Taking cognizance of industry?s apprehensions over viability of the 26% free-equity share model for new mines, the government is ready to have a re-look at the plan.
The alternative, which might be far more acceptable and ?practical?, includes setting up a fund open to audit by the Comptroller and Auditor General (CAG). The fund will be set up with a percentage of royalties paid by mining companies to the government and will finance development of the area around mines.
Mines secretary S Vijay Kumar said all options were open to replace the controversial plan in the draft Mines and Minerals (Development and Regulation) Act, which is yet to come before Parliament. ?We know there is disquiet in the mining industry (about the profit-share formula) and the fund is an option?, he told FE.
The MMDR Bill is with a group of ministers and is unlikely to be tabled in Parliament in the current Monsoon Session.
The Bill is significant as India plans to award a clutch of massive mining leases over the next few years to raise the share of the value-add from the sector to 4% of the GDP, from the current less than 2.5%.
The companies that are hoping to get the leases include both public sector SAIL and NMDC, private sector Tata Steel and JSW, besides Arcelor Mittal. Some of the largest global mining companies also want to enter the business, which the government has in principle allowed through a 26% FDI cap for the sector.
The tradeoff for the profit-share formula could, however, mean the Gram Sabha will earn an absolute veto on whether they will allow a mining project to come up in their area. The government will not act as the mediator between the Sabha and the companies that plan to mine ore in the area. The only exception could be for strategic minerals like uranium. ?It is a complex balancing act,? explained Kumar.
The profit-share formula says the displaced land holders from the mines (mostly tribals) shall be given either a free 26% share of the equity of the mining company or an annuity equal to 26% of the profit after tax from the mines. Industry groups like Fimi and even CII and Ficci have protested it as difficult to implement. One of the problem is this will need an amendment to the Companies Act, as there is no concept of free equity in it. What they have not said on record is that they consider it impractical. The plan is loosely modelled on the South African model of empowering the blacks. But that model does not envisage free equity.
Rana Som, chairman and managing director of NMDC, India?s largest mining company and now diversifying into steel, said, ?Till now the government has come out with its intent on those lines. We need to study the details?.
A private sector industry official, not authorised to speak to the media, said a single mine could never be a standalone profit entity for any company. Thus evaluating the 26% formula was just impossible. The other was the time lag. It takes several years for a mine to become fully operational and during that time, the land holder will earn no income from the original plan.
When contacted, a CAG spokesman said they have to study the detailed proposal before they could comment on it. In principle however, audit of a fund where the government is involved should not be difficult for the CAG.
Surprisingly, while industry has agitated about the Bill few state governments have views on it. In the latest consultation on the Bill on August 11 with states by the union mines ministry, the minutes of the meeting show none had any opinion to offer on it. However, mines secretary of Jharkhand, one of the most-affected state governments, NN Sinha said they will support the new proposal.
The advantage of the royalty-linked fund, as the industry official explained, is that it is related to the price of the ore extracted from the mines. ?A rise or fall in the price of the ore is immediately reflected in an ad valorem formula, impossible to reflect in a profit- share model?.
A CAG oversight of the fund will ensure no leakage from the fund, to be used for development of social infrastructure of the area around the mines like schools and hospitals.
Accretion of profit to single holders will be difficult to aggregate for such projects and will therefore be far more limited in turning around the poor living standards of the affected population.
Planning Commission data shows states like Jharkhand, Orissa and even Karnataka have not been able to plough back the mining reserves to substantially improve living standards in the state. In 2007-08, the growth rates of these states at constant prices at 8.6%, 5.85% and 6.2% were way below the national average of 9%.