good the losses have been passed on to the subsidiaries by CIL in the form of loans. Thus, the proportions of debt and equity of the subsidiaries are not very meaningful. In fact, the share capital and reserves of Rs 1.67 billion in BCCL and Rs 1.05 billion in CCL are the result of prior government equity in these two companies being transferred to CIL when the holding company was established, rather than by CIL passing on funds as equity.

50 E. Pricing Issues and Financial Outlook 1. Coal Pricing Policy 5.24 The basic economic principle for pricing energy products--or any product--is that its price should reflect its opportunity cost to the country. For tradeable fuels such as crude oil and coal, the international or border prices of the tradeables (i.e., cif price of imports or fob price of exports, with adjustments for internal transport and handling costs) are considered to be the efficient prices. The Indian coal is priced well below its border price value. As indicated in para 5.10, fob steam coal export prices are currently in the range of US$50-57 per ton. Taking into account variances in fob prices due to size and duration of contracts, a reasonable export price estimate for Indian coal would be US$50 per ton (for coal with 6,200 kcal/kg, 0.6% sulfur and 16% ash), which would be comparable to a minehead price of about US$45 per ton after adjustments for transportation and handling costs. By comparison such coal is priced at US$18.50 per ton (Rs 168 per ton--para 5.04). 1/ On the other hand, given the current shortage of coal, if Indian non-coking coal is assigned a shadow price equal to the cost of an alternative fuel, i.e., fuel oil, which is a substitute at the margin in the Indian economy, the difference between the current market price of coal in India and its efficient price is even larger. When corrected for the differences in heat content and efficiency of use (2 tons of coal equal to 1 ton of fuel oil) 2/ the cost of coal for steam raising would be approximately $37 at market prices compared with $194 for a ton of imported fuel oil. 3/ 5.25 However, an opportunity cost based on fuel oil prices is only relevant so long as coal is in short supply. In the long term, once the present coal production constraints are overcome and fuel oil is fully substituted by coal, it is to be expected that the marginal use for coal will be in the form of steam coal exports given the large coal reserves and the opportunity to expand coal transport and port capabilities. On the other hand, energy prices that meet the economic efficiency objectives generally require adjustments that take into account various financial (government revenue), social (income distribution), and political (energy self-sufficiency) objectives in different countries. In India, these considerations would argue against setting coal prices at parity with imported fuel oil price for several reasons. First, India is pursuing a policy to encourage substitution of coal for hydrocarbon fuels, more than 55% of which are currently imported, 4/ imposing a heavy burden on foreign exchange reserves. 5/ Second, there is a social long-term value 1/ On average, non-coking coal in India has a calorific value of 4,500-5,000 kcal/kg which, after adjustment for heating value and quality differences would indicate that the average economic value for non-coking coals would be in the range of US$30-35 per ton based on international prices. 2/ The calorific value of coal is taken as 5,000 kcal per kg and that of fuel oil as 10,000 kcal per kg. 3/ Average cif price of fuel oil imports during April-December / In 1981/82. 5/ In 1981/82, India's oil import bill constituted close to 70% of its total exports of merchandise.

51 to be attached to diversification away from hydrocarbon fuels where import dependence is high and the stability of supply sources is uncertain. Third, the current price differential between coal and imported oil is extremely large. Thus, the inflationary impact and the consequent social costs of basing prices on full opportunity cost would be unjustifiably high Subsidized coal prices are likely to discourage economy and efficiency in the use of coal. Given the current shortage of coal, as well as other energy resources, it is all the more important that coal prices signal correctly to consumers the real cost of fuel which they consume. Furthermore, subsidized coal prices put an additional burden on the limited financial resources of the Government. Today both the Central and State Governments are facing serious difficulties in financing the growing investment requirements of the energy sector, which constitute more than 27% of the Sixth Plan outlay. It will be increasingly difficult to meet the future investment requirements of the coal sector, as well as other energy producing enterprises, unless they are able to generate a substantial portion of their own resources for investment What then is a realistic coal pricing policy for India? Any coal pricing policy must ensure that three important concerns are addressed within the context of the Indian economy, as follows: (i) coal prices must correctly signal to users the value of the coal being consumed; (ii) (iii) coal prices must be suitable for making sound economic investment decisions; and coal prices must generate sufficient funds to facilitate efficient, cost-conscious operations for existing mines so that CIL and its subsidiary companies can operate in a financially viable manner. These various issues are addressed as follows: coal prices to consumers (para 5.28), coal prices for investment decisions (para 5.29), and coal prices to existing producers (paras 5.30 and 5.31). It is evident that prices which correctly signal the value of coal to consumers and investors will not necessarily be the same as those required for existing coal producers to be financially viable. There are a number of ways by which a coal pricing policy might be designed to overcome this problem. The following paragraphs present one approach, although other approaches are also possible. The approach considered by the mission is based on a two tier pricing system. Such a system would consist of a "consumer" price which would be paid by consumers and which would be used to evaluate investment decisions in new mines and a "producer" price which would be received by coal produers operating existing mines The mission would recommend that the pricing policy pursued in the petroleum sector, -- i.e., market prices approximating border prices -- should also be the guiding principle used to set prices to be paid by consumers and to be used for investment decisions in the coal sector. Such a "consumer" price for different grades of coking and thermal coal would be set at the

