Catastrophic Failure of Public Trust

7/23/2019 Catastrophic Failure of Public Trust

http://slidepdf.com/reader/full/catastrophic-failure-of-public-trust 1/22

Catastrophic failure of Public Trust

by Rahul Basu1

1. Abstract

Minerals are a commons, held by the state government in Public

Trust for us and especially our future generations. They are our

uttaradhikari, inherited assets which we must pass on to our

children. When mining occurs, States dispose our minerals, and

receive royalty & other amounts in return. We nd that States lost

over half the value of their minerals. !ver the last eight full years of

iron ore mining in "oa, the loss was #s $%.$ lakhs for a family of

four. 'ompare this with a recent estimate of average private

household assets in "oa of #s $(.)) lakhs. This is catastrophic. The

State has wasted our children*s inheritance.

2. Introduction & Background

+nder rticle -) of the /ndian 'onstitution, sub0soil minerals are

owned by the individual States, not the 'enter, the mining

leaseholder, or the land owner. There are some e1ceptions, but

usually ownership vests with a representative entity such as a

2istrict 'ouncil or a #egional 'ouncil. Technically, the provisioncarries forward the situation from the predecessor states. 3or

e1ample, in "oa, the state owned all mineral resources under the

predecessor Portuguese law. !4shore minerals 5chie6y oil & gas7 are

owned by the 'enter under rticle -. 3or simplicity of analysis, we

assume States own the minerals.

8atural resources are a commons. The "overnment owns them in

trust for the public and especially future generations. They are

uttaradhikari, inherited assets akin to ancestral 9ewellery, and needto be passed on to future generations. This obligation also 6ows

from the /ntergenerational :;uity principle 5:PW, -( 2ecember

-($)7. /n the 3omento #esorts and <otels =imited case >5-((7 %

S'' ?$@, the Supreme 'ourt heldA

$ The author would like to acknowledge helpful inputs from Sudipta Basu and Shrayragi

/srani.The author is a member of "oa 3oundation and ':! and 3ounder of 9adC. <e can

be contacted at rahulbasu$ at gmail dot com.

Page 1 of 22



“We reiterate that natural resources including forests, water

bodies, rivers, sea shores, etc. are held by the State as a

trustee on behalf of the people and especially the future

generations.”

“The heart of the public trust doctrine is that it imposes limits and

obligations upon government agencies and their administrators on

behalf of all the people and especially future generations. For

example, renewable and non-renewable resources,

associated uses, ecological values or objects in which the

public has a special interest (i.e. public lands, waters, etc.)

are held subject to the duty of the State not to impair such

resources, uses or values, even if private interests are involved.”

/n the Meerut 2evelopment uthority case >5-((7 D S'' $?$@, the

Supreme 'ourt heldA

EWhenever the Government or the authorities get less than the full

value of the asset, the country is being cheated there is a simple

transfer of wealth from the citi!ens as a whole to whoever gets the

assets "at a discount#.F

s a commons, the public owns e;ual shares in natural resources.

ny loss is e4ectively a poll ta1, a per0head ta1, a ta1 in e;ualamounts on every citiGen. Per0head ta1es are highly regressive H the

poorest are ta1ed the same amount as the richest. 3urther, as these

are inherited assets to be passed on, any loss is cheating our

children of their inheritance. So what are these assetsI

Mining impacts three signicant Public Trust assetsA

$. Real ption to !ineA Mining is a one0time income generating

opportunity. The opportunity is part of our uttaradhikari. We havethe option to mine as the previous generations did not utiliGe the

opportunity. /f we do not mine, the ne1t generation inherits the

option to mining. /n economics terms, this is a Ereal optionF that

has signicant value. The option to mine never e1pires, and its

strike price is Gero. Therefore, its value is the one time income

generated from mining 5Jolb -((%A 'h )7. This value must be

captured by the State so that future generations can inherit it,

instead of the opportunity to mine that we utilised.

Page 2 of 22



:mployment and income generation arguments for mining are a

demand by a few to encash the public mining option for their

benet. 8o consideration is given to the State capturing the value

of the option for the benet of future generations, likely a total

loss. rguably, the State is also obliged to ma1imiGe the benetsfrom this opportunity. This is usually through creation of multi0use

infrastructure, downstream and ancillary businesses, and creation

of mining competencies.

-. "ocial cost of !ining. Mining e1ternalities, or the social, health

and environmental costs of mining, impair other natural

resources. /mportantly, the impacts are not distributed e;ually. ir

pollution may have global impacts. 'orruption and civil unrest can

cover signicant areas. The impact on health may be morelocaliGed. !ften, the poor bear the greatest burden.

/deally, each social cost would be identied and appropriate

compensation designed, if feasible. :1isting compensation for

e1ternalities is limited. 3or e1ample, the Barge Ta1 in "oa is

intended to compensate for damage caused to khaGan bunds. The

2istrict Mineral 3und contributions are of this nature. <owever,

there is no comprehensive valuation of mining e1ternalities

available.

