Political Risk Management in Mining - Indian Perspective - Paper for MEAI Mining Conference

Abstract

Political risks in mining are significant and result in losses of capital assets and mineral rights. Mining, recently, has been rated as one of more corrupt industries and political risks get aggravated under such circumstances. With a large number of companies looking to acquire mining licenses abroad, the assessment of political risks can help them manage and mitigate the risks. Political risks are more prominent in emerging market economies like India, China, Brazil, Russia, Indonesia and African countries where the mineral reserves are in relative abundance. There have been cases of nationalization of mineral assets, imposition of windfall taxes, forced dilution of ownerships, confiscation, seizure and such other activities initiated or supported by the local governments. In case of a political risk event taking place, the mining investors may not have recourse to law and may lose their investments in prospecting, exploration, feasibility investigations, development of mines and infrastructure and in mining equipment. These losses may be huge as mining inherently are capital intensive.

Measurement of political risk therefore is inevitable to secure mining investments. This may be done in a three stage process of risk identification, risk assessment, and risk evaluation. This may involve collecting information from various sources. Following assessment, the political risk can be mitigated and managed using several management techniques, including buying political risk insurance products.

Managing political risk results in global performance improvement by equipping the mining companies to be prepared to handle implications of changing political scenarios. It may also help assess opportunities that such political changes may present. Both put together, the exercise of political risk assessment and management can result in significant benefits to the miners.

Political risk management in times when Indian mining companies are globe trotting to acquire mineral resources can help the mining companies protect their investments and improve performance.

1. Introduction

Mining industry in India is undergoing unprecedented level of globalization. India mining and end-use companies have been on a prowl the world over for acquiring mining rights and businesses for securing raw material supplies. Globally, 2007 saw record mining deals – a total of 1732 deals were made from January to December 2007, according to PwC survey. These deals were valued at USD 159 billions. 645 of these, about 37% were cross-border deals. But in terms of values, the cross-border deals were about 61%. Indian mining deals were 20 in number, 16 (80%) of them were cross border, and in terms of value the cross-border deals accounted for 66% of all mining deals. Numbers clearly indicate the Indian companies, as also many global players are on a hunt for mineral resources. The motivations for such deals are many, including supply security, management of price volatilities, competitive advantage in bidding for end-use projects, and business potential in unlocking the value from backward integration.

A large proportion of India cross-border investments have gone to developing countries in Asia, Africa and Latin America. Some of the geographies have had the history of political risk events that have resulted in losses to foreign investors. A prudent approach to identification, measurement and mitigation of political risks for the Indian mining sector players is, therefore, more important than ever before.

2. Political risks

Political risks can be country-specific and firm-specific. While country specific risks are applicable at macro level and may impact the economy and foreign investments in country as a whole, the firm-specific risks are micro level and may have an impact on the company and its business. There may be business risks in terms of impact of political developments on the operations of the mine, on the business and tax environment within which the mines operate, and demand and pricing of the mineral products. There may be foreign exchange risks which may impact the returns of a foreign investor. There may be governance risks as well from the political developments that may place restrictions on management and decision making processes of a foreign investment company in the mining sector.

These risks exist due to potential conflicts between the goals of a foreign investor in mining sector and the goals of the local governments and the political forces. The conflicts arise due to government’s perceptions company’s impact on development of the local economy, infringement on national sovereignty, control of natural resources and impact on other industries, degree of sharing of ownership and control with locals, impact on the fiscal state of the economy, control over exchange rate fluctuations, influence over export markets, impact on human resources and domestic labour pool, honouring social and environmental commitments, meeting contractual obligations, and such others.

Mining investors in foreign countries can face transfer risks arising out of limitations placed by the local governments on the ability to transfer funds out of the country. When local governments run out of funds to support foreign exchange, they might impose restrictions on transfers of dividends, debt amortization, royalties, and service fees out of the country. Mining investors may also have cultural and institutional risks in foreign investments in mining, which may manifest in the forms of restrictions on allowable ownership structure, human resource norms, differential labour laws and union contracts, and several others.

3. Political risks assessment imperatives

Political risks assessment is imperative for globalizing mining industry. The assessment, identification of risk elements, measurement of risks and institutionalization of mitigation mechanisms is important not just from the equity investors’ perspective but also from the perspectives of safeguarding the interests of lenders, suppliers, consumers and other stakeholders.

