Sharing the wealth of minerals: Policies, practices and implications

It is now well recognised across the world that wealth generated by the mining sector comes at a substantial development cost, along with environmental damages and economic exclusion of the marginalised. This has also been exhaustively documented in India. In fact, the major mining districts of India are among its poorest and most polluted. Considering the negative externalities of the mining sector, new policies and practices are being explored and implemented across the world to ensure that mineral wealth can be converted into sustainable development benefits for local communities.

Many mineral rich countries have enacted legislations in which provision of benefit sharing with the local communities is explicitly stipulated. Many of these legislations are built around a comprehensive framework in which compensation, benefit sharing and community development plans are integrated and the roles of local communities, governments and mining companies are clearly delineated.

The government’s proposal to amend the Mines and Minerals (Development and Regulation) Act (MMDR Act), to include a specific provision for sharing profits with local communities is an important step ahead in building an inclusive growth model. This proposal is also in line with the best practices being followed in the world. The principles are not new and many mineral rich countries have been following it for years without impacting the genuine profitability of mining companies.

In fact, the famous 1997 Supreme Court judgement on this matter (also referred to as the Samata Judgement) directed the following (in the case of fifth schedule areas):

a. Minerals must be exploited by tribals either individually or through cooperative societies with financial assistance of the State. Transfer of land to non-tribals in scheduled areas in the form of lease is to be avoided while the transfer of mining lease to non-tribals, company, corporation aggregate or partnership is unconstitutional, void and inoperative.

b. Where state government is undertaking mining, at least 20% of net profits would be set aside as a permanent fund for development needs. This will be in addition to reforestation and maintenance of ecology.

The current MMDR Act draft, which we understand has been cleared by the Group of Ministers (GoM) and is ready to be presented to Parliament, includes a provision that 26% of the net profits will be shared with local communities. The Ministry of Mines, which has piloted this amendment has even worked out the broad modalities for this profit sharing arrangement to be implemented. This can be detailed out further but what is important is to establish the key principle of sharing profits from minerals with people who are affected by mining leases and do not benefit from this extraction otherwise.

Mining Industry in India

India produced 84 minerals in 2008-09, valued at Rs. 1,24,321 crore. Coal, lignite, crude petroleum and natural gas contributed 57% of the total value of minerals produced in the country. Iron ore, chromite and lead and zinc contributed about 25% to the total value while minor minerals contributed 15%. Non-metallic minerals like limestone, dolomite, phosphorite, garnet, silica, etc., contributed the remaining 3%. The mining and quarrying sector accounted for 2.6% of the total GDP in 2008-09 at Rs. 97,215 crore.

India is the second largest producer of chromite, barytes and talc, third largest producer of coal and lignite and fourth largest producer of iron ore and kyanite, andalusite and sillimanite. The number of working mines in the country was 2,991 in 2008-09. Most of the mining activities in the country are concentrated in Gujarat, Andhra Pradesh, Rajasthan, Chhattisgarh, Jharkhand, Odisha, Karnataka, West Bengal, Madhya Pradesh, Tamil Nadu and Maharashtra.

Mining, people and environment

Almost all of the country's minerals are spread in regions that also hold most of its forests, river systems and tribal population. The average forest cover of the 50 major mineral producing district stands at 28%. The total forest cover in these districts, 1,18,90,400 hectares (ha) is about 18% of the country's forest cover. Mining and quarrying has destroyed large tracts of forestlands in these areas affecting the ecosystem and the livelihood of the tribal population.

Most of India's iron ore reserves are along the courses and watershed of rivers like Indravati, Baitarani, Tungabhadra and Mandovi. Most of the coal reserves of the country are also located within river basins – Damodar, Godavari, Son, Kanhan and Mahanadi-Brahmani. Large-scale mining in these areas have and are still degrading the catchment and affecting quantity and quality of water.

The major mining districts of the country are not only ecologically devastated and polluted, they are also the poorest and the most backward districts of the country. Consider the following examples:

•  Keonjhar (Odisha), where mining for iron ore and manganese started in the 1950s and which currently produces more than one-fifth of India’s iron ore, is ecologically devastated. Its forests have turned into wasteland and its rivers and air have been extensively polluted. Even worse, mining has done nothing for Keonjhar’s economic well being. Keonjhar has more than 60% of its population below poverty line and is ranked 24^th out of the 30 districts of Odisha in the Human Development Index (HDI).

• Bellary (Karnataka) produces about 19% of India’s iron ore (most of which is exported). It boasts of the maximum number of private aircrafts in the country, but majority of its population remains impoverished. Agricultural land has been devastated due to mining and dust levels in the air are leading to large-scale health problems. Bellary is ranked third from bottom in HDI in Karnataka.

• Gulbarga (Karnataka) is the biggest limestone producing district of India. It is ranked second from bottom in HDI in Karnataka.

• Koraput (Odisha) alone produces about 40% of India’s bauxite. Close to 78% of its population lives below poverty line, and the district ranks 27^th in Odisha in HDI.

