Best way to increase profitability of state-run coal mines is privatization – experts

Best way to increase profitability of state-run coal mines is privatization – experts
June 15, 2016.

Experts say privately run coal mines are most cost effective. State-run mines thus need to be either privatized or shut down. Collateral problems such as employment, ecological standards and illegal mining are also in focus.

Kyiv, June 15, 2016. Most feasible solution to the problem of state-run mines inefficiency is to privatize the majority of them and close down most lossmaking ones. In future coal mines will have to be gradually shut down in accordance with Ukraine’s commitments under the Paris Agreement. This process has to be gradual, based on a comprehensive program implemented over many years that would foresee among other things employment of people who were working in the coal industry as well as resolving ecological problems on the territory of the closed coal mines. That’s the viewpoint voiced by the coal industry experts during the discussion held at Ukraine Crisis Media Center “Coal mines in Ukraine: invest or close?”.

According to the experts there is direct correlation between the efficiency of coal mines work and the form of their ownership. Privately owned mines are much more cost effective, although they don’t get incentives. “In 2013 out of the officially registered extracted amount of power-generating coal, 30 percent was extracted at state-run mines and 70 percent at coal mines of DTEK company. Moreover the prime cost at state-run coal mines was 50-60 percent higher than at DTEK mines,” noted Mykola Chernyavsky, researcher at the Institute of coal technologies within the National Academy of Sciences of Ukraine. Anton Yashenko, director of the Bendukidze Free Market Center emphasized that the amount of state support increased seven times over 2002-2013 reaching its maximum – UAH 14 billion in 2013, however it did not affect cost-effectiveness. “Increase that we saw – from 70 million in 2009 to 85 million in 2013 was achieved exclusively by means of private extraction,” the expert emphasized. Moreover, added journalist Denys Kazansky, it is quite likely that part of the subsidies ended up in the pockets of the companies’ top managers. “There should not be state-run mines: they need to be either privatized or closed down. The state is not an efficient manager, it cannot efficiently run these companies,” said Maksym Nemchynov, Dixi Group expert. “Privatization is what can and should put our state-run coal mines in line with the privately owned coal mines. Then it makes no sense affirming that coal sector in Ukraine has no perspectives,” added Chernyavsky.

It is still early to speak about massive shut down of mines in Ukraine, similar to the way it happened it Germany, the experts say. Today coal power is a very important component in the country’s energy system. “Over a half of our capacities are the capacities of the coal heat power plants,” emphasized Ihor Volchyn, senior researcher at the Institute of coal power technologies within the National Academy of Sciences of Ukraine. However the structure of power balance will need to be gradually changed. Anton Yashenko reminded that according to the commitments under the Paris Agreement Ukraine has to replace coal with ecologically friendly energy sources by 2050. “It will not be possible to achieve by 100 percent in the nearest years and there is no need for that because we have private sector, if they are able to stick to ecological standards, ensure coal extraction and supply it at market prices,” noted Nemchynov. It makes sense closing down only least cost-effective mines, but the majority of state-run mines are able to work efficiently, Anatoliy Korzun, director of the Coal Industry Department at the Ministry of Energy and Coal Industry of Ukraine is convinced. “Provided that investment and structural changes are introduced for these companies, they will be able to extract coal for years,” he noted.

“Privatization requires certain preconditions. First of all they are clear and transparent rules,” noted Chernyavsky. One of the preconditions required is adoption of the law on coal market that will establish a free market and decrease the regulator’s role. “Only the law [on coal market] is able to establish common rules for everyone – for DTEK and other companies, for importers and exporters,” emphasized Nemchynov.

A comprehensive program for the transitional period of the Paris Agreement implementation needs to be developed that would foresee gradual replacement of coal in the country’s energy balance, gradual shut down of mines and alternative employment of miners as well as addressing ecological problems.

Employment is one of the key problems. Korzun noted that mine closure would affect about 150 thousand persons – it is the approximate number of workers of the coal sector and their family members. “We have to define the number of people who are going to need working places and have to define what industries they will be employed by,” he emphasized. Labor Market Monitoring Center that was tasked to prepare a program for restructuring of human capital in the coal sector. There are 51 thousand persons currently working in the sector, over eight thousand get in the segment that is subject to restructuring, said Oleksiy Zvolynsky, director of the Center. “About a half of a billion hryvnia needs to be spent on the program for restructuring of human capital, half of a billion more of investor’s money on creating the new working places,” the expert added. “We have already found an investor for the mine Novovolynska-1. He is ready to establish from 500 to one thousand working places there – it is the number of people to be fired in case the mine is closed down,” added the director of the Labor Market Monitoring Center. Zvolynsky added that 17 main occupations of coal miners coincide with 40 occupations in other sectors, that’s why there should be no considerable problems with their employment. Part of miners can be transferred to other working places inside the sector, around 30 percent want to continue working in the area.

To resolve all these issues a comprehensive program and close coordination of actions between the Ministry of Energy and Coal Industry, the Ministry of Finance and the Ministry for Social Policy is required. “Such inter-agency council set to resolve coal miners’ issues has been established, it only needs to be launched. We have already prepared a comprehensive program that defines the actions of each ministry including as to the industrial platforms that will be freed,” noted Zvolynsky.

Daunting problem remains illegal coal extraction in the so-called “kopanky” – illegal coal mines. Experts unanimously agreed that such practice has to be stopped. This process is not going to be simple as it touches the interests of coal miners who are working there and the players who are providing criminal cover for the extraction. According to the experts most rational way is the offer of alternative work for miners and/or legalization of such mines. Chernyavsky reminded that the first legalization attempt was in 2013, extraction of around 1,8 tons of power-generating was thus legalized.

Problems that emerged as a result of mining and extraction industry also need to be resolved including spoil piles, surface subsidence, flooding etc. Ukraine thus needs to turn to international best practices. “In majority of the countries no spoil piles are left, they have been used for road construction and production of construction materials. It is the area where new working places need to be created and where investments need to come to,” noted Korzun. Zvolynsky added that it coincides with Ukraine’s needs to produce a large number of construction materials for energy efficient programs in the nearest five years. Slag basins can be used as an energy source for power supply to the nearest towns provided that ecological standards are respected, noted Volchyn. Experts also noted that it should be private companies chosen through the tender that should take up the eco-projects and liquidation of mines – it will allow to save money and ensure higher quality and efficiency of work.

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