Achhe din ahead for mining sector

When he took over the reins last year, Prime Minister Modi gave us two mantras — ‘minimum government, maximum governance’ and ‘Make in India’. His philosophy is to reduce inefficiencies and delays, put the economy on fast track and turn India into a global manufacturing hub. In the past seven months of his governance, several policy decisions taken by the government tells us that it really walks the talk.

In its last winter session, the Rajya Sabha came to a standstill and did not pass key bills such as the Insurance Laws (Amendment) Bill and the Coal Mines (Special Provisions) Bill, which were cleared by the Lok Sabha.

However, in accordance with the commitment to improve governance and enhance the overall investment and business environment, the government issued Ordinances to start coal auction and allow foreign direct investment in insurance, apart from promulgating an Ordinance on land acquisition.

The Mines and Minerals (Development and Regulation) (MMDR) Amendment Ordinance, 2015, is another example of the government’s intent to ensure ease of business and encourage economic growth.

While there is a debate on whether the ordinance route is valid or not, the MMDR Ordinance is an important step to ensure that the nation’s mineral reserves are used judiciously and safeguard investments already made by steel and cement industries.

With vast reserves of iron ore and other favourable economic factors, the steel industry is poised to become a leading global exporter. However, recent policy uncertainty and the delay by certain state governments in renewing mining leases led to the closure of many mines, impacting not only the industry reliant on domestic iron ore, but leaving state exchequers empty and leading to an increased reliance on iron ore import.

With the date of last renewal of mining leases extended to March 31, 2030 (for captive miners) or till March 31, 2020 (for merchant miners), the fate of mining leases is no longer uncertain.

The transition time of five or 15 years allowed for the present lessees is a positive move to ensure that the momentum of growth is sustained and allows both the industry and the government to prepare for auctions more adequately.

The Ordinance provides for a transparent, auction-based allocation mechanism, wherein mineral administration will be streamlined to feed the government’s vision of manufacturing-led growth.

Steel plants are high investment projects with long gestation periods. It is, therefore, necessary to streamline the supply of raw material such as iron ore at competitive prices to maintain the economic viability of existing projects and incentivise investment in expansions.

Further, the life of capital-intensive steel plants is much longer than the 20 or 30-year lease periods for which captive mines are allocated. Hence, the government policies need to take a long-term view to support industry operations. The Ordinance has acknowledged this concern and has introduced 50-year leases for all mines.

It is estimated that 500,000 people are employed by the steel industry today, with a 3 mtpa (million tonne per annum) steel plant generating direct employment for nearly 3,000 workers and indirect employment for another 16-20 thousand people.

Mines supplying to these steel plants have also invested substantially towards developing sustainable mining practices along with the infrastructure, investing in skill development, education and medical interventions over the years.

The Ordinance acknowledges these investments and offers a solution to the renewal issue that safeguards the investments incurred by these miners. There is a background and a rationale to this provision. In eastern India, end-use facilities for the steel industry were established decades ago in geographically challenging areas, on the basis of proximity to raw material sources as an effort to address logistics concerns at those times. The government has, accordingly, taken a decision with regard to the transition periods.

End use facilities were set up decades ago in India’s eastern region on the basis of proximity to raw material sources despite the logistical disadvantages and high freight cost due to the distance from the market as well as customer.

However, the relatively new players, especially those who established their end-use projects post liberalisation, did not face this disadvantage as they were able to establish their plants close to the ports as well as in close proximity to the customer and the market. Hence, these new players have been able to enjoy lower freight costs with respect to raw material procurement as well transportation of the finished products to customers.

The new generation end-use projects did have an opportunity to own and operate captive mines at the time they set up their plants. However, as the cost of raw material was low at the time, there appeared no competitive advantage of owning these mines. Owning and operating captive mines also included the challenge of higher logistic costs, development of remote areas including the creation of infrastructure in and around mines, civic amenities and dealing with trade unions. Thus, at that point in time, the decision to purchase raw material appeared rationale.

It was only at the start of the 21st century, when the prices of raw materials such as coal and iron ore saw a significant rise as a result of the exponential growth of China, that most end-use companies realised the importance and need for owning and operating captive mines.

The Ordinance has drawn a perfect balance between investments already made and the ones that are yet to be made, creating a level playing field. The provision to establish a District Mineral Foundation (DMF) in the interest of affected communities is another positive from the ordinance. Industry must support the development of mineral rich districts and should widely welcome the clarity in the Ordinance, which specifies that the DMF contribution will now not exceed a third of the royalty rate in the respective minerals.

Overall, the MMDR Ordinance looks at boosting transparency in mining while streamlining the delivery development mechanism, which have been the biggest issues with the sector in the past. It paves the way for an effective and efficient framework with regard to the grant and renewal of mining leases. But it can succeed only if it is widely supported by state governments and industries.

The writer is former secretary of the Ministry of Steel

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