52 minehead, based on an estimated fob export value, less internal transportation and handling costs. Adjustments would be made for variations in heating value, sulfur and ash content in calculating the schedule for different grades of coal. Of course, the application of this principle would not necessarily require an exact correspondence between domestic coal prices and international prices at a particular point in time. Depending on careful technical evaluation of the qualitative characteristics of the Indian coal, short term fluctuations in world coal prices, overall energy demand management objectives, as well as other social and economic objectives, there could be variations from the border prices. Furthermore, since an immediate adjustment of coal prices to parity with international prices would entail a substantial increase in coal prices, a more realistic approach would be to spread the required price increases over the next three to four years. The case for not raising coal prices to border prices because of possible adverse effects on input costs of major consumers, and the concomitant impact on overall inflation, is a weak one in the Indian context. First, earlier studies have shown that the impact of relatively large increases in coal prices cause only marginal increases in the general price level. 1/ Second, while shifting to a pricing policy reflecting the full economic value of coal would involve substantial price increases during the 2-4 year transitional period, any price policy that does less than cover the costs of production and investment requirements may have a continuing inflationary effect by creating the need for deficit financing. Third, higher coal prices would help promote the current energy demand management objectives of the Government by encouraging greater economy and efficiency in consumption of coal. Since the price differentials between coal and its hydrocarbon substitutes are not likely to narrow significantly in the near future, the proposed pricing policy would not be an impediment to the desired shift from hydrocarbon fuels to coal The "consumer" price, as outlined above, not only correctly indicates the value of coal for consumption decisions, but also correctly indicates the value of coal when making investment decisions. In the case of investment decisions, however, no transition period is required; prices approximating border prices (adjusted as indicated above) should be used for all future project analyses. The basic principle for evaluating new coal projects is that investment decisions should be based on the economic return of the project measured by the costs and benefits of the project to the economy. Thus, the "consumer" price should be used to measure the economic benefits of proposed mine developments. Investment in coal production would only be approved if the "consumer" price were sufficient to cover all production costs, including a satisfactory rate of return on the capital investment. By taking this approach, medium and long term locational factors can be taken into account for investment decisions more fully than at present. Today, the development of new mines is often linked to specific consuming units such as thermal power, steel or cement plants, sponsored either by the State or public enterprises. With the exception of additional linkages 1/ A coal pricing study carried out by Coal India Limited (1976), for example, shows that a 20% increase in the price of coal will increase the general price level by only 0.5%.

53 to new coalfields, railway capacity is generally viewed as fixed as far as coal is concerned and the location of a new consumer unit is also taken as a fixed factor in the analysis. The present guideline for projects is, thus, to provide firmly identified customers with coal from the nearest source to minimize adding further rail traffic in coal. But in the long term, the transportation system should not necessarily be taken as a fixed factor. Instead, mine investment decisions should take into account the potential economic benefits of improvements to the transportation network, along with the economics of different mine alternatives. For example, in the long run, it may be more economic to expand the rail system so that additional future coal requirements of consumers in Bihar and West Bengal can be supplied from new, low cost, open pit mines at Singrauli rather than from higher cost, new underground mines in Bihar or West Bengal With regard to the "producer" price, the mission would recommend that the minehead price to be received by the coal industry should be set on the principle of providing sufficient funds to cover operating costs given certain minimum, agreed upon standards of efficiency plus provide a surplus sufficient to meet the capital expenditure requirements necessary for replacement purposes to maintain production capacity at existing mines. Given the fact that international coal prices are much higher than domestic prices in India, it is to be expected that the "consumer" price will be higher than the "producer" price. The cash surplus thus generated would be retained by the Government and would be available for financing the investment requirements for new mines, as agreed between CIL, the Department of Coal and the Planning Commission, and for other equally high priority investments However, although the "producer" price based on average costs would provide for the overall viability of CIL, it would not address the problem of the substantial differences in production costs between the different CIL subsidiaries (para 5.16). Thus, without any other adjustment, a single "producer" price would result in large losses for BCCL and ECL (the high cost producers) and large profits for CCL and, to a lesser extent, WCL (the low cost producers). BCCL and ECL have high production costs due to a variety of locational factors, including poor geological conditions, old deep mine workings, relatively severe power interruptions and frequent labor unrest (para 3.04). These high cost producers have suffered extensive financial losses which have adversely affected morale and effectiveness. The benefits of any improvements in production or productivity are obscured by the large losses of these companies and meaningful comparison of performance between the various subsidiaries is very difficult to make. The financial viability and cost-conscious management of the individual CIL companies could be secured by introducing different coal prices for each subsidiary to be administered by CIL for its subsidiaries. Administratively this could be handled by having in addition to the "producer" price based on the average operating costs and replacement investment requirements for CIL as a whole, "internal" subsidiary-specific accounting prices based on efficient production costs and legitimate replacement investment needs within the subsidiary. For each subsidiary, the difference between receipts based on the average "producer" price and receipts based on its own specific "internal" price would be debited or credited to a retention fund maintained by CIL.

54 Through this pool, the surplus fund earned by subsidiaries with lower cost of production, i.e., CCT, and WCL, would be transferred to subsidiaries with higher cost of production, i.e., BCCL and ECL. This system would require a more detailed and frequent evaluation of production costs in individual subsidiaries and could lead to more cost-conscious management and more meaningful financial information for performance evaluation and management control The pit-head prices of various grades of steam coal are based on useful heat value. However, there is a justification for a premium on high heat value coals to encourage their conservation for specific users for which only higher quality coal is technically feasible. 1/ Under the current pricing structure, as one moves away from the pit-head, it becomes increasingly more economic to use the scarce, high quality coal because freight charges are related to quantity of coal and the distance over which it is moved, regardless of the coal quality. Since coal moves long distances in India, pit-head prices become a relatively small element in delivered price to the distant consumer, encouraging consumption of higher grade coals by consumers who could technically switch to a lower grade coal and would do so if the price differential were sufficient. While the proposed approach (that "consumer" prices approximate border prices) will increase the price differential for high quality coal to consumers, additional measures may nevertheless be desirable to encourage conservation of high quality coal with minimum administrative burden The review of the coal pricing policies in India also indicates that adjustments in coal prices in response to increases in the cost of inputs has been delayed--at one point for as long as four years--resulting in a further deterioration in the financial performance of the sector. While the intervals appropriate might be debatable, what matters most is that price adjustments be made at regular intervals on a consistent basis. As a general guideline, "producer" prices might be set every year and "consumer" prices every two years. Both the Government of India and the industry are aware of the shortcomings of existing coal pricing practices and are searching for ways to improve them. 2. Financial Projections 1980/ / CIL prepares a detailed 5-year production forecast and associated expenditure plan which is submitted to the Planning Commission as the basis for CIL's requested allocation of funds in the Public Sector Investment Plan. For the purpose of other financial planning, however, CIL only prepares a one-year operating cost budget and financial outlook In late 1981, CIL projected a profit of Rs million for the financial year 1981/82 and a loss of Rs million for 1982/83 as shown below: 1/ In India, mostly in small industrial boilers when technical and economic limitations are most prohibitive for the utilization of low grade coal.

