Extracts from our letter to the CM Goa

The first few pages of the full proposal provides the rationale for the proposal that follows. This does not cover the estimates of amounts recoverable from illegal mining.
Note : Hartwick’s Rule essentially says that when you sell an asset, you buy a productive asset of equivalent value.
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What’s at stake for Goa
The Supreme Court judgment in the Shah Commission matter (WP 435 of 2012)
The judgment has the following key outcomes
  1. All mining leases have expired in 2007, and cannot be renewed under the MMDR Act, 1957.
  2. It was found that dumps outside mining leases are illegal under the MMDR Act, 1957.
  3. There are a variety of other practices that the Supreme Court found to be illegal and directed the State Government to prosecute.
  4. There are a variety of other implications from the above findings. For instance, restitution for environmental damage caused by illegal mining and illegal dumping operations can be sought.
  5. The Supreme Court directed that “the State Government may grant mining leases of iron ore and other ores in Goa in accordance with its policy decision and in accordance with MMDR Act and the Rules made thereunder in consonance with the constitutional provisions.” Constitutional provisions include the Public Trusteeship principle.
  6. The Supreme Court has mandated the creation of a Goan Iron Ore Permanent Fund. It has directed that “the State Government will within six months from today frame a comprehensive scheme with regard to the Goan Iron Ore Permanent Fund in consultation with the CEC for sustainable development and intergenerational equity”. Further, the Supreme Court has mandated that 10% of (a) the proceeds from e-auction of dumps (after certain deductions), and (b) the sale price of iron ore sold by mining lessees, be deposited into the Goan Iron Ore Permanent Fund.
Implications for Goa
The Goa Government has been handed a tabula rasa, a clean slate — there are no leases. It has to set all its policies anew, and decide on the optimal way to meet the Publice Trusteeship and Intergenerational Equity principles of the Constitution. There are certain implications of the judgment that need highlighting :
  1. The design of the new system for mining going forward will have a significant impact on intergenerational equity. The Chief Minister expects the iron ore reserves of Goa to be 3 billion metric tons[1]. We are using a figure of 1.3 billion MT for our calculations. Based on a captureable value of Rs. 1,909 / MT (the average for the 8 year period), and a 90% capture rate, the total captured value works out to Rs. 2,23,322 crores. This is equivalent to Rs. 61 lakhs for a family of four. An inflation adjusted rate of 3% would generate income for the state budget of Rs. 1.83 lakhs per family of four. Do note that a 1% change in the capture rate is worth Rs. 2,481 crores. If we continue to capture 4% as we did historically, we would capture only Rs. 11,004 crores. Compare that with Rs. 2,23,322 crores at a 90% capture rate. It is worth spending time on designing the new system correctly in order to maximize the capture.
  2. Large amounts need to be recovered from mine owners on account of mining after 20-nov-2007. Dumps outside lease areas need to be confiscated as they are illegal. Recoveries from the past illegalities is a complex endeavour. This would require significant financial, analytical and legal skills to investigate illegalities, apportion responsibilities to various parties, and to sue for recovery. However, the amounts at stake are enormous. Just on account of illegal mining after 20-nov-2007, the amount at stake exceeds Rs. 30,000 crores. The Shah Commission identified Rs. 35,000 crores on account of mining outside the lease boundaries. And the amount recoverable from the 750 million tons of dumps would also run into tens of thousands of crores.
  3. A quick restart of mining is a priority in order to generate income for the mining dependents. However, restarting mining will than a year at best – much likely longer. Even when mining does restart, it will take time to ramp up to the cap. And when it does reach the cap, it will be well below the peak level of 46.8 million tons of exports in 2010-11. The Government needs to be honest with the population while explaining the long term benefits of the stoppage. There is an urgent need for employment generation programmes, as well as reskilling programmes for the mining dependent population.
  4. The existing mining entities are disqualified from mining, due to the large scale illegalities that have occurred. As a result, there are a large number of qualified personnel with experience in mining operations. They can be employed by a Goenchi Mati Development Corporation. Initially, they could also help with the recoveries.
