January 24, 2015
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.