A parallel and related proposal to revise the royalty rates on minerals is also on the cards
The draft Mineral Development Policy (MDP) is on the verge of celebrating its sixth birthday as a draft, but the latest version has some interesting changes which if finalized could bring substantial changes to the mining sector. The latest draft was prompted by the current cabinet sending it back for improvements to the Ministry of Economic Affairs which is taking the help of the World Bank on the issue.
According to mining experts and officials, the current draft is the best yet in dealing with the existing problems in the mining sector that are leading to controversies and hampering its growth.
Value addition and royalty
In a change from the earlier drafts and current practices the draft MDP policy proposes to promote value addition in minerals through fiscal incentives like lower royalty rates for domestic use as opposed to higher rates for those exporting it raw.
A Department of Geology and Mines (DGM) official said that instead of the current practice of banning raw exports totally or other proposals of allowing raw exports the draft policy will encourage value addition by charging less royalty.
“We will have to see quantity and quality issues as some minerals like Dolomite might be in large enough reserves to export raw or some minerals might be of such poor quality that value addition cannot happen and it can only be exported raw,” said the official.
Related to this draft proposal is a separate proposal to revise the royalty rates upwards for all 13 minerals found in Bhutan including construction materials. These minerals are Dolomite, Limestone, Marble, Iron Ore, Quartz, Talc, Granite, Shale, Clay, Gypsum, Coal and Slate and construction materials like stone quarries.
This increase would mean an almost doubling in mining revenue. For example the mining revenue for the government in 2013 was Nu 230.92 mn but after the revision of royalty rates this can shoot up to Nu 440.5 mn per annum. This would mean an additional Nu 1 bn in revenue over the next five years or Nu 630 mn in the next three years.
A recent Royal Audit Authority (RAA) report had pointed out the very low royalty rates for mining saying that it was time to revise them. It had pointed out a notional loss of Nu 328.8 mn from 2008-2012 just in the export of Dolomite due to low royalty rates.
“To encourage value addition, the same mineral will attract low royalty for domestic use but much higher royalty if it is to be exported,” said the official. Royalty rates were last revised in 2006 and that too for only a few minerals in a very marginal manner.
Mining Regulatory Authority
As pointed out by at least four separate RAA reports in the last six years a major concern was on poor monitoring and regulation of mines by the DGM leading to environmental issues, illegal mining practices and potential revenue leakage.
To get over this problem the draft MDP has proposed an autonomous Mining Regulatory Authority (MRA) whose operations in part are to be funded from a levy on mines. The MRA will be tasked with solely monitoring the mines and ensuring that all mining, environmental and health issues are complied with. It will also be involved in assessment, collection and auditing of mining royalties, levies and fees.
The draft proposes that the DGM, instead of going into monitoring, handles issues like formulating policies, issuing mine leases, undertaking mapping of minerals, classifying minerals, developing human resource in both public and private agencies, revising royalty rates and etc. The DGM has also proposed to take over surface collection from the Department of Forests.
One major source of controversy has been the DGM’s system of allocation of mines in the past. Several RAA reports criticized the existing ‘first come first serve policy’ and the latest RAA report said that just in the case of seven major mines given under this policy the notional loss from 2008-2012 was Nu 307 mn.
The draft MDP says that the ‘first come first serve’ policy will be replaced with ‘first come first qualified’ policy. This will mean that potential miners will have to meet some technical and financial parameters before being allotted mines.
A DGM official said, “Many of the problems of the mining and quarry sector can be traced to the fact that people who don’t know or don’t have capacity for mining get into it and then makes losses and cannot meet regulatory requirements.”
Areas and minerals already explored and established by the DGM will be up for auction to the highest bidders.
For areas not yet explored by DGM the department will issue an Exploration Lease to miners to study the area and look for minerals. The lease again will be issued on a ‘first come first qualified basis,’ and the explorer will get the preference for a mine if he or she can find and establish new mineral deposits.
“The RAA reports always say that 33 percent of the country has been surveyed by DGM but technically it is not true as the scale of such surveys is to the scale of 1:50,000. We have a rough idea but it is not enough for mineral exploration as much more detailed and expensive surveys are required,” said the DGM official.
One of the major issues between miners and local communities are on the issue of clearances. A DGM official said that the draft policy does not dwell on this issue as existing laws and guidelines are already clear about it.
“For example Samtse Dzongkhag’s declaration to be a no-mining Dzongkhag is illegal as no law gives them that authority. Similarly while community members raise objections it will be investigated by the Dzongkhag Land Leasing Committee (DLLC) to see if it is genuine,” said the DGM official.
The draft policy instead talks of a new Social Impact Assessment (SIA) study to be done in addition to the existing Environmental Impact Assessment (EIA).
“Current SIA is a part of EIA but the carrying out of a separate SIA will show and focus on the impact of the mines on the community and also the mitigation measures needed. The SIA will also be in line with international best practices,” said the DGM official.
The earlier draft proposal to give a five percent share of the company to the local community has been dropped and instead there will be government negotiated Community Development Fund and plan between the local community and the mining company.
“The government agency like MRA will ensure that the communities don’t demand too much and also that the companies don’t give too little,” said the DGM official.
Environment Restoration Fund
On key observation of the RAA reports was either the non collection of the Environment Restoration Bond (ERB) or the non restoration of old mine sites that had been closed.
To address this issue the draft policy says that adequate funds will be made available to the miners in stages from their own Environmental Restoration Fund (ERF) so that they can restore the mine area.
“The problem right now is that the ERB is a punitive measure whereby funds only get released once restoration is done but this will not be good for those mines making losses and closing. Their only money could be tied up in the ERB. So instead of the old ERB the new ERF will ensure restoration and release of funds,” said a DGM official.
The ERF will also have the additional advantage of getting bank interest as banks refused to give interest for ERB’s calling them bonds.
The draft policy says that the newly established State Mining Corporation (SMC) will take a lead role in exploration for and production of strategic minerals. The SMC will not mine construction materials or industrial minerals but will take on a key role in coordinating supplies of construction materials and minerals needed for the construction of hydropower projects.
The draft so far has been careful in defining strategic minerals. The draft says strategic minerals shall be those minerals that have wider implications on the economy in terms of being essential for domestic industries, in short supply, have limited prospects for new production due to poor geological potential and presently lack a competitive market (i.e. monopoly supply).
It says the MoEA shall review the categorization of strategic minerals periodically based on the domestic market supply demand balance, the extent of dependence on imports and degree of competition between domestic suppliers and, thereafter, shall publish a list of any changes in strategic minerals.
A DGM official said that the dilemma with defining strategic minerals is that if it included abundant minerals like Dolomite and others then overnight it could kill the private mining sector as SMC would have the sole monopoly. There are also concerns if SMC can really take up monopoly mining on a large scale given the failure of the NRDCL with stone quarries.
In addition to all of the above the policy also says that leasing procedures, including permits from other authorities, will be simplified and better coordinated with the aim of reducing the time for exploration and mining leases to be issued. However, here again a DGM official pointed out that time delays were mostly to do with agencies outside DGM like Dzongkhags, NEC, NLC and etc.
The draft MDP is currently with the DGM and will have to be finalized by the MoEA before it is once again presented to the GNHC and the cabinet for a final nod.