• Jajpur (Odisha) produces 95% of India’s chromite (most of which is exported) -- the people of Jajpur have got hexavalent chromium pollution in return. Jajpur is ranked 22^nd in Odisha in HDI.

• Bhilwara (Rajasthan) produces more than 80% of India’s zinc. It is ranked 25^th out of the 32 districts of Rajasthan in HDI.

• Cuddalore (Tamil Nadu) produces three-fourth of India’s lignite. Groundwater near the lignite mines has been depleted, leaving local agriculturists high and dry. More than half of Cuddalore’s population lives below the poverty line and it is ranked 16^th out of the 30 districts of Tamil Nadu in HDI.

• Sonbhadra is the most mined district of Uttar Pradesh. It produces more than 20 million tonne of coal every year, apart from thousands of tonnes of limestone and dolomite. It is also one of the most backward districts of the state. About 55% of its population lives below the poverty line and its literacy rate is less than 50%.

• Udaipur has the maximum area under mining in Rajasthan; it is ranked 27^th out of the 29 districts of the state in HDI. 

The phenomenon of 'resource curse' puts most of the major mining districts in India in the list of 150 most backward districts in the country. In addition to all this, these mineral rich areas suffer another problem – naxalism. Although royalties are put in place for the extractive industry, this does not ensure financial flows to the affected communities.

Rent on natural resources vs. profit sharing

Economic rent is defined as 'surplus return over and above the value of invested capital, materials, labour costs and other factors of production employed to exploit natural resources. Development projects require land, water, natural resources and cause displacement. The extractive industry (mining) gains access to mineral rich lands and harvests the opportunity of earning substantial economic rent. This rent is looked at as a 'windfall' that the project developers (miners) gain by exploiting natural resources (minerals). The owner of the natural resource is the owner of this rent. Thus is it not unfair to say that population that is displaced from these mineral-rich lands and those who loose their livelihoods as a result should be the true owners of this economic rent in addition to the resettlement and rehabilitation packages. In Russia, economic rent concept is applicable and they have applied it on oil companies. The logic behind the concept is that companies do not own the oil that makes them rich, only the right to extract it from ground and that the profits earned by selling this oil are so large that they can afford to share the wealth. Similarly, in India a hydropower project has to give 12% of its electricity generated to the state government as a 'rent' to use the water in the state.

Presently, profits in the Indian mining sector are huge. A simple analysis from the annual reports of the top stand-alone mining companies show that they have been reaping windfall profits. In 2009-2010, the average profits after tax (PAT) of three major non-coal mining companies was about 50% of the turnover. In case of the Coal India Limited, this was about 22%.

Table: Financial performance of major mining companies: 2009-10

*PAT: Profit After Tax

Peripheral development fund: not enough

Although some states have tried to develop and implement mechanism in the past to ensure that benefit flows to the affected communities, these efforts have not produced the desired results. The Odisha state government, for instance, had announced a Peripheral Development Fund from mining. To be set up under the guidance of the Orissa Mining Corporation (OMC), the state government issued an official directive to collect funds for peripheral development from the mining companies. The OMC was also to deposit a certain per cent of its profit into this fund every year. The mining companies were also to give 5% of the total profit per annum for the peripheral development^. The fund was to be used for the welfare of the affected communities like providing drinking water, health services and development of education, infrastructure and plantation for rural poor. But the directive of the state government was challenged in the Odisha high court and the fund did not materialise. The high court rejected the state government's policy, in 2008, on the ground that no legislation was formulated in this regard. Till then the state government had collected only Rs. 52 crore as part of the fund. This calls for establishing better mechanisms of benefit sharing backed by legislations.

Profit Sharing: global experience

Profit sharing refers to the practice of sharing a part of a company’s profits with the employees or the affected communities. The super-profit mining industry has considerable impact on people, environment and resources of the region. Thus it becomes imperative for profits from mining activities to flow to the affected groups/communities.

A number of countries across the globe have incorporated the provision of benefit sharing in their mining legislations to enable local communities to benefit from mining activities in their region. Provisions may include compensation, benefit sharing, area development, special rights, etc., or a combination of these.

Papua New Guinea, for instance, has incorporated the concept of Free, Prior and Informed Consent (FPIC) into their Mining Act, 1992. FPIC recognises the rights of indigenous people over land and resources where a project can come up only once these indigenous people give their consent. This is to be implemented in the form of a “Development Forum”. This Forum should have representatives of different stakeholders – mine lease applicant, government and landholder/s whose land are sought or tenants on such land. There is a laid out procedure under which all the stakeholders are to be consulted prior to the grant of a mine lease. The Mining Act also has provisions under which the mine lease holder is to provide compensation to the landholders on whose land mining is to take place. The compensation is dependent on the negotiating skills of the community/landholders. For instance, the Ok Tedi copper mines have a special institutional structure to manage and implement the 52% dividends received from the mine operations. This is a legally binding obligation that the company must follow as per the legislation passed in November 2001. A non-profit company called the Papua New Guinea Sustainable Development Program Ltd. (PNGSDP) receives compensation on behalf of the affected community.