Mining industry is unique in the initial capital requirements for land and mine development and equipment. Mining projects tend to have larger gestation periods as well. In such cases of higher sunk costs before the minerals can be brought to the market, political risks may have severe impact. It may result in loss of revenues and incomes, extension of payback periods and breakeven points, lower than expected returns on investments, blocked funds, and loss of assets.

Four trends dominate the global mining investment environment in the developing world: the interconnection of financial markets for financing projects, increased dependence on natural resources for social development, deteriorating national security, and energy dependence. Anticipating the risks associated with each of these trends requires asking the right questions about how institutions’ and leaders’ preferences determine policy choices and, in turn, economic outcomes. Politics can make many economic decisions look foolish in hindsight. This is especially true in countries where autocratic leaders seem to personally steer policy and where quantitative data is often adulterated.

Conducting a political-risk analysis turns uncertainty into calculable risk. Because businesses are often affected by political decisions in the countries where they operate, all companies factor the political environment into planning scenarios.

4. Assessment of political risks

Political risks can be of the following types - inconvertibility – the risk that profits, royalties, fees, other income, or original capital will not be convertible back to foreign currency; expropriation – the risk that the host government will take control of the property; war, revolution, insurrection, and civil strife – the risk that property will be damaged by these activities; and loss of business income – the risk that political violence will damage the assets of the foreign enterprise.

To assess a nation’s stability, two factors may be considered - the capacity of political leaders to implement the policies they want even amid shocks, and the ability to avoid generating shocks of their own. A country with both capabilities will always be more stable than a country with just one. Countries with neither are the most vulnerable to political risk. In political-science parlance, these translate into “decisiveness” and “credibility” or “predictability.”

Understanding trade-off between decisiveness and credibility and the way the trade-off is managed in a country assists in anticipating political risk. Decisiveness represents the capacity to change policy rapidly, and it is necessary in the face of any crisis. But decisiveness implies unpredictability in that leaders who demonstrate a high level of decisiveness can quickly shift the political environment. Countries with high levels of policy stability will stay the course when times are good and avoid bad policy choices. Of course, countries with political institutions that promote policy stability can find themselves in dire straits when policy change is necessary but the political system finds it impossible to adapt.

A regime’s market orientation is equally important to understanding how a country will respond to shocks. The preferences of political leaders can biased for their acquaintances or promoting market competition. All countries strike a balance between competition and cronyism, but political systems tilt the scales. The nearer that balance is struck to favouring competition, the less likely politics will influence market outcomes and impinge on economic decisions. By comparing a country’s level of policy stability to its market orientation, one can assess the predictability of government responses to shocks.

5. Management of political risks

The management of political risks lies in effectively addressing the following issues: (a) What are the risks that affect the foreign investment in mining project at the corporate level? (b) How do the goals of the foreign investment in mining project and the host government differ? (c) What are the potential political changes and how will they affect foreign investment in mining project?

There are six broad risk mitigation categories for Political Risks:

Joint Ventures
Good Corporate Citizenship
Geographic Diversification
International Investment Agreements
Insurance

These mechanisms may be used in an appropriate combination to effectively manage the identified political risks.

In cases of joint ventures, having a local partner may potentially diminish the risk of local intervention due to local connections. It may also help share risk mitigation and loss impact in case of a loss. However, sometimes, the local partner can become liability with change of government. Local partner might want to use its local political leverage to pressure foreign partner out of the project or secure better terms.

Good corporate citizenship is an effective and feasible solution that does not need any alliances or partnerships. Positive community relationship minimizes the risk of local sentiments against project. But it may result potentially in higher costs of implementation and management.
Geographic diversification is similar to portfolio diversification, which states that for management of risks, investments should be made in more than one country. However, this technique reduces the overall risk for an investor with more than one mining projects but does not reduce the political risk of any of the specific projects.

International investment agreements may include the elements like remittance mechanisms of dividends, fees, and loan repayments; transfer prices; rights and obligations of export to third country markets; social obligations; taxation rules; access to host-country capital markets; permission for foreign ownership and expatriate management; price controls; requirements for local sourcing; procedures for arbitration; procedures for planned divestment; such others. These international bilateral or multilateral agreements avoid political uncertainties to a certain extent. However, it is usually long and costly affair to legally determine the remedies in the event of a loss.

