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Saturday, 22 October 11
WILL THE PROPOSED 26 PERCENT PROFIT SHARING CLAUSE IN THE MINING BILL SPEED UP THE PRODUCTION OR SCARE AWAY INVESTORS? - DIPESH DIPU
.jpg) A draft law has been approved by a ministerial panel headed by Finance Minister Pranab Mukherjee of India which, if passed by the Cabinet, will make it mandatory for the coal producers to share 26 percent of their profits with the population affected by the project. The proposed law has raised objections from the mining industry, fearing that it would result in heavy taxation, which, in turn, would diminish the investments in the sector. However, there are many who are in favour of it, including the largest coal producer, Coal India Ltd.
The mining industry is unique in some sense because of the magnitude of the environmental and social problems associated with this industry. A number of specific characteristics of the mining industry contribute to these problems. Choices of locations are not flexible, so often mining takes place in ecologically and socially sensitive areas. Particularly in those cases, the damage tends to be irreversible. Another characteristic of the mining companies is that they tend to be seen as an economically strategic sector. These two parameters tend to imply a conflict and a risk in terms of corporate accountability. That said, the mining industry has been moving from being a voluntary and marginal contributor to the society—it is part of becoming a partner in social development and making a significant impact on the standard of life for the project affected people. The Mines and Minerals (Development & Regulation) Bill that stipulates that coal mining companies will have to share 26 percent of their net profit for the purpose of the social balancing act. While there cannot be two opinions about compensating the project affected people, the stipulation of 26 percent share of profit does appear steep.
It may have an impact on investment in coal mining sector. And investments in mining ventures should not be viewed in isolation. Any impact on the investment in such a mining venture must consider the micro-economic impact of the venture. It would be stating the obvious that minerals produced from mining ventures are typically consumed in manufacturing sector and the chain of value additions end with the ultimate consumer. In case of a coal mine, the investment in mine is likely to be coupled with investment in power generation, steel or cement. If we take the example of coal mining and power generation, for every Rupee invested in coal mine, typically, five-fold investment goes into power generation plant. This can be enlarged, if the project needs infrastructure investments as well. Similar is the multiplier effect on generation of employment and these projects also help create local business opportunities and employment in these ancillaries. The local business development occurs through the investment in a coal mine and addition of power project in the portfolio, which enhances levels of economic activities and improvement in purchasing power of people in the region.
There is a difference between tax and social contribution, but the mandatory nature of the social contribution can make it appear similar to tax. Currently, coal mining in India attracts following taxes and contributions: Corporate income tax – 33 percent; Royalty – depends on the coal quality/grade; Dead rents – lease rents for land; Corporate social responsibility commitments (percent on revenues) – largely voluntary; Education cess – two percent surcharge; Environment levies – for coal, it is Rupees 50 per tonne of raw coal mined; and Indirect taxes – on consumables. If the 26 percent mandatory profit share is implemented, the taxes and mandatory contributions will account for more than half of the cost of coal production. While costs per se may not be a concern as much as the capacity to pass these costs on to the final consumer, which is where, the industry concerns may lay.
It is observed that raising the level of taxation brings the cash flows forward to the present from its mineral sector, which otherwise is due over time. Reason for this being the observation that tax hike always raises government revenues over the first few years from its promulgation. This is likely to discourage exploration and mine development in the longer run, and so reduces tax revenues on a life cycle basis.
The provision for profit share is likely to have limited success in addressing long-term issues that confront the industry and its investment environment, as hence, the same project affected people. Considering the macro-economic parameters, in long run, the industry and the government, as also the other stakeholders, including project affected people are likely to witness lower realization from a higher imposed contribution required from the mining projects. The provision, as it stands, is likely to erode the attractiveness of coal mining operations and may even act as a deterrent to investments into the marginally profitable coal blocks. It may help that the proposed profit taxes should be dropped in favour of enhanced but fair compensation to project affected people. Fair compensation for the project affected people should be based on earning capacity from that land keeping in view the market conditions for requirement of land. It may be suggested that in addition to compensation for land, the displaced should get annuity for life of the lease period at a rate agreed by the mining company, project affected people and the government.
The above analysis was originally published on Infraline.
The views and opinions / conclusion expressed on this analysis is purely the writers’ own.
About Dipesh Dipu
Dipesh Dipu works as Director with Deloitte in the Energy and Resources consulting practice of the firm and anchors the Firm’s initiative in the mining and metals sectors. He is a mining engineering graduate from Indian School of Mines and is a Chartered Financial Analyst (CFA).
He has also done executive program in business management from Indian Institute of Management Calcutta. Dipesh has recently been awarded the Abheraj Baldota Gold Medal for the Young Mining Engineer of the Year 2007 by the Mining Engineers’ Association of India in recognition of his contributions in the improvement of mining industry in India.
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Thursday, 03 November 11
DRY BULK MARKET OFFICIALLY IN THE RED ON LOWER CARGO DEMAND - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
The dry bulk market kept falling yesterday, on lower iron ore demand, which has caused the industry’s benchmark, the BDI (Baltic Dry Index) to ...
