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Sunday, August 18, 2024

Sharing of Profit Petroleum and the Constitutional Bench decision on the nature of royalty



Just as with other minerals, oil & natural gas are owned by the Center when in the ocean, and largely owned by states within their boundaries. This sector has a global standard of using Production Sharing Contracts (PSCs), where after a certain level of cost recovery, a proportion of the profit petroleum is handed over to the government by the extractors. For onshore blocks, the extractor signs a lease with the state, which includes provisions to pay royalty, and the PSC with the center. The 12th Finance Commission examined the question of to whom this Profit Petroleum (the government share) would go to, and decided that it should be split 50:50. The state of Gujarat took the stance that since the oil & gas is the property of the state, it should receive the entire profit petroleum, even though they also receive royalty.

The Constitutional Bench of the Supreme Court recently decided on the question of whether royalty was a tax. By an 8:1 majority, they ruled that royalty was a contractual obligation, payable to the state under the mining lease. After examining various provisions of the State and Union Lists of the Seventh Schedule of the Constitution, they also decided that only states have the power to impose taxes on land, minerals or mineral rights. They also emphasized the public trust doctrine as well as the need for many mineral bearing states to find sources of funds.

The only alternative that the center receives a part of the profit petroleum as a result of signing the PSC seems absurd as they only have rights to regulate and develop and nothing more. Therefore, it would seem that the judgment of the Constitutional Bench has clarified that the stance of the state of Gujarat is the correct position, and this needs to be revisited.

This letter is a follow up to an earlier letter that can be read here.



Thursday, July 18, 2024

Minerals and the Public Sector Net Worth: 16th Finance Commission

 Since 2016, I've been engaged with how government accounting for minerals makes their management significantly more difficult. In 2016, Goa Foundation sent the note Mitigating the Resource Curse by Improved Government Accounting to the IMF, UN, WB, INTOSAI, IPSASB and an equivalent set of Indian government officials. Read it, many have said they enjoyed it. Notably, the IPSASB responded, and in their consultation on their Work Plan for 2019-2024, a new standard for Natural Resource was put on the top of their agenda.

After a bunch of responses, Goa Foundation sent Government Accounting and the Resource Curse - Response to FAQs in 2017. While less fluent, it introduces multiple new ideas including the Goa Foundation Benchmark.

In 2018, Goa Foundation wrote to the IMF MD explaining how this government accounting error was resulting in the opening up of protected areas for oil & gas exploration. IMF's Government Finance Statistics Department called for a meeting in August 2018, where I represented Goa Foundation. IMF had nine staff members across 4 departments for a 2 hour meeting, a considerable time commitment. At around the same time, the IMF was working on its October 2018 Fiscal Monitor on Managing Public Wealth, so the ideas were well timed.

Since then, there has been a lot of action. Notably, IPSASB has moved forward on Natural Resources, while the UN and IMF are working together on updating the SNA (System of National Accounts) and  the GFSM (Government Finance Statistics Manual).

The core issue revolves around the long-standing practice of treating royalties and the like as "revenue" as opposed to treating as sale proceeds of a non-debt capital nature arising from an asset-stripping process. This is important if the goal is to have increasing public sector net worth. However, the usual goal of public finances is debt sustainability, without reference to net worth. 

In the attached letter to the 16th Finance Commission, Dr. EAS Sarma and I have argued for a change in the way India manages its public finances.


Wednesday, March 16, 2022

How to be a Good Goan Ancestor

 We Do Not Inherit the Earth from Our Ancestors; We Borrow It from Our Children

The intergenerational equity principle offers a criteria to judge whether we have been good ancestors to our children and the countless future generations to follow. The principle of Intergenerational Equity (IE) is, at its heart, quite simple. It is our duty to ensure future generations inherit at least as much as we did. Only if we succeed do we have a right to consume the fruits of our inheritance. Any loss is a loss to the people and all future generations.

If we are successful, our children will be at least as well off as we are. If we leave a bequest as well, they will be better off than us. Without intergenerational equity (IE), humans are doomed. Everyone will want to consume their inheritance, leaving the next generation poorer. Any group/society that adopts this path will be ruined in no time, like an addict selling the family silver.

The intergenerational equity principle is seen implemented in different ways through societal institutions. For example; families try to ensure the inheritance is safeguarded through custom as well as inheritance laws, charities & religious trusts set up endowment funds, corporates and businesses try to avoid losses and increase their net worth.

In the public sector, the “Public Trust Doctrine” is an important way to implement intergenerational equity; natural resources, including minerals, are owned by the state as a trustee on behalf of the people and especially future generations.

