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Mineral development and mining policy in Greenland Sinding, Sinding, Knud Knud 1994

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MINEiL DEVELoPMENT AND MINING POLICYIN GiuENJNDbyKNUD SINDINGB.Sc., University of Copenhagen, 1984M.Sc., University of Copenhagen, 1988B.Coimn., Copenhagen Business School, 1988A THESIS SUBMITTED IN PARTIAL FULFILLMENT OFTHE REQUIREMENTS FOR THE DEGREE OFDOCTOR OF PHILOSOPHYinTHE FACULTY OF GRADUATE STUDIESDepartment of Mining and Mineral Process EngineeringWe accept this thesis as conforming to the required standardi.•THE UNIVERSITY OF BRITSH COLUMBIADecember 16th, 1993© Knud Sinding, 1993In presenting this thesis in partial fulfilment of the requirements for an advanceddegree at the University of British Columbia, I agree that the Library shall make itfreely available for reference and study. I further agree that permission for extensivecopying of this thesis for scholarly purposes may be granted by the head of mydepartment or by his or her representatives. It is understood that copying orpublication of this thesis for financial gain shall not be allowed without my writtenpermission.(Signature)________________________________Department of Afininj 4hd iw;,1a PniiThe University of British ColumbiaVancouver, CanadaDategjDE.6 (2188)ABSTRAcTThe present document analyzes the economy of Greenland, a Danish self-governing territoryand highlights the narrow resource base of the Greenlandic economy. To provide the foundation for an analysis of the mineral policies that have been followed in the past, and for the proposed reform of these policies, three areas of relevance are identified, economic impact and long-term sustainability, taxation and economic regulation, and technical regulation. In each of theseareas, the literature is analyzed, and a range of practical solutions are surveyed.A detailed analysis of past and present mineral policy in Greenland is conducted, whichconcludes that investment is insufficient, and that the structure of the policy is unsuitable in anumber of areas. Based on these conclusions, and on the analysis carried out in the three areasidentified, a completely new policy is proposed. This proposal includes both a detailed partdealing with the direct management issues relevant to the drafting of a new mining law, and amore general discussion of the wider management issues, including management of mineral rentunder the special revenue sharing principle between Greenland and Denmark, as well as employment and town-site development.11TABLE OF CONTENTSAbstract.Table of contents iiiList of figures viiList of tablesList of acronyms and their meaning ixAcknowledgements1. Introduction 1Mineral resources and the Greenland economy — A rationale for research 1Policy objectives 3Rent capture, mineral taxation and economic management of miningindustry 3Direct regulation 4Economic consequences of mineral operations and their management 4Previous research 4Analytical approach and structure of the dissertation 6A note on terminology and emphasis 82. An introduction to Greenland 10Geography 10Physical features 10Geology 12Population, settlements, and towns 15Transport and communications 17History 19The earliest settlements 19Danish Colonization 19Postwar development policy 21Development plans G50 and G60 22The Home Rule period 23Home Rule authorities and jurisdictions 23Economic development in Greenland 24Subsistence economy in the colonial period 24Planned econoniic development 1950-1979 25Transfer of responsibilities to the Home Rule system 27The Greenlandic economy under Home Rule management 27Home Rule Administration 29Municipal councils 31State jurisdictions 31Production and trade 32Concluding remarks - Economic performance and structural problems 343. Mineral Development Models 38Mineral development models 38Mineral based industrialization 39Economic rent and mineral based development 45111Mining sector impacts and the Dutch disease 49Dependency on mineral exports 54Mineral resources and sustainable development 55Non-renewable resources and optimal depletion 56Sustainability and non-renewable resources 63Sustainable mineral policy 68Concluding remarks - Mineral development and sustainability 694. Economic management of mineral production 71Taxation and capture of mineral rent 72Competitive bidding for leases 75Royalties and production taxes 79Corporate income taxes 80Resource rent tax 80Risk and the choice of rent tax instruments 86An application of the Resource Rent Tax 87State mineral enterprises 89Economic management problems 90Mineral exploration 92Environmental management 95Concluding remarks - Mineral taxation and economic regulation 995. Technical management of mineral activities 101Regulation, property rights and externalities 102Exploration 104Land use planning and land access 105Location, position and recording of titles 107Exploration titles and control over marginal deposits 110Regulation of the exploration process 110Exploration work requirements 113Regulation of mine development and production 114Project approval 114Regulation of mine production 118Closure of mines and abandonment of mine sites 120Temporary mine closures 120Permanent closure, reclamation and long term monitoring ofabandoned sites 121On regulation design and the environmental costs of mining operations 123Environmental rules for mining and their place in the regulatorystructure 123Environmental costs and benefits in mining 125Concluding remarks - The details of mining regulation 1276. Mineral ventures in Greenland 129Mining history in Greenland 131Cryolite at Ivittuut 131Coal-mining at Qutdlissat 134The Blyldippen lead-zinc mine at Mestersvig 135The Black Angel Lead-Zinc mine at Maarmorilik 136ivMineral investment in Greenland 137Private exploration investment 137Government administration and exploration projects 139Government Revenues 142The Joint petroleum and mineral exploration company Nunaoil A/S 142Concluding remarks - The importance of exploration 1457. Mineral policies in Greenland 148Regulatoryvacuum before 1965 148The early mines 149Government equity participation 149The first Mineral Law 150Analysis of the Mineral Law commission report, 1963 150The final Mineral Law text 153Mineral Law change and Home Rule 155The ownership problem 155Division of powers in the administration of mineral resources 157Options for government participation, and the creation of Nunaoil 160Revenue sharing between Greenland and Denmark 161Mining policy reform, 1991 161Objectives 161Mineral tenure 163Economic terms for minerals 163Economic terms for petroleum production 164The new policies and their implementation 164The 1991 Greenland Mineral Law 164Principles, Procedures and Standard Terms 166Economic terms 169Environmental protection 172On the content and sufficiency of the 1991 policy reform 173Political and administrative organization 173Discrepancies and ambiguities in the reformed mineral policy 175Taxation and credibility 181Emphasis on petroleum investment 183Concluding remarks - when policy is reactive 1878. A mineral policy for Greenland 190Policy objectives 192Quantitative objectives 192Qualitative objectives 193Political and administrative organization 194Political control - The role of the Joint Committee on MineralResources in Greenland 195Administrative organization 197Economic policies towards mineral firms 200Exploration phase 201Production 202Closure and environmental protection 204Technical organization 205vLand use planning.206Prospectors, prospecting and early exploration 207Exploration license and advanced exploration 208Development approval procedures and project operation 211Concluding remarks and the future shape of regulations 2149. The impact of mine development and implications for Greenland 216The case studies 217Case study no. 1: Nanisivik Mines 217Case study no. 2: The Polaris Mine, Little Cornwallis Island, NWT 222Case study no. 3: The Balck Angel Mine, Greenland 224Discussion of case evidence 228Socio-economic agreements for mining projects 229Content of socio-economic agreements 230Special treatment and economic efficiency 232Implications for Greenland 234Management strategies for mining developments in Greenland 235Economic management, trust funds, and half ofthe mineral revenuesfrom Greenland 235Employment and training of local labour 247Mining communities 249Concluding remarks - some of many aspects of indirect management 23510. Conclusions and suggestions for further research 252GreenlandTssituation and the potential for mining 253The framework for mineral development 255The mineral policies of Greenland, now and in the recent past 257Design and implementation of direct management 259Indirect management 260Suggestions for further research 262References 264viLIST OF FIGURESFigure 2.1. Major geological terrains in Greenland 13Figure 2.2. The population of Greenland since 1961 16Figure 2.3. Age and sex distribution of the Greenlandic population 17Figure 2.4. Map of Greenland showing principal towns and administrative divisions 18Figure 2.5. Current public expenditures in Greenland, 1979-91 27Figure 2.6. Public investments in Greenland, 1979-84 31Figure 2.7. Investment expenditures by the Greenland Home Rule Authority 1987-9 1 ... 32Figure 3.1. The generation and flow of mineral rent 47Figure 3.2. The spending and resource movement effects 51Figure 3.3. The path of net price over time according to the Hotelling rule 57Figure 3.4. Consumption profile and optimal depletion of an exhaustible resource 58Figure 3.5. The effect of an increase in discount rate on the optimal price path 65Figure 5.1. Mineral titles when surface and mineral estates are granted together 108Figure 5.2. Mineral titles when mineral estate is vested in the state (regalian) property... 109Figure 6.1. Metallic mineral exploration spending in Greenland 138Figure 7.1. Organization of the “Joint decision-making power” 157Figure 7.2. Administrative processing of applications 168Figure 8.1. Future organization of mineral management in Greenland 196Figure 9.1. Organization of the Alaska Permanent Fund 237Figure 9.2. The structure of the proposed Greenland Mineral Resource Trust Fund 243Figure 9.3. The Greenland Transfer Equalization Fund 246Figure 9.4. Possible accommodation strategies for mine developments 250viLIST OF TABLESTable 2.1. The earliest settlements in Greenland 19Table 2.2, Employed population by occupation, 1834-1945 25Table 2.3. Comparative data showing indicators of the stage of development 28Table 2.4. GNP and GNI in Greenland 1980-90 29Table 2.5. Current expenditures of the Greenland Home Rule Authority, 1988-93 30Table 2.6. Exports, imports and Greenland’s visible trade balance 34Table 3.1. Mining sector growth impacts 49Table 5.1. Mineral exploration requirements in Canada 113Table 6.1. GGU expenditures 1988-94 141Table 6.2. Types of taxes in the Black Angel concession 142Table 7.1. Annual work requirements 169Table 7.2. Fees for Mining related permits 170Table 7.3. Required petroleum exploration work 172Table 7.4. Summary of mining taxation in selected countries 182Table 8.1. Administrative tasks and the organization of the new MRA 198Table 9.1. Employment at the Nanisivik Mine, NWT 218Table 9.2. muir employment, Polaris Mine, Little Cornwallis Island, NWT 223Table 9.3. Employment at the Black Angel Mine, Greenland 225Table 9.4. Greenlandic employment at Maarmorilik according to skill level 226Table 9.5. Economic impact of mining on the municipality of Uummannaq 226Table 9.6. Economic impact of the Marmorilik mine on Home Rule fmances 227Table 9.7. Numerical example of a trust fund based on 3 mines 245vi”LIST OF ACRONYMS AND THEIR MEANINGAGIP The Italian State Petroleum CompanyAHSTF The Alberta Heritage Savings Trust FundAPF The Alaska Permanent FundARCO Atlantic Richfield CorporationA/S Aktieselskab (Corporation or Public Limited Company)GGU Grønlands Geologiske Undersøgelse (Geological Survey of Greenland)GM Grønlands Miljøundersøgelser (Greenland