Royalty Debate of Coal & Foreign Investment

Zubayer Zaman

The potential for coal sector development of the country has become the topic of discussion once the declaration of 572 million tones of coal discovery in the Phulbari Coal Basin was made. Thanks to Phulbari Coal Project – as it has initiated many debates. Surely we need to unlock our coal resources and guide our country to a new era of economic development. One of the contentious issues now – whether positive or negative – is the much talked about subject of `Royalty’ for coal mining.

The Mines and Minerals Rules, 1968 (amended up to 2004) sets the royalty rate for numerous minerals and coal, and defines how it is to be calculated and when it is to be paid. The coal royalty is set at 6% for open pit mining and 5% for underground mining. Some consider this rate is too low and it is against the interest of the country. But they fail to suggest the ‘ideal royalty rate’ that would protect the national interest and will match with the international mine financing practices.

Some people are trying to give explanation of royalty stating that- 6% royalty rate means that government and people of Bangladesh will get only 6% share and the remaining 94% or the coal project earning will go into the investor’s pocket. Maybe there is some gap in understanding the royalty issue. Maybe it is a deliberate attempt to try to circulate wrong information/explanation on mineral royalty to create a negative impression about coal mining with foreign investment. Simple fact is that the royalty can’t be viewed in isolation of other earnings from mining and it has to be seen as part of an overall benefit package.

In the recent past there was an attempt in the debate by illustrating the royalty exercise as a violation of country’s constitution. As stated allowing the mining rights to the foreign company with royalty provision would compromise ownership of the property rights of the country.

The reasons for confusion in the royalty debate possibly is linked with some kind parallel drawn with “production sharing contract” arrangement, ie; only 6% share for the government and 94% for the investor. Under production sharing contract arrangements such as in place for the gas sector in Bangladesh, companies get the benefit of full capital and operating cost recovery and pay no taxes (either corporate or personnel income tax), royalties or duties. The Bangladesh Government typically gets about a 50:50 share of the gas produced after the cost recovery.

On the otherhand, mining in Bangladesh is not covered by production sharing contract arrangements. Those involved in mining are expected to pay corporate tax (currently 40%), income tax for personnel, VAT, duties, royalties, and other government service charges. To enable some off-setting of the large capital development costs the government through its Board of Investment (BoI) offers a range of fiscal incentives for investors. There is no provision for any cost recovery for exploration and mining industry including for coal and the full financial risk is taken by the investor.

All of these debates, mostly with negative approach, in a view to mislead people deserve some explanation: what does royalty mean? Does royalty of coal in Bangladesh is too low? What is the royalty rate in other coal producing countries?

Royalty is a form of tax, special to mine. The intent of the tax is to charge the producer of the mineral for the right to mine the minerals produced. There are different types of royalty that have been practiced in the world mining industry: unit based royalty, value based royalty or ad valorem royalty, profit based or income based royalty etc.

Unit based and value based royalty both are payable irrespective of whether the mine is making a profit or losing money. However, value based royalty fluctuate following commodity prices. Thus when prices are high, the government will enjoy more revenue than the prices are low. Some nations have moved away entirely from assessing royalty and rely instead only on the general corporate and income tax revenue streams, eg; Greenland, Mexico, Sweden and Zimbabwe do not impose a royalty.

All types of royalty have associated advantages and limitations but whatever the types and rate; royalty is a well practiced mechanism of tax collection in world coal producing nations. The provision of royalty rate for coal in Mines and Minerals Rules, 1968 of Bangladesh is in line with the world’s practices and at 6% is not at all a low rate. Though the royalty rate was only Rs. 2.50 per tonne in the Mines and Minerals of 1968, and for unknown reasons it increased to 20% in 1989. It had no applicability and was amended in 1995 to 6% reviewing royalty rates of different countries through a high level committee to make it realistic with the world’s perspective and to attract foreign investment in this investment intensive sector. Later two amendments of Mines and Minerals Rules in 1999 and 2004 also kept that royalty rate.

