With the Bill up for discussion again, the Thrizin of the National Council, Tashi Dorji talks to Kuensel on the National Council’s perspectives on the Bill
What is the current status of the Mines and Minerals Bill 2020?
The MMB 2020 will be discussed in the joint sitting of Parliament tomorrow, Wednesday, June 23. Due to disputes between the two houses on the Bill, a Joint Committee has been formed to resolve the disputed provisions. The Committee’s position will be presented to Parliament tomorrow.
What is the position of the National Council on the MMB 2020?
The NC wants to uphold the Constitution and ensure that wealth from the mining sector benefits the people of Bhutan. The NC seeks to ensure that the MMB 2020 is consistent with the principles and provisions of the Constitution, in particular Article 1.12 which vests ownership of mineral resources in the State.
The NC seeks to uphold Article 9.7 of the Constitution, because excessive wealth concentration and poverty must not coexist in the society as such extremes will undermine democracy, social justice, harmony and national security.
Economic data shows that both income and wealth disparities are growing in the country.
NC believes that the immense wealth generated from the mining sector should directly benefit the government and the people of Bhutan rather than the minority. The elite capture of mining wealth was highlighted in an independent report conducted by the Royal Audit Authority in 2014. The NC position will allow the private sector to continue to operate stone quarries, boulders, surface and river bed material collection as these operations do not undermine Article 9.7 and 9.10 of the Constitution. In view of the above, the NC’s position is that the law must allocate mining rights to a State-Owned Enterprise such as the State Mining Corporation Limited (SMCL).
Is wealth inequality a concern for Bhutan today?
Economic data has shown that income inequalities continue to rise in Bhutan as the Gini Coefficient has risen from 0.35 in 2007 to 0.36 in 2012 and 0.38 in 2019. Likewise, data from the stock exchange also shows that returns to capital have consistently outstripped returns to growth by a wide margin (as high as six-fold in 2017) indicating rising wealth inequality.
The National Anti-Corruption Strategy of Bhutan 2008-13 highlighted the nexus of power and wealth in Bhutan. The ACC report states “there is a feeling that a few well-placed and rich individuals, with strong hidden political connections, may be exerting too much control from the shadows, whilst at the same time hiding the origins of their wealth through complex corporate structures and unclear beneficial ownership”
His Majesty the King in the Royal Address to the Nation on 17 December 2017 highlighted that: “…more than external factors, we can become more vulnerable with internal instability. The history of global and regional trends in other countries has shown that the downfall of countries is caused by failure of governments, breakdown in the rule of law, economic crises, and the growing economic disparities between the rich and the poor.”
It is due to such potential risks in our nascent democracy, that the Constitution has enshrined the need to minimise inequalities of income and concentration of wealth.
Does the government support the NC’s position?
It would be highly presumptuous to conjecture whether the government supports or objects to the NC position. However, if the Druk Nyamrup Tshogpa (DNT) manifesto, statements of party leaders and decisions of the current government are any indication, there is no reason to doubt that the government will not support the NC for the following reasons:
The DNT campaigned with the slogan “Narrowing the Gap.” The party spokesperson Lyonpo Dr Tandin Dorji had once said at a press briefing that “their slogan was not developed overnight but is the culmination of wide consultation with the people from all the 205 gewogs, with the party members, and more importantly, he said that it is based and backed up on extensive research the party carried out over a period of time on the data and indicators available from various reports.” The spokesman also said that “… at the moment we (DNT) are of view that the wealth is concentrated in the hands of few people because of the discrepancy in our policies like the mining sector.” He added that “management of natural resources would be a great equaliser.
Lyonchhen Dr Lotay Tshering in an interview with a local paper said that “Coming from lower-income group, and symbolically an election agenda on which we fought, growing income disparities is one of our biggest concerns. Its implications are huge and worrying. So, it is imperative to ensure that we don’t bring about policies that widen inequalities.”
The DNT government was bold to table a comprehensive new Bill for the mining sector in 2020. Upholding the Constitutional provisions and national interest above political considerations and despite pressures from vested interest groups, the current government also allocated the Khothakpa Gypsum Mines and Chunaikhola Dolomite Mines to the SMCL.
If these statements, decisions and actions are any indications, the NC is optimistic that the government and the MPs will support the NC position.
Will the Opposition Party support the NC Position?
The Druk Phuensum Tshogpa (DPT) since 2008 has championed “Equity and Justice” as their party slogan. Further, the DPT’s 2018 manifesto emphasises the fair distribution of wealth as a priority.
Considering the link between the position of the NC on MMB 2020 and its positive contributions for promoting equity and justice and fair distribution of wealth, there is no reason to doubt that the opposition party will not support the NC position.
What is the legal basis for the NC‘s position on the MMB 2020?
The NC, since its first term, has maintained that the MMMA 1995, which gives mining rights to private companies is inconsistent with the Constitution and therefore, should be amended as per Article 1.10 of the Constitution.
The most directly relevant provisions of the Constitution include the following:
Article 1.12: “The rights over mineral resources, rivers, lakes and forests shall vest in the State and are the properties of the State, which shall be regulated by law.”