Environmental Research Institute)HRA Home Rule Authority (Greenland)KANUMAS Kalaallit Nunaat Marine seismic Programme (Kalaallit Nunaat is Greenland)MDR Mineral Development Review (British Columbia)MRA Mineral Resources AdministrationPRT Pure Rent TaxRRT Resource Rent TaxxAcKNowLEDGEMENTsI would like here to acknowledge the people who have aided and abetted me in the workpresented below. These include the members of my supervisory committee and in particular Dr.Richard Poulin who has read many drafts with great patience, and Mr. Brian Abraham, as well asmy friends working on projects in areas related to mine, Graham Poole (Cambridge) and MikePretes (Calgary, currently Rovaniemi, Finland). In addition, the staff of the Mineral ResourcesAdministration for Greenland, at the Geological Survey of Greenalnd and Mr. Erik Andersen ofthe Greenland Home Rule Authority have always been very helpfull when I requestedinformation on their activities and policies. A special acknowledgement is reserved for Mrs. LiseLyck of Copenhagen Business School, who has provided enormous help and encouragement inways too many to describe, My colleauges, especially Niels Blomgren-Hansen, Lakis Raimondosand Mich Tvede in Copenhagen, and Douglas McDonald, and Andy Burket in Vancouver mustalso contributed with discussions and helpful suggestions. Without all these good people theproject would have become a very messy affair, so to speak. The greatest burden, howevere, hasfallen on Gerd, my wife, who has endured endless proof-reading and long, and sometimes onesided discussions about the contents of this thesis.xIntroduction1INTRODUCTIONIn this chapter I will present very briefly the issues related to mining policy in Greenland and thebackground for the research presented here. In addition, I will sketch previous research on mineral policy in Greenland and describe briefly the structure of the dissertation, the analytical approach adopted in the following chapters and the terminology used throughout the thesis andthe areas where most emphasis has been placed.MINERAL RESOURCES AND THE GREENLAND ECONOMY - A RATIONALE FOR RESEARCHThe Danish territory of Greenland, with its extensive system of local government operating largely without interference from the Government of Denmark, has experienced deepening economic problems since 1988. The causes of this state of affairs are many and complex. However,economic and resource management policies combined with unforsecable changes in the naturallocation of fish stocks have played significant roles.Whereas marine resources have been part of life in Greenland from prehistoric times, minerals have only gained prominence as the industrial era was well under way, starting with themining of the cryolite deposit at Ivvittut from around 1860 onwards. Both this and the other1Introductionmines operated in Greenland were essentially the result of surface discoveries in convenient locations.Attitudes to mineral development in Greenland have been hesitant since the introduction of Home Rule in 1979. The primary reason for this is probably that control over resourcesand resource revenues is shared equally with Denmark. Conflicts between Greenland and Denmark over leasing of off-shore areas for petroleum exploration in the early l970’s, over uraniumexploration in the late 1970’s, and over the sharing of mineral revenues have also contributed tothis uncertain state of affairs. However, the closure of Greenland’s remaining mine, the BlackAngel, in 1990 and the onset of a severe economic crisis in 1989-90 led political leaders inGreenland to re-appraise past attitudes towards mineral resources and hope for rapid mineral development. The result was new mineral legislation and efforts to market Greenland as a mineralexploration investment target.The contents of past and present policies will be examined in much greater detail in subsequent chapters but the main conclusion regarding the policy changes introduced in the 1991Mineral Law was clear: they constituted a considerable improvement. Early in the present research project, attention was concentrated on the relationship between mineral investors and government. The first issue of concern was one of property rights protection in the sense that investors faced a rather low degree of security of tenure. The second was one of rent capture policies and taxation of mining operations. Under the policy prior to 1991, full tenure was closelylinked to rent capture through use of options for state participation in mineral projects. Theseissues were in part resolved by new legislation in 1991. However, although this mineral policyreform reduced the potential problems in the areas of mineral tenure and taxation of rents, it didnot deal with a number of important issues.The present project, which was initiated before the 1991 policy reform began, on theworking hypothesis that mineral policy in Greenland as conducted until then, was inadequateand in need of change. As the project proceeded concurrently with the changes resulting fromthe 1991 policy reform, the hypothesis was gradually modified. The revised hypothesis is based2Introductionon a distinction between four major issues, policy objectives, taxation and rent capture methods,regulation of mineral activities, and economic consequences of mineral operations and theirmanagement. It is the principal hypothesis that each of these four areas must be analyzedcomprehensively before a complete mineral policy can be developed and put in place. Thefollowing sections defines each of these areas in more detail.Policy objectivesIn the documentation supporting the 1991 policy reform some limited quantitative goals are setout along with general remarks about the need for and possibilities of economic development associated with minerals, both petroleum and hard-rock. However, while geological reality ultimately determines the success or failure of any mineral policy, it is important that major reformsare based on a set of realistic and internally consistent goals.In the present case four groups of goals invite further analysis. First are the operationalgoals already mentioned. These are, of course, open to discussion as to their underlying motivation (tax income, employment, etc.). Second is the organizational framework in terms of jurisdictional responsibility and power. This group is particularly interesting given the curious andcomplicated organizational structure in the management of mineral policy in Greenland and thepossibility of it changing soon1. The third group of policy issues is the extent of government involvement and public perceptions of how minerals are managed (mainly to “sell” the most optimal policy to the voters, even if it conflicts with popular opinion). The fourth and final groupconcerns the relationship between government and investors in mineral projects. The nature ofthis relationship has extensive implications for the design of any element of policy.1 There is an apparent change of policy underway in the Danish government, which seems disposed to releasecontrol over these resources to iocal governments. This has already happened with the resources of the FaeroeIslands, the other Danish territory in the North Atlantic. The implications of this change have yet to be assessed.The change may also be reversed following the recent (January 1993) change in Government in Denmark, from acenter-right coalition to a center-left coalition.3IntroductionRent capture, mineral taxation and economic management of mining industryThe second major area dealt with is rent capture policies and other forms of economic management. The net profits from mineral production are an important contributing factor in all government decisions on mineral policy. In relation to the analysis of present policies and the proposal for a future mineral policy, the structure and impact of a tax on mineral projects is of central importance. The question of mineral taxation is important both in relation to the promotion of Greenland as an investment target, and in relation to the rest of the Greenlandic economy. The other aspects of economic management are primarily related to the economic aspectsof exploration and environmental regulationDirect regulationDirect regulation of mineral operations, as opposed to economic regulation and taxation, coversthe four distinct phases of mineral activity, exploration, development, production and reclamation/abandonment. The 1991 Mineral Law for Greenland and its accompanying regulationspartially deal with three phases in a “traditional” manner. The provisions range from regulationof the exploration process in terms of what can and cannot be done, over the requirement thatdevelopment plans and environmental impact assessments be submitted and approved, to theprovision of funds for site reclamation at the end of mineral operations.The primary interest in this area is to determine when such traditional approaches areideal, and when they are not. At the same time it is interesting to examine the requirement incurrent legislation, that mineral operations be conducted according to “good mining practice”.Economic consequences of mineral operations and their managementFinally there are the economic consequences of mineral production on the economy of Greenland. These can be divided in different ways depending on the observers point of view, but ulti4Introductionmately they derive from the net value of the minerals (often also referred to as the mineral rent).The economic effects thus depend on how that part of rents which accrues to Greenland, through payments to local factors of production or through tax payments, are managed.PREvIous RESEARCHOnly one major research effort has looked specifically at mineral policy in Greenland. This project was carried out in 1982-84 by Finn Breinholt Larsen, Karen Marie Pagh Nielsen and JeromeD. Davis at the Department of Political Science at Aarhus University, Denmark. The resultingreport “Offentlig styring af olie-gasaktiviteter i Grønland (“Public management of oil and gasactivities in Greenland”) was published in May 1984 (Davis and others 1984). The report was,to some extent, related to the expected petroleum exploration in Central East Greenland, whichwas much discussed in the early 1980’s.The report deals with issues related to the possible consequences of oil and natural gasdevelopment and examines two major issues. The first is concerned with the extent of Green-landers political influence on mineral policies, and the second deals with taxation and economicissues related to exploration and production agreements (contracts). The report discusses variousorganizational forms (ranging from purely private exploration and production to a situationwhere a state company fully controls exploration and production), managerial resources availablein Greenland to deal with mineral issues, and possible fiscal income streams accruing to Greenland. The report includes some very simplified and static calculations using different tax structures and hypothetical costs. The emphasis in the report by Davis and co-workers is exclusivelyon oil and natural gas and there are few references to metallic minerals or other non-petroleumresources. This provides an added reason for the present effort which concentrates mainly onnon-petroleum minerals.Studies of mineral policy design and implementation have appeared from time to time.These studies have primarily been concerned with taxation and rent capture issues (Garnaut and5IntroductionRoss 1983; Wairond and Kumar 1986) and with mining in developing countries generally(Bosson and Varon 1977). Country-specific studies have covered Bolivia (Gillis 1978), Indonesia (Gillis 1980) and Papua New Guinea (Garnaut and Ross 1983). Much related research onmore narrowly defined issues has also appeared. The chapters in part two examine the literaturein these and related areas in considerable detail.Research on Greenland in non-mining areas has venerable traditions dating from theearly nineteenth