DHI and private companies tussle over mine ownership and strategic minerals worth billions
Bill likely to come up in the summer session and if not then by the winter session this year
The mining industry has hit the headlines for all the wrong reasons in the last one decade.
A series of ACC reports and investigations, RAA Performance Audit reports, media reports, complaints from the public and parliamentary discussions has put the sector in the dock.
The mining sector was found to have rampant corruption, non-payment of taxes and levies, poor monitoring and even collusion with mining officials, in-transparent mine allocation process, environmental damage, unprofessional mining methods, diversion of dividends away from public shareholders, conflict of interest and more.
It was found that a few owners became disproportionately wealthy, while, despite its potential, the sector contributed less than three percent of the GDP.
The current government whose main slogan is ‘Narrowing the Gap,’ has an opportunity to remedy the many ills above through the upcoming Mines and Mineral Management Bill (amendment) that seeks to update the 1995 Act.
More importantly, the Bill will define who will have access to Bhutan’s mineral wealth, under what conditions and the taxes and levies that have to be paid.
The MoEA Minister Lyonpo Loknath Sharma said that the government will aim to bring the bill by the upcoming summer or budget session of Parliament.
The Prime Minister Lyonchhen (Dr) Lotay Tshering said that the aim of the government is to bring the bill in by the summer session, and if it is not possible. then at least by the winter session later this year.
How should own the mines?
However, the main debate that is raging for now is in terms of the ownership of the mines.
The matter has become all the more important as some major mine leases which had been auctioned around 15 years ago are coming to a close.
The former MoEA Minister Lekey Dorji in a Facebook status pointed out that the Gypsum lease expired in December 2018 and coal and dolomite rights would expire in December 2019 and December 2020 respectively.
He said, “My fear is if these minerals are reverted to an SOE, there would be further crowding out of the private sector.”
Apart from old leases there is the issue of what should be classified as strategic minerals and who should have ownership over them, particularly when it comes to rare and expensive minerals like Tungsten, Graphite, Talc, Phyllite and others.
The many sins of the private companies in the mining sector has lead to an increasingly strong argument for more state ownership and control.
The National Council, in the past, had even called for the effective nationalization of mines in Bhutan after undertaking its own study, studying the RAA and ACC reports and conducting discussions.
The Druk Holdings and Investments’ (DHI) agrees with state ownership of mines by positioning State Mining Corporation Limited (SMCL) as the main player in mining industry.
DHI’s position is that under Article 1 section 12 of the Constitution the rights over mineral resources vest in the state and are the properties of the state.
DHI wants all major mines and strategic minerals to be allocated to its mining company, either directly or once their lease is over.
On the other hand, the existing mining companies and owners want the private sector to be able to bid and own mines and minerals arguing that government ownership would lead to inefficiency and that the government should stick to a regulatory role only.
The current government in the words of Lyonchhen (Dr) Lotay Tshering is trying to strike a ‘balance’ of keeping the private sector involved along with a role for DHI and SMCL too.
Owning the lucrative strategic minerals
When the SMCL was formed by the former government through a cabinet executive order in November 2014, one of the terms for the company was that it would be the designated body to develop strategic minerals, as defined by the MoEA.
Strategic minerals as defined by the MDP Policy 2017 are those minerals that have wider implications on the economy in terms of either being scarce and essential for domestic industries; or rare and high value minerals, and those minerals with security implication.
In May 2017 the SMCL sought an update on the processing of 22 mines which DHI and it had applied for since 2012 and it included some mines for strategic minerals like tungsten, coal, graphite and talc.
The Department of Geology and Mines (DGM) wrote back in July 2017 saying that as per the Economic Development Policy the above minerals are listed as strategic and so it can only be allotted based on an allocation framework to be developed by the department.
It also cited a 2002 Mines and Minerals Management Regulations saying that any pre-identified deposits proven by the DGM or government will not be given directly to any party thus equating the SMCL to a private company.
One main worry within SMCL and DHI is on whether private miners and owners will be allocated these lucrative strategic minerals and mines.
Though not publicly expressed, the worry among officials in DHI and SMCL is that the mining lobby in Bhutan comprises the biggest and richest private companies in Bhutan, who have no hesitation on lobbying, formally or informally, with the powers that be.
Currently SMCL runs two coal mines and one stone quarry. As of 2018 it was given the Gypsum mine to run for two years on an interim basis by the interim government since its lease to the private company Druk Satair had expired in mid 2018.
SMCL in 2018 made a profit after tax of Nu 91.39 mn after paying Nu 42 mn in tax primarily from the two coal mines.
