Ordinance to reform the mining sector will do more harm than good(Compilation of Down To Earth Articles on Mining Bill)

Ordinance to reform the mining sector will do more harm than good

SOON AFTER President Pranab Mukherjee signed the ordinance to amend the archaic Mines and Minerals (Development and Regulation) Act of 1957, Union minister for steel and mines, Narendra Singh Tomar, announced it is a revolutionary step towards reviving the country’s mining sector.

His ministry highlighted that the Mines and Minerals (Development and Regulation) Amendment

Ordinance, 2015 will address problems that have been plaguing the sector for long. These include granting mineral leases in discretionary, non-transparent and delayed ways, problems in renewal of mining leases, illegal mining activities, reluctance to undertake exploration and investment in the sector, and grievance of the civil society that the mining-affected people are not cared for. But these problems are not new and ways to address most of them have long been debated by the country’s intelligentsia. This includes the report of the High Level Committee on National Mineral Policy in 2006 by the Planning Commission. In 2011, the then government led by the United Progressive Alliance (UPA) introduced a bill to reform MMDR Act, 1957 which later lapsed.

So, what was the urgency behind introducing an ordinance? Is it to reform the sector, as highlighted by the mines ministry, or to give an impetus to the mining sector, by expediting and expanding mining leases? The ministry has several times acknowledged that delays in granting mining leases has been a major factor for “significant reduction in the output of the mining sector”. Sources say the Prime Minister’s Office has already announced a deadline of March 10 to begin the first phase of auctioning of non-coal mines.

Auction is the buzzword

The ordinance introduces a provision to grant all mineral concessions through auctioning. However, auctioning is hardly a one-size-fits-all solution.

It is the best way to allocate mineral concessions where mineral deposits can be accurately established and a proper valuation can be done. This will help the leaseholder capture the windfall profits as well as bring in transparency in the allocation process. However, in cases where mineral deposits are not properly established, auctioning can lead to problems like undervaluation of minerals, leading to lower revenue generation for the government, or overvaluation, resulting in the inability of the concession holder to meet commitments. This will lead to uncertainties in case of prospecting- cum-mining leases.

If auctioning has to be done for prospecting- cum-mining leases, it can only be done for bulk minerals, such as iron ore, bauxite and limestone that remain deposited close to the surface, and where substantial exploration work has been done by state agencies. For deep-seated minerals, which require highly specialised human and technical resources and is capital-intensive, “first-in-time” principle (whoever first applies for prospecting permit) is the most certain way of granting mineral concessions.

Revenue, but at what cost?

The prime objective of auctioning is to get more revenue for the state government. While this is fair enough, focus on revenue maximisation can lead to a race to the bottom, wreaking havoc on the environment, ecosystem and people.

Consider this. Most mineral deposits in the country are located in ecologically sensitive areas. A major share of bauxite deposits are found in the hilltops of east coast states such as Odisha, while iron ore, manganese and laterite are abundant in the Western Ghats. Auction guidelines thus need to be developed to discourage mining in ecologically sensitive areas.

Environmental concerns increase further when one considers the kind of unscientific and inefficient mining practices the ordinance encourages. While the MMDR Act grants mining leases for maximum 30 years and allows it to be renewed for up to 20 years, the ordinance grants leases for 50 years without any provision for lease renewal. This also applies to existing mines. Worse, the ordinance puts a special emphasis on extending the mining lease of captive mines. Promotion of captive mines would only aid poor environmental performance of industries owning the mines.

Analyses by Delhi-based non-profit Centre for Science and Environment (CSE) for the cement sector in 2005 and steel sector in 2012 show that environmental performance of these sectors largely depends on the way they source raw material from their captive mines. While cement companies were reluctant to invest in proper management of mines, steel companies were hardly developing technologies for efficient use of raw materials.

Besides, captive mine allocations involve unscrupulous activities. The Supreme Court, in its August 2014 judgement on the coal scam, noted that the way in which coal blocks were allocated to private parties for captive mining was highly “ad hoc”, due to which “common good and public interest suffered heavily”. Given the inefficiency and non-transparency in allocation and functioning of captive mines, the government should ensure that new allocations are made through “open auction” following proper exploration of minerals.

