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Category Archive: Public policy

Fundamental design flaws in the Modi government’s mining ordinance

These are my preliminary notes on the Mines and Minerals (Development and Regulation) Amendment Ordinance,2015. These should be read along with my blog posts here, here and here.

Prospecting mixed up with mining lease

The Ordinance introduces prospecting license-cum-mining leases (PL-cum-ML). This could be considered to be an improvement IF this implies an assurance of property rights after prospecting.  On the other hand, there is no assurance of any priority in renewal of mining lease. Mining leases will lapse after 50 years and go to a full auction. Unlike in the 1957 Act, there is no renewal of any mining concession. Mines already granted leases before the ordinance, would be deemed to have been given for a period of 50 years. Earlier renewals of lease were required after every 10 years. That was terribly bad policy, since no mining business can operate under such short time frames. But to have these leases permanently lapse after 50 years is equally bad. (The extension is not uniform and discriminates between different types of mines:  Mining leases would be deemed to be extended from the date of their last renewal to March 31, 2030, in the case of captive mines and till March 31, 2020, in the case of non-captive mines.)

This is appropriate policy on two grounds:

- Very few prospecting licences will ever go to become a full mining lease, since most will find nothing. Good policy requires the area for prospecting to be smaller than the mining lease. That allows the government to have multiple prospectors on a particular block of land, and give the mining lease to a larger area to that prospector who finds minerals. Keeping the two (prospecting and mining) separate is the right way to maximize discovery and extraction.

- The problem with mining lease expiring and being auctioned is even more severe. All good practice requires the government to give priority to existing mining lease holder, so he/she can continue to invest in necessary machinery for extraction. By sharply ending the licence after 50 years investors will be reluctant to maintain necessary machinery after the 40th year, thereby reducing the extraction from the mine. They may also be incentivized to build lower quality mines that are of no use to any other person after 50 years, but which can significantly risk the lives of workers.

Flaw 1) The prospecting licence and mining lease should have been kept separate.

Flaw 2) The idea of lapsing of a mining lease after 50 years is extremely bad policy.

Lack of full transferability

All over the world, and based on a basic understanding of property rights, it is clear that market TRANSFERABILITY of the prospecting licence/ mining lease is the best way to ensure maximum extraction by the most efficient miner.

This Ordinance allows some tradeability, although permissions are needed for transfer. Under 12(A)(6) transferability of any licence will only be valid for those granted under auctions. This seems highly regressive. This is a serious flaw. There should be no permission needed, just notification of the new owner’s details. FULL tradeability of the mining lease is absolutely critical.

Auction of uncertain and unknown deposits

Section 10(b) applies to auctions for land with certainty of deposits. In principle, this is not an issue, for such lands would be extremely limited in area. It is hard to think of many examples where this could apply.

However, Section 11 applies auctions to even uncertain mineral deposits. This is a serious design flaw. As already indicated earlier, the auction system is not an efficient system when there is significant uncertainty of deposits. The auction system for uncertain deposits will further reduce prospecting and mining in India.

Cancelling tens of thousands of pre-Ordinance applications

Section 10(A)(1) rejects all applications made prior to this ordinance. This is truly bad policy. Imagine the effort and time put in by thousands of prospectors to make these applications. The fact that these take tens of years to be approved is a disastrous idea. But cancelling them is much worse.

There are many other flaws I won’t go into, but these are the main ones from the design perspective. [I’m not even getting into the issue of whether a democratically elected government should use ordinances]

As a result I expect there will be almost no investment into the mining sector (except where there is already a well-known deposit). It is unfortunate that India will continue to sit on a HUGE pile of gold and other minerals which will remain untapped.

Note that these are my preliminary notes, and I'd be happy to have a discussion re: any error of anaysis.

Keywords

Problems defects with the Indian Modi mining ordinance. 

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India is failing to exploit its hidden wealth by choking its mining industry (#3)

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.

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India is failing to exploit its hidden wealth by choking its mining industry (#2) [keywords: gold mining, minerals]

I jotted down some initial thoughts on India's mining policy here. Some more info. These are extracts from info sent to me. I'm not attributing since I'm not sure these are publicly available. These points are additional to the points made in my first set of notes.

