The least bad option?

Author - Baijayant 'Jay' Panda

Posted on - 28 March 2011

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This article was published on ‘The Indian Express’ on 28th March 2011





The government’s draft mining bill requiring 26 per cent of mining profits to be shared with displaced local residents has finally provoked a long overdue national debate on the fair and equitable use of mineral resources. This became inevitable after the events of the last decade,which saw significant developments on three related fronts.

First,spiralling commodity prices have led to windfall profits for mining companies while,at the same time,affording other legitimate stakeholders a vastly unequal share of the pie. These disgruntled stakeholders include state governments and local residents,both of whom have been increasingly incensed and vocal. In the interest of full disclosure,I am from a business family with interests in the production of metallic alloys,including the operation of captive mines.

Second,the sharp rise in mining sector profit margins has induced illegitimate stakeholders to muscle in. These include illegal mining mafias that operate unlicensed mines,licensed operators who raise ores in excess of their permits or beyond their demarcated boundaries,officials and politicians who extract bribes to look the other way,and local toughs and even Maoists who run extortion rackets.

Third,increased environmental concerns have led to a sharp rise in the number of NGOs that mobilise opinion and litigation against mining. Most such activists treat mining as inherently unlawful,despite the continued existence of the Mines and Minerals Development and Regulation (MMDR) Act. But they are at least partly justified by the MMDR Act’s provisions being occasionally contradicted by other acts,such as the Forest Rights Act.

The inequitable sharing of the mining pie has its roots in the over-centralised command economy of the 50s,60s and 70s,some vestiges of which refuse to die out. Despite minerals being constitutionally the property of the states in which they are located,the heavy hand of the Centre has repeatedly foiled the equitable levying of royalties since independence.

Mismanagement by the Centre is not conjecture,it is amply borne out by hard facts. Starting in 1957 with the MMDR Act,the Central government took unto itself the task of fixing mineral royalties,and then persisted with what can be kindly described as spectacular ineptitude. The unkind would of course attribute other motives in keeping royalties absurdly low for six decades!

In sharp contrast with mining laws in the rest of the world,the Indian government just did not implement ad valorem royalties,that is a percentage of the prevailing market rates. That,despite repeatedly setting up committees over the years,every one of which recommended a switchover to ad valorem rates. Instead,it persisted with administratively determining flat rates of royalty,which were infrequently revised and remained shockingly low.

This blatant form of crony capitalism and pseudo-socialism (since many mines were in the public sector) cost state governments lakhs of crores of rupees in revenue loss over these years. This ensured that there were inadequate funds to properly rehabilitate displaced residents,let alone invest in the future of mining areas. Thus,while it is true that some mines have been run professionally and in conformance with environmental laws,all standalone mining operations in India have two common features: disgruntled former residents,and a boomtown trading mentality without the investments in local infrastructure that could provide a sustainable economy when the mines run dry.

By contrast,those mining areas that also had downstream value-addition operations  like steel plants in Jamshedpur or Rourkela — have seen far more of such investment,and in fact now have the potential to grow their economies in new directions. The main distinction is that downstream manufacturing operations,unlike standalone mining,are adequately taxed and are less susceptible to simple rent seeking.

The resistance to appropriately taxing mining has also continued into the 21st century. Since 2000,when ad valorem royalties began to be applied to selected minerals,the raison d’etre has been undermined by linking them to government-issued indicative prices of minerals instead of their actual prevailing market rates. Most shocking of all,even the 2009 revisions in the royalties on many major minerals  like most categories of iron ore continue to be at a government-determined flat rate that is a tiny fraction of what it would be under a market-price-linked ad valorem regime.

The latest round of expert study groups commissioned by the government have yet again recommended a move to ad valorem rates for all minerals. They have also recommended linking them to true market indices like the London Metal Exchange,and suggested that the royalty rates be modelled on successful mining economies like those in Western Australia. But the cynics can hardly be faulted: they have seen this movie many times before,with several earlier committee recommendations being smothered by mining lobbies.

In the meantime,while India is finally considering moving to the ad valorem royalty regime followed in the rest of the world,many countries like Australia,Canada,and South Africa are experimenting with profit-sharing regimes. This is expected to spur investment by lowering the initial burden on miners,but also ensure a fair apportioning of gains when markets surge. But unlike the Indian proposal,those experiments are a replacement for,and not in addition to,ad valorem royalties.

The irony is that making the mining sector transparent and win-win for all stakeholders is not rocket science. Three key elements are necessary for this: first,replace discretionary powers with rules,most importantly in leasing out mines by bidding rather than MoUs. Second,benchmark royalties to true market rates,not government fiats. Third,devolve powers to state governments,along with simple but strict rules on environment approvals and expenditure of royalties on building infrastructure and rehabilitating displaced people.

Unless India is truly serious this time in implementing these fundamental reforms in mining,the 26 per cent profit share proposal is the least bad option under serious consideration. While it has several flaws including the potential for being manipulated like the royalty regime has been so far it has caught the popular imagination and cannot be blocked by mining lobbies without credible alternatives in its place. Either way,it will have served the nation well in finally forcing action after six decades of foot-dragging