Reform policy framework to unearth mineral wealth

Written by Dipesh Dipu | Updated: Jun 28 2009, 03:20am hrs
The mining sector needs structural overhaul to attract investments that can help the sector meet the growing need for raw materials. The sector, including coal mining, has been traditionally dominated by the government-owned companies and with limited participation from the private sector. In the current financial crisis this may have been a boon as the government-owned companies have healthier cash positions to keep their capital expenditure plans intact. However to support the growth expectations private investments are inevitable. For this the capital markets appear less than prepared. Disinvestment through IPO routes and enhancing public floats in listed companies may enhance the market depth for mining sector investments.

The government, through the Budget, may provide a roadmap for the implementation of the National Mineral Policy 2008. The amendment to MMDR Act to ascribe marketability to prospecting and mining licenses will help the sector reap risk capital and will make exploration a sustainable business for private investment. Government may also facilitate creation of alternate investment market that will provide much needed funds to support prospecting and exploration activities.

Incentive may be provided to encourage innovation and adoption of cutting edge technologies, more so in coal mining sector where the cut-off depth is likely to require capacity additions in underground mining. Duties on capital equipment for both surface mining and underground mining may be revisited.

Competitive bidding for mining license allocations has its pros and cons. The method will enhance transparency and objectivity and may have inherent commercial mechanism to hasten project implementation. Depending upon how these are structured (initial bullet payment, production sharing, revenue sharing or profit sharing) there may be cost implications.

But looking at the bigger picture and the urgency to develop new mines, the pros certainly overweigh the cons. The government also needs to then de-risk the mining projects from delays due to approvals and clearances required to make the assets lucrative investment targets.

Proposed coal regulatory mechanism is unique to India which has its roots in the coal market structure and energy affordability. Pricing of coal by the government owned coal producing companies have so/thus far been opaque, even though prices have been lower than the international prices on energy-equivalence basis. The absence of a vibrant market with large number of buyers and sellers coupled with supply constraints have made fair pricing a difficult proposition in the Indian context. The policies framework should aim at a market driven pricing mechanism, however, till the time it is established, coal regulator may be required.

The writer is principal consultant, mining practice, PricewaterhouseCoopers