Lack of Clarity and Vision in New Mines and Minerals Act -EAS Sarma

Much has been claimed on behalf of the Mines and Minerals (Development and Regulation) Amendment Act that has been enacted by Parliament, but the legislation has introduced a watered-down version of auctions, has many exceptions to legalise the old first-cum-firstserve approach, and ignores previous Supreme Court rulings on measures to ensure sustainable development.

E A S Sarma (eassarma@gmail.com) is a former Union Power Secretary.

With a brute majority in the Lok Sabha and being able to manipulate regional parties to lend it support in the Rajya Sabha, the National Democratic Alliance (NDA) government has succeeded in converting a hastily issued ordinance on mines into a full-fledged law.

The Mines and Minerals (Development and Regulation) Amendment Act (MMDRAA), 2015, which amended the parent Mines and Minerals (Development and Regulation) Act (MMDRA) of 1957, shows how the government has not only shunned an opportunity to impart clarity and vision to an otherwise blurred mineral policy but also created considerable scope for opacity and rentseeking in tapping the mineral wealth of the country.

Section 11(2) of the MMDRA of 1957 required that reconnaissance/prospecting/mining licensees be selected on a first-come-first-serve (FCFS) basis. The low royalty rates on minerals, coupled with a non-transparent FCFS, allowed licensees to capture the lion's share of the profit margins, giving scope for corruption.

Caveats in Law

In the 2G Spectrum case, the Supreme Court directed the government to adopt a fair, transparent and non-discriminatory procedure such as auctioning in the allotment of natural resources.1 This has prompted the NDA government to amend MMDRA, ostensibly to make auctioning mandatory. In reality, the caveats provided in MMDRAA legitimise the majority of the leases already in existence that have been granted through questionable procedures, and severely restricted the scope for auctions.

The government is but a public trustee for mineral resources that belong to the people. Article 39(b) of the Constitution requires that "the ownership and control of the material resources of the community are so distributed as best to subserve the common good." By implication, in mineral resources exploitation, no undue benefit, other than a reasonable return on investment, can be granted to any private party.

Theoretically, if a tonne of a given mineral extracted from the ground can be "replaced" by an incremental tonne discovered, mining activity can continue indefinitely. This assumes that adequate investments are made on a matching exploration effort. However, the opportunity cost of discovering/extracting every incremental tonne will increase over time as it will get more and more difficult to discover new deposits, even if emerging technologies can partially offset the costs. Once the extraction cost exceeds the market value of the mineral, extraction of the mineral becomes unviable. That determines the time horizon for mining, unless the available reserves are exhausted earlier, in which case the time horizon will be shorter. Planners should necessarily evolve strategies for recycling the used mineral and finding substitutes to replace the mineral within that time horizon. The mineral in this case should be so priced as to generate sufficient funds for the required exploration effort, environmental restoration, mineral demand management and research and development (R&D) effort to find substitutes.

Mineral pricing by itself will not address intergenerational concerns. Depending on how society views the time frame for intergenerational equity and how it views the strategic importance of each mineral, it could impose ceilings on annual mineral production levels.

As early as in the 3rd century BC, Kautilya, in the Arthashastra emphasised the need to conserve high-valued minerals as a matter of State policy (Rangarajan 1992). It is ironic that neither the National Mineral Policy (NMP) of 2008 (Ministry of Mines 2008) nor any of the mining laws have addressed these concerns.

The NMP of 2008 states,

to maximise gains from the comparative advantage which the country enjoys, intra se mineral development will be prioritised in terms of import substitution, value addition and export, in that order.

It is significant that more than 30% of iron ore produced is exported, leaving deep scars on the landscape along the Karnataka-AP border and in Goa. Export-driven mineral production, being locally disruptive, may not be in the national interest.

Largesse to Existing Licensees

The press release that preceded the ordinance announced that

all grant of mineral concessions would be through auctions, thereby bringing in greater transparency and removing of discretion...Unlike in the 1957 Act, there would be no renewal of any mining concession (Press Information Bureau 2015).

In the same breath, it said,

the tenures of the mineral concessions have been increased from the existing 30 years to 50 years. Thereafter, the Mining Lease would be put up for auction (and not for renewal as in the earlier system)...the Mining Leases would be deemed to be extended from the date of their last renewal to 31 March 2030 (for the captive miners) and till 31March 2020 (for the merchant miners) or till the completion of the renewal already granted, if any, whichever is later. Thus, no Mining Lease holder is likely to be put into any disadvantaged condition.

