On April 21, 2014, the Supreme Court ruled that the ‘Goa Iron Ore Permanent Fund’ be created. The stated objective was to ensure Intergenerational Equity (IE) and Sustainable Development (SD) in relation to Iron Ore mining as enshrined in the India Constitution under Article 21 ‘Right to Life’.
This is the ninth part of a series. Read the other parts here
The Goan Iron Ore fund is the first Permanent Fund (PF) to exist in India and is based on the Public Trust doctrine that classifies natural resources as part of the commons. The underlying principle places the people as owners of mineral resources and the State mandated by them to act as a trustee. In practice this means State and legislature are obliged to act on behalf of present-day and future generations of Goans, to protect current resource wealth and to ensure biological survival.
The land, our rivers, and the air we breathe contain the primary elements that man requires to sustain life. They are our lifeblood. Without an enduring supply of these we have no roots from which to grow. Without lasting assets our children will have nothing except paper money and dust. Without material resources or the ability to leverage these, we are shadows — the walking dead, the dispossessed.
To this end the intergenerational equity principle requires us to pass on existing assets inherited from our ancestors, or alternative heritable assets of equivalent value. These are to be preserved for the welfare of future generations as a shared legacy, essential for the survival of the species.
Heritable assets can be characterised as those that retain their value. These might be precious stones and metals, diamonds, gold or land. Many assets like cars, consumables and technology depreciate or deteriorate, but heritable assets don’t lose value over time. Should we decide to sell some of our ‘commons mineral assets’ then logically and ethically what we receive must be preserved in new "heritable assets" of equivalent value. Heritable assets may additionally require care to protect their value. Land needs to be left fallow periodically and protected from trespassers. Land fertility needs regular attention to be sustained in order to reap viable crops.
Currently three assets are being depleted through mining: the mineral, the potential income derived from mining opportunity and the environment, health and other social aspects. A correctly structured Permanent Fund would not only achieve IE but would also ensure the protection of the capital. Reinvestment of fund income compensates for inflation while additional income is available to be paid as a citizens’ dividend.
The Anatomy of a Permanent Fund
It is not easy for governments to create large-scale heritable assets. For this reason many countries successfully invest receipts from sale of natural resources into Permanent Funds or ‘Future Generations Funds’. These are endowment funds where monetary receipts from sales of resources can be deposited. Financial investments need to be carefully managed, monitored, safeguarded and maintained in order to retain their value. We have all recently witnessed the tenuous value and security of cash first-hand in the current demonetisation exercise. Lack of foresight, short-term thinking and lack of planning can have far-reaching consequences
Permanent Funds must satisfy two conditions:
- Safeguard the principal against threats; inflation (reinvest income), taxes (tax exemptions), liens/charges (constitutional protection), fraud (multiple audits) and so forth
- Generate maximum and secure returns beyond inflation.
As the fund is created from selling a part of the public trust, the fund is also part of the commons. Income beyond inflation, the fruit of the commons, can be distributed. The logical distribution of commons income is as a commons Citizen’s Dividend.
The Supreme Court judgement in the Goa mining case ordered the creation of the Goa Iron Ore Permanent Fund. This Permanent Fund currently has a corpus of over Rs 94 crores derived from an interim levy of 10% of the sale value of iron ore. Details of the composition and administration of this fund are in the process of being decided by the Supreme Court.
In January 2015, Goa Foundation submitted a detailed proposal for the Goa Permanent fund. The blueprint covered receipts, investment management, dividend payments and proposed it be named the ‘Goenchi Mati Permanent Fund’. Key among the recommendations is the deposit of 100% of the mineral receipts across all minerals (not only iron ore) and the distribution of a commons dividend of above inflation profits, in the form of a commons (citizens) ‘universal income’. This is in stark contrast to the state government’s position, which is for the mineral sales receipts to be absorbed into government legislature as ‘windfall revenue’. In this latter model, commons ownership of Goa’s minerals would be diverted from the present and future citizens of Goa direct to the state coffers.
Over 50 examples of resource-based permanent funds exist. The most famous, best managed funds are those of Norway and Alaska. Norway and Botswana invest all money from mining into their fund, utilising the income as part of their government budgets. Alaska saves 25% of their oil receipts, with the income distributed solely in the form of a Citizen’s Dividend. Other countries with permanent funds include Chile, Russia, Kuwait, Botswana, Mongolia, Kazakhstan, Nigeria, Timor Leste, Equatorial Guinea, and Kiribati.
The earliest example of a permanent fund is Texas in 1876. Since then natural resource funds have become standard practice
Payment of citizen’s dividends has many advantages over the practice of investing fund profits in infrastructural projects such as roads, technological infrastructure, railways, hospitals or state-owned business:
To give over the permanent fund profits to the government hands over the commons ownership to politicians. It acts as an undiscriminating stealth tax, with the same amounts being deducted for every citizen regardless of their income, age, health or status, a payment for existence.
Good governance is linked historically quid pro quo with taxes. If mineral receipts are diverted and the government runs on windfalls, the social contract is weakened. The machinery of the state becomes independent of taxes and the support of the public is less important. The doors to corruption are flung wide open and democracy fails.
Governments are notoriously inefficient with their investments such as PWD projects. Professionals do a better job when performance is related to income. Raise taxes if investments are needed, monitor spending vigilantly, and borrow from independent financial markets if necessary.
Infrastructural investments are depreciating assets with a finite lifespan. Health and education are individual outcomes and more effectively addressed through focused taxes and targeted activity.
District Mineral Foundation
The District Mineral Foundation is designed to assist mining-affected people in specific geographical areas. It is intended to be used with reference to sustainable development and is related to the concept of the ‘polluter pays’ tax. Revenue is raised from the mining companies and used to address environmental and the many other kinds of damage that mining creates. There are limits to the level of redress that is possible. Mining caps are a critical factor in calculating sustainable levels of mining. Levels of extraction must conserve the mineral resources for future generations while simultaneously minimising ecological damage.
The Goa government argues that the DMF and the Goenchi Mati Permanent Fund perform the same functions. There are, however, some stark differences between them. The scope of DMF operations is as a district spending fund, a form of a non-profit trust for day-to-day management of localised and largely pre-determined, socio-economic issues of the mining affected.
The Permanent Fund is opposite; a fund that saves, not spends. The PF deals with the demands of intergenerational equity, the interests of future generations as well as present citizens. The key activity of the PF is to protect the principal against all threats, and invest in activities that create long-term income. Not only that, but the jurisdiction of the PF extends to the entire state.
Currently there is a legal battle underway concerning the architecture of the Permanent Fund. As one would expect the underlying argument is about who would control the funds. The 3rd draft Permanent Fund submitted by the Goa Government to the Supreme Court is not permanent! It is designed to have a life of only 20 years. It also contemplates the use of the capital in many situations and spending of 90% of income (which will ensure inflation will consume the capital).
Worryingly, the Goa Foundation scored the draft fund on the Truman Index (used globally for such funds). The draft fund scored only 14/100, lowest among funds scored. Norway achieves 98/100. Surely we can achieve at least 95/100 with a new fund.
This is the ninth part of a series. Read the other parts here
By Sarah Dynah McGinnis