55 CIL Group--Income Projection 1981/82 and 1982/83 (Rs Millions) 1981/ /83 Total Revenues 13, ,549.5 Operating Costs (11,496.1) (12,964.2) Operating Profit 2, ,585.2 CMPDI Profit Interest (833.2) (1,064.9) Depreciation (950.9) (1,397.5) Profit/Loss (869.1) Source: CIL Headquarters While a detailed projection for each subsidiary company was not available, CIL estimated that almost all of the losses would be sustained by BCCL and ECL and that CCL would make a small profit as follows: CIL Subsidiary Companies--Projected Profits/Losses 1981/82 and 1982/83 (Rs Millions) 1981/ /83 BCCL (338.6) (751.8) CCL 1, ECL (687.2) (1,036.1) WCL NEC (11.8) (19.5) CMPDI Total (869.1) Source: CIL Headquarters While normally one would expect financial projections to be made for several future years, as a matter of course, CIL does not systematically prepare any such projections, since no meaningful sales revenue projections can be made as long as prices continue on a non-predictable administered basis and as long as financial losses are covered through large scale deficit financing.

56 Financial Management and Control 5.38 Any analysis of the CIL group's financial situation using conventional measures such as debt/equity ratio, current ratio and coverage of interest charges, is not very meaningful because the extremely large losses made by the CIL companies are financed through debt. Yet, the absence of such measures makes financial evaluation and financial control very difficult, since the financial statements do not provide meaningful indications of financial health and performance, especially for BCCL and ECL. In fact, there appears to be a potentially negative consequence in practice because the financial situation of these companies is so bad that it detracts from the attention that can be given to production related and productivity matters and can even reduce staff morale and undermine their motivation for improving the situation To the extent that past practices continue and prices are not even adequate to cover operating expenses, CIL can only be expected to become increasingly dependent on the government for its financing. Unless prices are set so that operating costs are covered and a surplus earned (as described in para 5.30), increased government funds will be required, not only for planned capital expenditures, financial charges and loan repayments, but also to finance ever-increasing unplanned operating deficits and charges for non-planned loans. Moreover, as long as the financing is in the form of debt, the losses and the need for further financing will be compounded The question is raised as to whether it is in the best interest of the industry in particular, and the economy at large, for the government to have to provide such massive sums of deficit financing. The situation can be alleviated only through a combination of increased efficiency, improved cost control and prices being set at a high enough level to cover costs. Yet, a general increase in price alone will not solve the problems of ECL and BCCL. If these companies are to operate in a viable manner, improvements in efficiency will need to be accompanied by a reorganization of the pricing mechanism recognizing the different mining conditions for each CIL subsidiary (as noted in paras 5.18 and 5.31) To the extent that the principle of having viable coal projects and procedures is accepted, and prices are set to allow financially viable operations, it will also be necessary to improve the capital base of the coal producers, especially ECL and BCCL. It is therefore recommended that measures be taken to write-off accrued losses and interest arrears and to convert a significant portion of the outstanding debt into equity so that acceptable financial ratios (eg. debt/equity ratio, quick ratio) are established and the companies are provided a sound financial structure for their operations.

57 VI. COAL CONSUMPTION AND DEMAND/SUPPLY PROSPECTS A. Consumption 6.01 In spite of the size of India's reserves of coal and a wellestablished mining industry, coal has remained a relatively less-preferred commercial source of energy compared with petroleum and electricity. Throughout the past 25 years, the average annual growth in coal consumption lagged well behind the other commercial energy sources, as a result of which the relative share of coal in total commercial energy consumed declined progressively from 39% in 1970/71 to 34% in 1980/81. 1/ Against an estimated 8.9% growth in coal demand between 1974/75 and 1979/80, coal consumption grew only by an average annual rate of 3.3% during the period and actually declined during 1978/79 and 1979/80 when serious coal shortages were experienced Actual consumption in 1979/80 was about million tons and below estimated unconstrained demand despite large pithead stocks of over 14 million tons the same year. It was not possible to make use of pithead stocks due to continued decline in railway dispatches of coal. Under the priority system established by GOI, the two major consumers of coal--power and steel plants-- did not suffer significant shortages but there was a marked increase in ash content of both steam and coking coal received by them. The cement sector received around 75% of its coal requirements. As the major carrier of coal, the railways were able to meet their own requirements but had to cope with the problem of lower quality steam coal. Other major consumers of coal--brick kilns, paper, textile plants and other industrial units, especially those located in the west, suffered serious shortages. Coal shortages persisted during 1980/81 despite a 10 million ton increase in production during the year. This was largely due to inadequate rail capacity for coal haulage which lead to further increases in pithead stocks of coal More than one-half of total coal consumption occurs in the steel and power sectors. With the gradual replacement of steam locomotives with diesel and electric, the share of the railways in total consumption declined to 10.8% in 1980/81. The cement, fertilizer, brick kiln, textiles, paper, sugar and numerous other industries, including 20,000 domestic consumers account for a remaining 35%. The changes in the pattern of consumption during the past six years are indicated below. 1/ In coal equivalent terms.

