How to govern natural wealth
Allocation process must strike a balance between economic growth and environmental and social concerns
ALLOCATION OF natural resources in a fair and transparent manner has been a tricky business for the government. Even before the Supreme Court declared the 218 coal block allocations “illegal”, because of the “arbitrariness” and “inefficiency” in allocation to private and public sector companies, two botched cases of resource allocations were etched in public memory.
In 2008,the Supreme Court quashed all the 122 licences for 2G telecom spectrum issued by upa government on a first-come-first-served basis. The licences, which favoured a few private telecom players, had cost 1.76 lakh crore to the state exchequer, ac
` cording to the cag report.
The apex court is also hearing a case related to the gas field allocation and pricing of natural gas.In 1999, after the Centre introduced the New Exploration Licensing Policy, allowing private players to enter the field of exploration and production of gas and oil, Reliance Industries bagged the contract for D6 block with 7,645 sq km area in Krishna-Godavari (KG) basin for exploration and production of gas and oil. But Reliance violated its supply contract, forced the government to hike gas price in its favour and drastically reduced and delayed the profit share of the government, highlights the 2011 cag report on Performance Audit of Hydrocarbon Production Sharing Contracts. “Natural resources belong to the people, and the state government is the custodian of natural resources. However, allocation of the D6 block to Reliance in KG basin has violated the interests of the state and its people,” notes a public interest petition against Reliance.
As of now, the country seems to be nowhere near resolving the growing debate on what is the best way to allocate natural resources, which ranges from minerals to coal to airwaves. The only attempt made to resolve the issue so far was in 2011 when the government set up a committee under Finance Secretary Ashok Chawla to suggest a roadmap for enhancing “transparency, efficiency and sustainability in the allocation, pricing and utilisation of natural resources”. A major recommendation of the Chawla Committee was to introduce market-based competitive bidding to ensure transparency (see ‘Codes of conduct’on p36).
The idea was not new. It was first floated in 2004 by the then secretary of the coal ministry. But states opposed bidding. The then chief minister of Rajasthan, Vasundhara Raje Scindia, wrote to then prime minister Manmohan Singh citing Sarkaria Commission’s recommendation, which said states should have the autonomy to allocate natural resources. Chhattisgarh’s then chief secretary K Vijayavargiya said bidding would lead to coal price rise which would in turn lead to the increase in electricity tariff. West Bengal opposed bidding and wanted states to have the authority to allocate coal blocks.
Despite oppositions, in 2012 the Centre introduced the Auction by Competitive Bidding of Coal Mines Rules. Last year 10 coal blocks were allocated through bidding. It has also ordered auction for granting fresh licences for the 2G spectrum. But is bidding the best way to allocate natural resources?
Auction with caution
Several countries follow bidding mechanism for allocating natural resources for two reasons. One, it generates higher revenues for the government in a short duration; and two, it increases transparency.
However, bidding has an inherent caveat. “There is a risk of subjectivity and discrimination in the evaluation process (of mining proposals) if proper conditions of bidding are not allowed,” says S Vijay Kumar, former secretary of the Ministry of Mines and a member of the Chawla Committee.
Experiences from other parts of the world support Kumar’s opinion. In a 2013 report, Australian think tank Independent Commission Against Corruption pointed out that if not structured properly, the criteria for selecting and evaluating companies through bidding can be discretionary. During the mining boom in Australia, many companies participated in bidding by promising public benefits in future, which they never delivered, notes the report.
Besides, says Kumar, one needs to have sufficient information about a natural reserve, say a coal block, in hand before bidding for it. This can be obtained only through proper exploration, he adds. A 2011 World Bank report on mineral resources also suggests that gathering sufficient geological data is important before commencing bidding. The other safeguard that the report suggests is to conduct separate technical and financial evaluations. Social safeguards should be clearly specified in the bidding proposal and form a basis for evaluation, it says.The UN’s Sustainable Development Solutions Network in its 2013 report also emphasises the optimisation of exploration of natural resources.
Many countries that allocate natural resources through bidding carry out detailed exploration beforehand.In Democratic Republic of Congo, auctioning is done only after a deposit has been examined by the state authorities and is considered to be an asset of substantial value.In Zambia, auctioning is done only for areas that are known to hold mineral resources.
“However, exploration of natural resources is not done in a comprehensive manner in India,” says Ganpat S Roonwal, mining expert and former head of the geology department at the University of Delhi. This raises questions on the effectiveness of bidding.
Is CIL an option?
Natural resources belong to people and they have to be the beneficiaries.To ensure fair allocation of coal, petitioners of the case, demand that all coal blocks declared illegal by the court should be returned to the Coal India Ltd.But not all agree with the suggestion.
