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Coal royalty rates had not been revised in India since 2002. Financial Express in one of its earlier news item mentions that it is expected to be revised every three years. The delay in its revision resulted in big losses for states like Orissa and Jharkhand. Today’s news of the revised coal royalty rates is a big relief, albeit temporarily. Following are some excerpts from a report in Telegraph.

The cabinet committee on economic affairs today approved an average increase of 14 per cent in the coal royalty paid to state governments. …

“The producing states were demanding an increase in the rates as royalty on coal had not been revised since 2002,”Chidambaram said.

He added that the increase in revenues for the states, barring Bengal, would be 24 per cent for coal and 27 per cent for lignite. “The revenues of the coal-producing states will increase to Rs 3,718 crore from Rs 3,000 crore,” he said.

Following are excerpts from a Hindu report which mentions how much more states like Orissa and Kharkhand will get and the rationale behind the increase.

In a further explanation of the rationale for revision, Mr. Chidambaram said: “It is contended [by States] that while coal companies have been revising the prices frequently and since the royalty rates are fixed on tonnage basis, the benefit of higher prices has not been shared with the producing States. Consequently, the share of royalty as a percentage of coal prices has declined.” …

As for the increase in revenue for the coal producing States, it would be Rs. 152 crore for Jharkhand, Rs. 133 crore for Madhya Pradesh, Rs. 105 crore for Andhra Pradesh, Rs. 98 crore for Chhattisgarh and Rs. 90 crore for Orissa, Rs. 89 crore for Maharashtra and about Rs. 43 crore for Uttar Pradesh. In the case of Tamil Nadu which produces lignite, the State Government could expect the revenue from higher royalty to go up by Rs. 28 crore to Rs. 130 crore.

Although, this overdue increase is a welcome step, to address this for the long term the royalty calculation must change to ad valorem basis which automatically reflects the change in the market price and thus minimizes the need to depend on the center for an increase in the rates. In particular, ad valorem royalty rate of coal means that the royalty rates will move with world coal prices. Hindu Business line has an article related to this.

Various Interational journals( forbes,Hemscott,Abcmoney,Reuters UK) have reported that BHP Bilton is buying a stake in a mining unit Ashapura Minechem Ltd.The stake will be 51%. This provides a backdoor entry for BHP Bilton into Orissa. Earliar it tried toi bid in Sesa Goa. BUt that stake was taken by Vedanta group.

BHP Billiton Ltd./Plc. (BHP.AX: Quote, Profile , Research) (BLT.L: Quote, Profile , Research), the world’s biggest mining group, is in talks to buy a 51 percent stake in an Indian alumina project, the Business Standard newspaper said on Monday.Indian mining and mineral firm Ashapura Minechem Ltd. (ASHM.BO: Quote, Profile , Research) will hold the remaining 49 percent in the 25-billion-rupee ($614 million) project in the eastern state of Orissa, the paper said, quoting unnamed sources.The two partners will invest 8 billion rupees towards equity and the remaining 17 billion will be raised through debt, it said.The spokesman for Mumbai-based Ashapura could not immediately comment on the report.In May, an official at Ashapura had said it was bidding for a bauxite mining lease in Orissa.

The Business Standard reported quoted Managing Director Chetan Shah as saying that it would take three months for government approval, and the project would be commissioned by next year.

But he declined to identify a likely partner, the paper said.

Ashapura has a tie-up with China’s Qingtongxia Aluminium Group for a 25-billion-rupee alumina refinery project in the western state of Gujarat. Construction work is scheduled to start in November. ($1 = 40.7 rupees)

There are currently no plans for a Aluminium plant at this stage though.

Economic Times reports that central government is mulling to share with states the export duty that it levies on export of iron ores. If this happens this will add to the revenue of mineral rich states like Orissa. Following are some excerpts of the above mentioned report.

The Centre may consider sharing a portion of the recently imposed export duty on iron ore with states. The move is aimed at providing additional revenues to mineral-rich states, where royalty rates have remained abysmally low. Resentment expressed by several states over the Centre’s decision to pocket the entire levy on the mineral may also have swayed the Union government.