Wednesday, 02 November 11
MMTC TO BUY 3.73 MILLION TONS OF COAL FOR 2011- 2013
COALspot.com - India’s state-owned coal and mineral trader MMTC looking for 3.73 million tons of power plant coal for the period 2011 - 2012/ ...
Wednesday, 02 November 11
PANAMAX MARKET BECAME QUIETER AFTER THE RECENT RECOVERY - BRS
There were substantial losses across the board this week: the BDI lost 6.3% to end at 2,018 and the BCI 8.2% to end 3,274. In the smaller sizes the ...
Tuesday, 01 November 11
BORNEO LUMBUNG BUYS 23.8% INTEREST IN BUMI
COALspot.com - PT. Borneo Lumbung Energi (BORN), an Indonesian coking coal producer announces that it has signed a sale and purchase agreement, cond ...
Tuesday, 01 November 11
BAKRIE FORMS STRATEGIC PARTNERSHIP WITH BORNEO - REDUCING DEBT BY USD 1 BILLION
Press Release - Enhancing the standing of “Indonesia Inc.” at the London Stock Exchange PT Bakrie & Brothers Tbk (“BNBR” ...
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- Ministry of Mines - Canada
- Global Coal Blending Company Limited - Australia
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- Indonesian Coal Mining Association
- Orica Mining Services - Indonesia
- Carbofer General Trading SA - India
- Parry Sugars Refinery, India
- Ministry of Transport, Egypt
- Kepco SPC Power Corporation, Philippines
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- Trasteel International SA, Italy
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- India Bulls Power Limited - India
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- Leighton Contractors Pty Ltd - Australia
- OPG Power Generation Pvt Ltd - India
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- Straits Asia Resources Limited - Singapore
- European Bulk Services B.V. - Netherlands
- Eastern Coal Council - USA
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- Petrochimia International Co. Ltd.- Taiwan
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- Merrill Lynch Commodities Europe
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- Chamber of Mines of South Africa
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- LBH Netherlands Bv - Netherlands
- Jaiprakash Power Ventures ltd
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- Billiton Holdings Pty Ltd - Australia
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- Ceylon Electricity Board - Sri Lanka
- Toyota Tsusho Corporation, Japan
- Coal and Oil Company - UAE
- Kideco Jaya Agung - Indonesia
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- Mintek Dendrill Indonesia
- Kumho Petrochemical, South Korea
- Indian Oil Corporation Limited
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- Vedanta Resources Plc - India
- New Zealand Coal & Carbon
- Cigading International Bulk Terminal - Indonesia
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- Eastern Energy - Thailand
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- Australian Commodity Traders Exchange
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- Marubeni Corporation - India
- Aditya Birla Group - India
- Formosa Plastics Group - Taiwan
- Latin American Coal - Colombia
- Rio Tinto Coal - Australia
- PNOC Exploration Corporation - Philippines
- The Treasury - Australian Government
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Price Waterhouse Coopers - Russia
- Minerals Council of Australia
- Aboitiz Power Corporation - Philippines
- Edison Trading Spa - Italy
- Commonwealth Bank - Australia
- Kohat Cement Company Ltd. - Pakistan
- Alfred C Toepfer International GmbH - Germany
- Indika Energy - Indonesia
- Sarangani Energy Corporation, Philippines
- Independent Power Producers Association of India
- Energy Link Ltd, New Zealand
- Wilmar Investment Holdings
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- McConnell Dowell - Australia
- GN Power Mariveles Coal Plant, Philippines
- Bangladesh Power Developement Board
- Samtan Co., Ltd - South Korea
- Parliament of New Zealand
- MS Steel International - UAE
- Bhoruka Overseas - Indonesia
- Iligan Light & Power Inc, Philippines
- San Jose City I Power Corp, Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Binh Thuan Hamico - Vietnam
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- White Energy Company Limited
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- Bukit Makmur.PT - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Sakthi Sugars Limited - India
- Energy Development Corp, Philippines
- London Commodity Brokers - England
- Bhatia International Limited - India
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- Ministry of Finance - Indonesia
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- Tata Chemicals Ltd - India
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- Central Electricity Authority - India
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- Electricity Authority, New Zealand
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- Bank of Tokyo Mitsubishi UFJ Ltd
- Singapore Mercantile Exchange
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- Dr Ramakrishna Prasad Power Pvt Ltd - India
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- Maheswari Brothers Coal Limited - India
- Sindya Power Generating Company Private Ltd
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- Africa Commodities Group - South Africa
- Gujarat Mineral Development Corp Ltd - India
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- Ambuja Cements Ltd - India
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- The University of Queensland
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- Antam Resourcindo - Indonesia
- Vizag Seaport Private Limited - India
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- The State Trading Corporation of India Ltd
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- Australian Coal Association
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- Simpson Spence & Young - Indonesia
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- Wood Mackenzie - Singapore
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- Orica Australia Pty. Ltd.
- Oldendorff Carriers - Singapore
- Sojitz Corporation - Japan
- Salva Resources Pvt Ltd - India
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- Deloitte Consulting - India
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