A stake for stakeholders

by Business Standard, March 17th, 2011.

Sharing 26 per cent profit can be 100 per cent misery.

The hare-brained provision in the proposed Mines and Minerals (Development & Regulation) Bill, 2010, binding companies to share 26 per cent of net profit with the local population, is only one of the many serious problems with the proposed bill. The idea of such profit sharing is inherently uncertain, unfair, and cannot be easily monitored by the community. There are many other ways through which a community of stakeholders can be benefited that would be easier to implement and would be fairer too. The principle problem with the proposal is that there are many ways by which companies can fudge net profits. These methods are not necessarily illegal. Two, profitability is impacted by many factors, product prices, changing technologies, efficiency of management being some well-known ones; and beneficiaries from the local community could be adversely impacted by these factors. Three, there are large variations in annual profits, which bring in unnecessary uncertainty in the benefits to the community. It is not clear how such an abominable idea could go through the many layers of consideration in government. Especially when there are so many better alternatives that are more fair to the community, investors, and are easier to implement.

Take royalties for instance. The current problem with royalties shared with the state governments is that the basis for putting a rupee value to the output is highly flawed. But this can be corrected. A long-term average international price is available for all types of commodities. Such a system would be more transparent, be less affected by the efficiency of the firm, be more easily monitored by the community, and one can have more frequent transfers to the community (monthly or even weekly based on mining output) rather than waiting for annual audited profit calculations. But sharing royalties, though far better than profits, is still not ideal. Such sharing schemes are impacted by the number of beneficiaries in the local community. High population concentration areas would have lower benefits per person covered and those with lower concentrations would have higher benefits. (continue reading… )


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