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Saturday, April 13, 2024

Learning from Reko Diq: Mining Natural Resources & Maintaining Sovereignty?

After facing the modern age imperialism in the form of infamous Reko Diq Affair, Pakistani nation and institutions must honestly and deeply reflect on their multiple failures and capacity issues in the field of mining natural resources. This is a challenge every developing state faces in this globalized world and a challenge Pakistan must learn to undertake

Natural resources are one of the pivotal pillars of strong economic growth for any nation state. According to Pakistan Institute of Development Economics (PIDE) during the era of pioneering economists like Smith and Ricardo, natural capital was considered as cutting edge for a country and natural capital was considered an important source of wealth around the world. In the past it had been observed that many countries with vast mineral resources have accelerated economic growths compared to those which lacked natural capital.

While Pakistan is not poor in such natural resources, it has certainly lacked the capacities to exploit its abundant natural resources. Muhammad Sadiq Malkani, a nationally celebrated scholar, in his article published in Sindh University Research Journal highlights the abundance of natural resources in Pakistan’s soil and its geostrategic landscape such as Pre-Cambrian to Recent geological formations with different tectonic metallic and sedimentary basins like Khyber-Hazara Kashmir (northernmost/ uppermost Indus), separated by MBT from Kohat and Pothowar (north/upper Indus), separated by Sargodha high to Pezu from Sulaiman (middle/central Indus), separated by Sukkur rift to Jacobabad high, and Kirthar (south/lower Indus) basins of Gondwanan, separated from the Baluchistan basin and Kohistan magmatic arc of Tethys by western Indus Suture and northern Indus Suture respectively, and Karakoram-Hindu Kush basin of Tethys and Asia (Laurasia).

Read more: Mine-d your own business: Khewra, Reko Diq, and Saindak

Pakistan has 2nd largest salt mines, 5th largest reserves of copper and gold and the 2nd largest reserves of coal and an estimated 618 billion barrels of crude oil. Despite huge mineral potential, the contribution of the mineral sector to Pakistan’s GDP is only about 1% and exports from the country are only around 0.1% of the world’s total.

Various factors restrict the development of the mining sector and extraction of natural resources that can uplift the country’s dilapidated economic state. These include: – as the Riko Diq affair has demonstrated – dearth of effective macro level policies concerning natural resource management and their strategic utilization; lack of transparency in signing agreements with the foreign investment companies engaged in mineral exploration particularly in Baluchistan; ineffective legal framework and lack of accountability over breach of contracts; absence of financial muscle to fund the extraction process, and outdated mining methods with little or no inclusion of technology and training of the human resource and engineers on the mechanisms of modern mining methodologies.

Pakistan’s whole state system’s persistent failures over the Reko Diq case has reiterated these shortcomings in the mining sector and has revealed how natural resources worth billions of dollars are lying untapped and unutilized beneath its soil due to ineffective and inept government policies and flawed legal framework that controls the domestic law regulating the interests of the people.

Exploring the Mining Value Chain: Pakistan’s formidable challenge?

Mining value chain is complex to say the least; it commences from mining concessions, passes through stages of estimations, financial modeling, execution of mining/ processing/ production and ending at mine closure. Long lead times for returns, hazardous working environments, huge capital investments, bigger infrastructure and high investment risks have made the mining value chain very truly complex and value-derivation from it very dicey.

To begin with, the business entity controlling the mining company must obtain a prospecting license (PL) / mining lease (ML) to start mining operations. Technical control of mining operations is the responsibility of the Chief Inspector of Mines of the province concerned. Pakistan Mineral Development Corporation (PMDC), an independent company inaugurated in 1974, is the responsible authority for the support and development of the mining industry. It functions under the administrative supervision of Pakistan’s Ministry of Petroleum & Natural Resources. Wikipedia sources claim that Gemstones Corporation of Pakistan established in 1979, looks after the interests of stake holders in gemstone mining in Pakistan. However, in 1997 the corporation liquidated.