century onwards and is extremely wide-ranging. Geology has been covered by aseparate geological survey originating in the work of Lauge Koch, who led the geological mapping of almost the entire East Greenland Caledonian orogen. The work of the survey is recognized internationally as being of the highest quality. In the area of social science the recent contribution by Mark Nuttall (1992) must be singled out, as must the forthcoming work on theGreenland fisheries sector by Graham Poole (Poole 1993). The structure of the Greenland economy has been extensively analyzed by Lyck (1986) as discussed further in chapter 2.ANALYTICAL APPROACH AND STRUCTURE OF THE DISSERTATIONThe present dissertation consists of 10 chapters. The first chapter following this introduction iscompletely descriptive and presents a background picture of Greenland. The following threechapters examine the literature on mineral development and economics and establish atheoretical framework. Chapter three examines and synthesizes the literature on mineral baseddevelopment and on the sustainability issues related to mineral exploitation. Similarly, chapterfour deals with the different approaches to mineral rent taxation, and with a number of othermineral resource management problems closely related to the quantity of mineral rent subject totaxation. The fifth chapter departs from the strong binding to academic literature and deals withthe more technical aspects of mineral regulation. Based on mineral and related legislation in anumber of jurisdictions, the analysis is founded on two theoretical requirements. These are thatproperty rights are necessary for markets to function, and that externalities must be regulated.6IntroductionTo set the stage for the central element in the present investigation, chapter six is an analysis of the history of mineral activities in Greenland. The purpose of this chapter is to provideinformation on the mines which have operated, as well as on the other mineral activities whichhave occurred in Greenland. In itself the analysis is primarily descriptive.However, the events described have a parallel in the conduct of government policy, fromthe date of the very first cryolite concession to the present Mining Law. Chapter seven presentsa detailed analysis of these policies and argues that, despite the recent changes in Greenland’smineral policy more change is urgently required. Following these conclusions, chapter eight develops an alternative to the present mineral policy in Greenland, but only as it refers to metallicor “hard-rock” minerals. Petroleum is left for separate consideration and falls outside the analysis from chapter eight onwards.The final chapter in the main body of the text takes up some of the issues related to theimpacts of mineral development. This is done in chapter 9 by examining three case studies ofmines in the Arctic. These are followed by an analysis of one of the approaches used in Canadato derive local benefits from mining projects. Rounding of the treatment of mineral impacts is asection dealing with specific methods of capital accumulation as adopted in two North Americanjurisdictions. Based on these methods a specific proposal for a capital accumulation mechanismfor Greenland is presented.In terms of analytical approach the structure is straightforward. The first chapters (3-5) are usedto establish a framework for analyzing the case of mineral policy in Greenland. This frameworkis based on existing theory on mineral resource economics and management, and on experiencesin implementing mineral policies, some of which are based on immediately recognizable theories. The analysis of specifically Greenlandic conditions in chapters 6 and 7 is based on the insights gained in the preceding chapters, with the principal part of the analysis falling in chapter 7.This also applies to the second part of chapter 9, while first part of this chapter is more self-contained.7IntroductionThe approach used throughout this thesis is based on “results” of mineral activities, measured in terms of mineral rent, government revenues and employment, and the means withwhich these results can be influenced. The alternative is to place more emphasis on the“processes” leading to the “results”. However, to constrain the analysis within the appropriatestructure of a thesis it is necessary to focus the analysis more than possible if the “system” wasexamined. As a result I have chosen to emphasize the results over the multitude of different processes involved in any process of policymaking.The analysis of specific Greenlandic conditions based on the exposition of economic theory andmineral law procedure occurs primarily within a traditional neoclassical economics framework.However, while this involves a number of different models, these are not specified individually.The analysis leads to a number of conclusions concerning the present mineral policy forGreenland. These conclusions then leads to the proposal for a complete mineral policy forGreenland which is based on the theoretical exposition in chapters 3-5 and the specificconditions in Greenland, as analyzed in chapters six and seven. To illustrate the potentialimpacts and problems of mineral development in polar regions three specific cases, as well asrelated Canadian practices, are examined. This approach is less general than elsewhere but itsstrength is that it focuses attention on a number of important issues.A NOTE ON TERMINOLOGY AND EMPHASISMinerals are the subject of this dissertation. However, the term may be ambiguous since it iscommonly used to describe both “hard-rock” or metallic mineral resources and “any naturallyformed chemical element or compound having a definite chemical composition and, usually, acharacteristic crystal form” (Gary and others 1974). To confuse matters further, many socialscientists, particularly economists, include coal, oil, natural gas, and sometimes water, as minerals.8IntroductionIn an attempt to be consistent throughout the term “mineral” is used in the economist’ssense of a valuable non-renewable resource. For production of these unspecified minerals the expression “extraction” is used. When the matter at hand is specifically related to hard-rock or metallic minerals the terms “mining” and “mine” will be used. For consistency the term“petroleum” will be used to describe oil and natural gas. This is in preference to the more impractical “hydrocarbons”.With respect to the Mineral Law for Greenland, three terms occur frequently and havespecial importance. In direct translation they are “preliminary investigation permission”,“exploration permission” and “production permission”. It is tempting to translate these terms tosomething less tongue-twisting. However, they are retained on the grounds that the use of thisterminology reflects the attitude to mineral development which is entrenched in the administration of Greenland’s mineral resources.This also brings us to the main emphasis in the succeeding pages, mines and mining as opposedto oil production which was the main focus of the contribution by Davis and co-workers. Thischoice of emphasis is primarily based on a technological consideration. Mining in the Arctic isby now a well accepted possibility, as witnessed by the record of the mines at Nanisivik, Maarmorilik, Lupin, Red Dog and the Polaris operation on Cornwallis Island2. Oil and gas production in the Arctic is taking place in both Alaska, Russia, and the Canadian Arctic. Conditions inthose parts are, however, far from comparable to those in the off-shore shelf areas of Greenland,which are characterized by massive sea-ice movement. Technologies for drilling and productionunder such conditions are still in their infancy and other exploration techniques are only partially developed, even though some off-shore seismic work has been carried out in areas off EastGreenland with heavy drifting sea-ice during the past two years (see e.g. MRA 1993).2 A number of important mines in the Arctic areas of the former Soviet Union are known, the most famous beingthe nickel and copper mines in the Norilsk area in Siberia. These are important indicators of the technicalfeasibility of operating mines in the Arctic, but they operate under economic conditions not comparable to the othermines mentioned. Furthermore, much information concerning these mines is still classified information in Russia(Lars Lund, personal communication, 1993)9IntroductionFinally, there is the terms “the Realm”, and “unity’ of the Realm”. These refer to thecomplete entity known as the Kingdom of Denmark or the state of Denmark. The “Realm” isdefined in the Danish Constitution to be Denmark, the Faroe Islands and Greenland.On a concluding note it must be emphasized that the following chapters are based on a numberof implicit assumptions. The first is that mineral policy, and every other economic policy, iscomposed of the same basic elements everywhere, regardless of whether it is applied inGreenland or in the wilds ofAmazonia.The second assumption is that property rights issues on the international level are clear.This assumption may not be correct in the case of Greenland (where control over non-renewableresources has been a major source of disagreement between Greenland and Denmark) but theassumption is made in order to address the more practical problems of encouraging a mineralindustry.The third assumption or constraint is that the following discussion can be conducted interms which are mainly economic. There are clearly a number of important political andcultural issues related to mineral policy, but these are too large to include here.10An introduction to Greenland2AN INTRODUCTION TO GREENLANDThis chapter gives a brief overview of Greenland in terms of geography, history, political organization, economic structure and development. It will not be exhaustive on any of thesematters and some of the information presented will be examined in more detailed discussions at later stages of this study.GEoGRAPHYPhysical featuresThe area of Greenland is very large, 2,175,600 km2. of which 1,833,900 km2 or 84% are covered by ice. The ice-free areas form a zone of variable width along the coast, although the icecap reaches the sea in some places.The most northerly point is Kap Morris Jessup, at 83°39’ N, only 740 km away fromthe geographical North Pole, while Kap Farvel 2,670 km to the south has approximately thesame latitude as Oslo, Stockholm or St. Petersburg. The ice-free coastal zone is characterized by an ice-cap which, 1 million years ago, extended beyond the present coastline and into11An introduction to Greenlandthe shelf areas now covered by the sea, and by geological terrains of many different originsand ages.The ice-cap has a thickness of up to 3,500 m. and its highest point is at an altitude of3,200 m. (Berthelsen and others 1989). Considerable parts of the ice-cap rest on a basementwhich is up to 300 m. below sea level. The depression is probably a result of isostatic compensation, a process by which the total thickness of the earth’s crust (including ice) at a givenpoint determines the position of the crust in relation to the mantle beneath.The continental shelf around Greenland varies in width from the very narrow aroundKap Farvel to the extremely wide on the shelf off North Greenland. Beyond the shelf, theocean floor reaches depths of 4000 m in the southern part of the Labrador Sea. To the east, theNorth Atlantic has a depth of around 3000 m., while the Arctic Ocean North of Greenlandvaries in depth from shallow (less than 200 m.) to more than 4000 m.The sea-currents around the island are dominated by the East Greenland current whichmoves sea-ice from the Arctic Ocean down along the Eastern coast to Kap Farvel, whereuponthe Irminger current (a branch of the Gulf current) then moves the ice North along the Westcoast. As the Gulf current is warmer, the ice usually melts and disintegrates before it reachesthe latitude of Nuuk (Godthb). Between Paamiut (Frederikshb) and Sisimiut (Holsteinsborg) sea