Political risk insurance establishes precise definition of risk transfer and risks can be assignable and with provision to deal with corporate governance. Well structured insurance policy provides indemnity within a specific time-frame. However, like most insurance products, political risk insurance covers are usually not designed to respond to small losses, and have long process for remedies and arbitration. Insurance policies may sometimes be expensive as well.

6. Political risks management process

The political risk management process should be incorporated in any investment appraisal system for mining investments abroad. It should begin with assessment of exposure to determine the amount of financial and other losses from political risks. It should also assess the maximum foreseeable losses and probable losses from identified political risk elements.

Assessment should be followed with appraisal of the risk mitigation mechanisms for each exposure and each element of political risks. This appraisal should consider the appropriateness of the mechanism, its costs and amount of cover.

Finally, the risk mitigation mechanisms should be implemented through appropriate documentation, investments and continuous evaluation.

7. Options for Indian investors in mining abroad

Indian investors making investments in foreign mining projects can utilize the services of Export Credit Guarantee Corporation (ECGC), Multilateral Investment Guarantee Agency (MIGA) and several multinational insurance companies that provide insurance products for political risks in mining.

ECGC is a government-owned agency, specializing in export insurance, which set up its Overseas Investment Insurance programme in 1980 to support Indian companies venturing offshore via overseas marketing offices, joint ventures, and other kinds of investments. Indian mining companies may find such a facility useful although ECGC may not boast of a large portfolio of products for mining projects.

MIGA provides guarantees for mining sector investments in developing countries, and offers assurance that losses will be recovered. MIGA, being a World Bank Group enterprise, also benefits investors and lenders by deterring harmful actions through its relationship with shareholder governments and thus provides additional leverage in protecting investments. MIGA also has the potential to intervene at the first sign of trouble to resolve potential investment disputes before they reach claim status, helping to maintain investments and keep revenues flowing.

8. Conclusion

Political risks in mining sector are more significant than ever due to globalization of India mining companies that are forced to venture out for raw material security. At the same time, there are global undercurrents of resource nationalism and increasing dependence of local communities and governments for social upliftment. In such scenario, importance of political risk assessment, that includes identification, measurement and mitigation, can never be overemphasized. It is the need of the hour to appreciate the need to plan for political risk management and protect from the risk events that may result in significant losses of assets and incomes.

Human Resource Challenges for Mining Industry in India - Paper for Mine 2009 Conference

Abstract

Mining industry has experienced a boom in the last couple of years, which is likely to continue in the long run, notwithstanding the financial crisis, due to demand for raw materials from the growing economy. Although this growth is fantastic, there are not sufficient human resources to fully capitalize on the boom. Shortage for human resources is likely to be one of most factors for mining industry.

The lack of skilled resources is caused by a number of factors, including an ageing workforce, a levelling of number of labour entrants into the industry, a steady number of people exiting the industry.

Currently, young talent may not be particularly attracted to the resources or minerals industry for a number of reasons. Young people need to be marketed to with the new and changing opportunities and long term prospects in the industry. Reward is often looked at as only monetary payments; however it should be approached from a “Total Reward” perspective, including nature of work, projects, and relationships.

Finally, there are imperatives from the industry, the government and the society at large to look for strategies to mitigate the human resource risks that the mining industry faces.

1. Introduction

Mining industry has challenges related to three Ps – power, procurement and people. The energy costs have been rising as also the timeframe and costs of procurements of capital goods and spare parts. But one of the most important challenges that the industry faces today, in the era of globally connected mining industry, is that of human resources. There appears to be a severe dearth of talent to shoulder responsibilities for growth in mining industry to an extent required to meet the demand for raw materials.

In recent times, Indian mining industry as well has seen serious shortage of skilled human resources. The domestic Indian metal and mining industry grew at 22 % CAGR between 2001 and 2006. In 2001, it was worth $ 20.3 billion which and it grew to $ 43 billion in 2006. The index of mineral production was 155.25 in 2006 as compare to base year 1993-94. The growth in revenue for central sector public sector enterprises in mining is reported as 11.75% in 2007. Private sector investments in the sector are also on a rise. 53 coal blocks with reserves of 13,842 million tonnes allotted during April-January 2007-08 to Government and private sector companies.