This year’s Budget has imposed an export duty of Rs 50 per tonne on iron ore fines with less than 62% iron content and Rs 300 for the remaining ore. The Centre expects to collect over Rs 2,000 crore from this duty. Even if half of it is shared, mineral-rich states — including Jharkhand, Chhattisgarh, Orissa and Karnataka — could get over Rs 1,000 crore. This would be four times the Rs 250 crore that states receive annually as royalty on iron ore.

“Minerals belong to the states and there is no reason why the Centre should levy a duty and pocket all its benefits. The idea behind the duty was to create a deterrence for exports. The Centre should either pass on the entire collection from this duty to states or share a substantial portion with them,” a Planning Commission official said.

At earlier meetings on the subject of iron ore exports, a few states raised the issue of sharing the export duty and changing royalty rates on minerals from the present specific duty to ad valorem duty. In fact, the Hoda committee, which framed the new mineral policy, has also recommended that royalty should shift to ad valorem rates benchmarked against Western Austrian levies, which works out to about 7.5% of the per-tonne price of minerals.

Last week transportation of coal from Mahanadi Coalfields Limited came to a grinding halt and NALCO and NTPC Talcher that depend on that coal got into a critical situation. Following are excerpts from a Newkerala news report that mentions why MCL got into that situation.

Sources said the land losers of Zillinda, Kandhal and Solod affected by Ananta and Bhubaneswari mines stopped Ananata, Jagananath and Bhubaneswari open cast mines and close down the concerned project officers’ offices since yesterday demanding the promised job to the oustees by Mahanadi Coalfield Limited (MCL).

The villagers alleged that MCL authorities did not meet their commitments to provide 80 jobs to them till date forcing them to go for strike.

Similarly the land oustees of Kandhal marched to Lingaraj mine linked to NTPC-kaniha yesterday and stopped the output protesting the non-availability of employment to them as promised by Lingaraj authorities.

Coal transportation from Hngula and Balaram mines had been hit for the last four days due to the road blockade by Soloda villagers demanding jobs.

Angul Collector Girish S N said the authorities were monitoring the situation and senior officials dealing with land acquisition and rehabilitation had been rushed to troubled areas to negotiate with the agitating villagers.

Kalinga Times reported on a letter that CM Naveen Patnaik wrote to the PM on this issue. Following are some excerpts:

In a letter to Singh on Monday, the Chief Minister said that MCL should continue supplying coal to National Aluminium Company (NALCO) and National Thermal Power Corporation (NTPC) to help these industries continue uninterrupted power generation.

Blaming the MCL authorities for not extending the rehabilitation and resettlement benefits to the people affected by coal mining, Patnaik said the public sector undertaking should go as per the State’s R&R policy as the Centre was yet to adopt a new policy in this regard.

Extending R&R benefits to the families affected by the operations of MCL will go a long way in improving law and order situation in the region, Patnaik said.

In recent months there have been reports regarding how some R & R issues with respect to Hirakud dam oustees and SAIL Rourkela still remains unresolved after several decades. It seems that many public sector companies with their central government connections are arrogant and have not done R & R properly. As a result people do not trust R & R promises made by anyone (private or public companies) and as a result various projects that could help Orissa get out of the bottom, are getting inordinately delayed.

I came across a 1-page note someone from POSCO-India gave me when I was visiting Bhubaneswar in December 2006-Jan 2007. The 1-page note summarizes a study done by NCAER. The study has also been reported in News media such as Hindu Businessline. (POSCO-India in its web page has additional links.) We will give some excerpts from the Hindu Businessline report.

The 1-page note: POSCO-India’s rs 52,810 Cr investment by 2016 will stimulate Orissa Economy.