The ordinance that amended MMDRA and the act that followed reflected these provisions verbatim.

The exemptions allowed in MMDRAA from the auction method grant a huge largesse to licensees selected through the erstwhile, dubious FCFS procedure.

According to Claude Alvares and Rahul Basu (2015),

over an eight-year period, Goa exported 282 million tonnes of iron ore. This reduced the collective wealth of the state by Rs 53,833 crore. In return for the huge decline in common wealth, the state received only Rs 2,387 crore as royalty, less than 5% of the value! In comparison, total government receipts for that period from all sources were only Rs 27,402 crore, approximately half of the assets lost. The provisions of the new MMDR Amendment Bill 2015, by saving mining leases from auctions, continue this wholly bankrupting method of dealing with the country's natural wealth owned in principle by all.

A few days prior to the issuance of MMDRAA, the Goa government hastily renewed "over 85 mining leases to the same companies, (many of them) accused of being part of a Rs 35,000 crore illegal mining scam" (Nagvenkar 2015). The timing of this decision raised several eyebrows.

Companies such as Essar, Sesa Goa and others, some of which are known to have made huge contributions and provided hospitality to the political parties, have got a bonanza by being saved from "traversing the auction route to convert their existing concessions into the new 50-year mining leases" (Jha 2015).

According to Supriya Sharma (2015),

if the law is passed in its current form,... calculations show that for just one mineral (iron ore) in just one state (Chhattisgarh), the value of exempted deposits could amount to at least 1.71 lakh crore rupees and the losses to the national exchequer could come to at least 1.22 lakh crore rupees.

The notional losses for all minerals in the country can therefore be mindboggling. There are 11,104 active leases today, covering 4,98,249 hectares of mining area, out of which iron ore mining leases are 774 covering an area of 93,790 hectares and bauxite leases are 337 covering an area of 30,329 hectares (Indian Bureau of Mines 2014).

The NDA government has kept some states in the dark while issuing the ordinance that has been enacted as the MMDRAA. For example, Odisha had proposed to auction all its major minerals but the ordinance upset their plans (Mishra 2015). In a few other states, the ordinance created enormous scope for arbitrariness. For example, in Karnataka, the Bharatiya Janata Party (BJP) leader of the opposition in the legislative council asked, "Why did the CM renew licences of only eight of the 108 iron ore mining leases?" (Johnson 2015).

Apart from lease extensions, MMDRAA also provides for a composite prospecting-cum-mining licence, allows the central government to extend the area limits of mining, instead of providing multiple mining leases, permits easy transferability of mining leases, creates a National Mineral Exploration Trust (NMET) to be funded through a 2% levy on royalty and creation of district mineral foundations (DMF) to be funded by the miners to the extent of one-third of the royalty to undertake development works in the districts where they operate.

Ignoring Exploration Investment

India's mineral exploration expenditure is hardly 0.5% of the global expenditure. 98% of the area is geologically mapped but only 3%-4% is geophysically and geochemically investigated (Raju 2014). Therefore, what is urgently required in the first instance is to step up exploration investment, especially for deep-seated mineral deposits, since a reasonably accurate knowledge of the resources in each mineral area is a precondition to auctions being non-speculative and genuine. A composite prospecting-cum-mining licence does not permit this. Empowering the political executive to extend area limits for mining, rather than issuing multiple leases, will create scope for arbitrariness. The artificial distinction between captive and merchant miners in the matter of lease extensions is patently irrational. It neither encourages scientific mining nor does it make the lease tenure coterminous with the economic life of the end-use industry.

As far as NMET is concerned, it is inconsistent with the apex court's order dated 21 April 2014 on a writ petition filed by Goa Foundation in which the court directed the centre and the state of Goa to notify "eco-sensitive zones" where mining should not be undertaken, imposed a cap on annual iron ore production in the interest of sustainable development and intergenerational equity, and ordered the state to enhance the levy on iron ore production so as to be able to set up a Goan Iron Ore Permanent Fund (GIOPF) for sustainable development and intergenerational equity.2

Estimates show that Goa's revenues from iron ore extraction during 2004-05 to 2008-09, largely with payment of a meagre rate of royalty, captured only 0.3% of the value of the iron ore depleted (export value net of the extraction costs and a reasonable rate of return on investment), that is, Rs 161 crore out of Rs 48,199 crore (Basu 2014). In other words, the private miners captured 99.7% of the economic rent from the iron ore that legitimately belonged to the people of Goa! Hartwick's rule (Raju 2014) suggests that, for ensuring intergenerational equity, when mineral resources are extracted from the ground, investments in productive assets need to be made to leave future generations with as much assets as the present generation.