PATHETIC CONDITION AS AT 2010:

In February 1994, the Ministry of Mines, Government of India adopted the policy of liberalization in the mining sector throwing open high value metals such as gold, platinum, nickel, copper, lead-zinc and diamond for exploration and mining by the private sector. Sixteen years have passed since then, yet there are no new gold mines, no platinum mine, nickel, copper, lead, zinc mines and no new diamond mines in the country.   Within the same span of 16 years China has been able to achieve tremendous progress in exploration and mining of gold from a few tonnes of gold in 1993 to 350 tonnes in year 2009.  Not a single gold mine has come up during this period in India.   

INFINITESIMAL EXPLORATION IN INDIA

Global expenditure on gold exploration alone is ~US$ 4 billion out of the global total exploration expenditure of US$ 18 billion on all minerals. Alas! India’s total exploration expenditure for precious metals stands at <US$ 5 million/annum of which GSI’s expenditure on precious metals exploration is about US$ 3 M and that of the private sector about US$ 2 mill., the latter due to inordinate delays in grant of license for prospecting and clearances from Forest Depts & MoEF. 

The mining industry believes that with more investment the quantity of known resources/ reserves can multiply manifold, given India's geography.But hundreds of millions of dollars worth of investment is urgently needed. And much of it will need to be FDI, given the expertise of foreign companies in this area.

64,000 PENDING MINING LEASES

Total 63,395 mineral concession applications are pending with Karnataka, Andhra Pradesh, Rajasthan, Chhattisgarh, Goa, Gujarat, Jharkhand, Madhya Pradesh, Maharashtra, Odisha and Tamil Nadu as of April 30 of this year.  In which 42,861 were pending for mining leases (ML), 19,891 for prospecting licenses (PL) and 643 for reconnaissance permits (RP) with these states. [as at mid-2014]

MINING INCREMENTALLY BECOMING A TINY SHARE OF INDIA'S GDP

The mining sector's GDP contribution has dropped from 4% in 1994 to 2% in 2014.  

WHERE ARE THE MAIN DELAYS?

The main cause for lack of investments into mineral exploration & prospecting is the years of delay & the State Governments not acting in accordance with the concerned Rules & Sections of the Act.

VAST AREAS OF LAND LOCKED OUT FROM EXPLORATION

The existing provision under Rule 59 of MCR 1960(read with the MoM's GUIDELINES dt.30.10.14) mandates Gazette Notification of not only relinquished lands but also other virgin mineral bearing lands by the State Governments. It is an antiquated process. It unnecessarily blocks large exploration-worthy areas for years. It also makes room for corrupt practices in re-granting of such areas. The total area now locked up in India in this way amounts to more than 500,000 sq km out of the area of the GSI declared 750,000 sqkm of area having obvious geological potential.

THE IMPORTANCE OF GOVERNMENT EXPENDITURE IN GENERATING GEOSCIENTIFIC INFORMATION

Because of the many risk factors in exploration, Governments, world over, spend tax payers money only for generating geoscientific information useful for supporting private investments. Case studies have shown that every 1$ spent for generating basic geoscientific data would encourage private sector to invest 3-5 $ which eventually result in 25$ equivalent benefits to the Nation. …  [A Government Authority] should acquire all the published and unpublished data and maps relating to precious metals and publicise them on it's website.  [Sanjeev: This is, broadly, consistent with the finding of economic analyses of the sector: that it is worthwhile for the government to directly (or indirectly) conduct preliminary research and publish it widely]

WHEN SHOULD AUCTIONING BE USED?

The NMP-2008 recommends for auctioning of fully proven mineral deposits which are, in any case, rare in free hold areas. [Sanjeev: I agree with this to a large extent, with some qualifications re: considerations of optimality when a resource may not be fully but mostly known]

WILL THE NEW ORDINANCE HELP?

The industry feels it will not help. I haven't studied it thoroughly yet. I will outline world's best practice separately, and thereafter compare and comment on the Indian ordinance.

PURPOSE OF THIS ANALYSIS?

To refine SKC agenda policy on mining.

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India is floating on gold and precious minerals but its government doesn’t allow extraction

A mining industry leader from India has got in touch with me. He is totally disgruntled with the Indian system, after spending decades of effort in this area. The mining industry in India has been choked by bureaucrats and politicians. 

I've not had occasion, earlier, to analyse the details of the Indian mining industry. In this post I am preparing preliminary notes on this topic.

Policy question: auction or not

The current licensing system for prospecting is "first-in-time", i.e. whoever comes first and pays relevant fees. I understand that this licence is not tradeable.

The new system (Ordinance passed last week) requires auctions. The Hoda Committee recommended auction system for fully prospected ore bodies [Also see this]. 