Goa and Intergenerational Equity

Goa Guidelines on Intergenerational Equity 1988

While Goa is setting new precedents in the implementation of Intergenerational Equity, it has a longer history with the idea. Intergenerational equity became a part of the discourse with the Brundtland Commission report “Our Common Future” in 1987. At the same time, Edith Brown Weiss headed a six member Advisory Group set up by the United Nations University as a part of the Project on “International Law, Common Patrimony and Intergenerational Equity”. The six members, who acted in their personal capacity, were Edith Brown Weiss, A A Cançado Trinidade, A.-Ch. Kiss, Lai Peng Cheng, E.W. Ploman and the then Chief Justice of the Supreme Court of India, R.S. PathakTheir final meeting on 15 February 1988, which was held in Taj Aguada, Goa, adopted the Goa Guidelines on Intergenerational Equity. The crucial statement says:

"The temporal dimension is articulated through the formulation of the theory of intergenerational equity: all members of each generation of human beings, as a species, inherit a natural and cultural patrimony from past generations, both as beneficiaries and as custodians under the duty to pass on this heritage to future generations. As a central point of this theory’ the right of each generation to benefit from and develop this natural and cultural heritage is inseparably coupled with the obligation to use this heritage in such a manner that It can be passed onto future generations in no worse condition than it was received from past generations. This requires conservation and, as appropriate, enhancement of the quality and diversity of this heritage. The conservation of cultural diversity is as important as the conservation of environmental diversity to ensure options for future generations. ...

To implement intergenerational rights and obligations, the following strategies are proposed:
(a) representation by States not only of present but also of future generations;
(b) designation of ombudsman or commissioners for protecting the interests of future generations;
(c) monitoring systems for cultural and natural resources;
(d) conservation assessments giving particular attention to long-term consequences;
(e) measures to ensure use of renewable resources and ecological systems on a sustainable basis;
(f) commitment to scientific and technical research to advance the purposes set out above and
(g) programmes of education and learning at all social levels and age groups especially the young generations.
It is particularly important to give attention to the proper functioning and maintenance of facilities and services. It is crucial not only to establish services and facilities for conserving natural and cultural resources but also to take appropriate measures for maintaining them.

Subsequently in 1989, Dr. Weiss published her seminal book, In Fairness to Future Generations: International Law, Common Patrimony, and Intergenerational Equity, which “identified a principle of intergenerational equity in which all generations hold the Earth in common as a trust. People are both beneficiaries entitled to use the environment and its resources, and at the same time trustees (or stewards or custodians) with an obligation to pass it on in no worse condition on balance than that in which it was received."

This theory articulated three elements of intergenerational equity: non-discriminatory access to the Earth and its resources; comparable options (as reflected in the diversity of resources); and comparable quality in the environment. These elements apply to both natural and cultural resources and lead to a suite of intergenerational strategies.

The elements of the principle met four criteria: that they neither authorize unreasonable exploitation by the present generation nor impose unreasonable burdens on it; that they not require predicting the values of future generations and provide flexibility to future generations to achieve their own goals; that they be reasonably clear in application to foreseeable situations; and that they be generally shared by different cultural traditions and acceptable to different economic and political systems.

In August 2013, the Report of the United Nations Secretary-General on Intergenerational Solidarity and the Needs of Future Generations recognized the “fundamental principle of intergenerational equity” and noted that it included three elements: conservation of options, conservation of quality, and conservation of access.” (Source: Weiss (2020): Entry on Intergenerational Equity in the Max Planck Encyclopedia on International Law doi: 10.1093/law:epil/9780199231690/e1421)

There are a variety of initiatives promoting implementation of intergenerational equity in Goa. Prominently, the Goa Foundation, an environmental non-profit set up in 1986, has been advocating the implementation of intergenerational equity across the variety of issues it has taken up, including iron ore and sand mining, beaches and CRZ, forests and protected areas, etc.

Cidade de Goa judgment

One important aspect of this case related to public access to Vainguinim beach. In its judgment (Fomento Resorts & Hotels & Anr vs Minguel Martins & Ors, CA 4154 of 2009) delivered on 20 January, 2009, the Supreme Court required perpetual public access to the beach and observed

The heart of the public trust doctrine is that it imposes limits and obligations upon government agencies and their administrators on behalf of all the people and especially future generations. ... The Public Trust Doctrine is a tool for exerting long-established public rights over short-term public rights and private gain. Today, every person exercising his or her right to use the air, water, or land and associated natural ecosystems has the obligation to secure for the rest of us the right to live or otherwise use that same resource or property for the long term and enjoyment by future generations. … We reiterate that natural resources including forests, water bodies, rivers, sea shores, etc. are held by the State as a trustee on behalf of the people and especially the future generations. These constitute common properties and people are entitled to uninterrupted use thereof.” (bold added)

This judgment is reflected in India’s National Mineral Policy 2019, which states “natural resources, including minerals, are a shared inheritance where the state is the trustee on behalf of the people to ensure that future generations receive the benefit of inheritance. State Governments will endeavour to ensure that the full value of the extracted minerals is received by the State.