At this time, it has been observed that only a small proportion of the graduating engineers passing out of mining institutes are joining the industry. Most industry leaders agree that the industry is facing shortage of qualified and skilled human resources. The industry leaders also believe that this could pose a severe constraint to the ambitious growth being targeted for mining projects and mineral production, so as to support the needs of the mineral resource hungry Indian economy.

Young mining professionals who have the potential to shoulder the responsibilities of break-a-neck pace of growth in production and implementation of new projects and technologies have not been too keen on the industry. There is shortfall even at the intake stage. The seats in mining engineering course in premier institutions in India are not occupied, the average occupancy being 75% of the sanctioned strength. After completion of their course, many of the graduating students choose to walk away from the industry. This is expected to hinder the pace of growth in the mining industry.

2. Risks of Talent Shortage

There are several risks of talent shortage for mining industry. Some of these have begun to show impact on the performance of the industry in terms of project implementation, production and productivity issues. Some of the key risks are listed below:

Failure to sustain growth – in the absence of right talent, the mining organizations may not be able to execute their strategic business plans.
Failure to secure succession – there may be lack of people to take on the responsibilities of leading the organization
Failure to attract emerging talent – the new talent may not choose to invest their time in the industry
Failure to retain top performers – the outstanding performers may leave the industry to pursue opportunities that attract them
Failure to provide board-level direction – key talent issues may not get the attention at the highest level of decision making
Failure to provide effective support – the organization may be reactive to manage talent risk and may not provide effective support for the same
Failure to weed out poor performers – the poor performers with adverse impacts on productivity and group morale may not be identified and weeded out.

For effective talent risk mitigation in mining industry the organizations need to tackle the following questions:

Does the industry have the people needed to sustain growth?
Is the industry finding it difficult to fill critical positions?
Is the industry attracting enough emerging talent?
Is the industry losing top performers?
Is the industry wasting valuable mining project experience?
Is the industry providing effective direction and support?
Are the industry top performers carrying under performers?

3. Challenges of fresh recruitment in mining industry

In India 17 colleges are providing degree in mining engineering. Total sanctioned strength of these colleges is about 600. However, total number of students graduating per year from these colleges is about 370 on an average for the last three years. Of the three most premier institutions for mining engineering education, namely, Indian School of Mines (ISM), Indian Institute of Technology Kharagpur (IIT KGP) and Institute of Technology Banaras Hindu University (IT BHU), ISM has relatively stronger number of students choosing to work in the industry. But even from ISM, on an average only 60 % students accepted on campus job offers from mining companies in year 2006 and 2007. In IT- BHU, only 22 % students accepted on campus job offers from mining companies. Although, statistics were not available, relatively large proportion of students of mining engineering from IIT Kharagpur also tend to choose alternative career options.

4. Survey of graduate mining engineers

PricewaterhouseCoopers conducted a survey of graduating mining engineers from 12 institutions imparting mining engineering education, with the following objectives:

To identify the career expectations of the students currently enrolled in mining engineering degree courses.
Understand the factors which motivate them to join mining industry.
To identify the factors which students consider important while considering a job offer.
Identify the factors which when improved, will encourage mining engineers to work with mining industry
To identify the industry options on managing human resource shortage risks and improve the environment to attract and retain talent
To comprehend the opinions of the industry leaders on how the industry is currently attempting to attract and retain mining engineers.

The results of the survey indicated some obvious and some interesting results.

Majority of Students chose to study Mining engineering because, mining engineering was the best option available to them at their Ranks in Entrance Examinations and not because of their interest in Mining Industry

Nearly 59 % of students are unwilling to join mining industry after their graduation. Only 41% of total respondents gave high priority to the career in mining industry. Out of interested 41 % of respondents 54 % want to join core mining industry and rest want to join mining allied industry.

Although the opinions are divided but most of the mining graduates consider brand value and remuneration offered by a company are the two most important factor for accepting a job offer from a mining company. Other important factors influencing them are opportunity of working abroad and job profile.

