These are my notes on international best practice. These supplement notes here and here.
I am focusing on Exploration Licences (ELs) since this is the most crucial part of the mining regulatory regime.
I’ve consulted An Overview of the Australian Legal Framework for Mining Projects in Australia by Robin Chambers (available online) and another document.
1) AUSTRALIAN SYSTEM
This is probably the best or close to the world’s best. Australia was named as the world's most secure location for mining investment in the Behre Dolbear 2005 survey.
The processes surrounding the allocation of ELs in Australian States and Territories are similar.
1) ELs are allocated on a first-come first-served basis (with some relative minor exceptions, mostly related to knowledge available with a government regarding the quality and quantity of a resource). The processes for the allocation of ELs generally require: environmental, heritage and native title approvals; work plan approvals; land access agreements; public notification and comment with Ministers retaining discretionary decision making powers.
2) ELs typically have a duration of five years, with different renewal and relinquishment processes applying across jurisdictions.
3) ELs can be transferred between parties.
4) If more than one application for an EL is received for the same plot on the same day, the first application received is considered for the licence.
5) ELs are subject to reductions in area (“relinquishments”) from the third year onwards where no progress is made in moving to develop an area for mining.
6) Priority for further work: Exploration and then mineral extraction are regarded as part of the overall mining process, with exploration licence holders given priority to move to formal mining leases on proving up a reserve. State laws prescribe the manner in which miners are able to protect an interest in land from the exploration to operational phases (with miners effectively guaranteed further rights in land).
7) Mining leases (MLs) are granted for substantial periods with extensive rights of renewal; usually over a much larger area than is initially claimed.
2) CANADIAN EXAMPLE
In Alberta, things are broadly similar to the Australian model, above, but there is a provision for auction of ELs income cases. For instance, in the case of coal, Alberta is divided into four ‘environmental areas’:
- Category 1: Parks and protected areas. No coal rights are issued.
- Category 2: Sensitive areas. Coal exploration is permitted, and underground mining may be permitted. Surface mining not permitted.
- Category 3: Coal exploration permitted. Surface and underground mining may be permitted.
- Category 4: Coal exploration, surface mining, and underground mining permitted.
Applications for coal leases in Category 2 and 3 are accepted on a first-come first-served basis.
Category 4 areas are not necessarily most prospective areas, i.e., it is not necessarily the case that the areas with greatest demand are auctioned.
Coal leases in Category 4 are issued through an auction.
ROLE OF AUCTIONS IN INTERNATIONAL BEST-PRACTICE
Auctions are becoming more widely used by governments to allocate rights to mobile phone frequencies, airport landing slots, public infrastructure, land, fishing and hunting rights, high-voltage electricity cables and electricity generation capacity. Auctions are also used to allocate exploration rights for offshore petroleum in Australia. Auctions are of interest for the simple reason that they resolve key decisions about who wins and what price is paid, through competition between those interested in the asset or rights rather than through negotiation between the contestants and government. Auctions harness competition among informed mining companies to reveal which firm can create most value from the resource.
Revenue from minerals in can be collected in two ways—from royalties and from revenue raised through allocating ELs. To a large extent, the mechanisms substitute for each other, since decreases in the royalty rate will increase bidders’ willingness to pay at the auction, and thereby increase the expected revenue from the auction. From a theoretical perspective, it is preferable to collect revenue from an auction because bids represent the share of the resource rent (profit) that bidders are prepared to pay for access to the resource. There are also potential advantages of an auction-based revenue strategy in terms of limiting holdup and reducing opportunities for corruption, of requiring a single, one-time payment for the EL at the time it is granted.
The mix of revenue from an auction of ELs and royalty payments also changes the distribution of risk between government and the exploration and/or mining firm, timing of government revenue, the quantum of funds collected and participation by small firms. The mix of revenue can also increase the scope for holdup strategies to be engaged by either side. Royalties should not be set so high that they leave no residual profits (rents) to attract bids in the auction—this will disguise information needed to determine which firm can create most value from the resource.
BIG PROBLEM WITH AUCTIONS
Relying only on the auction of licences will diminish revenue if the resource and approval processes are uncertain. This is consistent with the finding of the NMP-2008 (which recommended auctioning only of fully proven mineral deposits).
WHICH AUCTION TO USE?
I won’t go into this for now. That’s only contingent on certainty. I’ll now move into the analysis of the recently issued Indian mining Ordinance.