By Rahul Basu
Rahul Basu is the Research Director at the Goa Foundation and a member of ‘The Future We Need’, a global movement to make intergenerational equity foundational for civilisation beginning with minerals
Treating mineral sale proceeds as revenue or income hides the real transaction — the sale of inherited wealth
The principle that the economy must be “sustainable” — we cannot compromise the ability of future generations to meet their needs — is beyond question. Climate change and high levels of consumption already threaten to rob future generations of a planet that is livable. The principle of Intergenerational Equity would make it imperative for us to ensure future generations inherit at least as much as we did.
If we are successful in abiding by intergenerational equity, 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. To consume what we have inherited without a thought for generations to come will leave the whole world poorer; like an addict selling the family gold.
How it is unsustainable
Subsoil and offshore minerals are usually the property of the state, through its national or sub-national governments. For example, India’s National Mineral Policy 2019 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.” (https://bit.ly/2Xy5wyd). The primary objective of a trustee / manager is to maintain the corpus of the trust, the shared inheritance of natural resources.
The extraction of oil, gas and minerals is effectively the sale of this inheritance, with royalties and other proceeds being the consideration paid in exchange for the mineral wealth extracted. Unfortunately, governments everywhere treat the mineral sale proceeds as revenue or income, a crucial error which hides the real transaction — a sale of inherited wealth.
This results in governments selling minerals at prices significantly lower than what they are worth, driven by lobbying, political donations and corruption. For example, data from the Australian Bureau of Statistics indicates that over the decade 2000–10, Australia lost 82% of the value of its minerals extracted (https://bit.ly/AussieLootMachine) – after all costs and a reasonable return for the extractor. Such losses are effectively a hidden per-head tax which make a few extractors and their cronies super-rich. Inequality grows sharply. This is the economics of loot.
Worse still, the trifles received by the government are treated as “revenue” and happily spent, leaving neither the minerals nor their value for future generations to inherit. This is just not sustainable!
Losses, error in accounting
There is growing empirical evidence of large losses in mining from around the world (https://bit.ly/GlobalLoss). There is also growing evidence from the IMF that many governments of resource rich nations, including the UK and Norway, face declining public sector net worth, i.e., their governments are becoming poorer (https://bit.ly/PublicWealthDestruction). Both indicate unsustainable mining.
Losses in mineral value drive many of the other problems with mining. In effect, the people and future generations of Australia have sold mineral wealth worth US$100 for US$18, a loss of US$82. Naturally the extractors are keen to extract as quickly as possible and move on. Forests, fauna and indigenous peoples are labeled as anti-development or anti-national.
If US$18 is received for allowing mining, doubling mining would result in US$36. Politicians and voters perceive more mining = more government revenue = good. Further, since extraction isn’t recognized as the sale of inherited wealth, the true loss of US$82 is hidden. More mining would make a bad situation significantly worse.
It is important to understand that as long as the IMF and the International Public Sector Accounting Standards Board (IPSASB) do not correct this error in the standards for public sector accounting and reporting for mineral wealth, politicians and voters will advocate increasing extraction. This will lead to every bit of mineral being extracted if there are no moral or legal safeguards against such wanton loot. It is essential that as humanity we change our paradigm to understand minerals as a “shared inheritance”, not a source of “windfall revenue”. (https://bit.ly/BnP20MPRA).
How to manage it
Since minerals are a shared inheritance held in trust for the people and future generations, our foremost duty is to maintain the value of our children’s inheritance by avoiding theft, loss, waste or consumption. Leaving the minerals undisturbed fulfills our duty.
Therefore, if we extract and sell our mineral wealth, the explicit objective must be to achieve zero loss in value; the state as trustee must capture the full economic rent (sale price minus cost of extraction, cost including reasonable profit for extractor). Any loss is a loss to all of us and our future generations, and makes some rich; that is patently unfair. As India’s Supreme Court put it, “Whenever the Government or the authorities get less than the full value of the asset, the country is being cheated; there is a simple transfer of wealth from the citizens as a whole to whoever gets the assets `at a discount’.”
Like Norway, the entire mineral sale proceeds must be saved in a Future Generations Fund. The Future Generations Fund could be passively invested in a global portfolio of low-cost index funds, earning the global market rate of return.
Setting a global judicial precedent, in 2014 the Supreme Court of India ordered the creation of a Goa Iron Ore Permanent Fund, which already has a corpus of around US$70 million — Goa Foundation vs UOI & Ors., WP (civil) 435 of 2012, judgment on April 21, 2014. (https://bit.ly/2014GF1).
The real income of a Fund of this nature may be distributed only as a Citizens’ Dividend, equally to all as owners. Future generations would benefit from the dividend in their turn.
On fair mining
For any economy (a) this is sustainable – capital has been maintained, (b) the savings rate would rise, (c) it diversifies risk while likely improving returns – it is nearly impossible to outperform the market rate of return, (d) the dividend is in effect a Universal Basic Income, (e) lower inequality leads to higher economic performance, and (f) as budgets no longer have easy mining money, public investment and tax administration will become more effective and efficient. This is a six-fold economic boost.
These principles of fair mining are moral, ethical, fair, just and right and promote equality, liberty, and fraternity. Importantly, they are sustainable – future generations will inherit at least as much as we did. The reduction in losses would limit corruption, crony capitalism and growing inequality. They fulfill our duties to our future generations. Let us be the generation that changes the course of history for the better, not the one that consumed the planet.