A strong and independent regulatory mechanism that is sensitive to the idiosyncrasies of the mining sector would be an effective way of insulating the sector from short-term political compulsions.
It is becoming increasingly evident that a restructuring of the way the Centre does business and deals with state governments is critical if mining has to move forward in India. For this it will have to redefine the whole institutional mechanism governing the ecosystem in which mining occurs.
It is not just that despite all kinds of reforms India has been unable to unlock the great potential of sub-surface wealth into incomes, government revenues and profits. Many indirect stakeholders have now entered the debate and effectively have veto power over most if not all facets of every single mining project. The public discourse on land transactions has already been converted to an issue of corruption and sharing of the spoils of high property valuations, rather than on how to create a low transaction cost and efficient institutional mechanism.
Corruption and fairness are important issues, but there is a far more important issue that needs to be brought back into the public discourse — efficiency. Thankfully, efficiency, transparency and fairness mostly go hand in hand. They are most flouted when there are many different entities involved in a process such that responsibility is shared and, consequently, answerability is reduced both individually and as a group. And that is what has happened in India. For responsibility to be assigned properly the Central government needs to be removed from the equation and, instead, a regulatory mechanism needs to be put in place. The role of this mechanism would be to ensure that (i) decisions taken are fair to all concerned, and (ii) all decisions are taken in a transparent manner.
Take auctioning of mining rights, for instance. It is well known that some elements in the industry are highly opposed to auctioning. What is even more interesting is that there are many ears in the government that are hearing them out patiently. This, when we know that whether it is gas or petroleum or spectrum for 3G, auctioning is by far the best system of allocation of scarce resources. Not only is it the most fair in that everyone has a chance to bid, but it also leads to the most efficient set of outcomes. Those who are most efficient naturally have a greater willingness to pay; those who are interested in obtaining the rights and then holding on to them, are automatically dissuaded; and so on.
But the non-auction based first-come-first-served approach allows the state governments to leverage the mining rights for other benefits — setting up an industry or a processing unit as a pre-condition for obtaining the mining rights, for instance. This is actually a cross-subsidy and should be seen as such; returns from the mineral resources are being used to incentivise manufacturing. This is not an efficient practice and only harms the state in the long run. But if state governments are keen on such a policy they can very well be subsumed in the auctioning process — the result would still be more efficient, transparent, and yes, fair than the current practice.
For auctions to work a more stable framework is required, that is not susceptible to policy changes driven by short-term political compulsions. The answer again lies through a regulatory mechanism.
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Then there is the royalty. Like everything else in India, there is a complex and highly fractured system of estimating royalty payments. Many minerals continue to be charged on the basis of weight. The calculation of royalties on ad valorem basis occurs for some others based on ‘sale price’ as estimated by the Indian Bureau of Mines. For some minerals royalties are estimated on the basis of international prices. But prices are updated very infrequently for many minerals. Important minerals such as coal and lignite continue to follow a dual regime where both tonnage and sale price play a role in the Central government’s estimation of value. A very simple and yet transparent system for royalty payments already exists in part in India — examples being for gold and silver. This can be extended to all minerals and to all parts of India.
The problem is that rates change on a daily basis and many times the domestic rates are not in sync with the real value due to imperfect domestic markets. Benchmarking all minerals to current international rates on a monthly basis should be a standard practice, and there really is no need for so many different systems to exist in parallel. But more importantly, there is no need for the Central government to be involved in this. Prices are international and well-known, any entity can do it.
Therefore, whether the royalty payments are from the Centre to the state governments, or potentially the mining companies to the state governments or local communities, the efficiency argument for having a better royalty payment regime should never be negated. Royalties that are not responsive to changing prices will not incentivise the stakeholders to focus on ongoing productivity improvements.
On the same lines, profit-sharing with the local community is a very bad idea; actually, stupid is a better adjective. One, it reduces the incentives for efficiently running a mining operation, thereby reducing the incentive for honest investors to invest in it. And two, it is unfair to the local community, as returns in this system are highly sensitive to annual account books and the quality of management. Direct royalty payments to the local community (perhaps to the PRIs) may be a far better system of benefitting the community.
There are many issues in mining — illegal mining, sharing of benefits with the displaced population, impact on the local community, environmental issues, etc. India rightly assigns ownership of most sub-surface mineral resources to the state government and land issues are also under its ambit. The Central government however has been unduly intrusive without being pro-active — its own arms (Central PSEs) have been as unfair to the local community and as harmful to the environment as many private entities. It continues to meddle in many different ways in the mining sector. But who can take it on? No entity within the state. Neither are the state governments empowered enough, nor is there an independent voice in the form of a regulator. So what we have as a response mechanism is a well-meaning, aggressive, but largely ill-advised civil society.
A strong and independent regulatory mechanism that is sensitive to the idiosyncrasies of the sector, operated by sector specialists and professionals, would be a far better means of insulating this sector from short-term political compulsions. This was done to some extent in the finance and telecom sectors and the results are there for all to see.
Moreover, by restructuring its own role, the Central government would remove the dividing of responsibility and answerability which will then be in the domain of the state government. Such decentralisation is what our founding fathers had anyway envisaged.
The author is Director, Indicus Analytics