How to develop the coal sector
Mumit M/ Real Pictures
The evidence in Bangladesh is that in the energy sector the private sector is more efficient than the government. The government has owned most of the producing enterprises in the power sector, in the gas sector, and in the coal sector. This includes the production, transmission, and distribution of electricity and gas. The government enterprises are generally unsuccessful, suffering from poor financial condition, weak management, unsatisfactory maintenance, and a lack of accountability. The private sector establishments in the energy sector are more efficient, financially generally sound, are accountable for their operations, and provide adequate maintenance for the facilities that they own. Despite this record, there is a loud chorus demanding that the government take responsibility for developing the coal resources in Bangladesh. It is a puzzle why intelligent men and women continue to encourage government involvement in production when the record is so dreadful. Why does one want to play a losing game? Of course, proponents of government ownership or control argue it is political interference that has caused all of the trouble. But that is exactly the point. There will be political interference in any government operated energy project. In the imperfect world in which we live the political authorities will never leave the government owned energy sector alone. Apart from the corruption potential, it is jobs for the boys, do not collect the accounts receivables, and forgive this man his overdue power bills, etc. The use of private enterprises opens the way for use of foreign funding that is absolutely needed to reach the production targets needed to support 7% growth. Without foreign funding it is impossible to develop the needed capacity to fuel, generate, and distribute the gas and electricity. The development partners will not be willing to finance public sector enterprises in the energy sector. Everyone recognises this; the question is why is there any interest whatsoever in keeping the government involved? Of course, the government must, through the regulatory process, protect the public interest. There is no dispute about that. But there is no need to invest in the SOEs to achieve the expansion of the energy sector. TaxationThe issue of taxation of coal mines and in particular the level of royalty is an issue on which there is a great deal of bold pronouncements but little analysis. Here the main points should be kept in mind. 1. The economic purpose of a royalty is to slow down the exploitation of mineral resources by reducing the rate of return to the investor. In Bangladesh, the argument for high royalty rates will have the effect of blocking the development of the sector. If Bangladesh charges a royalty of 20% then one might as well charge 90% since in either case there is not going to be any economic activity to tax. Excessively high tax rates simply reduce investment and entrepreneurship. 2. The taxes that should be paid are the corporate income tax, all of the taxes on personal income, VAT on non-exported coal, and whatever royalty is charged. In a representative open coal mine producing 15 million metric tons per annum with $45 price of coal at the mine face the rate of return with a 6% royalty is 23% on equity; at 20% royalty this declines to 14%. A return to equity of 14% will not attract domestic or foreign investors. The government's tax take at 6% royalty is about 24% of the sales value and at 20% royalty it rises to 30% of sales. 3. Most countries have royalties of 5-8% calculated as a percent of the value of the coal at the mine face. Pricing of coal
Pricing is simple. Unlike natural gas, there is a world market for coal. That coal value should be the price that is paid for coal purchased from the mine. If the government wishes to subsidise the power plants, it can do so, but not through forcing a low price of coal. That has the effect of a tax. The export price of coal can be used to price the coal at the mine face by deducting the transport costs to the port. Any attempt to set a price for internal purchase would distort the enterprises. This note has argued that the development the energy sector should be carried by private enterprises not government ones. But it is vital that the government's regulatory commission supervise carefully what is going on in the energy sector and insure that the rules are being followed. Next, we claim that the royalty rate cannot be changed very much as a return to equity of around 25% is required. Finally, we argued for using the international prices for pricing of coal and no government interference in the pricing mechanism. Forrest Cookson is an economist.
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