Article 9.7: “The State shall endeavour to develop and execute policies to minimise inequalities of income, concentration of wealth, and promote equitable distribution of public facilities among individuals and people living in different parts of the Kingdom.”
Article 5.4: “Parliament may enact environmental legislation to ensure sustainable use of natural resources and maintain intergenerational equity and reaffirm the sovereign rights of the State over its own biological resources. “
The NC’s position was further reaffirmed in 2018 by the National Law Review Task Force which recommended that the MMMA 1995, which was enacted prior to the adoption of the Constitution, must be harmonised and amended based on the provision of the Constitution that vests ownership of the mineral resources in the State. It recommended that those provisions in the MMMA and the Rules, particularly those that give mining rights to the private mining companies must be amended so that there are no infractions of the constitutional provisions.
What is the economic basis for the NC’s position to allocate mining rights to an SOE?
From the NC’s perspectives, allocation to SOEs in addition to Constitutional compliance provides many economic benefits as listed below:
1. SOEs fetch higher export prices
Recent experiences show that SOE operations fetch higher export price and greater profits for the country. For example, if we consider Dolomite, the export price declared by JMCL, a private company, was about Nu 520 per MT in 2019. After the government allocated the mines to the SMCL, in 2020, SMCL was able to export at about Nu 1,150/MT which is double the price declared by private sector.
2. SOEs generate greater profits
Contrary to the prevailing myth that the private sector is more efficient, the SMCL has shown that a professionally-managed SOE can outperform a private company. For example, if we compare the performance of Druk Satair Corporation Limited (DSCL) in 2018 and SMCL in 2019/20, the profit after tax per MT achieved by SMCL at Nu 802 is double of DSCL which was Nu 398/MT.
3. SOEs pay higher taxes
Under the current tax regime, a private mining company pays 25% as Corporate Income Tax. SOEs pay more than double the tax. For example, the SMCL pays 30% CIT on its profits and the DHI also pays another 30% CIT. Needless to mention, the profits from mining operations are transferred as dividend to the Royal Government.
4. SOEs contribute greater amount of revenue
Assuming that SMCL and a private company both export 3 million (M) metric tons of dolomite a year at Nu 1,150/MT; and the private company pays an auction fee of Nu 6 billion; have an overhead cost of about 22%, pay CIT of 25-30%, the SMCL will contribute approximately Nu 40,000M to government over a period of 15 years. The private company will contribute Nu 16,000M as taxes and auction fees to the government and pocket a net profit of Nu. 24,000M over 15 years.
Nu 40,000M can fully finance two Nikka Chu Hydro Projects and this amount can also meet the grant allocation for 20 dzongkhags in the 12th Plan. The estimated annual profits after tax of about Nu 1,618M for the private company is equivalent to the annual revenues generated by Dagachhu and Kurichhu Hydropower projects.
Therefore, the decision which benefits the people and country is straightforward. As a resource that belongs to the people of Bhutan, the profits must also benefit the owners – the people of Bhutan.
5. SOEs supports private sector development
As primary extraction and export of minerals do not require huge investments in factories, the major business activity generated is in the area of equipment hiring and transport. In the case of private mining companies, the local people could not participate in the hiring business, as these companies opened their own equipment hiring firms in the names of their family members and business partners, as reported by the Royal Audit Authority’s Report in 2014.
Once the SMCL took over the gypsum mines in Pemagatshel, it provided opportunities for local people to participate in hiring trucks, backhoes and excavators. This has stimulated grassroots private sector development as the SMCL allows any private bidder to participate in the operations rather than limit such opportunities to family members or business partners. For example, the SMCL paid Nu 643M in 2019 and Nu 521M in 2020 to truck owners, EME and small contractors who make up the larger private sector, as opposed to the private individuals who own the mines.
What about the private sector?
The NC considers private sector development as an integral part of economic development and national progress. The NC has supported policies for private sector development ranging from advocating policies, to reduce bureaucratic burden, to providing fiscal incentives. NC is also aware that Article 9.7 mandates encouraging and fostering private sector development through fair market competition and preventing commercial monopolies.
Data from 2020 shows that the formal private sector in Bhutan comprises 47,103 business license holders operating various trading, services industrial ventures. However, when it comes to activities such as the operation of mines, only a minority can participate in the auction. For example, in the recent dolomite auction, only eight individuals/entities qualified for the auction as the estimates of the auction fees ranged from Nu 2B to Nu 6B. The rest 47,095 were excluded as they did not have access to such vast sums of money.
The eight entities represent 0.017% of the 47,103 license holders or 0.001% of the total population of Bhutan making it indeed an extremely narrow band of the elite. For every mine auction, there is only one winner. If we take this winner as percent of total license holders in the country, this represents 0.0021% of the private sector in Bhutan. The winning bidder represents 0.000001 % of the Bhutanese population.
Therefore, this group who have access to billions of Ngultrums to take part in the auction of the mines is neither representative of the people of Bhutan nor the private sector of Bhutan.