%. #cono$ic %alue of the !ineralA The actual mineral itself has

value, which must be captured in full. The economic value of

minerals is the sale price minus social costs minus all e1traction

and processing e1penses. We can write it as 5#evenues H Social

costs H Private costs7.

The State*s duty is to avoid impairing the value of the above assets.

8o mining ensures the mineral resources pass on to the ne1tgeneration unimpaired. /f the State does mine, it must capture the

full value of the natural resources and avoid losses. !nly then can

future generations inherit unimpaired assets. /f the State cannot

avoid a loss while mining, its duty as trustee is not to mine. Since

mining has taken place, we evaluate whether the state has fullled

its duty as Public Trustee.

n earlier paper had used World Bank data to determine whether

"oa had avoided losses over a ve year period 5:PW, -( 2ecember

Page of 22





the 'K. We call their shares State capture, 'enter capture and

Windfall prot.

Public Property (ost & (oss Rate

EPublic Property =ostF is dened as 'K minus State 'apture. s the!ption value is not part of 'K, this underestimates the loss. We

dene the E=oss #ateF 5E=#F7 to measure the e4ectiveness of the

government when disposing natural resources. The =oss #ate is

Public Property =ost 'K. voiding losses re;uires a =oss #ate of (.

The E'apture #ateF 5E'#F7 is a secondary metric. The 'apture #ate

is State 'apture 'K. =oss #ate N 'apture #ate O $((.

+nder the /ndian public nance system, the States receive

signicant nancial support from the 'enter through the 3inance'ommission recommendations and the erstwhile Planning

'ommission. The basis for allocating funds to States has no linkage

to the ta1es and other sums the 'enter captures from each state.

Therefore, the argument that State capture should include the

in6ows from mining to the 'entre has no merit.

8evertheless, we calculate three additional metrics. The EState PS+

'apture #ateF 5ES'#F7 is a metric that measures the '# in the

hypothetical situation where the State owns the mining leaseholder. The E"overnment 'apture #ateF 5E"'#F7 looks at the total amounts

captured by the 'enter and the States as a proportion of the 'K.

E“Government Ta$e” is the government%s share of economic pro&ts

counting almost income sources' (onuses, royalties, pro&t oil, taxes,

Government wor$ing interest, etcF Qohnston 5-((A?7.

/nternationally, "overnment Take is fre;uently used. We calculate it

for comparison.

#)a$ple

We will use the -($%0$) accounts of 8M2' to demonstrate the

calculations. The following table compares the nancial statements

with the calculations for the 'apture #ate.

Table 1* +!,C -inancials recast for Capture Rate

) Where individuals or representative 'ouncils own minerals, there are four

competing interests. 3or analytic simplicity, we assume the States own the

minerals.

Page of 22



-inancial "tate$ents Recast for Capture Rate

#evenues $$,

-D

#evenues $$,

-D

8on ta1e1penses

-,)(D

8on ta1 e1penses -,)(D

#oyalty D( /ncome ta1 on earned prot %?-

:1port duty, etc D)L :arned prot 5-( return on

assets7

?$)

=essA Total

e1penses

),($

=essA Total Private cost %,)

-

PBT ?,$$ Capturable %alue /C%0, ofwhich '' 1334

/ncome ta1 %,%

D

5 Royalty 673 11

4

Prot after ta1 ,-(

%

5 :1port duty, etc D)L L

5 /ncome ta1 on windfall prot -,%%

D

-L

5 Windfall prot, of which ),)L

%

5 'enter 5L(7 %,

$

)%

5 Public 6oat 5-(7 LL $$

Public Property (ost 5'K H

#oyalty7

8'8

'

6

4

!etric +u$erator ,eno$inator Resul

t

(oss Rate 8'8' '' .7

4

'apture #ate D( L,)%) $$.)

"overnment 'apture

#ate

D(ND)LN-,%%DN%,$ L,)%) L.)

Page 7 of 22



State PS+ 'apture #ate D(N),)L L,)%) D).D

"overnment Take %?-N5?$)1L(7

ND(ND)LN-,%%DN%,

$

%?-N?$)NL,)%) L.$

SourceA 8M2' nnual #eport -($%0$)

We rst estimate the amount captured by 8M2' through un0earned

prot. Since 8M2' has multiple business segments, we use the

segment reporting tables in the notes to the consolidated accounts.

#evenues from the iron0ore segment 5#s $$,-D crores7, earnings

before interest & ta1 5:B/T7 5#s ?,$$ crores7, assets 5#s ),)%%

crores7 and liabilities 5#s LD% crores7 are available here. /nterest isGero, hence :B/T O prot before ta1 5PBT7. We use the gures for ta1

5#s %,%)$ crores7 and PBT 5#s ,?D$ crores7 from the consolidated

Prot & =oss 5P&=7 Statement to estimate the 8M2' e4ective

corporate ta1 rate 5%)7, and use it to estimate ta1 5#s -,?(L

crores7 and prot after ta1 5PT7 5#s ,-(% crores7 for the iron0ore

segment. This includes both earned prot and windfall prot 5and

ta1 thereon7.

