Mining Policy & Regulation – Need to Shift Gears - My article in Indian Infrastructure

Indian National Mineral Policy was unveiled in 2008 with much fanfare. The policy was stated to attract foreign direct investment of US Dollars 250 million per annum. However, the policy remains still on paper, with tangible impacts yet to be observed. Although, the economic down turn may have a role to play for the next couple of years, the policy for boosting mineral sector investments needs to be sharpened if India aims to solve raw material security concerns even in light of abundant mineral resources.

When international commodity prices skyrocketing only a few months ago and domestic supply sources were stretched, there were cries for long-term solutions. But now, as prices are falling and import sources look tamer, the supply crisis seems to bother less. The financial downturn is likely to have a profound effect on mining industry and mineral supplies. Due to the credit crunch and liquidity squeeze, there may be delay in mining investments and new project implementation. Brakes on investments will surely mean much worse mineral supply scenarios in future. Hence, this may be the time to act to avoid a more severe and damaging crisis in the future, and the financial downturn should be the trigger to initiate pragmatic, sound and sustainable mineral policy, which should go beyond mere statements of intent and must be supported by appropriate legal provisions to overhaul the sector.

Long-term perspective must be applied to mining policy, in the contexts of private sector participation, tax and royalty regimes, price regulatory mechanism, environmental and safety administration and human resource development for the sector. Some of the tenets for the mineral policies can be attracting private capital, development of financial markets, nurturing competition, providing for physical infrastructure, adopting sustainability practices and promoting innovation.

Attracting private capital

Indian mining industry needs private capital for revitalizing itself. Unfortunately, the policy formulation in India still continues to focus on expenditures by the government and government-owned companies. Making exploration and prospecting activities financially attractive for the private sector may be better than allocating government funds for these activities, more so when the fiscal deficits of the governments have reached alarming levels. For this, the nation needs to formulate un-ambiguous mining development policy guaranteeing right to mine or sell an exploration asset. Indian private players have been scouting abroad for mineral assets, including prospecting and exploration properties. They have invested in South Asia, Africa and even Latin America while Indian mineral deposits have remained inaccessible for private investment.

Foreign investors in mining consider country risk lower when there is an explicit commitment and proven track record for supporting private sector investment. According to 2009 country ratings for mining investment published by Behre Dolbear, India fares relatively low on social issues, permitting delays, corruption and tax regimes, which have significant impact on foreign investments. The foreign investments in the sector have been, therefore, low.

For attracting private capital in the industry, the policies need to have precisely defined objectives, transparent regulatory processes, predictability and efficiency. Indian mining policies are vaguely worded and appear indicating desirable goals only. The regulatory frameworks are opaque and un-predictable, and do not have timeframe dimension. For promoting private sector investment, time-bound approval and objective processes that can have predictable outcomes would help. According to one of the studies conducted by erstwhile Central Mining Research Institute, it takes on an average 7 years to develop a mine from the date of application for limestone mining leases. The results can be reflective for other minerals too. Such long pre-mining periods can turn off private capital inflows and may have damaging impact on the sector.

Questions have been raised by several stakeholders on the efficacy of coal block allocation process, which is considered laden with scope for discretion and judgment. The Ministry of Coal has proposed competitive bidding process for coal block allocation. Similar proposal has been supported for other minerals as well. The competitive bidding process is likely to lend credibility to process of awarding mineral licenses. Initial payments or committed payouts to the government may also result in commercial incentive for mine owners to develop the mineral reserves sooner. However, it may increase the cost of production to an extent. The quantum of such monetary commitments may therefore need to be prudently fixed.

Other characteristics of mineral policies that may help attract private capital are simplicity of the procedures and stability of fiscal and regulatory regime. The procedures for clearances and approvals in the Indian context are labyrinthine and involve consents from scores of authorities. Single window clearance proposal has not got its due, and effectively, the door to private and foreign investors remains near-shut.

Development of financial markets

Financing mining projects have their unique challenges. In India, traditionally, the government owned companies have relied on equity – from government or own sources – and have taken pride in zero-debt balance sheets. Even on the equity markets, many of the listed mining companies have marginal floats. This has resulted in not-so-vibrant market for mining stocks and debt issues.

Private as well as government sector mining investment may need development of financial markets to support their expansion and growth plans. According to the World Bank – PPIAF sponsored PricewaterhouseCoopers survey of emerging markets infrastructure investors and developers, emergence of local capital markets has been a big plus in pushing the share of developing country investors into prominence. The same may need to be replicated in the minerals sector as well. Private sector participation will certainly get a boost from development of alternate investment markets (AIM) for risky exploration and prospecting projects. The London AIM market attracts a large volume of investment trades in prospecting, exploration and development companies and caters to their funding requirements for relatively risky assets which may not have qualified to be listed on the main capital markets. Development of such market in the Indian context is likely to provide much needed exploration and development capital.