In terms of employment, only 1,393 persons are employed in the mining sector. Out of the total private sector employment of 2,74,499, mining employment represents only 0.5% of total employment, according to recent NSB data.
What is fair market competition?
The Constitution in Article 9.10 makes it clear that the State must foster private sector development through fair market competition. Global experience shows that free-market competition based on neo-liberal ideologies has led to wide economic disparities and social instability. From a distributive justice point of view, the idea of fairness can be seen from the twin perspectives of fair process and fair outcomes.
Due to the high entry barriers for mineral auction (requiring hundreds of millions and possibly billions of ngultrums) which only a handful of elites can produce upfront, there is no question of fairness in the process of mine auctions.
On the outcome side – the fact that vast amounts of mineral wealth accrue to the already wealthy, the fairness element is out of the question. A fair market would work to reduce the wealth gap, not increase it. In essence, the mining barons take almost no risks and capture the mineral wealth of the nation which is simply excavated and exported at minimal investment and close to zero risk.
Considering the high entry barriers and immense wealth generation potential the NC believes that elite capture of public resources in the extractive sector can lead the rising wealth and income disparities and contradict Articles 1.12, 5.4, 9.7 of the Constitution.
How can the private sector engage in the minerals and mines sector?
The NC position allows the private sector to continue operating stone quarries, surface collection, river bed materials, boulders. Currently, there are 350 private businesses in this area. Unlike mining, the engagement of such a large number of small and medium businesses do not restrict business opportunities (due to lower entry barriers) and also do not lead to concentration of wealth.
The NC is also open to allocating captive mines for use of the minerals in private industries for value-added activities in Bhutan. This is because industrial development is important for generating employment and contributes to export revenues and foreign exchange earnings.
There are opinions that SOEs should only deal with strategic minerals. What is the NC’s position?
Strategic minerals that are proposed for allocation to the SOEs include precious minerals like gold, silver and security related fissile minerals like uranium, thorium etc. Basically, the proposal is to allocate minerals that are not proven to exist in Bhutan to the SOE.
The definition of what is strategic for one country will differ from what is strategic for another. For example, militarily powerful countries engaged in an arms race – fissile materials like uranium or plutonium etc. become a strategic mineral. For other countries with industrial ambitions, rare earth materials become strategic minerals.
Given the vast potential to earn national revenues from the export of minerals all minerals should be classified as a strategic mineral for Bhutan. Lyonchhen Dr Lotay Tshering recently stated that “All minerals in Bhutan are strategic when we define them for generations to come. To me, given our size, all deposits by their size are also small. Whatever we have here is strategic.”
Should SOEs or SMCL divest its shares to the public?
The DHI has been established to look after the wealth of the nation on behalf of all the people of Bhutan. Therefore, when mines are allocated to the SOE, the 748,000 people are the ultimate shareholders. The taxes paid and dividends transferred by the DHI enable the Ministry of Finance and to meet recurring expenditures.
Even if shares are offered to the public in an IPO, within a few years, most of the shares concentrate in the hands of a few through trading in the secondary share market. One only needs to look at the top ten shareholders in publicly listed companies to see how shareholding patterns in the country converge despite open IPOs.
Does it mean that NC wants to nationalise mines and minerals?
No – Nationalisation happens when government expropriates/takes over private assets or businesses with or without compensation. For example, if the government takes over the ownership and operations of a private Ferro Silicon Company with or without compensation, it is called nationalization.
In the case of mines, they are State properties as defined by the Constitution and thus far, private persons and companies have been granted a lease to operate the mines for a defined period. The State has never transferred ownership to them. Therefore, the question of nationalization does not arise.
Will the NA and NC be able to reconcile the differences in the allocation of minerals to the SOE?
The main points of contention are twofold:
1. Should the MMB 2020 be consistent with and uphold the Constitution?
2. Should mineral wealth that belongs to the State benefit the government and the people of Bhutan or should the profits benefit a few wealthy individuals?
Difference of opinions is an essential part of democracy that must be respected. Thus, the role of parliamentary debate is to discuss such divergence of views and arrive at an agreed position. In this case, it is to hear differing opinions on the law governing the mining sector, and arrive at a consensus that is aligned to the Constitution and that serves the overall national interest.
Assuming that Bhutanese people are endowed with a deep sense of loyalty, we hope that if any MP had to choose between personal interests and national interest the latter will always prevail.
As our nation undergoes one of the most difficult times in recent history due to the pandemic, the most recent Budget Report (2021-22) shows Bhutan in a very weak economic position with rising fiscal deficit, declining revenues and growing national debt in the midst of high unemployment and low GDP growth rates.
His Majesty The King serves as the best role model of leadership in placing the interest of the nation above all else. His Majesty the King has commanded the sale of the shares of the Royal Kidu Fund and the Sungchop Fund to support Kidu for the affected people so that the government budget is not impacted.
When His Majesty The King has readily emptied the Royal coffers for the welfare of the people, there is every reason to believe that parliament will choose to strengthen the government’s financial position and enhance people’s welfare over enriching the few from mineral wealth that by Constitution belongs to the State and the people of Bhutan.