In commemoration of this historic victory for the people & future generations of Goa & India, every year on Republic Day, the Goenchi Mati Movement organises its Reclaim the Commons picnic on this beach & other public spaces.

Reclaim the Commons picnic 2020 organised by the Goenchi Mati Movement

Illegal iron ore mining case

The explosive report of the Shah Commission on illegal iron ore mining in Goa was released in 2012. It led to an immediate ban on mining imposed first by Goa’s CM, Manohar Parrikar, followed by the national government and finally the Supreme Court. One of the grounds of the public interest litigation that followed the Shah Commission report was intergenerational equity and the rights of future generations. The SC appointed an Expert Committee to examine how intergenerational equity could be implemented. The Expert Committee’s interim report drew on Goa Foundation’s recommendations. The SC, in its final judgment on 21 April 2014 (Goa Foundation vs UOI & Ors, WP 435 of 2012), which was based on the Expert Committee recommendations, directed the state to set up a Goa Iron Ore Permanent Fund and also imposed an interim cap of 20 million tons per annum on iron ore mining in the state, both on grounds of intergenerational equity. To our knowledge, this is a global judicial precedent. The Goa Iron Ore Permanent Fund has around Rs. 500 crore, enough to pay an annual citizens’ dividend of Rs. 100 to all citizens in Goa. Eight years later, the exact form of the fund and the final cap is still to be decided by the SC.

Illegal sand mining judgment

In a seminal case on rampant illegal sand mining in Goa, the HC of Bombay at Goa, in Rainbow Warriors & Anr vs Goa DMG & Ors (PIL WP 14 of 2018) said:

28. The reference to this Doctrine of Public Trust is necessary for two reasons in the context of large scale illegal mining of sand from the riverbeds and river banks in the State of Goa. Firstly, such reference is necessary so that the State realizes that it is not some literal or absolute owner of all these natural resources like sand, gravel, etc. found in the riverbeds and banks of the rivers. The State, is a trustee in respect of these natural resources and therefore, it is the responsibility of the State to ensure that such natural resources are protected, inter alia, from theft and even robbery. It is the responsibility of the State to ensure that such natural resources are not in any illegal and unauthorized manner converted into private ownership and exploited for commerce. The second reason is that these natural resources like sand, gravel, etc. found in the riverbeds and banks of the rivers are to be found in ecologically sensitive and at times even fragile areas. Doctrine of Public Trust requires the State to undertake the responsibility to protect the environment as well. The protection of environment is now accepted as one of the necessary facets of Article 21 of the Constitution of India, which guarantees the right to life and not merely livelihood. Therefore, when there is rampant illegal and unauthorized sand mining for commercial purpose and there is no proportionate will to initiate action, if necessary, criminal action against the exploiters of these natural resources, clearly, there is infringement of the constitutional guarantees enshrined in Articles 14 and 21 of the Constitution of India. In such a situation, there is clearly a breach of the Public Trust Doctrine, which is now recognized as a part of our Constitution through the dynamic interpretation of the provisions of Article 21 of the Constitution of India.

29. Just as the State, prosecutes thieves and robbers who steal and rob from private parties or their private properties, so also, the State must be equally, if not more, vigilant, when it comes to stealing or robbing of natural resources held in trust by the State. The attitude that something which belongs to all, belongs to none in particular, is required to be shunned and strict action is required to be taken against those who, with impunity, indulge in illegal mining of sand and gravel from the riverbeds and river banks, regardless of the damage which they cause to the environment and regardless of the financial loss which they cause to the State.

The unfortunate reality is that while there is no approved sand mining in Goa, illegal operations are rampant in all our rivers and now even our beaches. The members of the Goa River Sand Protectors Network are risking their lives daily to report on this illegal activity, trying to bring this theft of public wealth under check.

Goenchi Mati Movement

The Goenchi Mati Movement is a non-partisan political movement to implement intergenerational equity in Goan mining. At the core, they advocate the implementation of their Goenchi Mati Manifesto, whose fair mining principles are:

"1. We, the people of Goa, own the minerals in common. The state government is merely a trustee of natural resources for the people and especially future generations (Public Trust Doctrine). 

2. As we have inherited the minerals, we are simply custodians and must pass them on to future generations (Intergenerational Equity).

3. Therefore, if we mine and we sell our mineral resources, we must ensure zero loss, ie. capture of the full economic rent (sale price minus cost of extraction, cost including reasonable profit for miner). Any loss is a loss to all of us and our future generations. 

4. All the money received from our minerals must be saved in the Goenchi Mati Permanent Fund, as already implemented all over the globe. Like the minerals, the Permanent Fund will also be part of the commons. The Supreme Court has ordered the creation of a Permanent Fund for Goan iron ore and already Rs. 94 crores is deposited. 