ice is seldom a problem at any time, while further North ice formation again becomes a problem for shipping (Berthelsen and others 1989).Whilst Greenland is generally regarded as having an “Arctic” climate, this covers enormous climatic variability. Apart from latitude, the climate is mainly influenced by the icecap and the sea-currents around the island. Winter is long and dark, while average temperatures during the brief summer does not exceed 10°C. Extensive permafrost, absence of trees,and generally low precipitation all contribute to the “Arctic” character of Greenland’s climate. However, in the South-west, where the climate is influenced by the Irminger current,conifer plantations and birch trees can exist, and sheep- and reindeer-herding is carried on.12An introduction to GreenlandThe vegetation cover in Greenland ranges from sparse to non-existent. Four vegetation zonesare commonly distinguished:1. The high Arctic: arctic heath, snow beds and polar desert;2. Dry inland low-arctic: dwarf-scrub heath;3. Humid coastal low-arctic: herb slopes, willow thickets and crowberries;4. Northern boreal birch: only in the inner fjords in the southernmost part.Few species of terrestrial animals can survive in the harsh arctic environment. Thosewhich have managed to adapt successfully include polar bear, polar fox, musk ox, caribou, andsnow hare. Sea animals, on the other hand, abound in the waters around Greenland, includingseals of many varieties, walrus and several whale species. For the Greenlandic fishing industrycod, Greenland halibut, redfish, and shrimp are the most important species, with shrimpdominating in economic importance (Poole 1992).GeologyGreenland consists of a number of geological terrains of widely different character and ages(see figure 2.1). The oldest part is the Archean block in the southern part of Greenland, whichranges in age from 3,750 m.y. to 2,500 m.y. This block contains, in the Godthâbsfjord-Isuaarea, some of the oldest rocks on earth (Moorbath and others 1973). All of this block has experienced prolonged metamorphism (structural, mineralogical and chemical modificationprocesses occurring deep in the crust of the earth), and repeated deformation up until around2600 m.y. ago (Bridgewater and others 1976).The Nagssugtoqidian Mobile Belt is a 300 km wide zone north of the Archean blockwhich consists mainly of Archean gneiss (a quartz-feldspar rock with a linear fabric). Theoldest rocks have been dated at 2,860 m.y. (Escher and others 1976), and major deformationtook place around 1,700-1,800 m.y. ago. North of this mobile belt follows another calledthe Rinkian Mobile Belt, which consists of rocks that are probably of similar age as the13An introduction to GreenlandNagssugtoqidian rocks, and were deformed at a similar time 1,680-1,870 m.y. (Escher andPulvertaft 1976). Rinkian terrains are distinguished from the Nagssugtoqidian by a markeddifference in tectonic style.Located South of the Archean block is the Ketilidian Mobile Belt, which consists of abasement of age 2,600 m.y. and, laid down on top of that, sediments and volcanic rocks thatwere subsequently deformed and metamorphosed 1,700-1,800 m.y. ago (Allart 1976). Intothis mobile Belt the alkaline igneous rocks (i.e. high in Na and K) of the Gardar period,Figure 2.1. Major geological terrains in Greenland (modifiedfrom Escher and Watts 1976)14An introduction to Greenlanddated at 1,130 to 1,330 m.y. (Emeleus and Upton 1976), were intruded. In addition to thesemain Precambrian terrains, rocks of Precambrian age occur as basement for younger rocks inCentral East Greenland and in North Greenland.These younger rocks can be divided into two major fold belts and several areas ofsupracrustal deposits. The fold-belts are the Caledonian in East Greenland and the NorthGreenland belt. The former was formed around 320-455 m.y ago, while the latter followedat the end of the same period. It should be noted that though adjacent, the two belts are separated in time and were probably caused by different tectonic events. The Caledonian orogenic event can be explained as a collision between a plate containing Greenland, and perhapsparts of the North American continent, with a plate containing much of Scandinavia andNorthern Europe (Henriksen and Higgins 1976). In the case of the North Greenland fold beltonly the Greenlandic side is identifiable with any certainty (Dawes 1976).Rocks largely unaffected by deformation and metamorphism occur in several places.In North Greenland some sediments south of the North Greenland Fold Belt were not affected by this folding, while to the east new sediments were deposited after the folding event.Following the Caledonian folding event, detritus from this belt were deposited in thick sequences along the eastern margin of Greenland. In West Greenland, a large basin of sedimentary rocks evolved in the period of approximately 75 m.y. to 55 m.y. ago, of which theNugssuaq-Disko area is the smaller, on-shore part, the remainder being the extensive West-Greenland basin which extends along the entire Western margin of the island (Henderson1976). The most recent major geological events were the extrusion of vast quantities of basaltin both West and East Greenland. These events are thought to be related to the initiation ofsea-floor spreading and the formation of Baffin Bay and the Labrador Sea and the NorthAtlantic, respectively (Clarke and Pedersen 1976; Deer 1976).The various terrains noted above have a widely different potential for the discovery ofviable mineral deposits. This is partly indicated by the uneven distribution of known deposits and occurrences, and also indicated by the variable interest accorded different parts of15An introduction to GreenlandGreenland by exploration managers. The famous cryolite deposit in Ivvituut represents theonly mined deposit in the Gardar igneous province, while the Black Angel Lead-Zinc mine islocated in metamorphosed limestones of the Rinkian Mobile Belt. The formation of theLead-Zinc deposit at Mestersvig was related to the much more recent events in connectionpost-orogenic tensional tectonics in the upper Carboniferous, while the formation of the large,sub-economic molybdenum deposit called Malmbjerget (Ore mountain) was closely relatedto the final opening of the North Atlantic Ocean (Harpøth and others 1986). Currently, mostexploration activity is concentrated in four types of terrain. The greenstones of the KetilidianMobile Belt in South Greenland are being investigated for gold, as is the famous TertiarySkaergard layered basic intrusion in Central East Greenland. In central West Greenland thebasic volcanic rocks of Tertiary age are explored for massive copper-nickel sulfide depositsof Norilsk type, while in the extreme North East, a remarkable discovery of sediment-hostedlead-zinc sulfide showing is attracting considerable interest.Population, settlements, and towns3The total population of Greenland as of January 1st 1991 numbered 55,533 persons, of which8,842 were born outside Greenland. This small population lives in towns or settlements and,to a lesser extent, on scientific stations and military bases.In this century population growth has been rapid. Since 1901 the total population hasincreased from a mere 12,000 to the present 55,000, with growth being particularly rapidfrom 1950 to 1970. After 1970 population growth slowed, and now seems to have stopped(figure 2.2). While it is important to distinguish between persons born in Greenland andpersons staying temporarily in Greenland (e.g. Danish civil servants working in Greenland), it3 This section and the next relies heavily on data in the Yearbook “Greenland” published annually by the DanishMinistry for Greenland and, from 1988 onwards, by the Greenland Home Rule Authority.16An introduction to Greenlandis clear that the Greenlandic-born4 population have grown significantly, whereas the Danish-born population seems to be declining slightly in the late 1980s and early 1990s.In recent decades, the demography of the Greenlandic population has changedmarkedly. The population living in smaller settlements has declined, in absolute terms by1314 persons over the period 1970-1990. In relative terms, the decline is even more remarkable, changing from 28% of persons born in Greenland in 1970, to 21% in 1990. The lessrapid decline in settlement population after 1980 partly reflects Home Rule policies whichsought to slow the depopulation of smaller settlements.: Total opulati n-..—II 1111111111 LLLLLLLIJ( reenlan ic born—-___4on-Gr enlandi born -Figure 2.2. The population ofGreenland since 1961(based on data from GrønlandArbog, 1990).The strong population growth is also reflected in figure 2.3., which shows the age andsex distribution of the Greenland population. Danish civil servants and migrant workers appear as a clearly defined, predominantly male group ranging in age from 20 to 54 years. TheGreenlandic population is comparatively young (38% is 20 years or younger compared to26% in Denmark) and Greenland has not yet completed the demographic transition5.However, the life expectancy is markedly lower in Greenland (58.5 years for males and 66.0years for females) than in Denmark (males 71.5 years, females 77.5 years).6000050000 -40000300002000010000_____01961 1967 1973 1979 1985 1991The notion of birthplace defining ethnic origin is misleading. Figures from a 1901 census show that at thetime some 46% of the total population of Greenland was not of pure Inuit decent (Barford 1985).5 This refers to the time when a decline in mortality is matched by a corresponding decline in fertility (Todaro1989)17An introduction to Greenland,,,FFFF,F,,,FFF F F F FF F F F F F F J F F F F F F F FFFFFFFFFFF/F/FFF,rF,,,,,/,,,/,,,—//////‘//////Figure 2.3. Age and sex distribution ofthe Greenlandic population in 1991.Settlements range in size from just a few persons to several hundred. The number ofsettlements declined slowly since 1980, in line with the stabilization in settlement population. The largest town is Nuuk (also the capital of Greenland) with 12,181 inhabitants, andthe smallest is Ivittuut, where 211 live. Other important towns are Qaqortoq (Julianehâb),Paamiut (Frederikshâb, Maniitsoq (Sukkertoppen), Aasiaat (Egedesminde), and Ilulissat(Jakobshavn). Towns and municipalities are shown in figure 2.4.Transport and communicationsClimatic and topographic conditions dictate the structure of Greenland’s transport and communications infrastructure. Roads exist only within towns and all other transport must use airor sea. Outside the towns, dog sleds and skidoos are used. Regular air links with Denmark,Iceland and Canada are supplemented by freight transport by sea, primarily to and fromDenmark. Telecommunications are modern and reach all but the smallest and most remotesettlements.Women •FF/FIF F F F•7f//..— .