Minerals are a shared inheritance. In most countries of the world, minerals are owned by the state as a trustee for the people and future generations. We, as custodians, must ensure future generations inherit at least as much as we did, either the minerals or their value. The key objective then is protection of inherited wealth for future generations.
Mining is the sale of mineral wealth. Extractive companies are outsourcing service providers converting mineral wealth into cash. Royalties and other proceeds are received in exchange for the mineral wealth sold. How much is our fair share?
If the mineral extracted is worth 100 after all extraction costs, as owners we must receive 100. That is our fair share. The goal must be Zero Loss. A loss is a loss to all of us and all our future generations.
Everyone knows that mineral wealth is being plundered across the planet. But how concerned should we be?
Manage what you measure
The goal of the mining ministry is usually to increase extraction and “revenue” to the budget.As far as we are aware, loss minimization isn’t an objective anywhere in the world. Let us define Loss and Loss Rates:
1. Loss is the difference between
(a) the in-situ value of the mineral extracted (“Resource Rent” or “Economic Rent”), and
(b) the proceeds received in exchange for the minerals (“Mineral receipts” or “Rent payments to government”).
The in-situ value of the minerals extracted is their sale value minus the costs of extraction including a normal profit for the extractor. This can be estimated from the audited financials of extractors, extraction cost estimates or from the national income statistics.
The amounts received by the government in exchange for the minerals would typically be taken from the government finance statistics.
2. Loss rate is the Loss divided by the mineral value (after extraction costs).
For example, if the mineral is worth 100 (after extraction costs) and we receive 90 for them, the Loss is 10 (100–90), and the Loss Rate is 10% (10/100).
Loss or Loss Rate are not metrics in government finances or national income statistics. The System of Environmental-Economic Accounting (SEEA) standard by the UN does estimate the value of the mineral extracted, and can be used to calculate Loss & Loss Rates. However, these are not defined in the SEEA either.
Not surprisingly, governments don’t estimate or disclose loss / loss rates. Since Loss and Loss Rates are not measured, they are not managed and are likely to be high. How high is acceptable when we are morally required to make good the loss?
Empirical loss rates
We calculated our losses for iron ore mining in Goa. We used the audited financials of Vedanta’s subsidiary for an eight year period 2004–2012 & the government financial data. We found that for every 177 of minerals sold, the extraction costs were 77 and the minerals were worth 100 to us. Of this 100, the Goa government was receiving only 5 as royalty. We were losing 95 out of every 100, a loss rate of 95%. And even the 5 that was received was treated as income and spent. A total loss. We blew up our inheritance.
The losses amounted to an average 28% of GDP over the 8 years, approximately 2 years of income. It is a hidden per head tax on all Goans, which made a few miners and their cronies super-rich. This increases inequality and is unfair. Had these amounts been captured in a Future Generation Fund, and its real income distributed as a citizen’s dividend, we could have eliminated extreme poverty in Goa — a lost opportunity.
Sadly, Goa isn’t unique. We have found similar loss rates for the rest of India. IMF estimates losses of 15–35% for oil & gas, and 35–55% for minerals[1]. Recently, we have found data for Australia which indicates loss rates of 70–80% over the decade ending 2010.
Note that these loss rates are likely under-estimates. The amount received by the government is usually known. However, through marketing hubs and other tax management strategies, profits can be booked offshore, evading audited financials and GDP calculations. This tends to underestimate the mineral value, and by extension, the loss rate as well.
Systemic issues
We know that miners use corruption to get a sweet deal from the politicians and government officials. Politicians use the proceeds of corruption and the proceeds of mining to retain power. Goans receive lollipops from our own stolen wealth and gratefully vote our politicians again and again.
Miners and politicians realize that when people realize what is happening, it will stop. So everyone is in a hurry to extract. Trees, tigers and tribals become obstacles to “development”. Often, the mining areas are deprived to keep the people dependent on mining. Naturally conflicts arise, and get fueled by stolen minerals — increasing the losses!