58 India--Coal Consumption by Major Industries (%) 1974/ / / / / / /81 /b Steel Power Railways Cement Others _a Total Total Consumption (mill. t.) Pithead Stocks (mill. t.) /a Includes exports and colliery consumption. /b Preliminary. Source: Department of Coal. B. Coal Imports and Export 6.04 In 1980/81, India imn,orted 0.6 million tons of prime washed coking coal and an additional 1.0 million tons of coking coal imports are expected in 1981/82. The objective has been not only to meet shortages but also to improve the average ash content of coal charged to ovens through blending the imported coals with domestic coking coals. Demand projections indicate 1 to 2 million tons of coking coal imports annually through the Sixth Plan period. Current port handling capabilities for imported coal at-haldia and Paradip ports are put at 1.4 million tons annually and only a marginal increase in the capability is expected by 1984/8c. Between 1960/70 and 1977/78, India exported around 0.5 million tons of coal unnually to its neighbors. Due to the shortages of coal for domestic users in the last two years, exports declined to 0.09 million tons and 0.11 million tons in 1979/80 and 1980/81, respectively. No significant increase in coal exports is expected in the near future. C. Demand Projections 6.05 The mission studied two coal demand projections. The first, a relatively more detailed projection, prepared by CMPDI and the Coal Department, covers the Sixth and Seventh Plan periods (1979/ /90) and is based on an "end use" methodology. The second projection, prepared by the Planning Commission and adopted in the Sixth Plan, estimates coal demand of major sectors only for the terminal year of the Sixth Plan (1984/85) and is based on the input-output model analysis used in the Plan. The demand projections, prepared by the CMPDI and the Coal Department, indicate an average annual growth of 10% for the Sixth Plan period and 8% for the whole period as shown in the table overleaf. During the Sixth Plan period, coal demand for the power sector is projected to increase at an average annual rate of 16% and account for 41.7% of total consumption by the end of 1984/85. During the same

59 period, demand of the steel sector is expected to grow by about 12%, followed by cement (8%), and fertilizers, soft coke and others (5%). Only marginal increases are projected for colliery consumption and exports, while the railway's demand is estimated to decline by about one million totls. India--Coal D)emand Projections /a (million tons) Sector 1980/ / / / / /90 Steel Power Railways Cement Others Total /a Demand projections are net of 1 million tons of coking coal imports. Source: CMPDI and the Department of Coal The projected annual growth in coal demand for the Sixth Plan period (11%) is substantially higher than growth in actual consumption in the previous five years (3.3%). This is explained by (i) coal shortages experienced in the past three years; (ii) GOI's ambitious thermal power generation program; (iii) renewed emphasis on substitution of coal for oil and other fuels; and (iv) relatively higher growth targets for the cement and steel industries The assessment of coal demand in India requires detailed analysis of planned growth in four major sectors--steel, power, railways, cement-- and nearly 20,000 industrial units and 6 million domestic consumers. The CMPDI demand projections are based on the "end use" method for the four major sectors. Expected coal consumption norms of individual sectors, likely improvements in efficiency of operation and planned capacity additions are analyzed in determining demand. Coal demand of other sectors--brick kilns, textiles, paper, sugar, etc.--are determined by an analysis of historical consumption patterns and expected growth rates The coal demand projection for the steel sector has been based on hot metal production, the existing coke rate in steel production and expected blend ratios of different grades of coal as estimated by the Steel Authority of India. Efforts to reduce the coke rate in steel production have not been successful in the past. Therefore, current norms of coking coal for a ton of steel production are assumed to remain unchanged for the projection period. The draft Sixth Plan's investment program for the steel industry provides for the completion of on-going projects, further expansion of Bhilai and Bokaro plants to optimize the built-in capacity and rehabilitation of other existing plants. No new steel plant Ls planned to come on stream

60 during the Sixth Plan period. The coal demand projections for the steel industry for the Sixth Plan period are not beyond reach. Since no major plants are due for commissioning during the period, risk of major slippage in capacity increase is low. Norms adopted for coke rate for steel production are realistic. In the short term, however, continued input shortages, especially power, may adversely affect estimated production targets Coal demand projections for the power sector are based on detailed plant analysis of existing and new units to come on stream during the period. Coal consumption norms per unit of power generation have been analyzed on a plant-by-plant basis, taking into consideration individual coal mine linkages. For the new projects, a construction period of four-and-a-half years is assumed and an allowance for post-commissioning teething problems is built into the projections. However, demand projections for the existing plants may be low since no significant improvement in capacity utilization is assumed. In 1979/80 thermal plant capacity utilization was only 45.4% compared with an achievable norm of 58% (according to the Report of the Committee on Power, 1980). As capacity utilization improves in thermal plants, a greater coal demand will materialize. On the other hand, coal demand projections for new power plants expected to come on stream are based on target additions to capacity and do not discount for likely delays in commissioning. This overstates the coal demand attributed to new plants coming on stream. There has been a significant gap between planned and actual capacity generation during the Fourth and Fifth Plan periods. Only about 70% of the targeted capacity increase was realized during the period. Despite the Government's efforts to improve project implementation, there is no question that there would be further delays in commissioning during the projection period. In 1980/81, the first year of Sixth Plan implementation, only 1,823 MW out of the target 2,687 MW was installed The installed capacity in the cement industry is expected to grow at an average annual rate of 16.0% during the Sixth Plan period. This is substantially higher than the growth realized in the past ten years and explained by incentives created for private investment through recent increases in cement prices. Coal demand projections for the sector assume about 300 kg per ton of clinker, including transportation waste for existing plants and 200 kg per ton of clinker (dry process) for new capacities. Demand projections for other sectors--i.e., brick kiln, textiles, paper, sugar, etc.-- are based on a less thorough analysis. In principle, they rely on expected growth rates and historical consumption norms The Planning Commission's coal demand projections for 1984/85 at 168 million tons is about 15 million tons lower than the CMPDI projection indicating only 9.5% average annual growth in demand during the Sixth Plan period. The variance between the two projections is mainly attributable to 11 million tons difference in demand projects for the power sector. Although the specific assumptions and methodology of the Planning Commission's projections were not available to the mission, discussions with the Planning Commission indicated that they had assumed a significantly lower growth in installed generating capacity than targeted for the Plan period.

