Mining is risky business. Whether coal, iron or thorium, headlines scream about unaccounted losses. While fraught with special interests, resource allocation is a natural part of any emerging economy’s journey to middle-income status. Non-renewable resource extraction hits pay dirt quickly, generating exports, inward investment and government revenues.
Governance should build compliance with global environmental, social and human rights standards, whilst ensuring a transparent bidding process. What lies beneath should partially belong to those who live above it.
Given India’s ongoing energy crisis, coal was considered the answer, especially for the power and steel sectors. Over the last decade, about 44 billion tonnes of coal was allocated to the public and nearly 100 private firms — global annual production is 7.8 billion tonnes — with 142 blocks allocated without competitive bidding. Coal production stayed in the doldrums, leaving power plants mothballed.
The price of a non-renewable resource should grow at the market interest rate, with resource depletion compensated for by returns from substituted capital — infrastructure, human capital or money. Allocation needs to be via competitive bidding, utilising reserve prices and auction design to prevent collusion.
Transfer pricing opens up avenues for corruption. Greater transparency of company accounts is needed, with regular monitoring by revenue authorities.
As suggested by the Extractive Industries Transparency Initiative (EITI), rigorous standards should be adopted, with audits focusing on commodity trading operations, transfer pricing across concession holder group firms and “social expenditure”. Resource firms and governments must disclose what they give and receive.
Pricing of commodities like gas should be market-based, reflecting extraction costs, international pricing and local demand, with appropriate liquidity to avoid interest group capture. Equity stake sales of natural resource firms like Coal India and IOC should be conducted at appropriate market prices, instead of being pushed through to meet arbitrary deficit targets.
Every coal mine has its local conflict. As suggested by IFC and the UN, standard setting for fiscal contracts should adhere to global standards, with accountability enforced through legal mechanisms, investigations and clearly defined sanctions. Local people need to be actively consulted before, during and after the resource extraction phase. To avoid disputes about consultation, independent audits must be conducted.
As recommended by the World Bank, transparency about resource allocation should be promoted at local, state and national levels, with concession contracts publicly presented and revenue allocation clearly tracked. Unlike amultinational, villagers cannot afford armies of economists and lawyers.
Fiscal linkage is critical. The pending mining (MMRDA) Bill needs rework, with royalty rates supposedly set at optimum levels and mining leaseholders supposed to pay an annual amount to the District Mineral Fund (DMF) — 26% of profits for coal, 100% annual royalty for others — for the benefit of affected persons. Seemingly fair, this imposition of additional costs through DMF payments could make mining unviable, particularly in areas with little infrastructure.
The DMF’s governing council, regulating disbursement, will be composed of various government officials and mining firm representatives, with little representation from affected families.
With DMF compensation linked to profits, any shortfall, fair or foul, will be covered by the state government, putting pressure on its finances. Global comparison offers a better way. Alaska puts aside a quarter of its oil revenue into a permanent fund, with dividends shared amongst locals.
Bolivia created the Renta Dignidad programme, allocating proceeds from natural resource privatisation to pensions — about $300 for each citizen. Mongolia has the Child Money programme, using mining revenues to pay for the upbringing of poor children.
The push to mine natural resources, with little regard given to the environment and impoverishment, will initiate political movements and revolts.
Fair valuation, allocation and equitable distribution is needed. Whether we turn into a Norway or break down into a Venezuela, only time will tell.