Mining sector: accommodating local interests

ISLAMABAD:

Pakistan has considerable mineral resources which could not be utilised for a variety of reasons, perhaps mostly political.

The two main examples are mineral and gas resources. These days, Pakistan is suffering from the gas crisis as the local gas resources are constantly depleting and new resources could not be explored and developed. There are people who are sceptical about the gas resource potential. But there are other knowledgeable people who argue that high security risk areas have not been adequately explored.

A clear example given is of Kohlu where reserves of approximately 22 trillion cubic feet remain underdeveloped due to the local tribal resistance. There may be other reasons as well, but we will restrict to political economy of the subject.

In developing countries, mining areas generally have more poverty than other areas, which has caused conflict and strife. In developed countries, due to widespread development and the lack of disparities, these problems do not exist.

And where problems do exist, the developed countries have developed formulae, structures and mechanisms to deal with them. An example is Canada, where tribes in mining areas have been accommodated. Even India has somehow solved the problem through appropriate rules, as a result of which there has been a considerable improvement in the mineral sector associated with peace in the mining regions. In the mining sector including oil and gas, considerable damage occurs to the local communities. Environmental and physical degradation is usual. Local water and land use is affected.

Unfortunately, locals are not compensated adequately under a formal mechanism. Local identities are real such as the tribal ones, while provincial and federal boundaries and identities are political.

Under the existing rules, income and corporate tax goes to the federation and royalties’ income goes to provinces.

Provincial government is supposed to spend some of the royalty income on the local population in the mining areas but it is always short of revenue to run the administration and is dependent on federal subsidies itself. There is an issue of leakage and corruption, which is more in backward areas than in more developed parts and provinces. The mining sector also suffers from the colonial and imperial practices.

The sector is well integrated with the mainstream in the developed countries. There is generally lesser interest in the developed countries in royalties and more interest in profits and taxes.

Thus, royalties have been underpriced traditionally and more so because they belong to the developing world.

Creative royalty agreements can also solve some of the royalty income issues such as what the Chinese did with the Aynak Copper agreement in Afghanistan.

They had a S-curve formula, giving low royalty rates at low copper prices and higher royalty rates at higher international copper prices.

Metal prices vary a lot. Incidentally, this creative formula did a lot of damage in Pakistan as it was misconceived and compared with the Reko Diq royalty formula, causing opposition and ultimate cancellation of agreement and finally the ICSID tribunal fine of $6 billion on Pakistan.

There are various issues mostly of political nature but embedded in income sharing and control – one is of provincial ownership and rights to control and decide on mining contracts and utilisation, which is rather of theoretical concern as the capabilities and technical and management resources are lacking.

What happened to Reko Diq may partly be ascribed to confusion and malpractices in awarding the contract. The second issue is of having a higher share in the income beyond royalties, and the third is the share of locals – tribal vs provincial interests.

Resource ownership is a complicated issue. In developing countries, it is a political issue while in developed countries it is a commercial issue.

Resource belongs to the people or the government as long as it is under the surface. When it is brought on to the surface by the application of investment, resources and technology, it becomes property of the developer.

Commercially, companies claim that they decide in terms of maximising profits. The mineral sector could not be developed also due to security and political issues. In the case of Reko Diq, new dissenting voices are emerging against a reported compromise solution with the foreign investor, asserting autonomy and mineral rights. The World Bank tribunal has delivered award against Pakistan involving a fine of $6 billion based on doing a mere feasibility study at an overstated expenditure of $200 million.

While we thought it was our resource and we have the all the rights to it including specifying the installation of a downstream industry like copper refinery.

It is a separate matter had Reko Diq project been implemented as per the feasibility study, Pakistan would have got an income of $500 million per year and the accumulated income would have been more than $2 billion by now.

The second issue can be sorted out by developing a formula for sharing revenues other than royalty incomes as has been done elsewhere. The third one of tribal share and ownership has been intractable, although there are ways to resolve it. Tribes have been making claims of land ownership and government circles have been talking about Alaska formula, which recognises and compensates resource ownership based on the land sub-surface rights.

Canadian formula

Resource revenue sharing agreements let tribes share in the economic benefits of forestry and mining operations near their communities.

Tribes with resource revenue sharing agreements receive a share of 40% of the annual mining tax and royalties from the operational mines. Tribes can use such revenue for economic development, education, healthcare, community and cultural development.

District Mineral Foundation

In India, they have come up with the institutional concept of DMF under a federal law promulgated in 2015 according to which local governments get 30% of the mineral revenues including royalties.

Such income is to be spent by the local authorities. There are issues in its implementation like upward and downward integration. Tribes live in local districts. If local districts get the income, tribes get the impact on their development and welfare. There are other sectors like hydropower, which have recognised local interests and award a share in royalty income in recognition of the required compensation for physical and environmental damage and resource sharing.

In Pakistan, there have been discussions on the subject. However, it is not known if the same has been implemented.

The Petroleum Division has come up with a new policy which may give a fillip to the oil and gas exploration activities. However, this deals with the technical and procedural issues which are important itself. However, the main issue is political. They say all politics is local. Local interests have to be recognised for a peaceful and cooperative development.

In Pakistan, where there are diverse ethnic groups and several groups reside in one province, this aspect acquires a special importance.

Consultations and negotiations among the stakeholders should be initiated on the issue. There are successful examples as we have discussed in the foregoing. Intellectuals and political parties should help develop consensus on the issue.

The writer is former member energy of the Planning Commission and author of several books and publications on the energy sector

 

 

Published in The Express Tribune, January 17, 2022.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.