Monday, Nov21, 2011
The Government can take up the issue of coal pricing with Indonesia, the way China backs its businesses.
In August 2009, China arrested four employees of Rio Tinto on charges of stealing trade secrets and taking bribes. The arrests of the Anglo-Australian mining firm's Shanghai-based employees, which included an Australian citizen, were widely seen as action by China in retaliation to the collapse of Rio's proposed deal with Chinese state-owned firm Chinalco a couple of months earlier.
Rio had scrapped Chinalco's $19.5-billion investment in June that year in favour of a tie-up with fellow Anglo-Australian miner BHP Billiton. Despite the prospect of a diplomatic nightmare with one of its largest trading partners, China went ahead with the arrests. Subsequently, just before the trial, the Chinese state dropped the more serious charges of theft of trade secrets, while during the trial the defendants admitted to receiving bribes.
The events that led up to the trial, though, prompted analysts to conclude that the political relationship between Beijing and Canberra had touched “a generational nadir”.
Though the Chinese action was widely seen as an overreaction by the country to an international commercial deal that had gone awry, it is by no means an isolated case. Western powers, especially the US, are known to go to the extreme of orchestrating regime changes in countries if commercial interests of their companies are at stake.
Impact on infrastructure
India has been somewhat passive in its diplomatic overtures and generally indifferent to the fate of its companies abroad. A case in point is the quandary that Indian utilities and trading firms are facing in Indonesia, where a policy change in that country's coal pricing late last year has been applied retrospectively on contracts signed by Indian companies there.
This has created a big question mark for the country's infrastructure sectors, which had been banking heavily on Indonesian coal to tide over a widening domestic production deficit.
Tata Power, Reliance Power, GVK, Lanco and the Adani Group are among utilities that have struck deals in Indonesia during the last couple of years to either buy stakes in coal assets or for long-term supplies. The policy shocker came in September 2010, when the Indonesian Government ratified a new regulation that mandatorily benchmarked all coal offtake deals to international market rates.
The new rule, which was to apply to contracts retrospectively, immediately led to a sudden, unexpected surge in the price of coal. Indian developers had bid for specific domestic projects, based on their agreements with fuel suppliers in Indonesia.
Case for intervention
In light of the big hit on players across the infrastructure sector and the fact that there was such a large exposure of Indian commercial interest in Indonesia, private sector players feel that there perhaps was a case for the Indian Government to intervene through broader diplomatic channels. This is all the more because India is projected to overtake Japan as the biggest buyer of Indonesian coal in 2011, and is widely tipped to stay ahead of China in the competition for coal supplies from Indonesia. A big customer is generally assumed to have a certain clout and advantage.
However, as things stand, New Delhi has decided to mostly stay clear of direct intervention in the matter. That is, with the exception of a letter reportedly written by the Indian Embassy at Jakarta to the Directorate-General of Coal in the Ministry of Energy and Mineral Resources of the Government of Indonesia, seeking certain clarifications on the new regulations. This was at the behest of the Union Power Ministry and the Association of Power Producers, an industry body representing Tata Power, Reliance Power, Lanco and GMR, among others. However, the industry says the intervention is just “too little, too late”.
The clamour for a bit of Government-to-Government lobbying, it is felt, may be effective, especially as efforts are currently on to double bilateral trade between the two nations over the next four years through a comprehensive free trade pact. Also, the bilateral trade between India and Indonesia stood at $13.2 billion in 2010, but it is highly skewed in favour of the latter.
While it goes without saying that it is the sovereign right of a country to decide on how, or on what terms, it will let outsiders exploit its resources, there appear to be some loopholes in the Indonesian Government's stipulation. A diplomatic intervention in the matter, industry players say, could have sent home the message that the Government of India is willing to back up its firms.
Coal imports
In India, of the 43,000 MW of power projects awarded through competitive bidding so far, about 13,000 MW of generation capacity is dependent on imported coal. During the next five years (Twelfth Plan), about 74,000 MW of coal-fired capacity is slated to come up, of which most projects would be forced to run on imported coal.
Back-of-the envelope calculations show that against a projected requirement of 742 million tonnes of thermal coal for fuelling coal-fired stations by the end of the Twelfth Plan, only 527 million tonnes of domestic coal is likely to be available. This translates into a shortfall of 215 million tonnes by 2017. Currently, about 50 per cent of India's imported coal comes from Indonesia and around 5 per cent from Australia. Mozambique and South Africa make up for much of the rest.
The view is that if India is going to be a big importer of natural resources, it should leverage the best commercial terms for itself and its firms — be it State-owned or private. Something that China has been able to master.
Keywords: Anglo-Australian miner, Coal, natural resources, China, trade secrets
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