Read more: Reko Diq fiasco: TCC ready to negotiate settlement with Pakistan

Now several organizations are working in this sector including All Pakistan Commercial Exporters Association of Rough & Unpolished Precious and Semi-Precious Stones (APCEA) and Pakistan Gems and Jewelry Development Company (PGJDC). The “Pakistan Gems and Mineral Show” has been held annually in Peshawar since 1994, but prospective foreign buyers have not shown much interest. While even the national entities have been weak and disorganized, there were no development companies at provincial level that can promote such projects. Therefore, the mining industry is unable to synergize its full potential; consequently the labyrinthine loopholes in the governance, resource management and legal regulations have been determining the outcome of mining licenses.

Mining Act of 1948 had delineated the entire mining framework of Pakistan whereby all minerals – except oil, gas and strategic minerals – were given to provincial domains. But to this day challenge has not been understood; each province has dissimilar and underdeveloped mining frameworks which restrict the development of overall national framework to undertake large scale mining projects. The 18thAmendment, passed in 2009, has further reinforced these flaws and weaknesses in the provincial management of natural resources

Reko Diq: Disaster that exposed glaring short coming of Pakistan’s mining industry

Baluchistan’s provincial government – like all other provincial governments in Pakistan – lacked understanding of international political, legal and financial dynamics involved in undertaking large scale mining projects and perhaps more than other provincial governments they disdained intrusion of Federal Government in their mining projects. So, when the 1993 CHEJVA agreement was signed between Baluchistan Development Authority and American-based BHP mining company, the seeds of disproportionate share in profits and the potential exploitation of Pakistan’s natural resources remained unchecked.

Since the federal government concerns were not taken into consideration while the agreement was signed in 1993 between Baluchistan’s provincial government and the then Tethyan Copper Company, serious loopholes were already created setting the stage for modern colonial imperialism.

Given the serious underdevelopment of mining framework in the province of Baluchistan, there existed no mechanism to asses any national investor or a foreign mining company. Any Pakistani national could acquire an exploration license and mining lease without any thorough technical and financial scrutiny; thus, it had become a business as usual that individuals apply for mining leases and then sell them off to other investors. Also, there was a lack of exercise of laws for non-development of leases. So when the BHP sold its stakes to TCC resulting in abrupt and fickle changes of ownership, the entire CHEJVA agreement became dubious by becoming prone to numerous interpretations and annulments.

The crux of Reko Diq case lies in issues of non-transparency and corrupt practices of incumbent provincial and national governments and bureaucracies. In addition to intransigence – due to ineffective policy making and vested interest – outdated practices such as old paper-based map allocations created serious transparency issues. Given the scale of Reko Diq disaster (Pakistan penalized around $6 billion by International Center for Settlements of Investment Disputes, ICSID, equivalent to country’s largest ever IMF bailout) modeling the mining industry on modern lines through technological infrastructure is imperative.

Baluchistan: Issues of Political Instability & Security

Unfortunately, mining leases are normally given as political gifts and due to inherent political instability of the country such leases are frequently cancelled with the change of governments. The Reko Diq affair gained momentum when the CHEJVA agreement was challenged in the Baluchistan High Court on grounds that it was illegal and corrupt.

An unprecedented media narrative and public outrage over the agreement’s alleged unfair and questionable practices halted the operations of the TCC. Irrespective of the background of this case, such acts are detrimental to investor’s confidence, resulting in little or no investments especially for large scale mining. Also, such practices and revisions by the government raise questions on its competency in resolving investment disputes amicably within domestic domains.

Read more: Balochistan: The Decade Ahead

Baluchistan – due to its geo-strategic location, ethnically diverse population and geopolitical aspirations of the neighboring states to destabilize Pakistan – has remained volatile in terms of security. As China Pakistan Economic Corridor (CPEC) expands along with the scope of Gwadar port the instances of terrorism brimming out of the Baluchistan have deteriorated security conditions across the country. And this has remained a source of concern for the investors.

Challenges of Taxation, Technology and Finance

For mining industry in Pakistan to work to its full capacity and reap economic development, it has to have a financial muscle. However, the weak and confusing taxation system in Pakistan is another hurdle. Due to the absence of a uniform mineral policy, taxation and royalty on beneficiated ore and raw ore are different for every province. Taxation system has no linkage with the ease of operation and type of ore. South African Mineral Industry has different tax and royalty ratio for beneficiated and raw ore for export which have a direct impact on the national economy. And in this respect, Pakistan’s perceived failures in the Reko Diq case highlight the lack of revenue and tax culture to facilitate the mining industry.