61 India - Coal Demand Projections (million tons) Steel Power Railways Cement Others Total 1979/ / Source: The Sixth Five-Year Plan The methodology used in the CMPDI projections is basically sound. Coal consumption norms adopted for relevant sectors are realistic with the possible exception of the power sector where there is potential for improvement in capacity utilization and, thereby, coal requirements. However, the assumed production targets, especially for steel and cement sectors, need to be viewed as maximum attainable targets that have not been discounted for likely resource constraints and input shortages such as power or transportation bottlenecks. Furthermore, coal demand projections for the power sector needs to be discounted for likely delays in commissioning of new generating capacity. This is supported by the fact that out of 82 thermal plants planned to be commissioned during the Sixth-Plan period, 23 were delayed by one year during 1980/81. Assuming a slight improvement in power project implementation over the 1980/81 level and a gradual increase in thermal plant capacity utilization from 45% in 1980/81 to 47-48% by 1984/85 and using CMPDI's consumption norms, the coal demand of the power sector is likely to be around 70 million tons. This mission assesses the overall unconstrained coal demand for 1984/85 to be around 175 million tons. D. Coal Supply Prospects and Investment Requirements 1. Coal Production Targets 6.13 Following nationalization, coal production increased from 1973/74 to 1975/76 but then stagnated for several years. As a result, production was much lower than the targets set for 1976/77 and 1977/78 and the targets were cut back for 1978/79 as shown below: India--Comparison of Achieved and Target Production 1974/ /80 (million tons) Achieved Target Achieved/Target 1974/ / / / / /a / /b 0.97 /a Scaled down from /b Scaled down from Source: CIL.

62 Notwithstanding the difficulty in meeting previous production goals, a very ambitious target has been set in the Sixth Plan for 1984/85 at 165 million tons including 144 million tons from CIL. The CIL production target requires a growth of about 43 million tons over the next four years as shown below, of which 36% would come from CCL and 39% from WCL. CIL--Coal Production Targets 1980/ /85 (million tons) 1980/81 Incremental (actual) 1981/ / /85 Production BCCL CCL ECL WCL NEC CIL Total Source: CIL, Annual Plan 1982/83. Two thirds of the increase in CIL production is planned to come from open-pit mines with generally lower construction periods than underground mines. Even so, the production increases in the latter years are very large and even a one year slippage in project schedules would result in a substantial reduction in production achieved vis-a-vis target. The production target has been built up for each of the companies on a project-by-project basis. However such a rapid growth in production capacity is not realistically achievable in such a short time period because insufficient project preparation work has been done. In particular, 29.6% of the projected production increase is from projects formulated but not approved as of November 1981 and 17.1% is for projects identified, but not yet formulated, as shown below: CIL--Target Production Increase by Project Type 1980/ /85 Annual production capacity _ Approved reconstruction projects and spillover projects Approved new mines Existing mines (7.6) (17.6) Projects formulated and awaiting approval Projects identified and not yet formulated Total Source: CIL, Annual Plan 1982/83.

63 Five-Year Capital Expenditures 6.15 CIL's capital expenditures are financed directly by the Central Government. CIL's capital expenditure plan and budgets are submitted to the Planning Commission where they are reviewed and modified, as necessary, before being incorporated into the Five-Year Plans. From 1976/77 to 1980/81, CIL's total capital expenditures were Rs 11,956.3 million of which 23.3% was for approved reconstruction and "spillover" 1/ projects, 23.1% for approved new mines and 33.8% for existing mines (Annex 6-1). The expenditures were allocated fairly evenly between the various CIL subsidiary companies as shown below: CIL Subsidiaries--Annual Capital Expenditures 1975/ /80 (Rs millions) 5 year Company 1976/ / / / /81 Total BCCL ,719.6 CCL , ,278.3 ECL ,576.2 WCL ,953.4 Other /a Total 2, , , , , ,956.3 /a NEC, CMPDI and CIL Headquarters. Source: CIL In order to achieve the production increase to million tpy by 1984/85, an investment program of Rs 23,520 million has been approved for 1980/ /85 in the Sixth Plan. Thus the five year investment plan involves a tripling in annual investment for the next five years relative to the past four years. It will be difficult for CIL to increase its managerial and technical capabilities to absorb such a large increase in capital expenditures. Given the very large investment program, the successful design and implementation of these projects will require considerable efforts and, in view of the time required to construct new projects, some slippage would seem inevitable as discussed in the subsequent section of this report. In view of CIL's limited staff resources and funds availability, it is recommended that each year's investment and construction program be reviewed to ensure that priority allocation of funding and staffing be given to the projects with fastest payoffs and greatest returns. 1/ Expenditures on projects spilling over from the Fourth Plan to the Fifth Plan.

64 CIL--Breakdown of Investment Requirements 1980/ /85 Mining Projects Rs Millions % Continuing Schemes and Existing Mines 4, Approved Reconstruction/New Mines 8, Projects formulated but yet to be approved 5, New projects yet to be formulated/approved 1, Total 20, Other Projects Washeries Other Schemes 1, Exploration Total 23, Source: CIL Underground Coal Prospects 6.17 As has been previously stated, the majority of Indian underground mines remain non-mechanized room and pillar operations. Underground production costs in CIL coalfields, generally range between Rs (US$ ) ton. Some shallow depth underground mines with high productivity have production costs as low as Rs 75 (US$9.30) per ton, whereas deep, totally unmechanized mines show production costs in excess of Rs 250 (US$31.25) per ton Investment analysis, using 1979 price levels for a high capacity (1.2 million tpy) underground project (Mintech, Vol. 4, Nos. 3 and 4) indicates specific capital investments per ton of annual rated production of Rs 338 (US$42.25) in the depth range m and Rs 392 (US$49.0) in the depth range m. The lower capital investment estimate for the shallower mines is related principally to elimination of shaft sinking and vertical transport costs. Although underground mining capital and operating costs tend to be markedly higher than open pit mining costs, underground mining must remain an integral part of the Indian coal industry in order to fully exploit the country's coal reserves Project implementation, monitoring, and cost control are an "in-house" matter between CIL and its subsidiary companies. The Director of Corporate Planning and Projects and the Director of Production at the subsidiary company are responsible for the implementation--construction phase. Once in production, the responsibility for project monitoring rests with the subsidiary company Technical Director, who is responsible to the Chairman of that Company. The particular Project Officer submits daily production and monthly cost sheets through the General Manager of the particular coalfield to the subsidiary Company Technical Director, with a copy to CMPDI. These reports are reviewed