We have set the reasonable after ta1 return on capital at anattractive -(. By comparison, weighted average cost of capital is

often assumed to be in the range of 0$-D. We applied this rate on

the segment net assets 5segment assets minus liabilities7 to

estimate Eearned protF 5#s ?$) crores7. ny prot over and above

this -( return on capital would be regarded as Ewindfall protF 5#s

),)L crores7 that should ideally have been captured in full by the

State. We divide the ta1 on the iron0ore segment proportionately

into the ta1 on earned prot 5#s %?- crores7 and ta1 on un0earned

prot 5#s -,%%D crores7?.

We use the gure for ESegment #esultF. There is a gure reported for

E+nallocated 'orporate :1pF, this sometimes adds to prots and at other times

subtracts. We have ignored this. The impact is not material.

D 3or instance, W'' 5weighted average cost of capital7 of 'oal /ndia is

estimated at $- 5httpAindiankanoon.orgdoc$-(-$?L7

? "oa 3oundation calculations do not separate income ta1 into these

components. The impact is minor.

Page 8 of 22



The State captures value through #oyalty 5#s D( crores7. This is

available in the P&= Statement. The 'enter captures value through

e1port duty 5note -.-? on Selling :1pense7 5#s D)L crores7, and

through corporate income ta1 on un0earned prot.

The total 'K 5#s L,)%) crores7 is the sum of royalty 5#s D( crores7,

e1port duty 5#s D)L crores7, ta1 on windfall prot 5#s -,%%D crores7

and windfall prot after ta1 5#s ),)L crores.7 The Public Property

=ost was #s ?,)?) crores. The =# was LL.D 5and '# $$.).7 /n

other words, the States where 8M2' conducted its iron ore mining

operations lost LL.D of their assets.

The 'enter captured ?.? through e1port duty, and -?.? through

ta1 on windfall prot, totaling to %.). The shareholders of 8M2'captured the balance %.- of the 'K. s it happens, 8M2' is a PS+

with the 'enter owning L( of the shares, so another )-.D is

captured by the 'enter, bringing its share up to ?L.( and

"overnment 'apture #ate to L.). State PS+ 'apture #ate would

be D).D 5royalty N windfall prot7. "overnment Take is L.$.

Co$paring $etrics

ssuming private mining, =oss #ate is Public Property =ost 'K, or

R'K H State capture

RState capture N 'enter capture N Windfall prot

'apture #ate is State 'apture 'K, or

RState capture


State PS+ 'apture #ate is

RState capture N Windfall prot


"overnment 'apture #ate is

RState capture N 'enter capture


"overnment Take is

Page of 22



RState capture N 'enter capture N 5"overnment share of earned

prot N its ta17

RState capture N 'enter capture N Windfall prot N 5:arned prot N

Ta1 on earned prot7

/n order to avoid loss, the =oss #ate is the appropriate metric. The

goal is ( 5and $(( for '#7. /t can be calculated for the sale of any

asset. This makes it very suitable for comparing performance, and

learning from variations. 2espite widespread use, "overnment Take

is a poor metric. There is no ad9ustment for earned return on capital

and the associated income ta1es on earned prot. 'apital intensity

& risk varies widely across mines H deep o4shore mining is much

more capital intensive and risky compared with surface iron0ore

mining. We would e1pect lower "overnment Take where capitalintensity or risk is higher.

+nlike the universal 'apture #ate norm of $((, target values for

"overnment Take must be set individually by ad9usting for earned

prot and associated ta1esL. <owever, there is a close relationship

between "T and "'#. /n situations where the capital intensity & risk

is low and 'K high, the "'# will be very close to the "T. 3urther,

when there is earned prot achieves target 5'# O$((7, and the

normal income ta1 rate is e;ual or lower to the mining income ta1rate, "T will be lower than "'#. This is important as international

data shows that entire countries achieve "overnment Take in e1cess

of ( in the risky and capital0intensive oil & gas sector 5Barma

-($$A$D-7, implying that the "overnment 'apture #ate approaches

$((. /f the federal government owns the minerals, it implies a =oss

#ate in single digits.

/n its report on coal block allocations, the 'omptroller & uditor

"eneral 5'"7 had calculated EWindfall "ainsF using historicalaccounting data 5'" -($-7. <owever, while the absolute amounts

were provided, the =oss #ate was not estimated. =oss #ate of $

is an eUciency issue. =oss #ate over ( is a structural issue.

L "T of $(( implies no earned prots for the mining leaseholder 0 clearly

unacceptable.

5Ta1 on earned prot RTa1 on earned prot N :arned prot7 is di4erence

between "T and "'#. /t is O than 5Ta1 on windfall prot RTa1 on windfall prot

N Windfall prot7 by assumption, and the residual term in "'#, Rother

"overnment Take other "overnment Take, which is $.