The country’s targeted gdp growth of about 10 per cent banks largely on industries that heavily depend on coal.In 2013-14,the country produced 565.64 million tonnes of coal. Given the country’s growing energy demand, coal requirement is likely to double by 2017, according to the 12th Five-Year Plan. “In such a situation it is unlikely that private parties can be taken out from the equation,” says Roonwal. In 1993,the Coal Mines Nationalisation Act allowed private companies to develop coal blocks as cil was unable to meet the growing demand. “So one needs to ensure that coal is properly allocated and utilised with regulations and technologies in place,” he says. This is applicable to all natural resources, he adds.
Regulate, not negotiate
Allocation of natural resource is not just an economic consideration. “The best practices are the ones that are transparent, safeguard the rights of affected people and have minimal impact on the environment and society,” says Roonwal. India must follow these practices as a majority of its resources lie underneath the forests. Since 2007,about 45,000 hectares of forest— 57 per cent of the total forest diverted for mining during the period—were razed to give way to 157 coal mining projects, shows an analysis by the Centre for Science and Environment (cse), an advocacy organisation in Delhi (see ‘Forest cover in major coalfields’).
Open-cast mining also leaves deep scars on the earth surface.An estimate by cse shows that there are at least 240 abandoned coal mines across the country. Few companies restore the mined area to reduce environmental impact.The burning coalfields of Jharia in Jharkhand are glaring example of the poor performance of mining companies.
Roonwal, who has also served as an expert member in the Union Ministry of Environment and Forests’ (moef’s) advisory committee on coal mining, says underground mining is a feasible option for large-scale mining.The industry thinks underground mining is an expensive method.But the fact is it does not involve externalities such as loss of forestland,dis--
placement of people and pollution hazards.
Worst part of mining is that communities lose their traditional dwelling as well as livelihood. moef information shows that since 2007, over 720,000 people have been displaced by coal mining activities. Ground realities suggest that the actual number of people displaced is much more. About 90 per cent of India’s coal is found in tribal areas where 50 per cent of the population lives below the poverty line. Taking cognisance of the problem, the Supreme Court in 1997 ruled that private leases for mining would not be allowed in Schedule V areas (tribal areas). The judgement, known as Samata judgement, followed the petition of tribal activists who contended land acquisition by private companies in Nimalapedu village of Andhra Pradesh for calcite mining. However, the court had said if the state allows mining in such areas, benefits of mining should be shared with the affected community. “At least 20 per cent of the net profit should be set aside as a permanent fund for community use,” says the judgement.
Since mining may affect communities in other areas as well, profit-sharing should not be restricted to tribal areas. The draft Mines and Minerals (Development and Regulation) (mmdr) Bill, 2011, which lapsed early this year, had a provision of sharing profit with all affected communities. As per the provision, a mine lease holder must pay annually to the District Mineral Foundation 26 per cent of its profit-after-tax in the case of coal and lignite (and an amount equivalent to 100 per cent royalty in case of major minerals such as iron ore), as a profit-sharing mechanism.Now that the government plans to amend the mmdr Act, 1957, it should include the mechanism in the amended Act. This will go a long way in ensuring principles of equality as enshrined under Article 14 of the Constitution and reducing poverty in the mining regions of the country.
“The mmdr Act 1957 was enacted at a time when public sector was dominant,” says Chandra Bhushan, deputy director general of cse. “Though the Act has been amended a few times, it still suffers from nontransparency in terms of mine allocation and vague provisions for mineral conservation,” says Bhushan.
The Act, following the 2010 amendment, specifies that the Centre can auction natural reserves.The state government shall then grant the required permits, including reconnaissance permit, prospecting licence or mining lease, to the company. Instead of resolving, the amendment has intensified the debate about who governs these reserves and does not address the contention of state governments regarding their “virtually non-existent” role once a beneficiary has been identified by the Centre.The mmdr Act thus needs to clearly specify the role of the Centre and the state.
Integrate green clearances
Several coal blocks, though allocated years ago, are yet to begin production.In most cases,the companies delay production on the pretext that they are yet to obtain environmental and forest clearances.If prior environmental clearances are integrated in the allocation process, disputes in the post-allocation phase could be minimised.The Chawla Committe in its report had recommended that companies should obtain a certain level of clearance, for instance preliminary forest clearance, before bidding for an explored block. This will fast-track production and ensure that coal blocks are allocated in a more environmentally and socially responsible manner.
This is important as the country’s coal reserves are depleting at a fast rate. According to Coal Mine Planning and Design Institute Ltd headquartered in Ranchi, cil is now left with 18 billion tonnes of coal. If mined at the current rate the reserves would last 17 years.
This will force the country to import coal for generating power and other industrial use. This is not a viable option. Power utilities are already expected to import around 159 million tonnes to meet their requirement, according to the 12th plan report. Another 54 million tonnes of coal is likely to be imported by thermal power stations designed to use imported coal. More dependence on imported coal to generate power will only push the electricity price northwards and lead to increasing power shortage. The government must remember this before framing regulatory mechanism to govern the national asset.