In 2010 the Indonesian government decided to annually benchmark all coal exports to international market price and also announced the levy of higher royalty and income tax on these exports. It has adversely affected the operationalization of 20000 MW of power capacity addition projects in India, including two of the Ultra Mega Power Plants (UMPPs). In 2012, Indonesia accounted for 79% of all thermal coal imports, of which 93% were made by private generators.
One could take the view that these projects were awarded to private generators through global open competitive bidding and it was their responsibility to have hedged for such risks. But, given the strategic nature of these economic transactions, there is a compelling case for the government's close involvement in such transactions. In other words, shouldn't all such transactions, private and public, which impinge on India's energy security be facilitate and underpinned by the umbrella of India's strategic diplomacy?
If one were to step back and analyze this, certain important questions arise. When the private generators were aggressively pursuing coal mines acquisitions in Indonesia in mid-2000 and developing large country-risk exposure, how actively was the government engaged with the process? Did this form an important part of India's diplomatic engagement with Indonesia? Couldn't we have got early warning signals about the impending policy change and advised power regulators and private generators accordingly? Once the Indonesian government announced its policy, what could have been done to mitigate its adverse impact on India's power generation program?
In the years ahead, given India's ambitious infrastructure upgradation targets, our country-risk exposure in strategic minerals, oil, and gas will increase dramatically. The increasingly widespread trend of resource nationalizations means that expropriation risks are very high in these sectors. We cannot afford to leave such risks in the hands of the private sector, who are in no position to hedge against them. It requires active, often aggressive, support from India's foreign policy establishment.