Development of financial markets will need to include risk management instruments for mining sector. Volatilities in the commodities market have direct bearing on the mining sector, while the Indian market does not offer many hedging instruments to manage such risks.

Participation of financial institutions, venture capital and private equity funds may add dimensions in the financial markets for mining sector. Thus far, these participants have been lukewarm to the sector, for which the reasons could vary from high political and social risks to long gestation periods that may exceed their investment horizons.

Mineral policies need to take effective measures to pave the way for financial market development for mining sector.

Nurturing competition

India mineral markets are distorted with restrictions on ownership, transactions, end-use, pricing and market participation. On of the key roles governments – central as well as state – have to play for effective development of the sector is to nurture competition. For example, in coal sector, market participation is restricted to end users and pricing of coal, though deregulated, continues to be within effective government control. To monitor business practices, including pricing, creation of coal regulator has been mooted but the concept remains on paper in view of strong opposing opinions of coal consumers and suppliers.

Ideally, the ultimate aim of the policies should be to enable development of competitive markets where the market forces determine demand and supply and hence, pricing, under symmetric information dissemination. Institutions of regulation may help develop such market and hence, may be constituted, provided they do not duplicate efforts and authority resulting in unwarranted governance expenses and project delays.

Effective mineral policy will have to create a road map for development of such market with tangible milestones.

Providing for physical infrastructure

Mineral deposits occur in areas that need investments in physical infrastructure. Several coal and iron ore projects are hamstrung for want of evacuation infrastructure. The international trade markets have been constrained due to inadequate port facilities. The widening gap in coal demand and supply are likely to result in increasing dependence on imports. The coal demand by 2031-32 is estimated to be nearly 2.34 billion tonnes per annum, and even if coal supplies from domestic sources keep growing at 7% per annum from the current levels, the demand –supply gap may be conservatively estimated at 325 million tonnes. Sufficiency of import sources may itself be questionable, but infrastructure facilities are likely to be inadequate.

Mineral policies in isolation may not yield much unless they are embedded in infrastructure development plans. The disconnect between mineral sector growth plans that stem from the mineral policies and the infrastructure plans, including development of railway networks and port infrastructures, are likely to lead the nation into disappointment.

Adopting sustainability practices

One of the cornerstones of mineral policies has to be sustainability, which is in turn linked to successful implementation and operation of mining projects. Several key issues including environmental & forest clearances, land acquisition, rehabilitation & resettlement are linked with the industries’ focus on sustainability. Except a few, mining companies have fared low on this account, which is visible in their inability to get the project started and developed on schedule. Short term commercial interests are observed to take priority. Focus also is observed to be more on compliance in letter than in spirit.

Mineral policy certainly needs to provide motivation for effective and amicable solutions for social and environmental concerns. Several law and order problems too have roots in inappropriate handling of such concerns. Some of the manifestations of such problems, however, may not be directly attributable to mining ventures, but the mining projects need to plan for their business continuity through engagement with the society.

The reason enough for mining companies to engage with local population is also to mitigate human resource risks. The Central Coalfields Limited, a subsidiary of Coal India Limited, is stated to be facing employee absenteeism and attrition due to law and order problem.

The mineral policies need to align themselves with the economic goals of inclusion and social development. Although onus of responsibility lies on the mining companies, the policies need to determine the directive principles with measurable result areas. The government owned and private companies may also need to consider publishing sustainability reports that may help them in effective communication with communities and building brands.

Promoting innovation

Mining companies need to be adaptable and that involves being flexible, innovative, opportunity-seeking and resilient. They have to deal with cyclicity and must have resilience to ride the waves. This may be challenging when their revenues are elastic and determined by the external business environment whereas costs are sticky. Such circumstances, as can be seen in the current economic downturn, demands innovative approach to business. While controlling costs may be necessary, application of unbridled control can become counterproductive and choke innovation. While the economic buoy in the global and local markets have helped the mining sector reach unprecedented levels of growth and profitability in the last couple of years, the same is likely to be endangered if innovation is not encouraged.

There are many examples of technical developments in the global arena in mining and metallurgy, including remotely managed work-faces, GPS driven surface mining, new smelting and hydrometallurgical recovery processes and new geological modeling techniques. Much of these haven’t been adopted in India to the fullest, and these may help reduce costs and wastages. Indian mining industry needs to focus on both nut-and-bolt and revolutionary innovation to grow even in times of downturn. The mining policy needs to motivate investments in innovation. Budgetary allocations of government resources may be complemented with profit-oriented private funds in innovation. Fiscal incentives may also need to be devised for the sector.

Conclusion

Patchwork policy formulation for the Indian mining sector is unlikely to result in the push required for the industry which happens to be the fulcrum for economic development. At the same time, if the soul of policies is not supported adequately with bones and muscles of legal and regulatory frameworks, the sector will languish and will fail the nation.