• Economic Benefit:
  • Generate Rs 29,760 crores additional annual gross output for Orissa including Rs 12,610 Crore of POSCO-India’s direct gross output.
  • Create excess annual value addition of Rs. 12,100 crores for Orissa which equals 19% of Orissa’s state GDP in 2005-06 (equals 11.5% in 2016-17)
• Employment:
  • Job creation of 870,000 man years, absorbs 88% of state unemployment backlog (i.e., decrease in backlog of employment from 9.9 lakhs in 2005-06 to 1.2 lakhs).
  • 18,000 man years of direct employment in POSCO-India.
• Tax Contribution:
  • POSCO-India annual tax contribution (Rs 2,620 Crores) would be appx. 17.6% of total tax revenue of Govt. of Orissa in 2016-17.
  • POSCO-India SEZ would contribute Rs 174,970 crore tax revenue in next 35 years.
    • Rs 77,870 crores would be to Govt. of Orissa and Rs 97,100 crores to Govt. of India.
    • The differences of tax between SEZ and DTA status is less than 8% for Govt. of Orissa and 5% for Govt. of India.
• Comparison with current Orissa Economy:
  • Orissa in 2003-04:
    • Gross Output: 111,378 crores
    • State GDP: 53,830 crores
    • Employment: 143 lakhs (2001 census)
    • Tax: 8170 crores (2005-06)
  • POSCO-India’s impact:
    • Gross Output: 29,760 crores
    • State GDP: 12,100 crores
    • Employment: 8.7 lakhs
    • Tax: 2620 crores

We now give some excerpts from the Hindu Business line article of January 2007 which partly explains how some of the above numbers were calculated. That article was written by R. Venkatesan who works for NCAER, but the article was his personal view.

The NCAER study broadly used the ADB/World Bank methodology on the social cost-benefit with minor adjustments for the local parameters. Econometric models were used to project border prices for the useful life of the project. The project’s impact from the State economy perspective — in terms of the impact on the State GDP (output multiplier effects) and employment opportunities created within the State (employment multiplier effects) was also assessed.

The output multiplier for iron ore was found to be 1.4 compared to 2.36 for steel. In other words, every Rs 1 lakh worth of output in the iron ore sector would result in Rs 1.4 lakh of output (including the Rs 1 lakh output of iron ore) compared to Rs 2.36 lakh for every Rs 1 lakh output of steel. The employment multipliers for iron ore and steel work out to 0.35 and 0.69 man-years respectively. Therefore, in terms of both output and employment, steel has a larger impact.

These multipliers imply that the Posco project would create an additional employment of 50,000 person years annually for the next 30 years vis-à-vis 870,000 person years in the steel project alternative. In terms of value addition, the iron ore and steel project alternatives would contribute 1.3 per cent and 11.5 per cent to Orissa’s State Gross Domestic Product (or SGDP) by 2016-17 respectively.

An important part of the study was the Least Cost Analysis of technology options in the steel-making, the Finex process that Posco purports to bring and the traditional blast-furnace technology. The Average Incremental Economic Cost was used as the yardstick; this was followed by computing the economic IRR (internal rate of return)
to examine whether the project was economically worthwhile from the national economy point of view.

The EIRR for the Orissa project works out to 16.6 per cent for base case and even in the worst case scenario, the EIRR at 13.9 per cent would remain above the hurdle rate of 12 per cent. The economic impact of the project was estimated at $2.5 billion at the test discount rate of 12 per cent.

The significant feature of the study was the estimation of depletion premium or the opportunity cost for depleteable and non-renewable resource iron ore for reasons cited below:

India’s high-grade ore (+ 65 per cent Fe content — Haematite) reserves, proven and probable, amount to only 0.58 billion tonnes. And even if we were to factor in indicative and inferred reserves (probable/feasible), the total reserves (proven and possibly future potential) would be only 0.92 billion tonnes.

India’s medium-grade ore (+62 per cent Fe to 65 per cent Fe — Haematite) reserves, proven and probable, is only 1.3 billion tonnes. Here too, if we factor in indicative and inferred (probable/feasible and pre-feasibility estimated) reserves, the total reserves (proven and possibly future potential) will be only 2.8 billion tonnes.

Policy Implications

Orissa stands to gain significantly if instead of exporting iron ore it processes it to steel within the State, in terms of both employment generation (17 times), and GDP impact (9 times).

India’s high and medium grade iron ore reserves may not last more than 19 years even if exports of these grades are frozen at the current level or if the targets set out in the draft steel policy are to be met. The economic analysis considered the depletion premium for high and medium grade iron ore. This is the opportunity cost to the national economy of using the depletable resource, which is the average incremental cost of depletion premiums computed year-wise.