The Indian mining industry opposes auctions as a method of allocating natural resources. Reasons include:

(i)  Prospecting evidence in the country is not sufficient, and to invite bids on the basis of such a meager information is to encourage speculative venture.
(ii)  An entrepreneur would like to recover his (auction) cost at the cost of scientific mining which directly affects conservation of resources
(iii) auctioning would drive up the cost of minerals whereas prices are determined in a competitive market on the basis of supply and demand.
(iv) The spending on CSR activities to benefit the local populace would reduce since the bidder would try to recover his costs.
(v)  auctioning could lead to monopolistic practices as well as cartelization by financially strong players.
(vi) auction of mineral resources is not the popular practice anywhere in the world except in Russia, Kirgizstan and Kazakhistan.
(vii) without a proper bankable prospecting report, the bidder might have to take a big risk in the deposits, like that in the coal blocks.
(viii) applications at various stages of processing might be affected due this system. [Source]

Evidence? In a letter to Modi, the mining industry states: 

Auctioning of unproven resources has failed before in India and wherever it has been tried elsewhere in the world. About 20 years ago a proposed auction of land in Madhya Pradesh advertised as prospective for diamond‐bearing rock failed to attract any bids. Auctioning would threaten to exclude small companies that specialize in the science and techniques of mineral prospecting.  

My preliminary analysis

Many reasons listed by the industry are relatively minor (e.g. CSR), but the first point is significant. 

The objective function of the state is complex, but let's simplify to revenue maximisation. If that is so, the first thing the state should maximise is the extraction of minerals. It is wrong to keep the minerals in the ground. Resources are only relative to a particular state of economic development. There are no permanent resources (cf. Julian Simon). Thus, coal may be useful today but tomorrow may become totally irrelevant. By not exploiting coal to the hilt today, we reduce net national income.

So the main goal of the government should be to minimise obstacles to mining and motivate  the private sector to drill and extract minerals.  .

Further, the initial allocation of the right to drill (prospect) should be considered in the light of the Coase theorem. This theorem assures us that it is not the initial allocation of resources but the tradeability of the licence that matters. As a result, the most efficient producer will get hold of the licence.

As far as auctioning the prospecting permit (licence) is concerned, there is a trade-off between revenues raised through auction and revenue from royalties. If auction values are high, then royalties are generally expected to be low (since most value has been squeezed out at the time of auction), and vice versa. But there is a basic constraint involved: auction values can be high only if there is sufficient information available regarding the magnitude and extent of the resource. The greater the uncertainty, the lesser the chance that people will bid for the auction, or that the auction will be optimal for the state. 

The resolution of uncertainty is not costless. It can require extensive prospecting and drilling by the state to certify what precisely is being sold. Even then, significant uncertainty remains. It appears that this precisely was the intent of the Central government:

the intention of this provision read along with the provision for sequestering was to allow the State Government to do promotional exploration and after identifying the deposits, throw open the area for mining through auction/bidding. .. If land for exploration is dealt with by the Auctioning, or the Notification method, the opportunity for serious Indian and Foreign investment into Mineral Exploration will not take place. [Source]

But that's not all. These two methods (first-in-time/ auction) have distinctly different impacts on incentives to prospect. If the initial cost of the prospecting licence is low, more people will try to prospect (although some might just hoard the licence), thereby maximising revenues in the long run. On the other hand, through auction, the initial cost of prospecting can become too high (winner's curse problem), thereby lowering the incentive to prospect more widely. The net result can be less discovery and commercial exploitation, thereby less revenues.

In brief, the idea of a mandatory auction system is likely to reduce prospecting and aggregate revenues. The matter requires extensive economic analysis. I am not sure whether GOI undertook the relevant modeling. 

More later when I find some time.

[ADDENDUM: I'm informed that:

"The provision of free tradeability of licences specially Prospecting Licence, also called Mineral Exploration Licence, in Australia and Canada, that triggered heavy global investments pouring into those countries resulting in major discoveries of a variety of minerals and development new mines."]

Those who have attended PDAC in Canada or INDABA in Africa are witness to the enormous trading of exploration and mining licences for premium that take place at those annual Mineral Trade fairs.   

Allowing hassle-free trading in exploration and mining Licences(instruments), permitting of exploration Companies to list on Stock Exchanges and extending tax concession to investments in SHARES of exploration Companies are the biggest incentives to investors in the highly risky business of exploration and prospecting. These are international best practices but the Govt of India has chosen to ignore these basics necessary for attracting high investments, both domestic and FDI.]