Its aim is to make 116 profit after tax just from the Gypsum mine in the coming year since this was the last profit made by Druk Satair.
A SMCL official said that they are doing well with the Gypsum mine.
A DHI official said that the earlier Druk Satair was selling Gypsum to Dungsam Cement for Nu 2600 per metric ton but SMCL is selling it now for only Nu 1,000 per ton.
He said even in coal the SMCL had reduced the price by around 13 percent.
A DHI official explained that SMCL got the gypsum mine on an interim basis since there was not enough reserve left in it to auction it out.
The official said that SMCL can also run and supply from captive mines to Bhutanese industries at prices regulated by the government.
SMCL has applied for four additional coal mines, two dolomite mines, three Tungsten mines, four quartzite mines for construction, one graphite mine, one gypsum mine near the current mine, one talc mine and two stone quarries.
DHI and SMCL’s position
With both major new mine leases and strategic minerals at stake, DHI is openly asking the government to allot it the major mines and also the strategic minerals as they say these are national resources that belong to the people of Bhutan.
A senior DHI official who did not want to be named, but spoke for the company, said, “Bhutan is a social welfare country where the government provides free education, healthcare and other services that demand resources. DHI is currently meeting 30 percent of the government revenue but our plan is to cover 100 percent of the current expenditure by 2030 and this is only possible if we get access to the strategic minerals.”
The DHI official said that the state ownership of both strategic mines and also major mines would ensure a more broad-based ownership in the mining sector.
He said that this would also help reduce the growing income gap.
He pointed out that SMCL, in addition the mining levies and corporate taxes also had to pay a 65 percent dividend on the profit after tax to DHI which in turn is paid to the government. The rest is retained by DHI for further investments.
The official, pointing out the lucrative nature of the mining sector, said that currently SMCL, even though it is a new company, is DHI’s most profitable company providing around 22 percent return on investment while it was around 10 percent for hydro.
He said that since mines are not a renewable resource, it should be used for the benefit of future generations and to ensure inter-generational equity.
The DHI official said since mines will be exhausted the state should have the priority over them much like oil in the middle east. He said that private mining companies giving a minimum of 100 percent dividend going up to 500 percent showed that there was excess concentration of wealth in a few hands.
He said private ownership of mines leads to many issues and he pointed to the 2014 Performance Audit report by RAA.
The report calculated the potential revenue lost by the government through non auctioning of seven mines, and losses through royalties, mineral rent and taxes avoided between 2008-12 at Nu 756 mn.
It also found that the majority owners and directors of big mining companies engaged in conflict of interest payments to their sister companies and themselves leading to around Nu 326 mn in profits being taken by them.
The report also found that minority and public shareholders were cheated out of their dividends with the big owners creating subsidiary companies owned primarily by them that took the bulk of the revenue of the main company.
Here a representative of the private mining companies, who also did not want to be named, said that the audit report did point out issues but since then rectification measures were done and one of them is that the RAA can now audit mining companies.
The view of the mining companies
The Mining companies’ representative who is general manager in a major mining company said, “If the government gets into mining then all the inefficacies and bureaucracy of the government will have a negative impact on the sector and they will loose the mining market that has taken us private players 10 to 15 years to build.”
He said that DHI and others are currently looking at the profits of the private mining sector and think they can do the same.
“Mining is all about efficiency and the government is not efficient. There will also be procurement and transparency issues too,” said the manager.
He said if a private company buys a machine at a certain cost and gets more work out of it, the government company will be procuring it at two to three times the price and it will still not work well. “They will not even be able to maintain the machines well,” said the manager.
He gave the example of the failure of the NRDCL, a DHI company which had been allotted six stone quarries in 2010.
However, a few years later the company had to shut down its operation and looked at around Nu 400 mn in losses through equipment purchased.
The location was not viable and it was producing stones at a very limited capacity.
Here the DHI official said that this is not a fair comparison as the location of the quarries itself was not viable and it is like comparing ‘apples and oranges’.
The private manager then gave the example of India where state owned mining companies had not done well.
He said that the mine’s lease currently is 15 years. He said that the government companies would not survive that long.
“After mining you have to transport the minerals, make all kinds of arrangements, compete with other competitors and even pay ‘goonda tax’. The government will not and cannot do all this. They will lose the market share in no time,” said the manager.
The manager disagreed with the current classification of strategic minerals. “Strategic minerals are the ones with security implication like Uranium or valuable ones like gold but not coal, gypsum and others.”
