For an integrated resources policy

It is time to think out of the box and develop policy and regulatory models that are unique to us, rather than adopt the sector specific imported model of independent regulators.

A high-power committee headed by Ashok Chawla has been constituted to look into the pricing, allocation and utilisation of natural resources. The recent cases of illegal mining and corruption, undervaluation of 2G spectrum and its allocation, pricing of natural gas, and the potential of shale gas have prompted this exercise, long overdue. Here is an opportunity, however, to put in place an integrated development and regulatory policy for natural resources development rather than opt for a limited agenda.

Several factors make the need for an integrated policy compelling. One, the rising prices and economic rents these resources generate require a revisiting of how the rent is appropriated, and of the arrangements and business models we have to allocate resources and share the rents between the developer and the state. Two, the resource and capacity needs of the constituent resource rich States need to be assessed. For, key resources such as oil, natural gas, minerals, coal and hydropower are owned by the States and controlled by the Centre. Three, the strategic aspects of coal, oil, base metals, and rare earth metals need a longer term perspective on their development and utilisation. Four, the often adverse environmental implications of development call for a context-specific, informed and inclusive debate on weak and strong sustainability criteria. Five, the social impact that their development creates, in the absence of a focussed attention on a more people-oriented resources policy, will result in inequitable and unfair outcomes and, increasingly, a reduced social licence to operate. Six, oil, gas, coal and minerals are exhaustible resources. Developing them today means we forgo the opportunity of developing them in future. It is important to ensure that some of the revenues earned from such development are put into intergenerational funds so that they generate income streams in perpetuity, as does the Government Pension Fund of Norway that is built on a share of its petroleum revenues, and invests the proceeds in income generating activities. A fiscal rule then determines what can be appropriated for budgetary purposes.

In India, as in many other countries, there is a tendency to treat these issues separately. But the time has come for us to think out of the box and develop policy and regulatory models that are unique to us, with a common architecture rather than merely adopting the sector-specific imported model of independent regulators. Given that resources in India occur in rich terrestrial or marine environments - and onshore resources in the midst of dense habitations - and that we are still in the early stages of their development, there is a strong case for an integrated resources policy.

Our work in these sectors suggests the need to engage with the following questions:

Should India consider having different business models for different minerals depending on their strategic and economic importance, rather than a uniform concession system for all? For example, oil and gas have adopted production sharing contracts (PSC) because of their strategic importance and value. Should we not think of production sharing contracts or rate of return contracts for iron ore, copper, lead and zinc, for greater resource control, to capture the resource rent more effectively, and to have options to take shares in kind that can be used to develop downstream industry in States? Not being able (or willing) to oversee or control the cost component in production sharing contracts should not be an excuse for not seriously engaging with this business model.

Inadequate approach
Should we not introduce intergenerational principles in the design of funds that we create out of our resource revenues? The current approach is to impose a cess on the sector and then have the proceeds go to a sectoral fund which is part of the Consolidated Fund of India, as is the case of the Oil Industry Development Fund, a model that is also proposed by the MMDR Bill 2010. This approach is inadequate and, going by the experience of the oil fund, does not recognise the intergenerational aspects of exhaustible resource development. The oil cess is not shared with the States. Assam and Rajasthan have been asking for a share in grants from the oil development cess or its reduction to accommodate a larger additional royalty to States to be used for local development. Resource revenues need to be transparently recorded and spent on current poverty alleviation and social development priorities, and also invested in future needs.

Should we not use more competitive bidding processes to allocate acreage, blocks, and sites to get better deals for States as argued by Chhattisgarh Governor Shekhar Dutt in his letter to the PMO on the MMDR Bill 2010? Competitive bidding processes or auctions capture the differential quality of the resource or the hydropower sites, and the desirability of resource to the entrepreneur, and result in better economic outcomes for the resource owner relative to discretionary allocations, as the economic agent is in a better position to judge the value of the resource and express this valuation through the bid or premium offered as compared to the assessments of government agents.

Should we not seek to integrate better economic, social and environmental regulations around natural resource development? Environmental regulation can result in reduced competition and create barriers to entry through, for example, the time involved in the permitting process, tradable pollution permits which benefit the dominant firms, etc. On the other hand, permissive entry policies or the absence of policy or its enforcement can result in excessive competition and entry which exacerbate the cumulative environmental and social impacts, as is evident in the mining in Goa and Karnataka.

Should we not revisit Centre-State relations in the context of environmental regulation of resource development? The current sharing of rights and responsibilities of environmental management and oversight tends strongly to favour the Centre, as against the need for much more distributed governance. There is a limited functional interaction between Central and State authorities and among relevant State level agencies. The role of gram sabhas, PRIs is limited or absent, even where decentralisation is provided for, the corresponding institutional and fiscal support is inadequate and, overall, the States are under no strict obligation to devolve functions on natural resource management to local bodies.

Resource federalism
Should we not focus on strengthening the institutions of resource federalism as we put in place more and more independent regulators which tend to centralise power at the Centre? Resource federalism was not an issue in the earlier phases of resource development, in that federal arrangements did not constrain the Centre's statist and centrist approach to it. However, economic reform and coalition politics are leading to new demands from the States. As the Centre seeks to accommodate them through a greater devolution of revenues and control, there is need to strengthen the institutions of oversight and rule enforcement, which involve all three levels of government. In fact, in this context, and given the poor regulatory performance of the mineral rich States in recent times, should we not have a diffusion of regulatory control through society by requiring a more pro-active disclosure of information in connection with the RTI, institutionalising social audits and participatory monitoring using indicators, tools and spatial databases? One of the most interesting developments using Google earth maps, for example, is the way people are now in a position to locate illegal mining and the dumping of overburden rejects, and create protests around it because they have the information they need.