Any exporter of iron ore of medium and high grades from the State needs to pay a depletion premium of $27 per tonne. Even this would be a sub-optimal policy from the State’s viewpoint if it can process the medium and high grade ore to steel. No such depletion premium has been applied for coking coal as its price did not exhibit any
trend before the recent steep price hike.

For the eastern States seeking to raise the mineral sector’s share in their GDP, it may be a good idea to set up processing facilities. It would not be advisable to allocate iron ore mines through open bids or accept increased royalty payments, even accounting for the depletion premium, compared to the option of processing iron ore to steel. Future cost-competitiveness and logistical advantage imply that iron ore-rich States can compete with existing over-capacities in the US, Europe and Japan even after factoring in the capital charges for new investments.

Export of iron ore needs to be restricted to grades other than medium and high-grade ore categories; for instance, export of beneficiated ore from Goa using inland waterways logistics advantages could be encouraged. Allowing exports of high grade ore would facilitate export of steel from existing over-capacities in the US, Europe and Japan to East Asia at the expense of future steel exports from new Indian steel capacities which are likely to enjoy cost-competitiveness over existing over-capacities elsewhere.

I am not qualified to judge the above analysis. I would appreciate any comments, analysis, criticisms etc. on the above.

The Economic Times reports the allocation of coal blocks in Orissa to various power generation companies across the country. Following is an excerpt from that report.

The Damodar Valley Corporation (DVC) has been allocated Saharpur Jamarpani block having 600 MT reserves in Jharkhand and two blocks in Manoharpur with 531 MT in Orissa for the Orissa Power Generation Company (OPGENCO).

The Naini coal block in Orissa (500 MT) has been allocated to Gujarat Mineral Development Corporation and Pondicherry Industrial Promotion and Development Corporation, the official said.

Moreover, two blocks at Chandipara in Orissa (1,589 MT) has been allocated to Uttar Pradesh Rajya Vidyut Utpadan Nigam Ltd, CMDC and Maharashtra State Power Generation Company, the official said.

He said the Baitarani West block in Orissa (602 MT) has been allocated to GPCL, OHPGCL and KSEB while Mandakini B block also in Orissa (1,200 MT) has been allocated to Tamil Nadu Electricity Board, Assam Mineral Development Corporation, Meghalaya Mineral Development Corporation and Orissa Mining Corporation Ltd.

The above allocation is done by the Coal ministry in Delhi. Although the coal mining will add to Orissa’s revenue through royalty, a big concern is the low rate of royalty fixed by the center which also does not change as often as it should. Some reports on this were published in Financial Express and other papers. Following is Orissa government’s stand on this issue and the issue of compensation on thermal power generation.

Revision of rates of royalty on coal and other Major Minerals on Ad valorem basis.

Orissa is a mineral rich State, but it does not get non-tax revenue in shape of royalty from such major minerals in the State to the desired extent as the rates of royalty are not being revised in time. The 12th Finance Commission have recommended that the rate of royalty should be revised on ad valorem basis. But the Government of India has not yet done it. In the past, the rate of royalty on coal and other minerals was revised on expiry of more than 5 to 7 years though the rule stipulates that there should be revision after expiry of 3 years. The delay in the revision of the rate of royalty in coal and other major minerals has caused a loss of Rs.150.00 crore per annum. The State has suggested royalty on ad valorem basis.

Compensation on Thermal Power Generation.

Orissa has a vast coal deposit. Orissa is a power surplus State and it exports power to other States. Since, electricity duty can be charged on consumption only, the importing state benefits while the exporting state has to bear the negative externality such as environmental degradation due to mining etc. This tantamounts to transfer of resources from the producer state without any compensation for the huge negative externality as well as depletion of its natural resources. If 1000 MW power is generated in Orissa and evacuated, the importing State gets electricity duty to the extent of Rs.100 crores, while the State in which the power is produced does not get anything. This situation has to be altered by either allowing the State to levy duty on generation or else mandate that a percentage of power generated should be given free of cost to the State by the Central Public Sector generating companies as is the case in Hydro Power Generation.