65 by the Technical Director for comparison of actual versus planned production and costs and the Technical Director takes all necessary action, corrective or otherwise. In the event that the Technical Director identifies a continuing production shortfall or increasing production cost as against the original project report estimates (having allowed for inflation), the matter is referred to CMPDI and a Committee is formed, usually including the Technical Director, Director of Projects, General Manager of Excavation, each from the subsidiary company concerned and the Regional Director of CMPDI. In addition, major projects may also be discussed at subsidiary company monthly coordination meetings The reports received from subsidiary companies are monitored at Coal India by a project monitoring "cell" under the Chief of Production, Safety and Project Monitoring. That chief has four Deputy Chief Mining Engineers, one reviewing reports from each of the subsidiary companies. Daily production reports are computerized to identify any slip in coal output in excess of 20% of the production target. If the 20%, or more, slip occurs over a period of 7 days, the Deputy Chief Mining Engineer goes to the subsidiary company to investigate, together with CMPDI if the slip is due to technical difficulties. Monthly cost reports submitted to Coal India are monitored by the Chief of Finance, who runs a constant comparison of actual versus project plan cost estimates and passes comments to the Chief of Finance at a particular subsidiary company if costs increase to a level of concern A large number of India's underground coal mines have been unable to match planned implementation schedules and planned costs and many have performed below anticipated and planned production levels. In addition to technological difficulties, power supply deficiencies and labor problems contribute to unattained target production. While an exhaustive survey and discussion of every new mine/rehabilitation project has not been undertaken, there were several examples which indicated that although CIL and its subsidiary companies have developed detailed information and knowledge of the problem areas, corrective action appears to be lacking in effectiveness. For example, six ECL underground projects with an eventual production by 1985/86 of over 1 million tpy each were sanctioned from 1975/79. Of these six projects, only Bahula was on schedule. The other five, namely Chinakuri, Amritnagar, Dhemomain, Ningha and Bankola (with an eventual total production capacity of 5.82 million tpy) are one to three years behind schedule, and in 1978/79 collectively achieved only 1.56 million tons production or 65% of the production of 2.39 million tons scheduled in the original feasibility reports These delays were the result of a variety of unexpected technical difficulties, especially associated with coal handling plants and generally compounded by power shortages and labor difficulties. Delays are also apparent for several other projects such as Ratibat, J.K. Nagar, Satgram and Parbelia, due to shaft sinking delays. Two to four year delays were also reported for some CCL projects due to be completed by 1984/85 such as Nandira, South Kedla, Sarang and Talcher and for the power support faces at Sudamdih and Monadih collieries of BCCL. Fewest delays were experienced by WCL where more than half of the projects were reportedly on schedule. But even for WCL, several large projects such as Jarruna, Kirkona, and Nandan were delayed by two years

66 or more. 'The formal project monitoring structure appears relatively ineffective in providing corrective action for many of these problems. It is therefore recommended that a review he undertaken of all underground projects delayed by one year or more compared to original schedules in order to identify (i) measures for improving effectiveness of corrective action; and (ii) areas of particular difficulty, e.g., coal handling plants, shaft sinking, etc., to monitor in other projects. In addition, it is recommended that an external monitoring cell such as CMPDI should be appointed to review production and costs during implementation and subsequently at full production. This monitoring cell should, with the consent of the Chairman and Technical Director of the subsidiary, recommend corrective action to CIL Existing room and pillar underground mining is scheduled to continue in the future, but with increased mechanization involving cutting and loading machines. As part of the expansion of underground mining it is proposed to increase underground production by 7.4 million tpy in 1984/85 by tl-he implementation of 28 new longwall mines (16 fully mechanized). The inexperience in India of longwall mining and the difficulties encountered to date with longwall panel development (Monadih) cast some doubt on output projections. The difficulties experienced in the USA with such attempted "technology transfer" should be taken as evidence of the problems of attempting to reach the theoretically available high output levels of longwalls In similar physical/geological environments to India, many US coal companies have found far higher predictability of output at lower levels of capital costs with the implementation of continuous miners and shuttle cars in room and pillar extraction. Although initially the percentage extracted at such mines might typically be only 35%, advances have been made in pillar recovery--where local conditions are suitable--such that overall extraction can and does approach that attainable with longwall. Certain considerations of present Indian mining regulations would be necessary to implement extensive pillar recovery. However, if such a lower capital cost system with higher output predictability were included in future underground mining proposals, overall target production might be more easily attainable. It is recommended that a review be undertaken of the potential for the more extensive use of continuous miners and shuttle cars or other similar mechanized room and pillar mining systems and of the potential for pillar recovery Apart from technological considerations of proposed underground mines, difficulties associated with indigenously manufactured items, for example shaft ventilator tans at Monadih, spare parts availability and maintenance will--unless early corrective action is instituted--contribute to a shortfall in future coal production. It is recommended that there be close monitoring of procurement of critical supplies, spare parts availability and maintenance In addition, although training of people, particularly in longwall application, has been well thought out and implemented, considerable improvement in training centers and facilities is necessary to provide the increased numbers of management, operator and mnaintenance personnel that are vital if the increased underground production levels are to be attained. A specific study of this vital area is essential at an early date.