The PNGSDP, formed through an agreement between the state of PNG and BHP Billiton, the company operating the Ok Tedi mines, focuses on a number of areas like community investment, environment and conservation, investment in renewables, electrification, infrastructure and minimising impact of mine closure among other things. There also exists an Ok Tedi Fly River Development Programme (OTFRDP) which is another non-profit formed for managing and implementing compensation payments on behalf of the affected villages. Similarly, a Lihir Sustainable Development Plan Trust (LSDPT) has been formed to deliver the benefit package as agreed between the Lihir gold mine (operated by Rio Tinto) and the landowners. The package works through the landowners having bought shares in the Lihir Gold Ltd. (LGL) through the PNG government support. It is this equity fund that forms the core of the LSDPT. The Trust operates in different areas – compensation, capacity building, infrastructure development, town and village planning, trust fund payments, etc. The LSDPT also receives part of the funds form the royalties received by the landowners and provincial and local governments.

As per South Africa’s Mineral and Petroleum Resources Development Act, (MPRD) 2002; the Minister has the power to assist ‘historically disadvantaged persons’ (HDPs) in acquiring a prospecting or mining lease. The MPRD Act also has provisions under which a community may obtain a ‘preferential right’ to prospect or mine a mineral on land registered under the name of the community. The Impala Bafokeng Trust is a case in point. The Trust is a result of a black economic empowerment transaction for HDPs between Impala Platinum and the Royal Bafokeng Nation (RBN), a Northwest province in South Africa. Under the transaction, RBN exchanged their royalty rights for shares in the mining company. The Trust was thus formed to manage and implement the promised corporate social investment during the period 2007-2016. The Trust’s focus is on education, capacity building, health, sport, enterprise development, etc.

In Peru, the Law of Mining Royalty, 2004 mandates that 50% of the income taxes paid by the mining companies be channelled to regional (25%) and municipal (75%) governments as royalty. The regional government then forwards a small amount (5%) to national universities in the region. The municipality where the mining operations are located receive a larger portion of this royalty. The Yanacocha gold mines run by Newmont Mining Corporation (major shareholder), in northern Peru is considered the world’s second largest gold mine. The mining royalty tax ensures that 50% of the income tax remains in the Cajamarca area where the mines are operational. This is used for building infrastructure, educational facilities, encouraging tourism, etc. A number of non-profits have been formed to look into proper management and implementation of these initiatives.

In north-western provinces of Canada, special mining regulations are in place to recognise rights of the Nunaviks (Inuits). For example, Xstrata a global mining company, has an agreement with Makivik Corporation, which represents the Inuit’s, to share 4.5% of its Raglan nickel mine's operating profit with local communities. Raglan has delivered more than Cdn$65.4 million back to the community in this way. Similarly, Musselwhite agreement was signed by Joint Venture Partners, the four communities and two First Nation (FN) Councils (Shibogama and Windigo), closest to the mine. In this process, the signatory FN agreed to a revenue sharing agreement, which involves a fixed amount per ounce of gold produced, implementation monies, environmental monies, etc. Musselwhite gold mine, operated by Placer Dome in joint venture with TVX, is located near the territory of four FN villages: Cat Lake, Round Lake, Wunnumin Lake and Kingfisher Lake. The Musselwhite agreement also stipulates that the company aims to employ 30% the staff from the signatory communities. The FN tribal councils manage the money provided annually to them. Both the FN councils have employed implementation officers to monitor implementation of the agreement on a permanent basis. Working committee, an environmental committee and an implementation review committee have been established to discuss the agreement and ongoing issues periodically.

The Minerals Development Fund of Namibia Act, 1996; lays down provisions for the formation of a minerals development fund the proceeds of which will be used within the mining sector to enhance capacity and production and also for developmental activity.

The proposal for benefit sharing with the local community (26% of profits) and legislating a Sustainable Development Framework in the draft MMDR Act, 2010 is therefore in line with the best practices being followed in the world. The principles are not new and many mineral rich countries have been following it for years without impacting the genuine profitability of mining companies.

Implications of profit-sharing on profitability of companies

Assuming the draft MMDR Act, 2010 becomes a law; analysis shows that it will not make any material difference to the profitability of the company.

After sharing 26% of the net profit with the affected community, the PAT of NMDC will still be 41% of its turnover. In case of Coal India Limited, it will be 16%. Thus even with the MMDR provision, the mining companies will continue to make huge profits in operation and hence they clearly have the ability to share some part of these super-profits with the affected communities.

Cost of raw material must be paid

It is important to recognise that currently the cost of raw material for mineral based companies is very low. For instance, in the case of cement production, the cost of limestone (raw material) is just 7% of the turnover. In case of iron and steel sector, the cost of iron ore is less than 10% of the turnover. Considering that these companies make huge profits by selling their end products and that these end products require minerals as a major input, these raw materials need to be paid for accordingly. This will ensure better flows back to the mineral industry and hence better chances of profit sharing for the affected communities as well.