‘‘ ‘ Z—.. / //// // / / / / /F F —/ / / / —MenAge70-65-6960-6455-5950-5445-4940-4435-3930-3425-2920-2415-1910-145-90-440b0—/////////////3O00 2d00— / F . .. / F F F F F F F F F Fi dooBorn in Greenland0 idoo 2d00 3d00 dooBorn outside Greenland18An introduction to GreenlandFigure 2.4. Map ofGreenland showingprinczpal towns and administrative divisions.GREENLANDORr NUNAATIvittuutQaqortoqMunicipal boundaryRegional boundaryNanortalik19An introduction to GreenlandHIsToRY6The history of Greenland can be divided into 5 distinct phases. The prehistory ranges fromthe earliest known settlers who migrated from the Western Arctic around 2500 years BC, tothe almost simultaneous arrival of eskimos of the Thule culture in the North and norseVikings in the South. The colonial phase began in 1721 with the arrival of Hans Egede, aDanish Lutheran missionary, and lasted until just after the Second World War. The fourthphase can be called the assimilation phase after the efforts to make Greenland part of the Danish nation. The fifth and present phase began in 1979 with the introduction of Home Rule inGreenland.The earliest settlementsThe different pre-European invasions and settlements of Greenland, which originated in theEastern Canadian Arctic, are summarized briefly in table 2.1.TABLE 2.1. THE EARLIEST SETTLEMENTS IN GREENLANDPeriod (approximately) Name of settlement culture2500-2000 BC Independence I2500-1000 BC Sarqaq1000-700 BC Independence II200-0 BC Dorset I800-1000 Dorset II900- Thule982-1400 Norse VikingsSources: Gad (1984; Lidegaard (1991)Danish ColonizationDuring the 15th and 16th centuries visits by European whalers (Dutch, English and Portuguese)and scientific expeditions became increasingly frequent. The whalers came to exploit theplentiful whale stocks in Greenlandic waters. While there, they also traded with the Greenlanders. Iron (for tools) and other goods were given in exchange for whale-blubber, sealskins andivory.6 This section relies heavily on Gad (1984) and Lidegaard (1991)20An introduction to GreenlandThe whaling went on for 150-200 years, but at the beginning of the 18th century depletion of whale stocks and lower returns to whaling investors led to conflicts between whalersand Greenlanders. These conflicts, as well as the weakening of nominal7 Danish-Norwegianauthority (at the time the two countries were one realm) caused by the extensive foreign activity in Greenland waters, led to the dispatch, in 1721, of a combined trade and missionary expedition led by the clergyman Hans Egede.Despite setbacks, the colony and the trade with Greenlanders survived (albeit subsidized from Denmark) and developed slowly to cover most of the West coast fromFrederikshb (Paamiut) to Upernavik (see figure 2.4). In 1772, however, the private tradingcompany went bankrupt and the Danish Crown took over the management of the trade and established the Royal Greenland Trading Company (KGH) for the purpose. KGH wasprovided with a firm regulatory framework in 1782 under which access to Greenland wasrestricted and special inspectors were appointed to oversee KGH activities and to serve as acombination of law officers and justices of the peace.The Greenland trade was interrupted by the Napoleonic wars and only became profitable again in 1825. During the 19th century, the KGH monopoly was almost broken up, butwas retained for “humanitarian” reasons (to prevent the evils of competition). Instead, payments for the Greenlander’s products were increased, with unfortunate results. The purpose ofhigher prices was to enable Greenlanders to invest in productive improvements, but the resultwas that the higher incomes were used exclusively for consumption, and many Greenlanderseven disposed of essential possessions such as skins used for clothing and similar domesticpurposes. The rest of the 19th century was marked by economic and social stagnation.In 1908 a new law for Greenland was enacted which provided for more local influencein both local and legislative matters. The operation of the KGH was partly separated fromthe administration of other government business, which was turned over to local councils. At7 The island was considered part of Denmark’s North Atlantic territory based on the Norse colonization from982 to around 1400.21An introduction to Greenlandthe same time, two regional councils were set up which were to be consulted on legislativeproposals.In the first decades of the 20th century, the climate grew slightly warmer and the seal-catchdeclined, resulting in fundamental changes in the economic structure of Greenland society.The fishery for cod and salmon became increasingly important, but whereas seals had provided almost all the necessities of life, cod did not. The subsistence-hunting primitivesociety had to be replaced by a much more modern, monetized, economy. To keep pace withthese changes, official policy also had to adapt. Whilst the subsistence economy required thatthe population be as dispersed as possible in order to utilize seal-stocks, the fishing industryrequired more concentration of the population.The coastal fishery grew, and Greenland experienced some measure of prosperity.This change was, however, small compared to the outbreak of the second world war and theGerman occupation of Denmark. A centralized authority was introduced under the leadershipof the Danish governor of Greenland, and at the same time the Danish ambassador to theUnited States negotiated a treaty which allowed the US to build bases in Greenland in returnfor American recognition of Danish Sovereignty in Greenland. In addition, the US helped replace the supplies which no longer arrived from Denmark.Postwar development policyDuring the Second World War, the emergency administration had worked remarkably welland a return to prewar conditions was difficult. Greenland’s staunch support for the alliedpowers during the war had to be rewarded and at the same time the newly formed UnitedNations began asking questions about the colonial status of the island. The resulting policy,announced in 1950 (and commonly known as “G50”), proposed a completely new policy forGreenland. The main changes were the partial abolition of the KGH monopoly, concentrationof the population in larger centers, a more formalized legal system, separation of church and22An introduction to Greenlandschools, new hospitals, and much new housing. A central element in the new poiicy was that,following initial Danish investment, the economy should be self-sustaining. To complete thereforms and to satisfy the United Nations, Greenland formally became part of the DanishRealm when a constitutional amendment was adopted in 1953, following a referendum inDenmark. No referendum was held in Greenland but the agreement of the non-electedregional councils was obtained.Development plans G50 and G60The economic development envisaged in the G50 plan did not materialize, mainly becausethe private investments in production were much lower than anticipated. The failure of thisplan served to illustrate forcefully that equality (in terms of living standards) between Denmark and Greenland was very difficult to achieve, given the much more extreme physicalenvironment, the lack of infrastructure, lower standard of education and differences in culturebetween Greenland and Denmark. These problems were recognized in the early 1960s, and amodified policy (G60) replaced G50. Danish management, a policy to concentrate thepopulation in larger towns and settlements, and the forced abandonment of smallersettlements as well as the emergence of an intellectual Greenlandic elite led, in the early1 970s, to demands of more Greenlandic influence.In the resulting negotiations the present Home Rule system (described below) was designed, in some cases (such as the question of mineral resource ownership) only after protracteddiscussions. The proposals for a Home Rule system involving gradual transfer of responsibility from Danish to Greenlandic authorities were enacted as the Home Rule Law bythe Danish Folketing (Parliament) in November 1978 and endorsed by a referendum inGreenland in January 1979. As a result, the new Home Rule system came into force on May1st 1979 and the gradual transfer of responsibilities to the Home Rule Authority began.23An introduction to GreenlandThe Home Rule periodUnder the Home Rule system the transfer of responsibilities happened much more rapidlythan expected (Lyck 1989). The Home Rule Authority has since attempted to stop the depopulation of settlements through various subsidized measures. Since 1979 the highly state(i.e. Home Rule) controlled fishing industry, which has been developed since the 1960s, hascontinued to exist. It never fulfilled the expectations for rapid economic developmentassociated with it. In political terms, the major event since the introduction of Home Rule,was the withdrawal from the European Community (EC), which Greenland hadautomatically joined in 1973 when Denmark joined. The withdrawal was based on the clearconflict between the principle of self-determination on which the Home Rule system is based,and the fact that fisheries, the single most important element in the Greenland economy wascontrolled from Brussels (Harhoff 1983). The situation was compounded by suspicions ofextensive violations of quotas by EC fishers. Despite the official withdrawal, Greenland hasmaintained a relationship with the EC, under which Greenland fish products are almost fullyexempt from EC tariffs. Special agreements also allow EC fishers to fish in Greenlandwaters within limited quotas (Martens 1992).The most interesting aspect of the relationship between Greenland and the EC followsindirectly from the fact that public life and policy in Greenland relies heavily on theprocedures followed in Denmark. However, as Denmark becomes increasingly integratedinto the economic, monetary and political union of the EC (known as the Maastricht treaty),direct impacts on Greenland are inevitable. The most obvious problem will be theintroduction of a common EC currency, but many other impacts can arise from the gradualadaptation of Danish legislation to EC standards (especially in areas where Danish legislationapplies in Greenland) (Martens 1992).24An introduction to GreenlandHome Rule authorities and jurisdictionsThe Greenland Home Rule system consists of a legislature (“Landsting”) currently with 27members and these elect an executive or cabinet (“Landsstyre”), currently consisting of sevenmembers of the legislature. Elections for the legislature are held every four years. Theprincipal areas of Home Rule authority are: Fiscal policies of the Home Rule, organization ofHome Rule and local (municipal) government, direct and indirect taxes, the churches (i.e. theDanish state church, which is Lutheran-evangelical in orientation), fishing, hunting, agricultureand herding, land use planning, trade and competition, social welfare, health, labour market,education and culture, state enterprise, public utilities (electricity and water supply), housing,internal transportation, and environmental protection. The areas not transferred to Home Ruleinclude international relations (except a few areas where Greenland is directly affected),defense, monetary policy8, citizenship, constitutional affairs, criminal law, and laws ofpersons, family and inheritance, as well as contract law (Foigel 1980). Greenland is dividedinto 18 administrative districts, each of which is run by a district council and headed by aMayor. The district authorities are responsible for finance, social services, education andculture, housing and labour affairs.ECONOMIC DEVELOPMENT IN GREENLANDThe economic development of Greenland is closely related to its history. Here we takethe colonization in 1721 as our starting point. Three distinct phases are recognized: colonial subsistence economy, planned economic development after 1945, and the transfer toHome Rule in 1979. The time after this event is treated separately in the subsequent section.8 Greenland uses the Danish Krone as currency25An introduction to GreenlandSubsistence economy in the colonial periodThe traditional way of living in Greenland at the time Hans Egede arrived in 1721 wasbased on whale and seal and to a lesser extent on caribou and salmon. Intensive activity byEuropean whalers in the 17th and 18th centuries may have contributed to declining whalestocks. The Greenlandic culture, however, successfully adapted to this change by increasedspecialization in the seal hunt. During the colonial period depletion of whale stocks continued.From the arrival of Hans Egede in 1721, Greenlanders were employed in new occupations. The first figures shows that, in 1834, 13.8 % of the employed population hadnon-traditional occupations such as commercial fishing, construction, mining, and administration. Until the 1930s this figure varied between 12 and 19% but from 1945 the shareof people in non-traditional occupations jumped to almost 34% (table 2.2). This tablealso reveals the increasing importance of the fishery from 1911 onwards.TABLE 2.2. EMPLOYED POPULATION BY OCCUPATION, 1834-1945 (PERcENT)Year European occupation Hunting and sealing Fishing1834 13.8 86.21860 17.6 82.41890 12.1 