Different countries practice different royalty rates but the difference is not significant and is within the range of 1-8%. It is true that Indonesia has the highest royalty rate (13.5%, as per amended laws of 1996) in the world but Indonesian coal is at relatively shallower depth (in some instances at the surface and exposed in water courses), of good quality and moreover easy to transport to the international market directly by sea going large vessels. On the other hand, though the coal resources of Bangladesh (Barapukuria, Phulbari, Dighipara) is of good quality and is within reach of open pit mining operation, a considerable amount of overburden must be removed before first coal is achieved which involves large continuous operating costs and large capital injection. Moreover transportation of coal to international market involves huge investment for infrastructural development including rail network up gradation, building coal terminal in Khulna, deep sea cargo facility, dredging of outer sand bar to maintain the navigability of the channel etc. Compensation, resettlement, rehabilitation and related cost will also be higher as population density is relatively high comparing to other countries.

The world is very much open now and anyone can browse internet to get the latest information about coal royalty in different countries of the world. Here is some information about royalty rates and taxes in different countries of the world:

Country	Royalty Rate (%)	Corporate Tax Rate (%)	Customs (%)
China	0.5-4	30	0
Indonesia	Up to 13.5	30	0
Laos	2.5	20-33	0
Malaysia	5	34	-
Mongolia	2.5	40	0-5
Vietnam	1-8	25	0
Peru	0	30	0
Australia	2.5-7.5	30	5
Brazil	3	30	-
Chili	0	35	-
Pakistan	1	35	5
Ghana	3-12	-	-
Uzbekistan	5.4	-	-

India, the 3rd largest coal producing country in the world had the royalty rate variable with state to state from Rs. 65 to Rs. 250 per tonne depending on the grade and coal fields. Recently on 01 August 2007 India reviewed its royalty rate and introduced a new formula for royalty calculation (coal with similar heating value of Bangladesh Coal requires to pay approximately Rs.102-Rs.133 per tonne royalty depending on coal fields). With that new provisions of the regulations, the royalty rate of coal will be subject to coal quality variations and dependant on coal fields and their locations. It may be mentioned that the increased royalty rate in India will not be applicable for West Bengal coal mines.

The Coal Policy Review Committee shows its dilemma while fixing the royalty rate. The last few weeks discussions were mostly concentrated on royalty rate. The committee is still to come to a conclusion. From the media reports it reveals that some of the committee members are in favour of increasing the royalty rate as high as 30% ignoring the commercial reality; others favour for keeping the existing royalty rate unchanged or bring it down. The Managing Director of the country’s sole underground coal mine strongly opposed the idea of increasing the royalty rate. He expressed this view to coal policy review committee that Barapukuria coal mine has been facing trouble with the existing 5% royalty rate and economic existence of the mine will be in danger if the rate is increased further.

As an operator of the mine with practical experience the MD of Barapukuria mine has realized the economic reality. Increasing royalty doesn’t ensure more profit for the Government. It will automatically increase the production cost of coal which obviously will increase power generation and other costs and ultimate sufferer will be the consumers. Higher coal price will encourage other users to go for import of inferior quality coal from neighboring country. These inferior quality imported coal mostly used in the brick kilns cause serious environmental pollution.

Coal mining is a capital intensive sector (more so than oil and gas)of investment and Bangladesh does not have technology, trained manpower and financial capability to develop the sector alone. Bangladesh just can’t compare its coal sector with Indian coal mining industry and introduce what they are practicing now for the development of this sector. We must take into consideration that Indian coal mining history which is more than 200 years old and has established huge infrastructural facilities and skilled manpower. On the other hand the coal sector in Bangladesh is in its very early “pioneering” stage and needs to be nurtured properly. The coal policy should be such that will create an investment friendly environment, a win-win situation for the investor and the government and people of Bangladesh. The adoption of a pragmatic coal policy will attract the investors to develop the coal sector protecting the national interest ensuring capacity building of local human resource and expertise.

Source: http://www.ep-bd.com/archive/13th-issue_07/index.html

Date: 16-31 December 2007, Bangladesh