Students, who are willing to joining mining industry, are attracted to the industry because of higher initial salary offered. The other most important factor that satisfies them is the opportunity of career development in their field of specialisation.

Lack of social life and remote location are the two most important factors which make career in mining industry an unattractive option. 23% of the respondents stated lack of social affiliations and 21% stated remote locations, which in some ways may even be connected, as the key factors that make mining unattractive as a career option.

32 % of the respondents aspire to take up managerial roles in mining industry within 5 years of their joining, whereas about 22% of the respondents desire to be able to work in cities. Only 18 % of the respondents have given high priority to getting higher salaries than their peers in other industries. About 21% of the respondents desire to get out of the industry within a 5 year period.

Students have attached almost equal weights to the need for improvement in work environment, and in infrastructure facilities, as also to higher salaries and improved job content.

Most of the graduates agree that the remuneration offered by the mining companies are not good and needs to be revised on immediate basis. Infrastructure of the townships and working conditions of the mine site should also be improved upon on high priority basis. Moreover more mining engineers can be attracted to industry by undertaking brand building exercise.

5. Implications for the industry

The results imply serious implications for the industry. These revelations also may help the industry formulate the strategies for acquisition and retention of talent.

Since students are not joining mining by their interest, they may have less focus on the subjects of the course and may not be interested in mining industry as their final career. Since the students are more likely to move away from mining industry and look for other alternatives, the industry may need to make efforts to enhance the levels of interest in the industry and a career in the industry. Brand building exercise with emphasis on improved work environment and challenging roles and responsibilities may help the industry.

Since only 41% students pursuing mining engineering are willing to join mining and mining allied industry, growing mining industry is likely to face the shortage of mining engineers. This may also affect the growth adversely. To maintain the high growth rate, industry needs to attract more engineers to join the industry. Industry need to think and formulate the strategies with academic institutes to counsel the students and motivate them to join the industry. Organizing seminars and counselling sessions, emphasizing the contribution of the industry to the economy, focussing on the challenging job contents and growth opportunities may help attract talent.

Students are more interested in working for the companies which are having global presence and the companies which pay high. It may be inferred that mining companies with lesser visibility and repute are more likely to face the shortage of mining engineers. Brand building exercise together with loosening the strings of the purse may be appropriate. Companies may provide learning and development opportunities through collaborations with reputed companies, make policies encouraging job rotations, ensure better and healthier work environment, improve amenities and provide for recreational facilities. Concerns regarding job location may be addressed through postings in phases at the head offices and mine sites, wherever feasible.

Since initial salary is the most important guiding factor for opting mining engineering as career, the probability is higher for their turnover in future if they are not paid comparable to their peers working in other industries. To retain mining engineers, mining companies may need to assess their salary structures and align them with the other industries. Mining industry may also need to pay premium over other industries due to the work environment and location factors. The industry also needs to blend the job contents of production with opportunities for innovation and creativity. Rotations between production, planning, development, feasibility assessment, safety and such others may help attracting students.

Lack of social life and poor infrastructural facilities in and around mining area creates family pressure on a mining engineer. The difficulty in balancing work and family life force them to leave the industry. It may appear light but some of the respondents and industry leaders acknowledged that mining engineers may find getting a good match difficult due to the work location. It is appreciated that minerals occur where they do. But the industry may do well to provide for improved social affiliation, creation of facilities for recreation, create facilities for providing support to families, create vocational opportunities for spouses and family members and support them in their endeavours, and such other steps that may make stay at mine locations comfortable.

Mining industry may need to provide for a fast track growth opportunities. The desire to opt out within a period of 5 years expressed by 21% of the respondents may indicate loss of trained hands, creating shortage at middle management levels. This may also lead to succession issues and leadership crisis subsequently. The growth opportunities need to be created with significant improvements in the job contents to retain talent. Also, there may be opportunities created for phased alternate postings in cities interspersed with postings at mine locations. Delegation of responsibilities and decision making to the middle level management may make talent attracted to continue with the industry.

Industry may need to invest and spend on creation of better working conditions, improved civic amenities and infrastructure facilities. The investments may also need to be recurring. Salary alignment and job profile enhancement may also be needed, and may mean pressures on margins.