Page 6 of 22



'. Results

A. "esa 9oa & +!,C Results

Sesa "oa is the only public company that mines in "oa. /t is the

largest producer and e1porter of iron ore from "oa 5%( by volume7,so it is representative. n overwhelming ma9ority 5?) by volume7

of Sesa*s mining operations were in "oa. Mining accounts for L- of

Sesa*s revenues, the rest coming from pig iron and metallurgical

coke. :1ports are ) of mining revenues. 3urther, since it is well

integrated, we can get an understanding of the complete cost

structure right through e1ports. =astly, it has few related0party

transactions.

The 8M2' is a PS+ of the "overnment of /ndia. !ver of 8M2'*s

revenues are from iron0ore mining, with mines in several /ndian

States, primarily ndhra Pradesh and 'hhattisgarh. 8M2' sales are

largely domestic 5L7.

Table - summariGes the results for Sesa "oa and 8M2'.

Table 2* "esa 9oa and +!,C results

"esa 9oa +!,C

233'53 52311512

233'53 523151'

/#ight years0 /Ten years0

Rs Cr 4 toC%

Rs Cr 4 toC%

#evenues %%,-L- $?? ?),?D $%$

8on ta1 e1penses $-,%%) DD $-,?(D --

/ncome ta1 on earned prot D)( % $,?- %

:arned prot 5-( return on

assets7

$,$% L %,%( D

=essA Total Private cost $),)LL ?? $?,L- %$

Capturable %alue /C%0, ofwhich

186'

$(( 781

$((

0 Royalty 6 4 '3 4

0 :1port duty, etc -,L)$ $ -,$) )

0 /ncome ta1 on windfall prot ),-%$ -% $D,L-) %(

0 Windfall prot, of which $(,L%% L %%,-%$

0 'enter ( ( -D,L )?

0 Public 6oat $(,L%% L D,D)D $-

Page 13 of 22



Public Property (ost /C% 5Royalty0

1863

64 22'

624

!etric "esa 9oa +!,C

(oss Rate 6.4 62.14'apture #ate ).? ?.

"overnment 'apture #ate )-.) LL.%

State PS+ 'apture #ate D-.) DD.

"overnment Take )$.$ L%.L

Rs Crore "esa 9oa +!,C

Public Property =ost $?,( -,-)L

:mployee e1pense ?L ),(?(

Mining dependent e1pense ),L- ),L$?

:arned prot $,$% %,%(

Total Private cost $),)LL $?,L-

SourceA Sesa "oa & 8M2' annual reports

The picture is remarkably similar across Sesa and 8M2'. =oss #ates

are above (. nd these may be underestimates. Sesa "oa was

mentioned in the Shah 'ommission #eport % in relation to under0invoicing. Similarly, the '" 5-($-7 report on production and sale of

iron ore by 8M2' estimates a loss of #s $,?).$$ crores over -((?0

$$ due to Einrmities in price 1ationF.

Windfall prot is nearly D( of the value, much greater than all the

ta1es put together. Since the "overnment of /ndia owns L( of

8M2', it is the primary beneciary of the windfall prot, e1plaining

the higher "'# and "T. s central ta1es capture a large part of the

value, the State PS+ '# does not reach ?(.PrivatiGation of mining is often on the basis that the public sector is

ineUcient or corrupt. The comparison reveals that 8M2' has better

operating metrics H similar asset intensity, better margins.

B. :ydrocarbons

recent doctoral thesis 5Saksena -((7 uses a similar methodology

to calculate royalty and 'K for fossil fuels. <owever, not enough

data is available to calculate other metrics. 3or oil & gas, nancials

Page 11 of 22



for $ years H $(0-(( of !il & 8atural "as 'orporation 5!8"'7

and !il /ndia =imited 5!/=7 were used.

0

&,(((

$(,(((

$&,(((

-(,(((

-&,(((il & 9as Royalty ;s Rent /Rs.Crore0

similar analysis was carried out for 'oal /ndia =imited 5'/=7 and its

subsidiaries for a $? year period 0 $L0-((D. s can be seen, the

=oss #ate in the early years was low. By the end of the period, the

=oss #ate was clearly over (.

C. 9oa "tate

Page 12 of 22



/n order to estimate values for "oa, we used the per0ton gures from

the Sesa "oa analysis and applied it to the "oan iron ore e1ports as

reported by the "oa Mineral !re :1porters ssociation 5"M!:7 in

its nnual Selected Statistics. s domestic sales are ignored, the

'apturable Kalue is underestimated. s all mining is in privatehands, the #oyalty 5actually revenue receipts of the Mines

2epartment7, is the amount captured by the state of "oa.

0

-,(((

),(((

D,(((

L,(((

$(,(((

$-,(((

$),(((

$D,(((

0

$,(((

-,(((

%,(((

),(((

,(((

D,(((

9oa Iron re

Rent Royalty /Rs. Crore0 Price per ton

The chart clearly demonstrates that royalty fails to ad9ust to priceincreases.

Table * "tate of 9oa /eight years 233'53 <23115120

%alue of the ore e)tracted =nits Total

'K 5Mineral depletion7 #s 'r $,D#oyalty 5Mines dept. revenuereceipts7

#s 'r -,%L?