5. Any real income (after inflation) from the Goenchi Mati Permanent Fund must only be distributed to all as a right of ownership, a Citizen's Dividend. This is like the comunidade zonn, but paid to everyone. 

6. The implementation of these principles will be done in a transparent participatory process with the people of Goa.

Save Mollem / Amche Mollem

The national government has proposed an incredible number of new projects in Goa. Three linear projects are intended to pass through the Bhagwan Mahaveer WLS & Mollem National Park – a new transmission line, adding a new railway line and widening the national highway on a mostly new alignment. The major cargo over this section of the western ghats has been iron ore exports from Karnataka and coal imports into Karnataka.

The Save Mollem / Amche Mollem campaign is led in great numbers by the youth of Goa, Goa’s future leaders and workforce. Their key demand is that Goa adopt a model of development that does not destroy our natural resources in the process.

The Future We Need - global movement originating in Goa

The Future We Need” is a global movement based in Goa, that builds on 12years of work by the Goa Foundation in the area of implementing intergenerational equity & the public trust doctrine. The movement maintains that the intergenerational equity principle must become foundational for how society and the economy are organized, or civilization will perish. The starting point is with mineral conservation/sustainable use, but the end goal is for the intergenerational equity principle to be embedded into all human activities.

How can we be Good Goan Ancestors?

How do we implement intergenerational equity in Goa? How do we conserve our rich natural resource inheritance for our future generations while also generating enough income for all Goans to live well? Can we become world leaders in implementing intergenerational equity, our expertise demanded everywhere? Where do we begin?

Many of Goa’s main industries rely significantly upon depleting natural resources. Mining depletes our mineral wealth & related inheritances - the environment, social fabric, even the work of extraction. Even tourism and real estate industries deplete the natural resources of Goa. The current path of development has bigger losses in store for Goa’s natural landscape. The expansion of infrastructure – airports, railway, water & road transport, electricity, natural gas, water supply and sewage – will be on land that is in the “hazard line”, ultimately fragmenting and controlling nature, while ignoring the impact of sea level rise.

On a hopeful note, sustainable and economical solutions to harmful mining practices are possible. To protect Goa’s beaches, their access can be carefully thought through in order to minimise the impact of careless tourists. To generate income, more superior tourist experiences that are sustainable as well can be created. A carbon tax and dividend on industries can encourage a move toward renewable energy. Panchayats could raise a land value tax that can be paid as a dividend to Gram Sabha members to disincentivize empty homes and fallow land. Tourism could rely on Goa’s diverse musical and culinary traditions to differentiate Goa from other tourist destinations, while at the same time being sustainable. Ideally, Goa should set up a Centre for the Implementation of Intergenerational Equity, combining academics, researchers and policy advocates.

Goa has a rich legacy of intergenerational equity. Let us continue on this journey to be Good Ancestors. This is the future we need.

Thursday, August 6, 2020

Minerals are a Shared Inheritance: Accounting for the Resource Curse

Dr. Scott Pegg & I have co-authored this article, where we argue for a paradigm shift in the way mineral wealth is managed. This version of the paper was accepted for publication by Extractive Industries and Society. Enjoy.

Highlights:
Many resource-rich countries badly mismanage their natural resource endowments.
Seeing minerals as a source of windfall revenue is a central reason for poor outcomes.
Government accounting standards underpin the “windfall revenue” paradigm.
Better mineral management needs a paradigm shift from “windfall revenue” to “shared inheritance.”
Minerals are a shared inheritance, extraction its sale, capital maintenance the goal.

Abstract:
Many countries badly mismanage their natural resource endowments. We argue that a fundamental change in paradigm is needed. Specifically, we advocate treating non-renewable natural resources as a finite shared inheritance asset, and extraction as the sale of the inherited wealth. We identify several proposals that logically derive from treating mineral sale proceeds as intergenerational wealth rather than as revenues that can be spent. Wealth portfolio management suggests that mineral owners must strive for zero-loss when selling minerals, establish a passively invested future generations fund from the proceeds and distribute dividends from that fund to citizens as the rightful owners of the shared inheritance. The current dominant metaphor of proceeds from the exploitation of non-renewable mineral resources as being “windfall revenues” is underpinned by government accounting standards. The “windfall revenue” metaphor is not only inaccurate but also produces several pernicious effects that help explain the poor management of natural resource endowments in so many countries. We do not anticipate that our ideas will quickly overturn centuries of established practice. We do, however, believe that the case needs to be made.

Keywords: resource curse; government accounting standards; inter-generational equity; public sector net worth; shared inheritance


Wednesday, June 1, 2016

Thursday, March 10, 2016

Mopa's Environment

A long and detailed article by Nihar Gokhale in Catch News on the environment at Mopa makes for damning reading. It covers many aspects of Mopa including wildlife & water resources. Recommended.