The ordinance has done away with the provision of renewal of leases. Given that assessment and monitoring of mines are weak in India, such a provision in the MMDR Act offered an opportunity to assess the performance of mines, both in terms of productivity and environmental impact. A long lease period without any provision for periodic audit would further impact regulatory supervision.

So, a mechanism must be put in place to ensure intermittent assessment of a mine’s performance. The ordinance further states that mines will be re-auctioned after the leases expire. This will discourage leaseholders from investing in progressive closure and rehabilitation of mines. The long duration of the lease will also make it difficult to estimate and establish appropriate financial guarantee to ensure that mine closure will happen. This will encourage the practice of “dig and run”, adding to the burden of abandoned mines.

As per 2010 estimates by the Indian Bureau of Mines, there are 297 abandoned mines of major minerals. This does not include abandoned coal mines, which, according to a 2008 analysis by CSE, number at least 240. However, this could still be a gross underestimation of the scale of the problem. Former Union environment ministry officials acknowledge the poor documentation of abandoned mines. In December 2014, responding to a Lok Sabha question on the status of abandoned mines, the Ministry of Mines stated that there are 5,028 non-working mines and that there is no “separate classification” of abandoned or sick mines.

Writing off social contract

It is not just the environment, the ordinance also brushed aside the concerns of mining-affected communities. According to the Union Ministry of Tribal Affairs, 90 per cent Union Ministry of Tribal Affairs, 90 per cent of the 104 million poor tribal people in India traditionally live in mineral-rich forest areas. So far, no law addresses this dichotomy or directs companies to share profits earned from mining activities with the community. In 2008, CSE had initiated this equity debate, which prompted a nation-wide conversation on environmental justice in mining activities.

In 2011, the Ministry of Mines recognised the problem in the Sustainable Development Framework formulated for the mining sector by saying that “in recent decades, mining activities have resulted in little local benefit”.

To undo this historical injustice, the ministry that year introduced the MMDR Amendment Bill in Parliament. The Bill specified that for mining for major minerals, the leaseholder shall pay the district mineral foundation (a non-profit body set up by the state government) “an amount equivalent to the royalty paid during the financial year” annually. For coal and lignite, it was to be an amount equal to 26 per cent of the profit after tax.

The benefit-sharing provisions have been diluted in the ordinance. Leaseholders are now required to pay not more than “onethird of the royalty” from the respective minerals, in addition to the royalty paid to the state. A back-of-the-envelope calculation shows that this will be a 20 per cent reduction in the funds made available to the community. CSE analysis shows that under the profitsharing provision of the MMDR Bill, the community would have received Rs 10,500 crore a year. Going by the ordinance, they will receive Rs 8,320 crore a year at the most.

More displacements, unrest?

The MMDR Act empowers the Centre to extend a mine lease up to 10 sq km for “development” of any mineral. The ordinance extends this discretionary power for development of an industry. With no specification on the extent to which the area can be extended, large areas can now be leased out to cater to industrial demands.

The increase in size of the mine lease area will effectively mean more displacement. An analysis by CSE shows that since the beginning of the 11th Five Year Plan in 2007, the area leased out for various mining activities can potentially displace more than 800,000 people. This is a gross underestimation as displacement- related information is not available for many projects.

Less benefit with the potential for more displacement only perpetuates the exploitation by mining companies. The distrust and anger of the dispossessed is evident in the uprisings in the forested and economically backward mining areas of Chhattisgarh, Jharkhand, Odisha and Andhra Pradesh.

Uncertainties for mining sector

Though provisions of the ordinance may help the mining sector earn short-term gains, it cannot remain immune for long.

The ordinance will hurt the sector in the long-run by limiting innovation and investments, required to ensure optimum exploration. It promotes “open sky” policy (opening up the scope of exploration) by granting non-exclusive permits, but does not guarantee any return to the investors. To ensure returns the government should adopt the “first-in-time” principle.

The ordinance has proposed setting up a National Mineral Exploration Trust, which will be created with the two per cent royalty paid by leaseholders. This will at best create a corpus of Rs 500 crore (about US $90 million). The amount will not be sufficient for exploration of strategic minerals required for electronics, renewable energy and advanced energy storage. Australia, with a similar potential of mineralisation, has an exploration budget of about US $3 billion. Limiting the scope of exploration will prompt companies to cherry-pick mineral deposits close to the surface, such as bulk minerals, and deepseated minerals, such as base metals, noble metals, rare earths, will remain unexplored.

