Persistent Problems

Long-standing issues of MDOs still to be addressed

The concept of a mine developer-cum-operator (MDO) has been widely accepted in the Indian mining sector. The MDO route presents growth opportunities for domestic players with a demonstrated and relevant track record, if the mine economics are attractive. However, the credit profile of the appointed MDO during the mine development phase is perceived to be risky owing to high capex and negative to low cash flows. Subsequently, the MDO’s credit profile improves over the mine operating period as cash flows turn positive once annual production reaches peak capacity.

Given the high risk and delayed reward, the MDO route attracts a limited number of players. There are only a handful of MDOs in the country – Essel Mining & Industries Limited, Thriveni Earthmovers Private Limited, the Adani Group, the EMTA Group of Companies, and a few entities from Andhra Pradesh.

The pain points

A plethora of factors have hampered growth in the MDO space. Since the entire process of developing a mine is carried out by the MDO, there are a number of risks that it has to bear. Many of the risks, from securing regulatory clearances to acquiring land, are beyond the MDO’s control, resulting in significant time and cost overruns.

Though accepted theoretically, the concept of an MDO is fundamentally flawed. As far as the law enforcing agencies are concerned, particularly labour inspectors or regional labour commissioners, from whom permissions are sought under the Contract Labour (Regulation and Abolition) Act, 1970, the MDOs are forced to move forward with the project without securing technical permissions, creating complications at a later stage. Besides, MDOs face uncertainties related to legal aspects as well since the legality of the concept of an MDO is yet to be properly established in the country.

A shortage of skilled manpower to carry out mining operations is another problem faced by MDOs. While the availability of low-skill manpower is not an issue, the dearth of skilled manpower with proper knowledge of handling high-tech mining machinery and equipment affects the overall performance of MDOs. Besides low productivity levels of MDOs due to the aforementioned reason, the productivity of labour has also been low due to a host of problems. In particular, the number of accidents in opencast mines is higher than those in underground mines due to the equipment being handled by incompetent operators, absence of proper maintenance facilities, lack of proper training, etc. In addition, the legal boundaries are not being respected and labour is asked to work extra hours in unhealthy conditions, affecting productivity levels.

Technology penetration too has been fairly low in the MDO space. While some advancements have been witnessed in technology adoption in coal production and extraction, progress is still far from satisfactory. In this regard, proper incentives are needed to ensure greater technology deployment.

Another major problem being faced by MDOs is with regard to the system of contract finalisation. In most of the mining plans, the geological reports are prepared taking the total deposits into account. Initially, the average stripping ratio, that is, the ratio of the volume of overburden/waste material required to be handled in order to extract some tonnage of mineral, is better. However, over the course of time, the ratio drops drastically, thereby increasing the cost of mining for the MDO. In addition, the cost escalation formula mentioned in the mining contract does not cover the extra/overhead costs entirely, thus reducing the rate of return for the MDO. Further, developments beyond the control of MDOs such as lack of local manpower, local unrest, political interference, and resistance to vacating project land also affect their operations.

MDO contracts are also fraught with issues with respect to clarity of clauses. Clauses related to land acquisition, resettlement and rehabilitation, and labour are not well defined and are open to interpretation. Lack of standardisation and transparency in the bidding documents is thus a major issue.

Net, net, there is a need to address these issues in order to create a favourable environment for MDOs. Going forward, while there exists significant potential for MDOs in the country, close coordination and improvement in overall practices is the need of the hour.

Based on a panel discussion among Upendra Kumar, Advisor, Coal, Essel Mining & Industries Limited and R.B. Mathur, President, Business Development and Mining Strategy, Virginia Mining Resources Private Limited, at a recent India Infrastructure conference

 

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