He also said that the government getting into mining would lead to a conflict of interest as the mining regulators themselves are government officials.
The manager said that the government, instead of doing the business itself should focus on making regulations and monitoring the sector well. He stressed that the government will not be able to perform efficiently like the private sector.
The government’s view
With DHI and SMCL squaring off against the private mining companies, the government’s view will tip the scales.
Here Lyonchhen (Dr) Lotay Tshering ruled out that there will be no nationalization of the mining sector in Bhutan. He said that the private sector will have a role in the mining sector.
At the same time, he stressed that there will also be a role for the state owned SMCL especially in the case of very rare and valuable minerals. Lyonchhen said that what can be classified as strategic minerals will be studied.
Lyonchhen said that the main issue at the top of his mind in the mining sector is the issue of efficiency. He said that the sector must also be fair and uniform.
He said that on one hand the option was of having an efficient taxation system and private participation and if that did not work then the other option is state ownership.
Lyonchhen said that the government keeps saying the private sector is the engine of growth, but this would be contradicted if the government does everything and forms SOEs.
The PM said that the Mining Bill will have to come along with taxation measures as both will be correlated.
He said that the fact that some miners have done well is not an issue as they must have done well after specializing in the sector.
The PM said that while the government aims to raise more revenue it will not be done by arm twisting the mining companies.
Lyonchhen said that the mines whose lease periods are running out will be leased out through auctions again.
In response to question on DHI’s stand and the Constitution saying the state has the right over the minerals resources, the PM said that he was sure that DHI would not disagree with the fact that a private Bhutanese company operating the mines and paying taxes would also fit within this Constitutional clause.
The PM said that the government, at the moment, is absolutely in the center and neutral on the debate between DHI and the private mining companies, though he would have to take a stand later. He said that the main effort is to strike a good balance.
The MoEA Minister Lyonpo Loknath Sharma also echoed the views of the PM ruled out nationalization. He said that his own view is that the private sector as the engine of growth must be a part of the mining sector.
The minister said that the private sector is more efficient than the government and will bring in long term growth.
He said, in his view, the government will carefully decide and define the list of strategic minerals and, here too, the private sector will have a role to play. The minister said that things cannot be done at the expense of the private sector.
The minister said that he would like to consult more and listen to the views of the technical experts too.
Some key decisions of the government that will settle the whole issue in the upcoming Act will be on the allocation framework for mines in general, listing of strategic minerals and also the allocation framework for strategic minerals.
Apart from the Bill, the rules that will be made later will also assume importance.
The minister said that the Bill will be based on the Mineral Development Policy of 2017. He said that the aim will be to ensure a fair and broad-based allocation of mines and also ensure more public benefits out of the mines, including to local communities. He said that the rates could also be increased.
The MDP 2017 talks of creating a mining regulatory authority, increasing the lease period to 30 years, streamlining allocation, giving mines to only competent and capable miners, having a regular revision of rates, having more benefits for communities and limiting the environmental and social impact.
The minister said that a team from DGM shall be soon going to Western Australia at the DMIRS mine to look into their methods, so that the new bill could be given one more ‘touch over’.
A source within the DNT said that the main aim is to balance the issue as complete state control is also not advisable given inefficiencies in state owned companies and at the same time the mines should not end up in just a few hands. He said that the government could ask for shares in the mines or ask them to float more shares to the public and civil servants. There could also be more shares for local communities and gewogs.
The Opposition and NC view
The spokesperson of the Opposition Party MP Dorji Wangdi of Panbang said that the opposition has not yet discussed much on the issue to formulate a position on it.
He said that since the bill is coming up, the opposition would be discussing more among themselves on the issue.
He said that bill is an important issue that needs to be taken up.
The NC in the past has had a more definite and consistent view on the need for more state ownership given that it is a natural resource.
A NC member, on the condition of anonymity, said the DNT manifesto in 2013 had a citizen’s dividend bill where such benefits like mining were to be given to citizens.
The member said that the NC’s position would likely be based on the Constitution which says that mineral resources belong to the people.
He said that the NC would be concerned that the benefits of mining should not be captured by a few and there should be fairer distribution.
On the issue of nationalization, the member said that it is not a new concept as the nationalization of sand and timber brought down prices by 200 percent.
The NC member said that irrespective of the position of the government or others, the NC would make a morally persuasive argument on if the mineral wealth of Bhutan is to just enrich around five families.
Whatever the plans of the government, it is clear that the combination of the public opinion and the discussions and stands taken in Parlaiment will eventually decide the outcome of the Bill and its many implications.