The government needs to promote both public and private sectors for exploration works. The ordinance is also weak at curbing the numerous illegalities that plague the mining sector. These include over-extraction of mineral ore, illegal selling, export and transportation of ore; removal of ore from overburden dumps and selling them without state approval; mining outside the lease area; unscientific and unregulated practices in smallscale mines; and carrying out mining in officially closed mines. Tackling the situation requires strengthening the regulatory institutions and mechanisms. But the ordinance calls for increasing penalties for any violation under MMDR Act, and creation of special courts for speedy trial of mining offences.

Tilting the balance?

Instead of strengthening institutions and improving governance at the state level, the ordinance allows huge scope for interference by the Centre. Though it allows the state to grant leases, the power to determine terms and conditions for bidding and auctioning remains with the Centre. The Centre will also have the power to direct the state on implementation of various provisions of the MMDR Act. This is in addition to its power to revise any order passed by the state with respect to minerals other than minor minerals. With the Centre having such overriding powers, states no longer remain equal stakeholders in mining governance.

The ordinance has failed to take into consideration the need for reforms to improve governance in the mining sector. It also undermines the spirit of co-operative federalism, much championed by Prime Minister Narendra Modi to ensure good governance. There is no doubt that our existing regulations and institutions need reforms to deliver better results on the ground. The country needs a new law and a reformed regulatory mechanism. However, the Act must be formulated not only as a mechanism for aiding mining, but to ensure a sustainable mining future, balancing the needs of people, the environment and economy.

With inputs from Manavi Bhardwaj

Ideas to improve environmental and social performance of the sector have been thrown out of the window

Photo: Sujit Kumar Singh

Amidst protests by the Opposition, the Lok Sabha, on March 3, passed the Mines and Minerals (Development and Regulation) Amendment Bill (MMDR) 2015 to replace the Ordinance promulgated in January. The Bill has a few more steps to go before it becomes law. But it is important that we understand its implications on people and environment, and on the future of the mining sector itself.

For over a decade, we have debated the need to amend the MMDR Act 1957. The conversation intensified with the publication of the report of the High Level Committee on National Mineral Policy (2006) and the 2008 report of Centre for Science and Environment (Rich Lands, Poor People: Is ‘Sustainable’ Mining Possible?). Then the Mines and Minerals (Development and Regulation) Bill 2011 was drafted and introduced in Parliament. But due to disagreements within the UPA government and pressure from industry, this Bill was allowed to lapse in February 2014.

The MMDR Bill 2015 is a distorted version of the MMDR Bill 2011. A coherent whole has been truncated to suit the short-term interests of industry and all progressive ideas to improve the environmental and social performance of the sector have been thrown out of the window.

Institutional reforms

The mining sector is plagued by multiple regulations, discretionary decision-making powers, weak institutions, inadequate monitoring and feeble enforcement. These are the reasons for large-scale irregularities—illegal mining, destruction of environment or ill-treatment of mining-affected communities. Simply put, the entire governance structure of the sector is outdated.

Mining Acts and Bills   • The Mines and Minerals (Development and Regulation) Act, 1957 • The Mines and Minerals (Development and Regulation) Bill, 2011 • The Mines and Minerals (Development and Regulation) Amendment Bill, 2015 • The Mines and Minerals (Development and Regulation) Amendment Ordinance, 2015

The reforms proposed include introduction of an auction mechanism for allocating all mining concessions; provisions for timely decisions; increase in penalty for violations; and creating special courts for speedy trial of offences.

Considering the challenges, these reforms are inadequate and some of them may create more problems. For example, simply increasing penalty for violations within the existing institutional framework makes rent-seeking behaviour lucrative and will not be effective in curbing illegality. Similarly, auctioning of mineral concessions requires scientifically competent institutions to establish reserves and valuation. In the absence of such institutions, auctioning can be manipulated. Auctioning, thus, is not a substitute to but a part of the larger reform in governance. The biggest problem is that the Bill jeopardises all efforts made in the last 10-15 years to improve environmental and social practices in the mining sector.

