Why mineral policy is a potential Land Mine

Industry News 2010-03-16 10:18:04



Source: The Economic Times

Published :Jan 7, 2010

 Author: Jaideep Mishra


There’s credible reforms underway in the much policy-abused mining and minerals sector, or so it would seem.What’s proposed is apparent transparency in licensing reconnaissance activity, prospecting for mineral ore and streamlining of the process for the award of mining lease.There’s also specific mention of the auction route in the policy proposal, albeit with qualifications.Yet, in both the recent policy initiatives of the center,the Model State Mineral Policy,2010, and the modified draft mines and minerals act,2009,there seems enough scope for continuing opacity and atavism in mining investments

Overall, there appears no clear policy intention to end routine distortions in market design, pricing and attendant rigidities in the mineral economy. The way ahead in to have forward-looking policy that envisages a proper domestic market for ore. The idea is to determine scarcity value via regular market-determined prices, instead of having to routinely mandate ore allocation by fiat, with much scope for bias and give and take by the powers that be.

However, the fact of the matter is that, downstream, in the metals sector, the ground reality is that the market is regionally underdeveloped, backward and, generally speaking, lagging in industrial activity. Which is why the main iron ore-rich states, for instance, also need to encourage downstream value addition in steel and related industries, as a matter of policy. Given that the risks, costs and project delays in setting up greenfield steel plants can be considerable, it would be unrealistic to expect reasonable market-determined ore prices in the short to medium term. Hence, the need for proactive policy to have a phased schedule for efficiency prices of mineral ores, the raw material for metals.

The policy objective ought to be to incentivise steel plants, industrialisation and manufactures while, at the same time, gradually bringing about a thriving market for ore sans rigidities, unreal prices and opaque administrative allocation. It is welcome that the Model Policy, 2010, circulated by the Centre does call for a series of reform measures in the states.

What’s stated upfront is that the regulatory environment will be ‘made conducive to investment’. Specifically, it’s proposed that ‘first in time’ and ‘continuity or seamlessness’ principles be fully taken into account when it comes to policy follow-through on the ground.

The idea apparently is to prioritise investment proposals in minerals on the basis of first come, first served. Also, the gameplan seems to be that parties undertaking reconnaissance would have priority when deciding on prospective licence, and further that the latter activity would weigh in one’s favour when it comes to granting mining lease. It remains to be seen how the new rules are actually implemented in the states, both in the letter and spirit of the reforms.

Yet, the plan to have arm’s length distance between state agencies involved in mining and those that regulate the sector makes perfect sense. Also, the suggestion of scientific and systematic mining practices so as to promote sustainable development is unexceptionable. What’s stressed is the need to inculcate the concept of ‘zero-waste mining’ to minimise environmental impact. Additionally, what’s proposed is computerisation of land records and mining activity for close, online monitoring of day-to-day operations in the field.

Overall, the declared policy objective is to grant mineral concessions ‘as per equitable and just criteria’ (para No. 7 in the Model Policy). The key policy intention outlined (para 13) is that ore linkages would be on the basis of ‘availability’. What’s stated is that captive mines would be allocated only through the auction route, or on the basis of ‘first-in-time’ principle at the prospecting stage in non-notified mining areas, or in accordance with relevant ‘policy in notified areas’. The point is that, in effect, the new guidelines do leave enough room for questionable interpretation of policy and follow-up, which may well defeat the very purpose of the reform measures proposed.

There are other lacunae as well. For example, Modified Draft Act does propose seemingly objective criteria for bidder selection for reconnaissance, prospecting and on to grant of mining lease. What’s outlined is that priorly-notified weightages be given to such parameters as special knowledge, advanced technologies and other resources proposed to be brought for mineral processing and benefication.

However, such criteria are likely to be subjective, especially when there would be no parallel requirement for simultaneous, sealed-bid auction for price discovery and bidder selection. In any case, the auction route may often be sub-optimal, given the incomplete markets in downstream value addition.

Besides, given the complex pricing structure in metals, simple price bids for ore allocation may not quite lead to better allocation of resources. In such scenarios, a more dynamic auction design — with package bids and the like — may be more appropriate. But the better policy solution would be to provide for ore linkage — read: captive mining based on proposals for subsequent investment and value addition — and to further require that the mineral prices reflect market-price indices once plant and machinery is fully depreciated, say, after seven years


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