Accommodating local interests

The writer is a former member of the Energy Planning Commission and author of ‘Pakistan’s Energy Issues: Success and Challenges’.

Pakistan has considerable reserves of mineral and gas resources which have not been utilised for a variety of reasons, perhaps mostly political. The country is currently suffering from a gas crisis as local gas resources are constantly depleting and new gas resources have not been explored and developed. Some people are sceptical of the country’s gas resource potential. But some argue that high-security risk areas have not been adequately explored.

A clear example is Kohlu where the reserves of approximately 22 trillion cubic feet (tcf) remain underdeveloped due to issues with local tribal resistance. There may be other reasons as well, but we will restrict to the subject’s political economy.

In developing countries, mining areas generally have more poverty than other areas, which usually causes conflict and strife in those areas. In developed countries, due to widespread development and a lack of disparities, these problems are almost non-existent. These countries, on the other hand, have developed formulae, structures and mechanisms to deal with those areas which encounter similar problems.

In the mining sector including oil and gas, local communities have to face considerable damage as environmental and physical degradation is normal in these areas. Local water resources and land use are affected. Unfortunately, the locals are not compensated adequately through a formal compensation mechanism. Local identities such as tribal ones are real, while provincial and federal boundaries and identities are political.

Under the existing rules, the total income and corporate taxes go to the federation and royalties’ income goes to the provinces. The provincial government is supposed to spend some of the royalty income on the local population of the mining areas, but it is always short of revenue to run the administration and is dependent on federal subsidies. There is an issue of leakage and corruption which is more in the backward areas than in the developed ones.

The mining sector also suffers from colonial and imperial practices. It is well integrated with the mainstream in developed countries which have generally less interest in royalties and more in profits and taxes. Thus, royalties have been underpriced traditionally and more so because it belongs to the developing world. Market forces and international contracts define royalty rates. Corruption on the part of the negotiators also plays a role in the underpricing of royalties; after all companies have an upper limit on how many overheads they can absorb keeping in view the competitive markets of the minerals.

Creative royalty agreements can also solve some of the royalty income issues such as the Chinese did with the Aynak Copper agreement in Afghanistan. They used an S-curve formula under which they gave low royalty rates at low copper prices and higher royalty rates at higher international copper prices. Metal prices vary a lot. Incidentally, this creative formula did a lot of damage in Pakistan as it was misconceived and compared with the Reko Diq royalty formula, causing opposition and the ultimate cancellation of the agreement and the ICSID tribunal fine of $6 billion on Pakistan.

There are various issues, mostly of political nature but embedded in income-sharing and control: one is provincial ownership and rights to control and decide on mining contracts and the utilisation which is rather of theoretical concern as the capabilities and technical and management resources are lacking.

What happened to Reko Diq may partly be ascribed to confusion and malpractices in awarding the contract, although the role of the federal elite and the judiciary turned out to be the last nail in the coffin. The second issue is having a higher share in income beyond royalties, and the third is the share of the locals/tribes vs provincial interests.

Resource ownership is a complicated issue. In developing countries, it is a political issue, while in developed countries it is a commercial issue. Resources belong to people or governments as long as they are under the earth’s surface. When they are brought on to the surface by investment, resources and technology, they become the property of developers. Commercially, companies claim that they decide in terms of maximising profits.

The mineral sector could not be developed also due to security and political issues. In the case of Reko Diq, new dissenting voices are emerging against a reported compromise solution with a foreign investor company, asserting autonomy and mineral rights. Enrichment of local and provincial incomes can facilitate ready access and a receptive population welcoming mineral businesses. The World Bank tribunal imposed a $6 billion fine. We thought that since it was our resource, we had the rights to it including specifying the installation of a downstream industry like a copper refinery. It is a separate matter that had the Reko Diq project been implemented as per the feasibility study, Pakistan would have had an income of $500 million per year and the accumulated income would have been more than $2 billion by now.

The second issue can be sorted out by developing a revenue-sharing system which also includes revenue other than royalty incomes as has been done elsewhere. The third issue of tribal share and ownership has been intractable although there are ways to resolve it. Tribes make claims of land ownership, and government circles talk about the ‘Alaska’ formula which recognises and compensates resource ownership based on land sub-surface rights.

Here is how Canadian authorities deal with this issue: Resource revenue-sharing agreements let tribes share in the economic benefits of forestry and mining operations near their communities. Tribes with resource revenue-sharing agreements receive a share of 40 percent of the annual mining tax and royalties from operational mines. Tribes can use such revenue for economic development, education, health, community and cultural development.

On the other hand, Indian authorities have come up with the institutional concept of the District Mineral Foundation (DMF) under a federal law promulgated in 2015 according to which local governments get 30 percent of the mineral revenues including royalties. Such income is to be spent by local authorities. There are issues in its implementation like upward and downward integration. Tribes live in local districts. If local districts get the income, tribes get the impact on their development and welfare.

There are other sectors like the hydropower sector which have recognised local interests and award share in royalty income in recognition of the required compensation of physical and environmental damage and resource-sharing. In Pakistan, there have been discussions on the subject. However, it is not known if the same has been implemented.

The petroleum division has come up with a new policy which may give a fillip to the oil and gas exploration activities. This deals with the technical and procedural issues which are important. However, the main issue is political. They say ‘politics is local’. Local interests have to be recognised for peaceful and cooperative development.

In Pakistan, where there are diverse ethnic groups and where several groups reside in one province, this aspect acquires special consideration. Consultations and negotiations among stakeholders should always be initiated in a timely manner before launching a project. There are successful examples as we have discussed in the foregoing. Intellectuals and political parties should help develop consensus on the issue.

Email: akhtarali1949@gmail.com