Wealth protecting mineral system
The fundamental problem is that minerals are extremely valuable, and attracts thieves of great skill. After all, why does civil society ask for mandatory disclosure of project wise payments — to detect theft. Base Erosion & Profit Shifting (BEPS)? To control losses. Why do we want beneficial ownership disclosure? To detect conflicts of interest leading to losses. Extractive Industries Transparency Initiative (EITI)? To control losses.
Suppose we design the mining system to protect our wealth & prevent losses. What would that look like? We can learn from security and control systems that protect other valuables — our banking and financial systems like SWIFT, our computer systems like google & apple, our treasures like Fort Knox or art museums, etc. Politicians and bureaucrats, as our government representatives, are supposed to prevent theft.
Two key learnings from history are: (a) any weakness can result in total loss; and (b) Insiders like politicians and bureaucrats are the biggest risk, both from negligence as well as from corruption.
Here is a high level sketch of needed wealth protecting measures:
1) Zero Loss must be included in the mining laws as a goal, not just an increase in mining output at lower prices. The target must be a Loss Rate of 0%. It must be estimated ex-ante and measured annually ex-post and disclosed at least annually. The IMF has developed the Fiscal Analysis of Resource Industries model and released it for open use. This or a similar model should be used and the models available online for scrutiny.
2) Mineral inventory, valuation and disclosure — we must know what we own. It is clear that mineral resources are extremely valuable assets of the people. As trustee for the public, it is the duty of the State to provide the public with adequate information about their assets, viz., known sub-soil and offshore minerals. There should be a requirement in the laws for all Governments to provide a detailed estimate of the assets of the people — all mineral deposits and minerals within leases, giving volume, quality and estimated value of the mineral reserve. Similarly, all mineral lease holders should have an obligation to make similar disclosures on an annual basis, as often these estimates are revised.
3) Integrity due diligence is key. Fit & proper testsfor every person and entity participating in mining or its control is needed to ensure known corrupt players are excluded. The test should include the entity, its directors and key officers, owners and related parties. Beneficial ownership disclosure, disclosure of Politically Exposed Persons and Conflict of Interest Registers are some other measures.
4) High security control system to protect against theft. Any weakness can lead to a total loss of wealth. As minerals are some of our most valuable assets, the state must implement a cutting edge control system. This includes satellite, drone and lidar imaging, system auditors, biometric tracking, etc. Audits — concurrent, surprise, statutory, etc must be mandatory. Mining entities should also be audited frequently. Laws & contracts must extend to the entire supply chain to prevent Base Erosion and Profit Shifting (BEPS), schemes to cheat the people of their wealth.
5) We must change incentives. A whistleblower and public interest litigants rewards and protection scheme is needed. At the same time, anyone found stealing wealth must be subject to severe punishment and blacklisting.
6) The people, as the real owners of the minerals, should be permitted to satisfy themselves at any time that their children’s inheritance is protected (& not stolen by insiders). This requires radical transparency, including the ability to conduct social audits, and open access to the public to all data (including transaction level data feeds) in real time at no cost. The demands for mandatory disclosure of payments to governments, disclosure of beneficial owners of extractive companies and the requirements of the Extractive Industries Transparency Initiative (EITI) are a subset of these demands.
Where have we reached?
In India, the three key ministries — finance, mines and environment — have acknowledged minerals are a shared inheritance. Geophysical data on minerals is planned to be treated as a public good. A mineral supply chain control system is planned. Satellites & drones have been deployed to detect illegal mining. India’s Right to Information Act is quite broad. Still, the road ahead is long.
Conclusion
In conclusion, minerals are a shared inheritance. It is our duty to ensure future generations inherit at least as much as we did. If we fulfill our duty, we may enjoy the fruits of our inheritance. A loss is a loss to all of us and all our future generations. As owners and custodians, protecting our mineral wealth from theft is our central problem. Zero Loss must be our goal.
[1] Fiscal Regimes for Extractive Industries: Design and Implementation, paragraph 63&64
Rahul Basu is the Research Director of Goa Foundation, an environmental NGO in India. The Future We Need is a global movement asking for natural resources to be viewed as a shared inheritance we hold as custodians for future generations. This work is based on the practical research of the Goa Foundation.