Increase in salary offered to mining engineers and improvement of infrastructural facilities will help in attracting more mining engineers to the industry. Mining industry needs to pay immediate attention to revision of remunerations offered to mining engineers. A detailed salary survey to establish comparisons with other industries may help align the salary structures.

6. Conclusions

It has been observed that less than 50 % of graduating mining engineers are willing to opt for a career in Mining Industry. Majority of students think that mining is unattractive because of lack of social life, unattractive working conditions at mine and poor infrastructure facilities at mine townships. Students who are willing to join mining industry are guided by the thought of development of career in their field of specialization.

It is, therefore, concluded that long term focus of the mining industry should be on:
Improvement of working conditions at mine site
Improvement of infrastructure facilities of mining towns.
Revising salary structure and linking it to performance
Incorporating job rotation policies.
Brand building and awareness programs.
Industry may also need training geologists, geo-scientists, mining diploma-holders and those with sufficiently long experience in mining operations to manage mining activities. It may be good to contemplate on increasing the number of institutes offering degrees in mining engineering to meet the growing demand for mining engineers. If employment opportunities are provided to the spouses of mining engineers, they may be willing to join mining industry.

Import duty waiver to make naphtha cheaper - Quoted in the Business Standard

The government today announced to lift import duty on naphtha, which is used as a fuel in power sector projects. “Import duty on naphtha for use in the power sector will be eliminated,” it said in a statement.

India is self-sufficient in producing naphtha and meets almost all of its requirement of the fuel. The elimination of import duty will bring down the price of naphtha, since petroleum products are priced on an import-parity basis, which includes components such as freight and import duty. Currently, naphtha attracts a Customs duty of 5 per cent.

“The cut on the import duty will bring an impact of about $1.5 per million British thermal units (mmbtu) on the delivered price of naphtha. This is estimated to result in an overall 50-55 paise reduction in the cost of power generated from naphtha,” said RS Sharma, chairman and managing director of NTPC Ltd, the country’s largest power generator.

Since the country is not self-sufficient in natural gas, power producers often use naphtha for generating electricity. The price of naphtha has decreased to about $10 per mmbtu as compared to over $30 per mmbtu in June this year. Prices of naphtha, which have traditionally been higher than imported gas, have fallen to levels which are currently lower than gas. This has made naphtha more competitively priced than imported gas.

“The elimination of import duty on naphtha announced by the government will ensure that the prices of naphtha and of the power produced will come down. This will give a boost to the sector as a whole,” said Dipesh Dipu, principal consultant, PricewaterhouseCoopers.

“The package will definitely help the power producers. It will help us to bring down the tariff of power that we sell to transmission companies. This is a welcome move as the prices of naphtha have fallen by 50 per cent from their peak, and elimination of import duty will result in lower cost of raw material for the power producers,” said A Subba Rao, president and CFO, GMR Energy Ltd.

To meet its growing demand for power, India needs to increase its electricity generation to about 1,000 billion units (Bus) by 2012, from a current level of about 666 Bus.

CIL plans JV with Aussie firm for better coal usage - Quoted in the Economic Times

NEW DELHI: The government is considering a proposal of Australia-based Hindustan Global Resource Ltd (HGR) to form a joint venture with public sector Coal India Ltd (CIL) for efficient use of coal. The Australian firm has proposed to offer the coal-to-briquette technology that would use coal wastes from mines and washeries to produce fuel briquettes.

“The results from an economic feasibility study for briquettes production uses blends of coal tailings, fines and an organic waste binder,” HGR vice presidepresident of Amar Bhasin said. “The technology can significantly utilise the undersized coal waste and mix it with an agricultural binder to produce coal briquettes for use in fuelling coal-fired power stations, steel plants and other commercial and domestic uses,” he said.

The 18 abandon mines of CIL may produce up to 320 million tonnes of coal fines during the life of the projected reserves and coal tailings production will increase as production of washed coal increases, he added. A CIL official said the company is considering the proposal.

Dipesh Dipu, principal consultant (mining) with audit and consulting firm PricewaterhouseCoopers said, “coal tailings from washeries are generally discarded as waste from coal washeries contains moisture and cannot be used further for any purpose. Briquetting technology can remove the moisture and make it into solid palettes to make it fit for use for consumer industries.”