87.91911 13.8 73.0 11.11921 18.2 66.5 15.11930 16.2 49.0 32.01945 33.9 41.6 20.1Source: Modified from Kjr Sørensen, 1983, pp. 15 and 40.The Greenlander’s production was, to the extent that it was not used by themselves,purchased by the Royal Greenland Trade Company (KGH) as it had been since the establishment of the monopoly in 1772. The Greenlanders used their income to buy a range ofconsumer goods and food, the latter item becoming increasingly important when the de—dine in the sealing in the first part of the 20th century reduced the traditional reliance onseals for almost all necessities of life (Kjr Sørensen 1983).26An introduction to GreenlandPlanned economic development 1950-1979After the second world war it was clear that a new system of management in Greenlandwas both expected and much needed. The Greenland people, represented in the two regional councils, was presented, in 1948, with one option: development of Greenland into amodern society (Kjr Sørensen 1983). The resulting policy, G50, which was implemented from the beginning of the 1950s, included a significant increase in the standard ofliving, which was to be achieved through private investment, mainly in the fishery sector.In addition, the Danish state invested heavily in infrastructure, housing and health care(Lyck 1986).The G50 policy was, however, flawed in several respects. While it resulted in major investments in housing and infrastructure, it used Danish labour for these projects- so asnot to draw Greenlanders away from the occupations on which they were to rely in the future. Thus there was little transfer of skills in the course of the G50 plan. Similarly, theeducational policy was based on general educational improvements, rather than the encouragement of an intellectual elite with academic or business-oriented training (Lyck 1986).Most critical to the G50 plan however, was the fact that while the state investments proceeded as planned during the 1950s, the hoped-for private investment in production didnot take place.As the failure of G50 became increasingly evident in the early 1960s a policy review led to a significant change of policy. The fishery was still the main commercial activity, but now the development of this business was financed and managed by the Danishstate. An accompanying measure, aimed at providing pools of labour at strategic locations for the fish processing plants, was a policy of concentration and settlement abandonment. At the same time significant saving in the supply of goods for these settlements wasused to justify the policy (Kjr Sørensen 1983). In terms of the benefits to the labour employed in the fishery, the wages were linked to both labour productivity and the worldmarket price for fish products (Lyck 1986). Despite many good intentions the plan was27An introduction to Greenlandadversely affected when, in the course of just a few years, the most important species, cod,almost disappeared from Greenlandic waters (Kjr Sørensen 1983).Transfer of responsibilities to the Home Rule systemAs noted, the transfer of responsibility for specific areas was based on the principle that thegrant accompanying the transfer should reflect the expenditure level under Danish statemanagement at the time of transfer. At the same time, however, the Home Rule Administration has no subsequent obligation to maintain expenditure in a specific area and can dispose of the grant at its own discretion9. The transfer of responsibility proceeded rapidlyafter 1979, and the final transfer took place in 1992, when health service came under HomeRule management. The effect on public spending resulting from the transfer is reflected infigure 3.1, which shows the current expenditures of the Home Rule Authority, the localcouncils and the Danish state since 1979.3000I2000C100001978 1980 1982 1984 1986 1988 1990 1992Year—D-— HRA• CouncilsU— StateFigure 2.5. Current public expenditures in Greenland, 1979-91. The largejump in spending in 1984 reflects the purchase of two new vessels for fisheriesinspection. (compiledfrom Grønland Arbog 1982-90).9 For example, if the HRA took over an area where annual expenditures were 100 million DKr, this sum wasadded to the net unrequited transfers while the HRA is free to use the funds as it wishes.28An introduction to GreenlandThe Greenlandic economy under Home Rule managementThe Greenlandic economy is small, open and highly dependent on two income-streams.One comes from the fishing industry, and the other from net unrequited transfers fromDenmark. In terms of per capita gross domestic product, it resembles a developed country, while by other measures the country is midway between a developing country and adeveloped country. These characteristics are brought out by the data in table 2.3., whichcompares Greenland to Chile, Zimbabwe and Denmark.The Greenland economy has grown in fits and starts since the introduction of HomeRule in 1979, as shown by table 2.4. The good years for growth were 1981 and 1986-88, withquite high increases in per capita gross national income (GNI). On the other hand, 1982,1984, 1989 and 1990 were dismal, with substantial reductions in income. Employment isstrongly seasonal, with the highest proportion being employed in the period June toSeptember. Furthermore it is clear that turnover on the labour market is high’°TABLE 2.3. COMPARATIVE DATA SHOWING INDICATORS OF THE STAGE OF DEVELOPMENT FOR GREENLAND AND THREE OTHER COUNTRIESGreenland Chile Zimbabwe DenmarkGDP per capita 1985 (Current US$a) 8,098 1,320 600 11,354Life expectancy at birth, males (Years) 58•8b 68.05 56.52 71.80cLife expectancy at birth, females (Years) 68•1b 56.72 60.13 77•60dInfant mortality in 1987 (age<1) per 1000 26.6 18.5 72.1 8.3Notes:a. Calculated using an exchange rate of 1 US$ = 10.115 DKr.b. 1986-90c. 1986-87d. 1985-90Sources: Figures and calculations based upon data taken from The Greenland Home Rule Treasury Department (1988) and United Nations (1988, 1990).10 The number of unemployed at the end of a month is generally much lower than the number of people whoexperience periods of unemployment during the month (Grønlands Arbog, 1990). If unemployment at the end ofeach month is taken as an indication of the of unemployment this indicates that people move in and out ofjobs rapidly.29An introduction to GreenlandTABLE 2.4. GNP AND GNI IN GREENLAND 1980-90 (CURRENT PRICES, 1,000 DKR)Year GNP Disposable GNIa GNP growth (%)b Disposable GNIper capita1980 2,683 4,395- 87.51981 3,104 4,826 8.2 94.61982 3,353 5,499 -5.3 106.41983 3,806 5,864 1.2 112.51984 3,929 6,303 -4.5 119.71985 4,375 6,708 1.8 126.21986 4,999 7,182 8.4 134.01987 5,875 8,117 14.3 150.01988 6,631 8,948 4.9 163.11989 7,072 9,283 -0.6 167.71990 6,732 9,149 -10.0 164.61991 6,568 9,181 -6.7 165.4a. Disposable GNI includes the net unrequited transfers from Denmarkb. Baseyear 1980Source: Grønland Statistiske Kontor, 1991 and Grønland yearbook 1992/93.Inflation has been moderate since Home Rule was introduced, on average 7.4% annually. However, in the first part of the 1980s the inflation rate was 14.7%, declining laterto a record iow of 2.9% in 1986-87 (Grønland Arbog, 1990).Home Rule AdministrationThe Home Rule Administration is the major public organization in Greenland. In addition to its own administrative activities, the major areas (as measured by current spending)are education (post primary level), social services, transport, housing, and the three HomeRule owned enterprises Greenland Trade/KNI, Nuna-Tek, and Royal Greenland.Greenland Trade/KNI which consists of three subsidiaries responsible for retailing intowns, supply of settlements, postal services and shipping. Nuna-tek is in charge of publicutilities including electricity, telecommunications, energy supply, and also some construction and shipyards), while Royal Greenland has production and trade in fish products.In addition the Home Rule Administration transfers large sums to the local councils. Theallocation of current spending to the various areas is shown for the past 6 years in table 2.5.The significant increase in spending over the period reflects both the transfer of health careand a change in accounting procedure in 1992.30An introduction to GreenlandTABLE 2.5. CURRENT EXPENDITURES OF THE GREENLAND HOME RULEAuTHORITY, 1988-93 (DKR MILLIONS)Year 1988 1989 1990 1991 1992 19931Administration 209 230 257 264 265 273Education & culture 392 422 433 441 482 493Social services2 313 136 151 155 158 204Transfers to councils 477 722 793 851 879 946Internal air transport 43 47 52 90 112 141Home Rule enterprises 402 152 256 164 137 251Subsidies to businesses 130 226 289 265 243 350Housing- 9 -41 -50 -40 -80Health care- --- 539 514Net interest payments-- 54 67 16 14Other expenses 55 227 27 67 52 75Total current expenses 2021 2221 2271 2314 2843 318111993 budget2 The decline reflects that councils have taken over some social services, hence the increase in transfers.Source: Annual reports from the Advisory Committee on Greenland’s Economy, 1989-93.Parts of the Home Rule Administration itself and the enterprises directly ownedby the Home Rule Administration are characterized by relatively large investment programs. The major areas are housing, Royal Greenland production facilities and Nuna—tek.For the latter, large investments are currently being made in a hydro-electric generatingfacility in the vicinity of Nuuk (Buksefjorden). The distribution of investment expenditure in the years 1979-84 and 1987-9 1 are shown in figures 2.6. and 2.7.The data used in these figures are, however, ambiguous. They do not use the samegrouping of expenditures, and the data had to be split into two overall groups. The changein grouping reflects the transition to Home Rule management of important parts of theeconomy in 1985-86 which led to a change in accounting procedures. Furthermore, the investments quoted are measured in current terms, and an examination of the index for current and capital expenditure by the Home Rule shows that in 1990, current expenses wereabout 10% above their 1981 level, while investments were 14% below, having declinedsharply from an index of 119 in 1989 to 86 in 1990 (Grønland Arbog p. 72, 1990).31An introduction to GreenlandFigure 2. 6 Public investments in Greenland, 1979-84 (modif1edfrom Lyck (1986),table 62).Municipal councilsThe municipal councils in Greenland are primarily responsible for the system of primaryschools, a major part of the social service system and for roads, refuse collection, firebrigades, etc. While the councils are major landlords in their own right, they are also responsible for the administration of housing owned by the Home Rule Authority. The major areas of public investment by the local councils is also housing. The activitiesundertaken by the councils are partly financed through grants from the Home RuleAdministration, usually earmarked for specific purposes. In addition, the councils havethe power to raise funds through income taxes.State jurisdictionsThe areas retained by Denmark under the Home Rule Act of 1978 include defense, judicial affairs and the legal system, and some activities related to weather forecasting andshipping services. Furthermore, the monetary policy is under Danish control. Until 1992,the health service was also under Danish management and is included in the budget forDanish state expenditure in Greenland. Apart from the net unrequited transfers, health was,with 20% of current expenditures, the largest single area of spending in 1991. For defense,1:10• OtherQ CommunicationRoads/utilitiesHousingPublic Inst.