Environmental practices

Environmental performance is closely linked to how a mine is opened and how it is ultimately rehabilitated and closed. In fact, it is said that a mine should not be opened if it cannot be closed. The MMDR Bill 2015 undermines this very principle.

Under the new Bill, all mining leases will now be granted for 50 years. The lease for existing mines has also been extended to 50 years. After expiry, leases can be re-auctioned.

From an environmental perspective, it doesn’t make sense to keep thousands of mines opened at one point of time as every open mine is a source of pollution. But this is what the 50-year mine lease provision will do. From an economic perspective, it doesn’t make sense why mines should compulsorily be given a 50-year lease period; it amounts to sitting and speculating on resources. Thus, it makes sense to open a mine, remove all minerals quickly and progressively rehabilitate and close the mine and return the land to the landowners. But the long lease period with subsequent re-auctioning provision means leaseholders will do the opposite. They would keep the mines open and shift the burden of rehabilitation to future generations. The long lease period means it will be difficult to establish appropriate financial guarantees to ensure that mine closure will happen. This will bring back the practice of “dig and run”, adding to India’s poor legacy of “orphaned” mines.

Alienation of communities
The MMDR Bill 2015—along with the changes proposed in environment and forest clearances, Land Acquisition Act and Forest Rights Act—will further alienate communities and increase conflict in mineral rich areas. The relationship between mining companies and communities has a legacy of abuse and distrust. This is reflected in the fact that India’s most mineral-rich districts are also its poorest, as communities have benefited the least from the wealth of mining. Recognising this, the MMDR Bill 2011 had specified that for major minerals, the leaseholder should pay the local community an amount equivalent to royalty each year. For coal and lignite, it was to be an amount equal to 26% of profit after tax. This money was to be put in a fund for certain specified benefits. The Bill has considerably diluted these provisions.

First, leaseholders are now required to pay not more than one-third of the royalty for all minerals. Second, it is now up to the states to decide how these funds will be used. So, not only the size of the funds has been considerably reduced, they can now be potentially misused too.

The MMDR Bill 2015 will lead to more displacement of people. The Centre now has discretionary power to allow mine leases beyond the stipulated 10 sq km lease area. In general, larger lease area means more displacement. With an already poor record of resettlement and rehabilitation, this provision can create more conflicts. The government’s other move, the proposed changes in the Land Acquisition Act, will alienate communities further as it removes the requirement of consent of landowners for acquiring land for private and public-private infrastructure projects (which includes mining). Similarly, the provision of public hearing and consultation is being diluted in the environment clearance process.

All these changes mean that neither are the benefits from mining going to be shared adequately with the affected people, nor will they be asked before their lands are acquired for mining activities.

Not a win-win for the sector

Despite diluting social and environmental provisions, the MMDR Bill 2015 will not help the mining sector in the long run. The development of the mining sector requires fair play, clarity of processes and security of investments. Though the Bill intends to achieve all these objectives, its prescriptions may achieve the opposite.

The Bill provides for granting all types of mineral concessions through auctioning. However, auctioning doesn’t work in all situations.

Auctioning is the best way to allocate concessions where deposits can be accurately established and assessed. But in cases where mineralisation is not properly established, auctioning can result in undervaluation of minerals and subsequent lower revenue for the government, or overvaluation, resulting in the inability of the concession holder to meet commitments. Auctioning, therefore, is not suited for prospecting. For prospecting, a transparent first-in-time principle is used globally. By mandating auctioning of prospecting-cum-mining leases, the Bill has introduced huge uncertainty. Similarly, the Bill might end up restricting investments in exploration.

The long-term growth of the sector is dependent on advanced technologies and large investments in exploration. Though public investment in exploration is important, reconnaissance/regional exploration requires private risk capital. The Bill discourages this. On one hand, it promotes “open sky” policy for reconnaissance by granting non-exclusive permits, while on the other hand it does not guarantee any return to the investors. This will restrict investment in hi-tech exploration, which is urgently needed for deep-seated strategic minerals.

The proponents of the MMDR Bill 2015 have decided to ignore past mistakes. For short-term growth, they are taking the sector back to the exploitative practices of the past. This will hurt the long-term sustainability of the sector itself.

The author is deputy director general at Delhi-based non-profit Centre for Science and Environment