17th February 2015
Fundamental design flaws in the Modi government’s mining ordinance #2
The report regarding auctions of coal is positive. This is consistent with good policy – where reserves are proven.
However, all flaws I have identified here, remain.
In particular, a CRITICAL flaw is that the ordinance (s.12A) only allows the transfer of licences obtained through auction. That means EXISTING rights holders can't transfer their rights. As I noted in my previous blog post, FULL tradeability of the mining lease is absolutely critical.
I chanced upon an observation by the Indian Supreme court in Special Reference 1 of 2012 (download here):
130. A fortiori, besides legal logic, mandatory auction may be contrary to economic logic as well. Different resources may require different treatment. Very often, exploration and exploitation contracts are bundled together due to the requirement of heavy capital in the discovery of natural resources. A concern would risk undertaking such exploration and incur heavy costs only if it was assured utilization of the resource discovered; a prudent business venture, would not like to incur the high costs involved in exploration activities and then compete for that resource in an open auction. The logic is similar to that applied in patents. Firms are given incentives to invest in research and development with the promise of exclusive access to the market for the sale of that invention. Such an approach is economically and legally sound and sometimes necessary to spur research and development. Similarly, bundling exploration and exploitation contracts may be necessary to spur growth in a specific industry.
This more or less summarises my position and the economically correct position on such issues.
The ordinance must be amended to address the problems I've pointed out, and aim to achieve world-best practice policy outcomes, not some obtuse outcomes that may be useful for certain types of auctions but choke the bulk of the mining and exploration industry.
Moreover this policy is effectively retrospective. Retrospective law is the worst possible kind of law. Companies that invested in the past to explore minerals would have done so on the understanding that they would (if they so chose) be able to sell this right.
The policy is a serious mess. This should be fixed asap