• Business1979 1980 1981 1982 1983 198432An introduction to Greenlandthe major area of expenditure is fisheries inspection (which received 80% of investmentexpenditures in 1991, for new inspection vessels and helicopters). A special case is exhaustible resources, which are subject to a special joint management system (see chapter 6&7).Figure 2.7. Investment expenditures by the Greenland Home Rule Authority 1987-91(compiledfrom Newsletters from the Home Rule Directorate ofEconomy).Production and tradePrimary production in Greenland relies, especially after the closure of the Black Angellead-zinc mine at Maarmorilik in 1990, almost exclusively, on fisheries. In 1988 primaryproduction accounted for 21% of national income (including mining, 5.3%). The primary sector employed 10.2% of the workforce in 1987. Manufacturing (i.e. processing offish) accounted for only 2.8% of income and 9.4% of employment. The secondary sectoras a whole generated 23% of income and employed 22.5% of the workforce. The tertiarysector accounted for 58% of income and employed 65% of the workforce. Almost half ofthe income generated in the tertiary sector (27%) originated in the public sector or bycompanies wholly owned by the Home Rule Administration, a far higher share than, forexample, Denmark, Norway or Sweden. To complete the description it should be notedthat 5-10% of the population relies on subsistence hunting and fishing, having only limitedcontact with the monetized sector (Poole 1990).200001000Q CouncilsState• OtherQ Supply&transport0 EducationO Nuna-tekTrade&industry• Administration01987 1988 1989 1990 199133An introduction to GreenlandThe major primary industry, fishing, has been beset by problems. Prior to themid-1980s, the dominant catch was cod, but this fishery collapsed for reasons believed tobe related to climatic and oceanographic changes and possibly overfishing. Instead, increasing emphasis has been placed on the shrimp fishery. This, however, is also havingproblems, mainly because a significant over-capacity in the shrimp fleet has meant thateach vessel will maximize the value of limited quotas by discarding smaller size shrimpswhich are less valuable (Poole 1992). The problem has been recognized by the Home RuleAdministration, and policy has been adjusted to encourage the retirement of older and lessefficient vessels. The problem of discarding has not yet been solved (Poole, 1992).In the secondary sector, construction is by far the most important industry,accounting for 17% of national income in 1988 and 8% of employment (half of whichwere born outside Greenland) (Grønland Arbog, 1990). Given the extensive involvement ofthe Home Rule Administration in housing, infrastructure and industry, and the housingpolicies of the local councils, it is clear that the industry is very sensitive to changes inpublic investment policy.The main export commodity is fishing products. Before 1991, minerals also contributed significantly to exports but this ended with the closure of the Black Angel mine atMaarmorilik in 1990. Table 2.7. shows exports (by main categories) and total imports aswell as the visible balance of trade for the period 1984-92. The table is based on officialstatistics and does not take re-export or re-import into account. Estimates by Lyck (1986)for the period 1979-84 indicate that actual data for export and import should be reducedby 5-10%.The dramatic improvement in the balance of trade from 1987 to 1990 reflects thevery tight economic policies pursued by the Home Rule Administration in recent years.From 1991 the visible trade balance has deteriorated severely, for two reasons. One is thatthe end of mining, but the decline in fish exports is also strong.34An introduction to GreenlandTABLE 2.6. EXPORTs, IMPORTS AND GREENLAND’s VISIBLE TRADE BALANCE1984 1985 1986 1987 1988 1989 1990 1991 1992ExportsFish products 1064 1431 1706 1973 2067 2381 2331 2075 1900Mineral concentrates 495 332 281 286 472 565 363 0 0Other 192 79 91 110 92 110 100 104 107Total exports 1751 1842 2078 2369 2631 3056 2795 2179 2008Imports 2836 3140 2912 3471 3495 2915 2756 2609 2737Visible balance of trade -1085 -1298 -850 -1101 -864 141 39 -430 -729Source: Grønland Arbog, 1986 and 1990; Advisory committee on Greenland’s economy, 1993.CONCLUDING REMARKS - ECONOMIC PERFORMANCE AND STRUCTURAL PROBLEMSThe years 1984-85 roughly marks the time when the economic decisions by the HomeRule Authority began to influence the economy. In the years to 1987, fiscal policy wasvery expansionary, as witnessed by the large increase in the budget deficit of the HomeRule Authority, from being close to balancing in 1983 to a deficit of 497 million DKr in1987. Whilst this may not sound like a large sum, it was, at around 10% of GDP, largeby most standards (Westerlund 1988). 1987 also became a turning point for the economicpolicy of the Home Rule Authority. Severe cash-flow problems and a large need to borrow brought about much tighter fiscal policies, and the short-term result is reflected in thebudget improvement of more than 500 million DKr from 1987 to 1988 (Directorate of1988). The improvement continued in 1989, when a surplus of 265 million DKr was reported. In 1990 and 1991, budgets were close to balanced (Directorate of 1992), while in1992 and 1993 surpluses of 16 and 151 million DKr, respectively, were expected (Detrâdgivende udvalg vedrørende Grønland økonomi 1993).The economic tightening imposed in Greenland reflects a temporary improvementand is only a partial solution to the economic problems facing the country. These includethe large public debt and the oversized public sector, a range of structural problems in theeconomy and a primary and manufacturing sector that is heavily dependent on a narrow resource base.The fact that the Home Rule Authority debt has been rising in recent years has beenemphasized by Westerlund (1988) as one of the major constraints on the economic policy35An introduction to Greenlandof the Home Rule Authority. First of all, the debt reflects the accumulated deficits of theHome Rule Authority, beginning in 1984. However, the actual debt is larger since theHome Rule Authority has been an active lender for housing and commercial purposes.Though officially loans these are often more in the nature of subsidies and should be reflected in the budget (Westerlund 1988), as will be the case for future budgets (Directorateof Economy, 1991). The budgetary improvements in the period since 1987 has stoppedthe debt accumulation, but has not reduced it much. To achieve this, the Home Rule budget needs to have a significant surplus (around 1,5 % of national income) for upwards of 10years (Westerlund 1988). For 1989, the surplus was a good start but in subsequent yearsslightly less headway has been made with debt reduction. A further problem in relation tothe debt problem is related to the combined effects of an absent domestic capital marketin Greenland and the currency union with Denmark. This union implies that the two countries have the same currency, and that monetary policies are determined by the DanishCentral Bank. Borrowing under these circumstances does not result in either higher interestrates or in exchange rate adjustments as would normally be the case. Thus, the “normal”constraints on government borrowing in the form of rising costs are absent and the debt ismore free to grow (Westerlund 1988). A final problem is that debt reduction depends onthe rate at which the economy grows. Given the large contraction in the economy shown intable 2.4. it is clear that debt reduction is likely to be slow and tortuous.A second set of problems that have affected the economy are of a structural nature.First and most obvious is the recurrent need to import labour from outside Greenland,mostly from Denmark (Lyck, 1991). This need is closely related to the inadequate education and training which characterize the Greenlandic labour market. The cost to Greenland results both from underemployment of the resident labour force and the high cost ofimporting labour.As noted above, administration takes up many resources (accounting for 26% of national income) and needs to be reduced (Lyck 1991). Much of the problem originates in36An introduction to Greenlandthe transfer of power to Greenland and the use of Danish civil servants. The result has beenthe uncritical adoption of many Danish administrative traditions at a very high cost(Westerlund 1988). However, even if less ambitious organizational structures were to beadopted, this would be difficult due to the general lack of appropriately educatedGreenlanders.A third structural problem is the settlement pattern in Greenland. The significantnumber of smaller settlements in Greenland dates back to a time when a large part of thepopulation was employed in either subsistence hunting and fishing or in limited inshorefishery. The development of off-shore fisheries and the use of larger processing plants requires a larger pool of labour in towns with production facilities. This was recognized inthe Danish G60 policy, which sought to concentrate the population in the larger towns. Themost dramatic example was the forced abandonment of the Qutdligsat coal-mining townin 1972, where 2,000 people were relocated (5% of the entire Greenland born population),an event which caused much resentment towards Denmark and contributed to the demandfor Home Rule (Lyck 1986), even if the mine was known to have been highly inefficient formany years. Maintaining many smaller settlements is, however, very costly and causes significant inefficiencies. The reason for this is partly the way it is done. Rather than givingthe settlements a direct subsidy, goods and services are provided at the same price all overGreenland. Given the long distances and extreme conditions, the costs are not reflected inthe prices charged. The indirect subsidies help preserve an inefficient situation where economic reality dictates more concentration of the population in the towns. Unfortunately,the fact that housing in the towns are in very short supply indicates that the present settlement pattern cannot be dismantled rapidly. Similarly, a large influx of people to thetowns could exacerbate the already precarious social situation in Greenlandic towns.A fourth structural problem is also related to the settlement/town structure. Inmany of the smaller towns transport cost (though heavily subsidized) and the limited sizeof the market essentially prevents competition in some lines of business. There are oppor37An introduction to Greenlandtunities for monopoly behaviour and collusion can easily occur. In the construction sector(where much housing construction is undertaken by the local councils), inefficiencies arefurther compounded by the subsidies provided by the Home Rule Authority (Martinsen1992), which remove much of the incentive for the councils to be cost conscious.38Mineral development models3MINE1L DEVELOPMENT MODELSMineral development commonly refers to the economic development associated with thediscovery, development and operation of mineral projects. For a country possessing mineraldeposits of sufficient quality and size the two main issues related to exploitation of these arethe direct and indirect economic effects of exploitation, and the timing and speed with whichexploitation occurs. The present chapter first examines the economic implications of mineralexploitation and development based upon it. Second, the issue of sustainability of mineralpolicies is taken up in relation to the timing and pace of exploitation.MINERAL DEVELOPMENT MODELSTraditionally, mineral commodities have been exported from less developed countries inraw form, usually as mineral concentrates or crude petroleum. However, over the past 30years or so, there has been a slow increase in the share of mineral production processed indeveloping countries (Johnson and Pintz 1985), although it is difficult to determine whetherthis has been the result of a greater share of mineral production being located in these coun39Mineral development modelstries, of developing country (LCD) government policies, or if the countries in question possessome comparative advantage in mineral processing.The trend towards more domestic processing can be analyzed from different perspectives, depending on what mechanisms are thought to be at work. The literature in thisarea suggests that the two major approaches are related to either “resource based industrialization”, or development