Margins for Private Miners

Going by the above logic, the government, in order to ensure sustainability of mining activity and intergenerational equity as envisaged by the apex court, should maximise its take on the margins on all minerals such that the funds so generated can fund exploration for new deposits, environmental restoration, improvements in mineral end-use efficiency and development of substitutes. The way NMET is to be funded, as provided by MMDRAA, will only perpetuate the present situation in which the bulk of the margins are pocketed by the private miners.

From its inception in 1974-75 till 31 March 2014, the government collected Rs 1,33,049 crore as Oil Industry Development Cess on crude oil but credited only Rs 902.40 crore to the Oil Industry Development Board (OIDB) to be used for the purpose for which it is intended (GoI 2014). Considering the fiscal stress on the government, one should not be surprised if NMET meets with the same fate.

DMFs are apparently intended to provide a fig leaf to miners to cover up the damage they inflict on the local environment. The experience so far with companies spending a portion of their profits towards corporate social responsibility (CSR) under Section 135 of the Companies Act does not inspire confidence in the way DMFs are conceived.

In August 2014, the NDA government raised the royalty rates on many minerals, enhancing the income for the states (Business Standard 2014). While this was indeed a step in the right direction, had the centre gone all out in favour of auctions, the corresponding receipts for the states would have been several times more.

Coming back to the apex court's order on Goa Foundation case,3 it was the apex court, for the first time, that imposed a cap on the rate at which iron ore should be extracted annually, on considerations of intergenerational equity. Minerals such as iron ore, bauxite, monazite-rich sea sands have long-term strategic implications, both nationally and globally. If the reserves were to be assessed as per the United Nations Framework Classification (UNFC) (Indian Bureau of Mines 2015), at the rate at which iron ore and bauxite are being depleted today, they would last for 60 years and 40 years, respectively. As the rate of extraction increases in the coming years, the reserve-to-production ratios will decline rapidly. In view of this harsh reality, caps on annual mineral exploitation rates become necessary.

Ignoring Samatha

Mineral areas lie largely in areas notified under the Fifth Schedule to the Constitution, where the local Adivasis have entitlements to land, minerals, etc. Clause 5 of that schedule empowers the state to adapt any law, including the law relating to mining, to suit the interests of the Adivasis. The Samatha judgment of the Supreme Court stipulated that no mining leases be granted to any person other than the government and the tribals within such areas.4 In contrast, NMP states, "in grant of mineral concessions for small deposits in Scheduled Areas, preference shall be given to Scheduled Tribes singly or as cooperatives" (emphasis added) (Ministry of Mines 2008). This is not wholly consistent with the apex court's directive.

In conclusion, exemptions in the MMDRAA for licensees selected through the FCFS should be dropped. Auctions, if not prudently designed, can become counter-productive, if there are asymmetries and inadequacies of information available to bidders and cartelisation. This needs to be addressed. NMET should be set up on the lines of the GIOPF subject to an independent statutory body overseeing its administration. Miners' contribution, coupled with CSR funds, should be channelled through DMFs whose activity needs to be restricted to the villages affected by the mining project.

The NMP should provide for strategic ceilings on annual mineral extraction levels. Decisions on mineral regulation should be entrusted to a statutory regulator. The socio-economic costs of mining call for regulating both local demand and exports. Mineral demand management should be given a high priority.

Notes

1 Supreme Court Order dated 2 February 2012 in Centre for Public Interest Litigation and Others vs Union of India and Others, Writ Petition (Civil) No 423 of 2010; with, Dr Subramanian Swamy vs Union of India and Others, Writ Petition (Civil) No 10 of 2011; and Supreme Court Order dated 27 September 2012 in Spl Ref 1/2012.

2 Supreme Court Order dated 21 April 2014 in Goa Foundation vs Union of India and Others, Writ Petition (Civil) No 435 of 2012.

3 See note 2.

4 Supreme Court Order dated 11 July 1997 in Samatha vs State of Andhra Pradesh and Others, SLP (C) No 17080-81/95, http://mmpindia.in/samatha%20vs%20AP.htm

References

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