67 Open Pit Coal Prospects 6.27 The majority (in excess of 70%) of coal from open pit mines in India is produced by CCL. The main contribution to CCL open pit production is, and will continue to be, from the Singrauli coalfields. Of the eleven delineated mining blocks at Singrauli, six are scheduled for ultimate capacities of 10 million tpy will thus become the largest open pit coal mines in Indian history. Production, productivity and capital/ operating cost summaries relating to these major open pit mines are given in Annex 6-2. Capital investment per ton of ultimate capacity ranges from Rs (US$ ) per ton and operating (production) costs range from Rs (US$ ) per ton. Productivity ranges from 4.75 to tons per manshift. Annex 6-3 gives similar summaries for a series of other proposed major open pit coal mines in India. Although these mines show similar estimated productivities ( tons per manshift) to Singrauli, capital investments range from Rs to Rs (US$ ) and operating costs from Rs to Rs (US$ ). Relative to many existing open pit coal operations, these proposed operations suggest much improved production levels, productivities and economies. It has to be remembered, however, that coal quality at several of these mines is inferior and operational profitability may therefore not be as high as might initially be expected Unlike the underground mines, little delay has been experienced so far for open pit mines. Only two open pit projects were reported to have any delays--ramgarh and Kedla (both CCL) and these were due to coal handling plant and washery problems. However, while this is a promising note for the future, it must be recognized that most open pit mines, unlike underground mines, have been sanctioned in recent years and are still in the early stages of development. A note of concern was raised in the field trips to various mines, where there were reports of delays in land acquisition in some areas which could subsequently impact construction schedules. It is recommended that advance action in land acquisition for planned open pit mines and careful monitoring of coal handling plants be taken to avoid delays in implementation A second and more general area of concern was reported regarding delays in the procurement of heavy earth-moving equipment especially associated with finalizing government clearances for imported equipment and opening letters of credit. While such delays have not yet impacted overburden removal schedules through the reallocation of existing equipment, they may become more critical if continued slippage persists In the early 1960s and 1970s, almost all open pit equipment was imported from USSR or was produced by domestic manufacturers based on USSR design. However, the specification of draglines, trucks and shovels has increasingly been recognized as sub-optimum for very large projects. Thus procurement of larger equipment (para 3.12) is being initiated, e.g., draglines and shovels, or is being considered, e.g., trucks. This policy decision to increase standardization of heavy earth-moving equipment on larger size ranges is responsible, to a large degree, for the low costs and high productivity of the new projects projected in the feasibility reports, and should be encouraged to continue. The majority of these larger equipment sizes being scheduled for major new open pit operations is not, at this time, manufactured indigenously

68 and will have to be imported. Nevertheless, such imports require certification from the Ministry of Heavy Industries that the equipment is not available domestically. Such clearance can take several months to be obtained and, unless carefully monitored, could be a source of future delay in open pit development schedules. It is recommended that delays in placing orders for procurement of imported heavy earth-moving equipment from foreign suppliers be reduced, and particularly delays in opening letters of credit be avoided It is understood that indigenous managemneat' have been, and are belng, encouraged to expand their facilities to include these larger equipment items. Caution must be exercised in not placing too much emphasis on merely increasing production line facilities and output, but also on ensuring that adequate spare parts facilites are developed by the indigenous inanufacturers or in bonded warehouses. Even greater pressure will be necessary on international companies for representation in India if spare parts unavailability is not to stall the output and efficiency of the major open pit coal mines (para. 3.21). Additionally, CIL must accelerate its program for the development of new central and regional workshops for major repairs and other than routine and preventive maintenance. It is recommended that planned expansion of maintenance facilities at central and regional locations be accelerated, especially for heavy earth-moving equipment, and brought in line with procurement and operating plans Perhaps the most important problem obstructing the realization of output from the major new open pit mines is the provision of management, operation and maintenance personnel. Training proposals, including scheduling of development of new training centers, should be the subject of an in-depth review and very early implementation if the provision of qualified personnel is not to become a major obstacle to the success of future large coal open pits. It is recommended that there should be a major near term effort regarding the expansion of training programs for management, operators and maintenance personnel, to be consistent with achieving production targets; an in-depth study by external advisors familiar with large scale open pit mining operations would give a higher degree of security to this vital issue Another factor impacting development schedules for major open pit mines in India is slippage in the construction schedule of the consumer linked to a particular new open pit. This is evidenced at the Rajmahal open pit operation which was sanctioned by the Department of Coal in 1979 to produce 5 million tons per year by 1986/87 in response to the proposed Farakka Super Thermal Power Station demand. In early 1980 the National Thermal Power Company (NTPC) revised their schedule to the extent that a build-up to only 4.5 million tons by 1989/90 is now required. The Rajmahal open pit project is consequently scheduled to produce up to 2.5 million tons per year in excess of Farakka requirements during the period up to 1989/90. It has been decided to hold the original coal production schedule and it is hoped that the excess coal can be disposed of. This may be possible but other new open pits, if faced with similar consumer problems, may have to scale down production One of the most difficult aspects of feasibility assessment for a new open pit is the provision of power availability, particularly in CCL, BCCL and ECL. Steps are being taken to associate captive power sources to new mines, but some production slippage seems inevitable.