  5. A large number of mines are permanently closed or abandoned. Their mine closure plans need to be implemented. This would generate significant new employment. Restoring both dumps as well as mines will create a lot of new usable land, alleviating the current shortage.
Our Proposal
  1. As a starting point, the Goa Government should adopt a new mineral policy that keeps Intergenerational Equity and Sustainable Development at its heart. Explicit targeting of the Hartwick’s Rule should be incorporated into this policy. Irreparable damage to critical assets should be prohibited.
  2. Drawing from the Public Trusteeship principle, there should be an explicit target to capture 90% of the mineral depletion. This is an international best practice and should be our initial target. In order to achieve this goal, the entire state should immediately be reserved for mining exclusively by state corporations. Further, we are unable to see how a 90% capture rate can be achieved except by mining through a Goenchi Mati Development Corporation (GMDC).
  3. Also deriving from the Public Trusteeship principle, it must be the policy of the state to terminate any and all existing leases where legally possible, in order to enable a regime with a higher capture of the mineral depletion.
  4. The Goenchi Mati Permanent Fund
    1. We recommend renaming the fund from Goan Iron Ore Permanent Fund (GIOPF) to Goenchi Mati Permanent Fund (GMPF). The primary reason for renaming it is that this fund should cover all minerals, including manganese ore and bauxite. The new name would also more closely reflect the Goan identity.
    2. ALL funds from mining received by the State should be invested in the Goenchi Mati Permanent Fund (GMPF). This is the minimum required in order to achieve intergenerational equity. It would ensure meaning of “uttaradhikari” or “patrimony” are met. Anything less would be cheating our children. While the Supreme Court has directed that 10% of certain amounts should go to the GMPF, nothing prevents the State Government from deciding that 100% of funds from mining go into the GMPF. This would bring Goa in line with global best practices.
    3. This fund could be set up on the lines of the National Pension Fund. Its objectives would include earning a real return on investments of at least the GDP growth rate. Only to the extent that the Fund earns returns that exceed the inflation would these returns be used by the Goa Government as part of its revenue income. It could initially be set at 2-3%.
    4. Alternatively, it can be the practice to pay equal shares of this amount annually to each person domiciled in Goa[2]. Such a mechanism would increase the involvement of the general public in the management of our inheritance.
    5. Logically, the GMPF should also own GMDC (Goenchi Mati Development Corporation.)
    6. A specific policy would need to be created to determine the rate of extraction. This would have to take into account
      1. Environmental sustainability of mining operations in Goa. Since it is a tabula rasa, the Government can define a single mine of 10 sq. km., as opposed to the 1 sq. km. limit under the Portuguese Mining Code[3]. This can make for efficient mining operations concentrated in one or two large mines. This could minimize damage to the environment, including the aquifers.
      2. Current and anticipated commodity prices. Extraction should be greatest during periods of high prices. Thought needs to be given to the creation of “swing” capacities to enable greater extraction in periods of higher prices.
      3. The need for income in the Goa budget. At this point in time, the state is comfortably meeting its requirements under the Goa Fiscal Responsibility and Budget Management Act, 2006. In fact, the Act was recently amended to provide for tighter goals, including a nil revenue deficit.
      4. The likelihood of generating real returns through the GMPF in future. Initial analysis shows that achieving real returns on a sustained basis will not be easy.
      5. International best practices in minerals can be adopted in multiple areas
        1. A strong monitoring mechanism should be instituted, ideally based on the ICGLR Certification Mechanism.
        2. Measure – it is important for the Government to measure elements like mineral depletion, capture rates, etc. What is measured is managed.
        3. A regime of heightened transparency should be instituted to encourage citizens participation and oversight on the entire minerals sector. This could include adoption of EITI and EITI++.
      6. Goa should consider a few additional cutting edge steps.
        1. Goa should implement Natural Resource Accounting for the state. This would provide a second level of guidance on how the state is progressing.
        2. Australia has been producing Intergenerational Reports, which provide a perspective for the next 40 years. The latest one is titled “Australia to 2050: future challenges.”[4] This is a practice for the State to consider, especially taking into account the adverse demographics on account of low fertility in Goa, well below replacement rate.