Public Property (ost #s 'r '627

(oss Rate 6.'4

"oa "S2P at current prices #s 'r $L?,-?

!ineral depletion /C%0 >9",P

24

9oa "tate -inances & !ining =nits Total

"oa "S2P at current prices #s 'r $L?,-

?

Page 1 of 22



"S2P from mining #s 'r -?,))L

!ining as a 4 of 9",P 14

"ovt. revenue receipts #s 'r -?,)(-#oyalty 5Mines dept revenue

receipts7

#s 'r -,%L?

!ining as 4 of total re;enue 64

Mineral depletion 5'K7 #s 'r $,DPublic Property =ost #s 'r ),-DL

"ovt total e1penditure #s 'r %-,((L

3iscal decit #s 'r ,%LD

"ovt outstanding debt #s 'r D,L?-

=nits Total

Public Property =ost #s 'r ),-DL:mployee e1pense #s 'r -,)$-

Mining dependent e1pense #s 'r $$,D-

:arned prot #s 'r %,?

Total Private cost #s 'r %D,(-

SourceA Sesa "oa, "M!: & "oa State data

This is a catastropheV The 'K of the mineral resources that were

e1tracted was #s $,D crores, -L of "S2P over the period. !fthis amount, the State managed to lose #s ),-DL crores, an

incredible .). The earlier study used World Bank data, covered

the rst ve years of this period, and arrived at a =oss #ate of .$

5:PW, -( 2ecember -($)7. few comparisons are usefulA

$. The loss 5#s ),-DL crores7 was far in e1cess of the outstanding

"overnment debt 5#s D,L?- crores7 and the cumulative scal

decit 5#s ,%LD crores7. /n fact, it is much greater than the

government e1penditure over this period 5#s %-,((L crores7.-. "oa has a small population H $),L,DLD as per the -($$ census.

The loss per person works out to a whopping #s %.%L lakhs over

eight years. :veryone lost #s )-,-$ per year, #s %,$L per

month, or #s $$D per day. 3or eight years. The -($) /ndian

poverty line is set at #s )? per person per day in cities and #s %-

per day in rural areas 5Jumar -($)7.%. 3or a household of four, this is a loss of inherited assets of #s

$%.$ lakhs. 8SS! 5-($)7 estimates household verage Kalue of

5private7 ssets in "oa at #s $(.)) lakhs.

Page 1' of 22



=ooking forward, the amounts at stake are enormous. The value of

the iron ore still remaining in the ground in "oa is conservatively

worth #s $? lakhs per man, woman and child, or #s DL lakhs for a

household of four. 'learly, the value of the 'ommons dominates all

else.

2espite multiple representations & the BQP election manifesto, the

present BQP government in "oa has renewed all leases on the

e1isting system, i.e., loss rate. The alternative of auctioning

them o4 was abandoned due to the possibility of the mining maa

entering "oa. Mining under a PS+ was similarly beset with vague

diUculties. Many renewals were on the date of the promulgation of

the MM2# mendment !rdinance.$(

The 'hief Minister of "oa has stated in the =egislative ssembly as

recently as ugust -($) that the Mining 2epartment of "oa is

ridden with corruption 5/8S -($)7. /t is diUcult to imagine that the

corruption is restricted to the bureaucracy. <ave the mining

leaseholders captured the State along with the windfall protI

,.I$plications

The problem is grave. /t spans minerals and states. We the people

are being cheated. Systematically. The avoid loss standard has beenignored. We are living o4 our inheritance. !ur true income is much

lower, as also our savings rate. Windfall prot is probably also

overstating returns to capital. Taking an intergenerational e;uity

lens, we have s;uandered our future generations* inheritance. !ur

8ational ccounts are misleading us.

/t*s no surprise that ine;uality is rising. This is a massive 6ow of

wealth from the poor masses to a few rich persons. This is the

opposite of ESocialismF as set out in the preamble to our

'onstitution. Trickle down seems to mean E"ush up rst, then trickle

back downF. /n many mineral rich yet poor countries, this represents

not 9ust a transfer of wealth from the poor to the rich, from future

generations to the present, but also a transfer from poor nations to

global mining multinationals 5Barma -($$, <umphreys -((?7.

<idden neo0colonialism.

$( The same has also happened with the 'ongress government in Jarnataka but

on a smaller scale. Sesa has beneted in both statesV

Page 1 of 22



"iven the large sums involved, it raises signicant moral, ethical,

and human rights issues. rticle $? of the +niversal 2eclaration of

<uman #ights states E)*+ veryone has the right to own property

alone as well as in association with others. )-+ o one shall be

arbitrarily deprived of his property.F /t would seem that the people of "oa 5and other States7 have a viable human rights complaint.