Technological underdevelopment multiplies these complex problems. Pakistan’s mineral industry is still operating at very orthodox levels. Besides Saindak, there are very few planned and optimized open pit mines in Pakistan. Despite having vast potential, mineral industry had not focused on transfer of technology (TOT). Metallurgical Corporation of China (MCC) had been operating in Pakistan for past two decades but still human capital is not trained to undertake independent projects at mega level. These outdated mining strategies and lack of funding in the mining sector have led to the interference and inclusion of foreign mining companies to extract resources at a cost of our national interest.

Read more: Ambassador Munir Akram: Pakistan’s Foreign Policy – Emerging Challenges and Opportunities

Lack of financial support from national banking system is another challenge. China’s example is helpful to understand this. China is biggest importer of base metals and at the same time largest exporter of finished goods. After 1998, China had implemented the policy of financial support to all its mineral based industry. China’s central government has historically taken the leading role in financing the country’s mining industry. After 1998, a market-oriented financing system began to develop.

Bank loans, corporate bonds, trusts, project financing, and finance leases have been employed to fund the Chinese mining industry. Due to the long lead times, long payback period and fear of unsympathetic court system – that thrives on mindless stay orders-  financial institutions, in Pakistan, are reluctant to finance the mining projects and as a result, corruption, intransigence and questionable practices dominate public interest and fosters private gain.

Academia-Industry linkages are also lacking in Pakistan. Countries which aim their economic growth on mineral industry establish the horizontal linkage of mineral industry with their academia. Thus, under the broader framework of “Triple Helix Model”, the Government-Academia-Industry Nexus operates with the aim of fostering state-of-the-art development in the crucial sectors of economy. With respect to enhancing the existing state of mining industry and ensuring that future crisis and debacles such as the Reko diq case do not occur, this strategy is the need of the hour.

In this respect, research institutions should be financed by the government that aim to analyze, develop, and implement the updated, advanced, and novel mining practices with operational efficiency. Pakistan lacks modern mining institutions that can employ latest technical, financial and legal practices to develop self-sufficiency in exploring and extracting national resources while maintaining much needed sovereignty.

What can be the Way Forward?

Numerous research studies show that investor’s top priority is political stability, transparency, equitability, efficiency, predictability, and a supportive mineral policy. Therefore, the government of Pakistan needs to take certain practical steps to inspire investor confidence and revive the large-scale mining industry of Pakistan.

Federal government should take the initiative and play a critical role in providing necessary concessions, legal counsel, financial muscle and sovereign guarantees to undertake large scale mining projects on the basis of transparency and securing national interests. As a policy, export of raw ore from Pakistan should be stopped in a phased manner. It will encourage local investors for value addition of minerals within Pakistan thus acquiring more foreign exchange.

Moreover, it is essential to attract foreign investors by relaxing taxation and creating a safe and secure business environment regulated by flexible and robust legal mechanisms. In this way, crisis like the Reko Diq can be avoided that led the country to international defamation for not formulating effective legal regulation to resolve investment disputes domestically and falling prey to ICSID’s arbitration.

Read more: ‘Victory for Pakistan’: Pakistan wins stay over $6 billion fine in Reko Diq case

According to a research study on “Strategy for Mineral Sector Development in Pakistan” country needs to focus on provision of an enabling regulatory framework, infrastructure, improved geological information and mapping for future planning & development. This strategy entails the comprehensive efforts by local and federal governments to modernize the mining industry through scientific methods such as “3D modelling” and “geo modelling”. In addition, technological up-gradation through short, medium and long term interventions by businesses, individuals and clusters, can be fostered through research induced training centers, establishment of mining pools and modern warehouses that improve productivity, competitiveness and quality.

Research by Hadia Mukhtar, in GVS Editorial team, with additional input by Senior Editors and GVS Desk. A different version of this piece has appeared in the print edition of Global Village Space Magazine (June 2021 Issue)