        3. As recommended in the Goa Guidelines 1988[5], Goa should also consider creating an Ombudsman for future generations, emulating countries like Hungary.[6]
        4. There are significant economic advantages from openly publishing real time data from trucks, barges, as well as environmental sensors both with the government as well as in the mines. Truck position data would permit more efficient operations. Traffic patterns can show the various choke points. Queues building up would trigger dispatch of policemen. Theft of trucks or iron ore would be reduced. Similarly, real-time environmental data would enable micro-climactic predictions. This would help with disaster preparedness. Over time, precision agriculture would be aided by knowing real time wind patterns or water levels for irrigation. This could be done through data.gov.in or a separate Goa Government open data portal.
Additional steps that would be required
  1. It is important that the GMPF be structured so that it is difficult to access the principal of the Fund. Ideally, this would be done through a Constitutional Amendment protecting the Fund from any liens or encumbrance. This is perhaps one of the demands Goa can make for inclusion in Article 371-I of the Constitution (Special Status).
  2. It is important that the GMPF receive various tax and cost exemptions on the likes of the NPS. This would include inclusion in Section 10 of the Income Tax Act, 1961, among others.
  3. The Goa budget may need an additional fiscal rule (which is in use in countries like Botswana.) The proposed rule in that the non-mineral revenues of the State should be equal or greater than the revenue expenditures. In other words, the budget should show a revenue surplus, after all the mineral revenues have been invested into the GMPF. These are misclassified as revenues – in reality, it is our capital being transformed from minerals into cash, and should be treated as being from “sale of assets”.
  4. It is possible that the MMDR Act itself may need amendment to achieve these objectives and to bring it in consonance with the higher Constitutional principles of public trusteeship and intergenerational equity.
Implementation of the Goenchi Mati Permanent Fund
Much work is needed. Ideally, design of this would be done by a committee of eminent natural resource economists, investment practioners, experts in government finances and government bureaucrats. We could draw from the experience of the Ministry of Finance, RBI and PFRDA. A separate group of geologists, environmentalists and transport engineers would have to work out the optimal lease designs and locations to minimize environmental and social impact and enable efficient extraction. Implementation would need to be done by the Government in totality.
This would require a new mineral policy; the creation of entire new skills in the mining department; and possibly the formation of a state mineral corporation. It may need new laws to embed fiscal discipline and transparency.
Interim measures
It is clear that creating proper policies and implementing them would require a year or more.
Certain interim measures are needed.
Revenue to the State can be met through recoveries from ore stacks, which are estimated at 15 mn tons. There may be other monies to be recovered from the mining companies on account of illegalities. The PAC Report, chaired by the current Chief Minister, estimated illegalities of Rs. 3,500 crores, enough for at least 3 years.
In order to recover money arising on account of illegalities, a separate organization may be needed. Consideration should be given to creation of an effective Whistleblower Protection Act and mechanism. Consideration should also be given to legally give rewards for information leading to recovery of money. This kind of scheme has been successfully used around the world. The reward is set at 10% for the US IRS.
However, employment and income in the mining belt are still major issues. We have a couple of suggestions.
  1. First, the State create a more comprehensive plan to deal with the mining impacted persons. This should include a comprehensive debt restructuring plan.
  2. Second, most of the existing mines would need to be closed, and back-filled as per their Mine Closure Plan. There is vast rehabilitation of natural assets to be done. All this will be an enormous earth-moving task which can generate employment and income for the truck owners.
[1] http://in.reuters.com/article/2014/02/10/ironore-india-goa-mining-idINDEEA1905620140210
[2] This is currently the practice in Alaska, and a similar scheme is being considered in Switzerland (except that is through the budget).
[3] Under Section 66 of the Mineral Conservation Rules, 1960, all mining leaseholders are required to annually update all the geophysical data with the Department of Mines and Geology.
[4] http://archive.treasury.gov.au/igr/igr2010/report/pdf/IGR_2010.pdf
[5] The Goa Guidelines on inter-generational equity were adopted by the Advisory Committee to the UN University Research Project on 15 February 1988 in Goa, India. The committee that included Shri R.S. Pathak, who was the Chief Justice of India at that time.
[6] Technically, Parliamentary Commissioner for Future Generations. http://jno.hu/en/