. :o? did this happen@

<istorically, the origins of the MM2# ct lies in times when

prospecting meant trips into dense 9ungles, mining was manual, risk

capital & e1pertise was scarce, and minerals were needed for

industrialisation. The concern was to have enough minerals

available for growth and development. Minerals were serendipitous.3inding new mineral deposits were a bonanGa for a poor developing

country. 'onse;uently, the ob9ects of the MM2# ct are the

development and regulation of mines and minerals. The key

ob9ective when setting royalty rates was to ensure that mining was

an attractive industry for investment in prospecting. The basis for

royalty setting was a worldwide comparison, leading to an inevitable

race to the bottom.

3lowing from this, the 'entral Mines Ministry does not recogniGe theneed to avoid loss for the people H not in the Kision & Mission,

Strategy Plan, #esults03ramework 2ocument, 8ational Mineral Policy

of -((L, various reports on #oyalty #ates, or in the 3ive0year and

nnual Plans. /t is simply not a re;uirementV Similarly, loss

avoidance has not been an ob9ective in either the previous or the

current mineral policy of "oa.

3rom a structural perspective, while States own sub0soil minerals,

the 'entre controls most aspects of mining through the MM2# ct. The chief tools available to States in the case of private mining are

5i7 royalty rates, and 5ii7 amounts from auctions 5after the MM2#

mendment !rdinance -($.7 Both are completely outside their

control. The MM2# ct species that royalty rates can be enhanced

only once every % years, and set by the 'entre. nd auctions will

take place twice a century with the structure decided by the 'entre.

3rom a political economy perspective, private mining creates an

unnecessary layer of agency issues. The leaseholder is interested incapturing as much of the value of the mineral as possible. "iven the

Page 17 of 22



sums of money involved, it is in their interest to capture the political

system and the government as well. This makes it highly unlikely

that the public can avoid a loss, despite assurances from theoretical

modeling.

The 'entral government, as we have already seen, has no interest in

=oss #ates. This leaves the States, with the most to lose and weaker

governance. Predictably, we nd e1tremely loose controls over

mining, and perhaps active connivance to hand over mineral

resources to favored cronies. Escaping the /esource 0urseF

5<umphreys -((?7 and E/ents to /ichesF 5Barma -($$7 have useful

discussions.

!ur cognition is wrong. /n prospect theory terms, mining has beenframed as a windfall gain. /n reality, it*s an astronomical loss that we

would strenuously avoid. Mining is framed as windfall income due to

two factors. 3irst, the government accounts treats royalty as income

5technically a revenue receipt7. :ven Supreme 'ourt 9udgments

encourage an income approach H Ema1imiGe revenuesF. Second, the

States are not re;uired to publicly disclose & value their mineral

assets. ny loss or undervaluation of assets is well hidden. /t

certainly doesn*t appear in any budget or other public nance

documents.

<ence, royalty is income that magically appears from nowhere H a

classic windfall. nd a steep increase in royalty is treated much like

winning the rst priGe in the lottery. We give ourselves freedom to

blow up windfalls, une1pected income. nd we never like to look too

closely where windfalls are coming from H in case we nd something

unpleasant. =ike an ethical issue.

!ur mental accounting instinctively treats money from sale of assetsdi4erently even from earned income. ssets represent savings, and

we know that a lot more income is re;uired to replace an asset.

/nherited assets have an even higher standard of care. They must be

preserved at all costs and passed forward. =osses are wrong. This is

the opposite e1treme of windfalls. By not e1amining where our

mineral windfall comes from, we have ignored our obligations to

future generations. !ur minds have been hacked.

We have the familiar tragedy of the commons. !n one side, we havethose who directly benet from mining H motivated. gainst them,

Page 18 of 22



the larger populace, who don*t even realiGe their loss. /n fact, they

incorrectly reason that more mining means more windfall income. /n

reality, more mining means more self0in6icted losses.

This may also e1plain some other puGGles. Why even seniorbureaucrats are not aware that States own the mineralsI Why the

=oss #ate isn*t part of the public discourseI !r why a priori analysis

of mining is far more common than looking at actual outcomesI Why

are minerals rarely treated as part of the commonsI Why are the

distributional impacts of mining on wealth not consideredI

7. !!,R & Coal Act A$end$ents

There have been some recent amendments to the MM2# and 'oal

cts. They seem to meet the transparency & competition

re;uirements of the -" Presidential #eference 9udgment. <owever, it

utterly fails to avoid losses H this is not an ob9ective under the

amendments either. There are a variety of reasons.

The basis of auctioning is important. 'oal was auctioned with

bidding on a rupees per ton basis with no linkage to market price.

The current auctions are taking place at a low period in the price

cycle. Most of economic rent arises during commodity booms. This

will lead to high =oss #ates when it matters. link to the market

price is essential.

The auctions are for mineral leases of ( years. "eological studies

are typically carried out for up to -( years of reserves, with the

result that the later years will be valued essentially at Gero. lso,

private discount rates will be much higher than social discount rates

as private party face the risk of the "overnment changing royalty

rates, e1port duty or numerous other factors that impact their

business. s risk increases with time, having a long lease term will

lead to a very high discount rate. =astly, as the #/= J"02D

controversy has shown, even with a good auction structure losses

are diUcult to avoid where private interests are involved.

/n some coal auctions, the price is capped or use specied. The

reason given is that the eventual price of power is lower. The

estimated tari4 benet is #s D,%$$ crores so far 5Sethi, -($7. This

is a transfer of wealth from the commons. Who benetsI Power

consumers 0 industries, the rich, & the powerful. <ighly regressive.

Page 1 of 22



/n some cases, the power consumers are not in the same State that

owns the coal. =ike the =P" subsidy, power subsidies should be

given directly and transparently. Should the 'enter compensate the

people and the future generations of the States for this forced lossI

The new sub0sections L5%7, 57, 5D7 and $( 5-7 5b7 from the MM2#

!rdinance and mendment ct, which cover ma9or non0fuel and

non0atomic minerals, result in the grant of leases, renewals or

e1tensions of mining leases without an auction. =arge swathes of

mining are covered by these sub0sections. "iven that the present

MM2# ct results in a poor =oss #ate, the granting, e1tension or

renewal of leases through the law is tantamount to a transfer of

mineral assets to lease holders without ade;uate compensation to

the States 5$( of the value can hardly be considered ade;uateconsideration7. The States did not have a say in the matter. !ne

estimate of the loss for iron ore in 'hhattisgarh alone is estimated at

#s $,--,((( crores 5Sharma -($7. Should the 'enter compensate

the owners, for this lossI

/n totality, this represents the single largest anti people act in the

history of independent /ndia. Such large transfers of wealth will

inevitably be seen as illegitimate by the polity. This in turn creates a

pressure for leaseholders to e1tract as ;uickly as possible, and parkwindfall prot overseas, away from any later attempts to claw back

5<umphreys -((?A %0)(7.

8. Reco$$endations

Mining has changed. Prospecting is often by remote sensing, mining

is highly automated, both capital and e1pertise are plentiful and

minerals are traded domestically and internationally. The key

concern today is the capture of the value of the minerals. Thecurrent MM2# ct makes it diUcult for the States to avoid losses. 3ar

too much control is in the hands of the 'enter and not with the

States.

The entire mining regulatory framework needs urgent change to

bring it in line with current needs and the 'onstitution. /t should

treat minerals as uttaradhikari, and put loss avoidance at its heart.

!ver $(( countries have radically updated their mining laws in the

last two decades. There is a large body of literature on what changesneed to be made 5see <umphreys -((? or Barma -($$7.

Page 16 of 22



A?aiting big bang refor$s

The cognitive illusion around mining needs to be changed. !ur

8ational ccounts must treat minerals as uttaradhikari. We need to

inventory and value them. When they are disposed o4, the receiptsshould be treated as capital receipts. "reen national accounts must

be implemented. Parallel accounts can be published for a decade to

ensure comparability. =oss #ates should be published. Wide publicity

is necessary.

ll Public Trustees should report annually on their performance. The

=oss #ate and asset inventory must be provided with its calculations.

The '" & 'S! can 9ointly conduct a one0time study of all the States

and the 'enter in mission mode. This can help standardiGemethodology. The public can then be consulted on the way forward.

s we have seen, losses are inevitable under private mining. Mining

through a PS+ does not avoid loss due to the levies of the 'entre.

new structure needs to be designed. Pending that, States should

immediately reserve all minerals for the public sector. This harks

back to the rthashastra 5'hanakya %(( B':7, which concludes

'hapter $- on 'onducting Mining !peration and Manufacture withA

EThus besides collecting from mines the ten $inds of revenue, suchas 1, the government shall $eep as a state monopoly both mining

and commerce )in minerals+.F

rguably, the States are constitutionally obliged to adopt a policy to

terminate all e1isting leases with high =oss #ates, when legally

possible. 3urther, the standard mining lease provides for termination

of leases with $ year notice. The states can adopt a policy that

notices would automatically get sent out if certain trigger conditions

e1ist H =oss #ate rises above $(, or the market price rises above athreshold. Market disruption can be minimiGed by strategically

encouraging a domestic market for minerals, and by staggering the

termination notices by lottery H $( every month for e1ample.

nother policy that the States can adopt is to automatically

terminate the ( year leases so that they become $( years long in

the normal course and -( years for captive use 5the usual period of

capital recovery for large investments.7 This would be prudent as the

realiGed =oss #ate can be published, and course corrections made.

Page 23 of 22



/n the last instance, the State may decide not to mine at all. Perhaps

no structure can avoid losses while the 'enter holds all the cards.

=oss avoidance is a necessary but not a suUcient condition. lot

depends on what the "overnment does with the amount captured. /t

is very diUcult to invest this in assets that retain value indenitelyand can be inherited by future generations. The State can decide

that with the current governance structures, it will be impossible for

the Public Trust to be honored when mining. The state is not mature

enough. We cannot avoid a loss to our children. /n this scenario, the

best option is not to mine 5<umpreys -((?A $$, 'h $7.

There are a number of international best practices and standards

that can be adapted or adopted. /n particular, radical transparency

at all times is a necessary condition to ensure that our childrenreceive their inheritance. This applies across the entire

intergenerational e;uity cycle of mining through investment. /t is

disappointing to nd a sharp decline in government transparency on

minerals across /ndia over the last year.

. Conclusion

There is a widespread failure of States as public trustees where

minerals are concerned. The MM2# mendment is perhaps thesingle largest corporate giveaway in /ndian history. !ur children*s

inheritance is evaporating by the day. There are many international

best practices that can be adopted. :ven 'hanakya*s prescriptions

are better than the present practices.

Page 21 of 22



References

Barma, Naazneen H, Kai Kaiser, Tuan Minh Le and Lorena Viñuela (2011): Rents to Riches? The

Political Economy of Natural Resource-Led Development , World Ban, Washin!"on #$,

h""%s:&&%u'lia"ions*orld'anor!&inde+%h%main-%a!e.%rodu"-in/o%rodu"s-id.211

$3 (2012): 4er/ormane udi" on 4rodu"ion and 5ale o/ 6ron 7re '8 NM#$ Limi"ed, $om%"roller

udi"or 3eneral, 376,

h""%:&&***saiindia!o9in&en!lish&home&7ur-4rodu"s&udi"-e%or"&3o9ernmen"-Wise&union-audi"&

reen"-re%or"s&union-%er/ormane&2012-201;&$ommerial&e%or"-20&e%or"-20h"ml

$hana8a (;00 B$<): Arthashastra h""%:&&***sds"a"eedu&%ro=e"sou"hasia&u%load&Boo>66>The>

#u"ies>o/>3o9ernmen">5u%erin"enden"s%d/

Hum%hre8s, M, 5ahs, ?#, 5"i!li"z, ?<, eds (200@): A Escaping the Resource Curse, $olum'ia

Cni9ersi"8 4ress, Ne* Dor

6N5 (201): 4arriar sa8s %as" !o9ernmen"s orru%"ed o//iials, Business 5"andard, @>u!>201

h""%:&&***'usiness>s"andardom&ar"ile&ne*s>ians&%arriar>sa8s>%as">!o9ernmen"s>orru%"ed>

o//iials>110E0@01;FE-1h"ml

Kol', o'er" W and 79erdahl, ?ames (200;) A inancial Derivatives Third Edition, Wile8

N557 (201): A !ey "ndicators of All "ndia De#t and "nvestment , %%endi+ Ta'le 2>, N557 @0"h

round, Mo546, 376 h""%:&&mos%iniin&Mos%i-Ne*&u%load&K6-@0-1E2-1Gde1%d/

5asena, 5halini (200G): A$ustaina#le Resource Accounting % A Case $tudy of the ossil uels

$ector , 4h# Thesis, ?a*aharlal Nehru Cni9ersi"8, Ne* #elhi

h""%:&&shodh!an!ain/li'ne"ain&handle&100;&1E1G

5e"hi, 5ur8a 4 (201F): Coal sector& $till an area of dar'ness( Hindu Business Line, 2E>%r>201F

h""%:&&***"hehindu'usinesslineom&o%inion&oal>se"or>s"ill>an>area>o/>

darness&ar"ile@1F12@ee

5harma, 5u%ri8a (201F): Coalgate seemed huge #ut it might pale in comparison to the impending

)inegate, 5rollin, 1G>Mar>201F h""%:&&srollin&ar"ile&@11&oal!a"e>seemed>hu!e>'u">i">mi!h">

%ale>in>om%arison>"o>"he>im%endin!>mine!a"e>sandal

5in!h, Mahendra Kumar (201): Ne* poverty line& Rs +, in villages( Rs . in cities, Times o/ 6ndia,

@>?ul>201 h""%:&&"imeso/indiaindia"imesom&india&Ne*>%o9er"8>line>s>;2>in>9illa!es>s>@>in>i"ies&ar"ilesho*&;@G201ms

Page 22 of 22

https://publications.worldbank.org/index.php?main_page=product_info&products_id=2411

http://www.sdstate.edu/projectsouthasia/upload/Book-II-The-Duties-of-Government-Superintendents.pdf



http://mospi.nic.in/Mospi_New/upload/KI_70_18.2_19dec14.pdf

http://shodhganga.inflibnet.ac.in/handle/10603/18169

http://scroll.in/article/714614/coalgate-seemed-huge-but-it-might-pale-in-comparison-to-the-impending-minegate-scandal


http://timesofindia.indiatimes.com/india/New-poverty-line-Rs-32-in-villages-Rs-47-in-cities/articleshow/37920441.cms




http://mospi.nic.in/Mospi_New/upload/KI_70_18.2_19dec14.pdf

http://shodhganga.inflibnet.ac.in/handle/10603/18169





https://publications.worldbank.org/index.php?main_page=product_info&products_id=2411

Date post:	18-Feb-2018
Category:	Documents
Upload:	rahulbasu
View:	213 times
Download:	0 times

Catastrophic Failure of Public Trust

Documents