INDIA IS FLOATING ON MINERAL WEALTH

The following chart shows that the geology of India and Western Australia is very similar. If India's mineral sector is opened up, it can generate massive wealth and jobs.

Not just KGF: 90 places in state have gold. According to this article, "280 tonnes of gold reserves are waiting to be tapped in Karnataka".

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VERY preliminary sketch of a proposal for Chanakya School of Government

Please provide thoughts/ comments. This is VERY preliminary and I'm going to update as more ideas come through. But the plan is to keep this fairly short, and not go into too much detail till a group of people is found that is interested in implementing this proposal.  [Previous notes]. 

Chanakya School of Government

Website: http://csog.in/ Facebook Page: https://www.facebook.com/groups/chanakya.school/

Purpose of this document

Lant Pritchett of Harvard’s Kennedy School of Government once described the Indian bureaucracy as “one of the world’s top 10 biggest problems, up there with AIDS and climate change.”

India has tens of technology, medical and management schools of some calibre. But not even one high quality School of Government. This document sketches a proposal to be discussed in meeting to be convened in 2015. Further actions will be taken subject to the decisions at such meeting.

Why we need such a school

Indian schools that cover some parts of the proposed course work, include:

None of these is, however, of the stature of J F Kennedy School of Government or even lesser institutions like ANZSOG.

Without high quality governance capability, India cannot design or implement world-best governance reforms. This is a critical bottleneck in India, today. Such a school will be better able to support the reforms outlined in the SKC agenda.

Why Chanakya?

Chanakya’s Arthashastra is one of the earliest analyses of the economy and governance in the world, with significant learning for India even today. The name of the schools honors Chanakya's multi-faceted approach to governance.

How will it be run?

Options:

  1. Part of an existing university

  2. Stand-alone institution

The former option integrates the school with an existing university but risks losing focus.

The stand-alone option will give it better focus and avoid the nuisance of integrating with an existing low quality university. 

Key degrees and courses to be offered

The school should offer both undergraduate and postgraduate degrees. Is should also undertake policy research and train senior public sector executives. It should have branches across the country.

The school should impart training in inter-related disciplines such as the following:

  • economics including regulatory studies

  • new public administration

  • liberal political theory

  • law and justice

  • management, as it applies to governance

  • strategic affairs and defence

  • foreign policy

  • public policy studies in a wide range of areas

Faculty

The faculty would need to be world-class, with extensive publications in international journals. At least a third of them would be economists, mostly micro-economists. Another fifth would be specialists in public administration.

Salary and accountability

Staff and faculty should be paid at levels comparable to the best in the world. They would, however, be accountable for results, as suitably defined. Tenure would not be on offer. A part of their salary would be at risk both through direct payment by students for their classes, and by post-graduation student performance. 

Estimated initial ballpark cost

The school would require around Rs.500 crores (around $100 million) in setup costs for the first three years, with around 40-50 faculty and extensive infrastructure. It would take around 5 years to establish, from approval till it is ready to take students. 

Who could fund it

Since the qualifications imparted by this institute will be very highly valued by the world market (including India), this shoudl be a private, not-for-profit institution. Private donors in India could work with world-class universities to operatinalise this concept.

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Modi, why this big talk in 2013 about rail privatisation, but now you’re the cowardly Maunmohan Singh II?

Swarna Bharat Party policy:

Railways have been successfully privatised in countries like Japan, UK and Australia. This can be done in India, as well, through options such as unbundling (1) the tracks, i.e. multiple rail operators, (2) the trains, i.e. multiple train operators, and (3) the stations and coordinating systems to attract passengers and look after their amenities, under broad regulatory control. Private operators will then be allowed to enter these areas. This will subject railways to intense competitive pressures. All subsidies would be phased out over time, and competitive (regulated) prices allowed.

Now, Mr Modi last year (2013) said big things about partial privatisation of railways. Watch from around 43 minutes.

But the moment he comes to power he lets loose the Hindutva forces on India and backs off from ANY innovation. He has now ruled out rail privatisation

SHAME on you Modi. You will be remembered as Maunmohan Singh II.

[Thanks to Rakesh Pujari for the tip-off re: Modi's talk]

Addendum

Sandeep Datir pointed to the risks of privatisation under the current circumstances, leading to further corruption. I agree. I'd be reluctant to have privatisation without fundamental governance reforms in parallel. But he's not interested in such reforms, either. India is caught in a vice of under-performance.

ADDENDUM

[Source]

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