69 E. Production Projections 6.35 It is the view of the mission that CIL will not realistically be able to achieve the target production for 1984/85 within the time available because insufficient project preparation work has been undertaken for the planned expansion and because the CIL plan requires a tripling of annual capital expenditures relative to recent years which would, without doubt, stretch CIL beyond its managerial and technical capacities. While an exhaustive study was not possible, it is evident that there are many underground mining projects that are two to four years behind schedule, including the initial self-advancing longwall faces. Many of the development difficulties are due to the geological conditions in Bihar and West Bengal and while some improvement will no doubt be achieved regarding the various factors such as power and other input shortages, absenteeism and difficult labor relations, it must still be expected that delays of at least one to two years compared with present schedules will occur for many underground projects and that the major impact of new longwall development will be after 1984/ While almost all open pit projects are on schedule, at present, it must be recognized that most are still at a very early stage and all are susceptible to delays in procurement of heavy earth-moving equipment, from both foreign suppliers and domestic manufacturers, and in training and maintenance programs. Lack of spare parts is presently a source of poor equipment performances, and it is considered unlikely that indigenous manufacturers will be able to improve their spare parts service as well as achieve the required delivery schedules for new equipment. Delays in open pit production schedules have resulted from problems with land acquisition, rail linkages and coal handling plants. Training and maintenance are also recognized as constraints to the achievement of present targets The increases in production of the past two to three years are largely the result of improved capacity utilization and completion of longdelayed projects. While the achievements of the past two years should not be underrated, it is important to recognize that they do not guarantee that such high rates of production increase can be sustained each year for the next three to four years. It is possible that the coal industry could reach the production target of 165 million tons in 1984/85, but this would require all of the projects in the investment program to be completed in a timely fashion. For this to be achieved, Coal India and its subsidiaries would have to make satisfactory progress on the necessary predevelopment work for underground longwall faces, improve project monitoring systems and provide faster responses to rectify project implementation problems so that no slippage in project schedules occurs. It would also necessitate minimal disruption from external factors such as power shortages, labor disputes, or delays in land acquisition and in supply of local and foreign heavy earth-moving equipment. It will also require adequate financing to be made available for the program. In the view of the mission, some contingencies must be allowed for slippage in new projects compared with planned schedules. Thus, it is expected that, in practice, achieved production will be in the range, i.e., million tons in 1984/85, i.e., 5 to 10 million tons lower than the Sixth Plan target of 165 million tons (para 6.14).

70 F. Supply/Demand Balance and Prospects 6.38 The CMPDI/Coal Department production and demand projections for the Sixth and Seventh Plan periods assume an 11.9% average annual growth in production during the Sixth Plan period and a 9.6% through 1989/90. When compared with the demand projections, the projected production is expected to catch up with demand only in the late 1980s, the gap declining from 11.2 million tons in 1980/81 to 5.1 million tons at the terminal year of the Sixth Plan. The Sixth Plan has adopted lower production and demand projections than estimates by the CMPDI. Production is projected to grow by 10% between 1980/81 to 1984/85 to reach 165 million tons in 1984/85, while growth in demand is projected to grow only by 8.8% and reach 168 million tons in 1984/85. 1/ Thus, there is still expected to be a gap between production and demand in 1984/ In view of the lower investment allocation to the sector in the Sixth Plan and the operational and technical difficulties discussed earlier in this section, the mission finds the Planning Commission's production projections more realistic and closer to its own estimate of million tons by 1984/85. On the demand side, after analyzing the methodology and assumptions of the CMPDI/Coal Department projections, the mission finds the Planning Commission's projections (168 million tons in 1984/85) low, especially for the power sector (para 6.09). The unconstrained demand for coal is assessed by the mission to be around 175 million tons in 1984/85. Thus, the gap between production and unconstrained demand would be between million tons in 1984/85. The actual shortages during the period could, of course, be lower 2/ or higher depending on the progress on the coal transport front Mostly due to the rail bottleneck, it is to be expected that economic growth in many sectors will be constrained by coal shortages during the Sixth Plan period. As a consequence, it will be necessary to continue to ration coal supplies to consumers. Although the current policy of assigning priority to the power and steel sectors is essentially correct, it is recommended that rationing policies be closely scrutinized with a view to minimizing overall efficiency losses to the economy given the prospect of shortages of coal persisting for consumers in the next several years. 1/ Exclusive of imports. 2/ The pithead coal stocks in 1980/81 are estimated to be 16 million tons.

71 VII. SUMMARY OF RECOMMENDATIONS 7.01 This report has addressed a number of selected issues regarding the Indian coal sector relating to reserves anid ekploral-lon (Chapter TT), production (Chapter III), transportation (Chapter IV), pricing and financial performance (Chapter V) and consumption and future supply/demand prospects (Chapter VI). Based on findings regarding the state of presently completed project preparation work and regarding the extent of delays and slippages for new projects under construction--especially underground projects--the mission estimates a maximum achievable coal production for 1984/85 of million tons. By comparison, unrestrained demand is estimated to be around 175 million tons, indicating a relatively large shortfall between production and demand for the next several years Given the relatively large and growing pithead stocks (estimated to reach 21 million tons in 1981/82), the extent of actual coal shortages dirlrig the Sixth Plan period will largely depend on the future performance of the railways. Although the Sixth Plan investment allocation For the railways doubled in real terms and some marked improvement in capacity utilization has been observed in the last quarter of 1980/81, the coal haulage capacity of the railways will continue to be constrained, especially due to rolling stock shortages at least during the next three years CIL has sustained large cash losses in recent years and is dependent on the Central Government to finance its operating deficits as well as all capital expenditures. At the same time, the total share of the energy sector (oil, coal and power) in total Plan outlay has been increased from 25.1% in the Fifth Plan to 27.2% in the Sixth Plan. If investments in the transportation sector to move coal and oil were added, the share of the sector would be close to 40%. Thus, the financing requirements of the coal sector represent an ever increasing burden for the Central Government at a time when it is allocating an increasing share of its resources to the energy sector, and facing serious difficulties in financing them In response to these issues, recommendations have been made which are designed to improve (a) coal exploration; (b) the efficiency of present coal mining operations; (c) coal transportation; (d) coal pricing and the financial performance of the coal companies; and (e) the development of new projects and the expansion of coal production. This final chapter provides the following summary of these recommendations in the order in which they were presented in the text. Exploration 7.05 The exploration reports prepared by CMPDI and MEC are of high quality, but the effectiveness of CMPDI's exploration activity is limited by three operational issues--the method of selection of blocks for exploration, drilling productivity, and coal quality analyses. In order to improve these operational issues, it is recommended that: