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New environment may curb mining, not illegal mining

New environment may curb mining, not illegal mining

The recent mining scams have sounded a wake up call, and yet definitive  action to prevent illegal mining has not come forth.Will new laws such as higher taxation and profit sharing help the cause of the government's efforts to curb illegal mining through technology and strengthened monitoring? Charu Bahri goes beyond the regular headlines of new scams and ends up not being convinced the new law will curb illegal mining.

The word is out: the Cabinet has approved the Mines and Minerals (Development and Regulation) Bill, 2011 (MMDR) with no cha­nges, thus replacing the half a century old, archaic legi­slation ruling the industry. The Parliament is not ex­pected to veto. How does it stand up to illegal mining?

Last year, more than 82,000 instances of illegal mining were reported. With so much newsp­rint being accorded to the subject, the new Act was an opportunity to effect a turnaround in the mining industry. The industry expected robust new laws addressing a broad range of issues  from giving commun­ities displaced by mining a fair deal to curbing mining excesses by addres­sing illegal mining at a broad regulatory level by introd­ucing penalties and setting up a regulator.

Technology to the rescue?
Beyond doubt, laws play a major role in preventing illegal mining. Nowadays, however, technology driven administrative best practices are gaining the spotlight for their ability to improve systems and processes. Technology solutions may chart the way forward for the mining industry. To cite an example of the power of technology, the Integrated Lease Management System developed by (n)Code (the Information Technology division of the Gujarat Narmada Valley Fertilizers Company Limited) is designed to help the government monitor and check rampant illegal mining and nullify the associated loss of revenue.

According to Bhaumik Thakar, Head-e-Governance, (n)Code, “The solution mitigates corrupt practices by gradually replacing the manual processes of issuing royalty passes and filing returns with online bar-coded e-royalty and e-returns respectively. Also, e-payments replace offline payment mechanisms, thus drastically reducing the possibility of collusions between leaseholders and local officials. Also, by integrating the weighbridge with the software, every outbound truck is weighed at the mine entrance and the data is directly transmitted to the government within a matter of a few seconds. Weighing is sacrosanct in mining. Other modules of the solution help monitor the distribution of the minerals up to the level of the stockist. We are in the process of covering the entire mineral distribution chain as required by the respective government.”

Although the Central Government has mandated that the (n) Code solution be adopted by all mining states, it is being currently used only by the Governments of Gujarat and Karnataka. About 2,300 leaseholders are covered by the solution in Gujarat. The software has been customised for the Government of Karnataka. For instance, an ePermit module covers the transportation of iron ore. Future versions of (n)Code will introduce m-governance by which handheld devices can be used to apply for royalty passes, thereby simplifying the procedure for miners operating at remote sites where power supply is not regular. A GIS module is also on the cards. Images provided by this module will help auth­orities down on illegal mining in open areas.

Although the Centre has asked all states to adopt a technology solution, only Gujrat and Kranataka have started using it so far.

Thakar believes that technology-driven processes are ideal to ensure better transparency and account­ability across the mining sector. “Information and communication technology has paved the way for better governance in infrastructure sector in general and min­eral administration functions in particular.Not only the authorities but leaseholders also benefit as the auto­mated and online methods are time-saving and also red­uce capital costs as mining companies no longer need to pay royalty in advance at the beginning of every month.” he adds.

Mining companies would agree with Thakar's observations. For instance, L&T's Construction Division has operations in eight districts in Gujarat where the company is presently executing highway expansion projects having a total length of 700 km and an atomic power project. Mining activities taken up for these construction projects include quarrying for stone aggregates. According to NK Palai, DGM–Mines, L&T ECC, “Time is the essence for infrastructure development and contracting companies needing to adhere to tight deadlines.Procedures for which we earlier had to depend on the availability of district level officers such as gene­rating royalty challans can now be performed online.The bulk quarry permits granted by the government is also a big step forward in speeding up grant process.”

Taxation as factor
Concerningly for the industry, the tax incidence on coal post-implementation of the Bill will rise to over 61 percent among the highest in the world from the current 47.7 percent. For the iron ore industry, the effective tax rate will be about 55 percent, while it will be a staggering 110 percent for bauxite mining likely to render the Indian mining industry uncompetitive.

Comparative tax rates in major mining countries like Brazil, South Africa, Australia and Canada hover between 35 and 40 percent. Likening the draft Mines and Minerals (Development and Regulation) Bill, 2011 to South Africa's Black Empowerment Act (BEE), FICCI has pointed out that the growth of mining sector and actual capital expenditure in South Africa has declined significantly post implementation of the BEE Act. Higher taxes may be detrimental to the cause of curbing illegal mining.

Taxing wealth of iron: As though the tabled Bill were not enough, suggestions have been made to introduce a veritable wealth tax on supernormal profits accruing to companies engaged in export-oriented iron ore mining. Orissa Chief Minister Naveen Patnaik has asked the Centre to impose a mineral resource tax on iron ore in lieu of the present royalties paid by such mine owners, in view of the fact that runaway demand has made the mining of iron ore very lucrative. He has proposed that this wealth tax, as it were, should be modelled on Australia's Minerals Resource Rent Tax (MRRT), which will come in force in July next year. At 30 percent of the super profits accruing from the mining of iron ore and coal in Australia, the MRRT would be lower than the 40 percent Resource Super Profit Tax it will replace but significantly higher than the 8-13 per cent royalty rates that are in effect the world over.

Introducing wealth tax would ensure that the Indian government does not miss out on a share of handsome returns from iron ore mining. Still, Patnaik's proposition has been met with criticism from the industry. Hiran Bhadra, Partner, Management Consulting, KPMG, explains: “The price of iron ore has seen a significant increase largely due to demand for the commodity from China. For the proposed tax, industry concerns re­volve around the possibility of timely recalibration of policies during periods of price downturn. The mining indu­stry would rather prefer the option of being required to reinvest the higher profits in capital investment pro­g­r­a­mmes. Even if the tax is imposed, better mecha­nisms are required for transparent administration of the colle­cted funds in initiatives that are tied to the industry.”

Underreporting profits is a form of illegality in mining that industry experts suspect may spurt unless monitoring is strong. Coal producers will soon need to share 26 per cent of their profits while other miners will bear a levy equal to the 100 percent of their royalty payment, by making contributions to a District Minerals Development Fund. On top of these provisions, the new Act proposes new cess rate 10 percent as state cess and 2.5 percent as central cess. Tuhin Mukherjee, Chairman of FICCI's National Mining Committee, expresses concern over the difficulties in practically implementing the new provisions: “Coal mined by one company is often geographically distributed across district and states. A company could have coal mines in three districts spanning two states. It is possible that one of the mines is incurring a loss whereas the other two are profitable.The final results would be declared after consolidating these individual units, thus allowing the company some financial respite by setting off losses from one unit against the profits  from the others. Now if coal miners have to consider making pay-outs from profits made by single mines, with no consideration of their overall business, they could face financial difficulties.”
With huge profits to share, chances of under repor­ting profits can only increase. FICCI had suggested scrapping the  proposed cess and expressed concern over the doing away with the cap on surface rent at a level equal to the land revenue as this could lead state governments to fix arbitrarily high rates and further increase the cost of mining. However, the Bill has been approved without any changes.

Arguably, effective mining regulation is critical for industry growth. In that context, it becomes important to review to what extent the existing National Mineral Policy succeeds in addressing the key elements of effective mineral regulation: the transferability of mineral conce­ssions, transparency in the allotment of concessions, and as­sured right to next stage mineral concession are key elements.

According to Arvind Singhal, Managing Director, Wolkem India Ltd, “It is good that the government has woken up to the importance of providing for the transferability of mineral concessions. Unscrupulous tran­sferring methods have been practised especially by small mine owners since decades: they sign away their rights by a simple power of attorney. An open transfer­ability system would help put an end to these methods, which are less than ideal as it is as the transferee cannot charge premium under the existing [old] MMDR Act.”

Transparency In Allotments
To achieve transparency in the allotment of concessions, a competitive, auction-based framework is required. Singhal says, “The existing law is perfect as it is. First-come-first-served is an open policy and ensures that existing applicants cannot be rejected de novo.” “It is not advisable to establish a competitive auction-based frame­work for mining licences as this would raise the prices of end-products. Also, the demand of annuity of 26 per cent of profit after tax from mining companies is counter-productive. A 26 per cent profit share would make business unviable,” adds Dr Meda Venkataiah, Executive Director, MSPL Limited, a Baldota Group company.

Singhal is not in favour of the proposed auctioning of mineral concessions as this would go against smaller players: “Some aspects of the new MMDR Act seem to be skewed in favour of big players with financial strength and power. The government must realise that smaller-scale industries provide employment to nine out of 10 people working in the mining sector and make a huge contribution to the overall Indian industry. Probably there is not a single industrial activity which does not consume minerals in one form or the other ranging from talc, calcite, and clay, to limestone etc, which are by and large mined by small and medium scale minors. The proposed new Act is completely anti-friendly to such players.”

Venkataiah rightly points out that red tape is the sector's biggest bane and discourages private investments: “A file can move from table to table between various government departments for as long as six to seven years. Many international mining companies have exited India rather than go through this cumbersome process.”

Procedural delays at various levels are a reality of the industry. So, Singhal says concession renewal is another area that could be streamlined: “If a company's production capacity stays constant and environmental concerns are being addressed, existing licences should be renewed with­out their having to go through the lengthy renewal process. Lifetime concessions could be granted to com­panies com­mitting to produce up to the approved level of output like any other manu­facturing industry.”

About the assured right to next stage mineral con­cessions, Venkataiah believes the linking of minerals to specific end-use industries is yet another issue needing ref­orm: “In India, many states make downstream value add­i­tion a pre-condition for granting permits. End use ind­us­tries are often not interested in developing the mineral.” Summing up, he says the proposed MMDR Act would be relevant if the government also addresses issues of own­ership, prices and adequate returns. As for checks on ille­gal mining, the laws must be clear the role of the central government is limited but it is the state government offi­cials who create havoc within states knowing very well that these mechanisms are under their jurisdictional powers.

Clearing the earth around the menace may mean making the industry standalone in contributing to GDP. FICCI's Mukherjee says: “At present, mining accounts for only 2.4 per cent of GDP, in spite of India having vast untapped mineral resources. In comparison, mining contributes to 16 percent of the GDP in Chile and 6 percent in Australia and Canada. We should aim for a contribution of 4 percent at least.”

The setting up of a national regulator is also on the anvil, but as with monitoring of mining operations, the implementation depends on political will at state levels. Still, it is assurance of stringent monitoring alone that will make mining more credible. A holistic solution that takes into its purview the needs of the communities as well as makes room for the industry to flourish, albeit in a responsible manner, is the need of the hour.From the looks of it, the new MMDR Act may not itself be the answer to illegal mining. Indeed, the cascading effect could be a slowdown in mining and all related sectors something the nation can hardly afford.

What is illegal mining?
Rampant illegal mining in ore-rich Indian states has had adverse spillover effects, most notably on civil law and order. Illegal mining spans a range of activities including:

•Over-exploitation of mining resources by extracting more minerals than permitted;
•Surreptitiously increasing the area under mining;
•Underpayment of government royalties;
•Encroachment of forest areas, especially areas inhabited by tribal people, and coming into conflict with these communities about land-rights.

Government solutions (implemented or soon to be)
•Computerised tracking system for ore from mining gate to port / plant
•Impose cess to be used by states for better equipment
•Set up mining regulator, more stringent monitoring and auditing systems, and demand implementation from states
•Set up separate fast track courts and tribunals
•Ore mining and export banned in Karnataka after Supreme Court order

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