based on investment of mineral revenues (not necessarily in themineral sector). There are, however, additional problems related to the production andexport of natural resources. First is the fact that the growth of a resource sector can have strongadverse effects on a country’s economy as a whole, either through the effects of the “DutchDisease”, as defined below or because increased mineral exports will make countries moredependent on the mining sector. The following sections also examine these issues.Mineral based industrializationA policy promoting the processing of primary commodities in their country of origin can include elements of one or more of the following strategies: industrialization, trade integration,and economic-environmental strategy, as noted by Johnson and Pintz (1985).The industrialization strategy seeks to make use of the comparative advantages of having the primary commodity available in the country. These advantages are transport cost savings, availability of subsidized capital, and low cost energy, as well as cheap labour. In addition to the direct effect of processing the mineral products, this strategy is expected to resultin linkage effects whereby the processing of minerals leads to derived demand for goods andservices, as well as the use of the processed minerals as inputs in downstream manufacturing.A trade integration strategy is motivated by the belief that the markets for many ofthe primary commodities commonly exported by developing countries are monopolistic oroligopolistic (e.g. copper concentrate and bauxite) and by the desire to retain economic rentfrom minerals in the country which might otherwise be transferred (using transfer pricingmechanisms) to countries with more favourable tax regimes.40Mineral development modelsThe third strategy noted by Johnson and Pintz (1985) involves a “pollution advantage”in the sense that the environment in a developing country may have a larger capacity to absorbpollution, as a result of lower degrees of industrialization. Such countries may also be morewilling to tolerate environmental degradation, given the potential economic benefits of doingso.Despite the emphasis placed on mineral based development, there are, however, several strongreservations about the usefulness of such strategies, regardless of their good intentions. Immediate concerns include higher capital costs of projects in developing countries (canceling outthe supposed availability of subsidized capital), significant technological risks, and difficulties in raising the required capital (Johnson and Pintz 1985). The value of these strategies isdetermined by economic mechanisms, and the assumptions on which the strategies are based.The first assumption is the idea that processing primary commodities, which are otherwiseexported, implies value added to the export goods and further, that this is beneficial to thecountry. Although this may be the case, the benefit may be smaller than expected or absent.The underlying assumption for promoting processing in the country of origin is that there maybe a comparative advantage in doing so. The presence of this advantage depends on a range ofcircumstances such as factor intensity, costs, transport costs, price of complementary inputs,availability of economies of scale, the existence of external economies, and on processes oftechnological change (Roemer 1979).In terms of factor intensity, most resource processing industries have high capital tolabour ratios (as do the mines), indicating that developing countries with cheap and abundantlabour have no competitive advantage (Balassa 1977). Only at the manufacturing stage doeslabour become an important input, and give advantage to developing countries (Roemer1979). The perceived comparative advantage may also be the result of the reduction intransportation cost, as a result of weight reductions during processing of concentrate to metal.41Mineral development modelsSome savings may be possible on this account (Radetzki 1977), but on the other hand, thismay be lost again when the higher cost of handling non-bulk material (e.g. metal bars oringots) is taken into account. A typical example is the processing of bauxite ore intoaluminium metal. Both the bauxite and the intermediate product alumina are bulk materialsand easy to handle in large volumes. Once the alumina is smelted into aluminium metalingots handling is more complicated. Thus, despite the 50% weight reduction at both stagesof the process (bauxite to alumina and alumina to aluminium metal), this is generally far lessimportant for the selection of processing location, than is the availability of cheap electricity(Peck 1988; Nappi 1992).In some cases, transportation cost puts developing countries at a comparative disadvantage. It is, for example, much less expensive to transport elemental sulfur than the end-product for which it is intended, sulfuric acid. Similar disadvantages are found in iron oreand steel, where the transport of large items of steel is much more expensive than movingsemi-processed iron ore pellets. In both cases, a large part of the processing andmanufacturing will take place close to the end use market. The competitive position ofdeveloping countries is also influenced by the availability of complementary inputs. Asnoted above, in the smelting of alumina to aluminium, energy is the essential input and thelocation of aluminium smelters is primarily determined by the availability of low costelectricity.Further determinants of the competitive position of a [developing] country are the existence of scale economies and external economies in many resource processing industries, andprocesses of technological innovation (Roemer 1979). Scale economies may be difficult toachieve in developing countries for the simple reason that these countries are seldom able tosupply inputs (i.e. mineral concentrates) sufficient to feed an optimally scaled processingplant. This problem may be compounded by difficulties in marketing output from large facilities, in markets characterized by strong vertical integration (e.g. the aluminium and petrochemicals markets). External economies, associated with the existence of markets for addi42Mineral development modelstional outputs from processing, are also unlikely to be present in many developing country settings.Resource based industrialization is often put forward as a means to increase employment in the primary resource producing country. Given the low labour content of most resource extraction and processing, this effect must come through the linkages of the primarysector to other sectors, but even here the prospects for employment are limited (Roemer1979). Substitution of labour for capital may occur as a result of political pressure onresource companies. Even if resource industries have iow labour intensities they maynevertheless have significant effects on the rest of the economy. This is because the resourceindustry is prepared to pay higher than average wages in order to get the best and mostproductive workers. In turn this may lead to the classical migration-unemployment situation(Harris and Todaro 1970), where labour will migrate to areas with high unemployment.In conclusion to the above discussion it is interesting to examine the results obtained fromcost comparisons between developing country and US producers of aluminium (Adams andDuroc-Danner 1987). By comparing production costs for a wide range of products in both themember countries of the OECD (Organization for Economic Cooperation and Development)and the developing countries it was shown that, on a simple exchange-rate comparison, developing countries have a significant comparative advantage over US producers, with nominaloperating costs which are 72% of those in the US. However, by comparing relative costs,both on US and LDC cost basis, it is demonstrated that in fact US producers have asignificant advantage. This indicates that the main reason for the shift in processing ofbauxite to aluminium has been the result of exchange-rate effects.A mineral industry may also produce a number of linkages to other sectors of theeconomy (Hirschman 1958), either forward or backward. Backward linkages involve theproduction of inputs used in the mineral industry, ranging from the food and housing consumed by workers, to plant and equipment for the mine and mineral industry. Forward43Mineral development modelslinkages implies that the output from the mineral industry is used for downstream manufacturing and fabrication. Both types of linkages are potentially important (Radetzki 1982),but their emergence depends on the comparative advantage of the activity in question (whichmay be artificially created through government policy). The fact that a mineral industry aswell as linked industries may create unwanted effects in the economy as a whole is discussedfurther below.There is a third type of linkage which is related to the infrastructure commonly established in connection with mineral projects (roads, railways, power and water supplies, schoolsetc.). It is seldom possible to exclude others from using such facilities, which thus create apositive externality.The preceding discussion indicates that industrialization could be based upon linkages. It is, however, difficult to find unequivocal examples of this taking place. Furthermore, there is considerable consensus, that such linkage effects tend to be rather weak (Bossonand Varon 1977; Emerson 1982; Gillis 1978). This follows from the “enclave nature ofmineral projects due to their often remote location, their capital intensity and technicalcomplexity (Emerson, 1982, p. 563). Mineral projects are bound by the location of mineraldeposits, often far away from established centers. Most less developed countries have littleor nothing in the way of capital markets and cannot supply the capital necessary for mostmineral projects. Similarly, since marketing opportunities are mostly in industrializedcountries, aai. because the degree of tariff protection tends to increase with the degree ofprocessing, there is little opportunity for forward linkages.The second strategy for processing primary commodities in the country of origin was called“trade integration” by Johnson and Pintz (1985). It is based on the assumption that international mining companies are monopsonists (i.e. they act as one buyer), and that they tend toremove mineral rents from the mineral producing countries in order to avoid taxation.44Mineral development modelsWhilst this may be a valid strategy, its usefulness is qualified by the nature of the assumptionsabout the market for mineral concentrates and metals.First, the market structures for primary and derived products may be oligopolistic,and may resist the entry of new suppliers. A new supplier on the market must, (i) be able toobtain sufficient investment funds in order to achieve the same scale economies as competitors; (ii) find and master the required technologies by purchasing the required equipmentand employing technical manpower; (iii) find ways to market the product and find buyers (ortempt them away from the competing suppliers) if he is to survive (Roemer 1979).Second, the market structure in ocean shipping means that monopolistic shippingconferences (cartels) may discriminate against exporters, either because their demand isrelatively inelastic (i.e. they need the shipping if they are to sell their minerals or processedmetal), or because shipping firms attempt to obtain a share of the savings associated withweight reduction and lower material loss in bulk shipping.Third, processed goods may be subjected to increasing tariffs as the degree of processing increases. These qualifications of the applicability of the “trade integration” strategyare partly offset by the argument that forward integration into manufacturing can be a way toachieve more stable prices and sales volume (Smith and Wells 1975).The fourth qualification to the trade integration motive for resource based industrialization concerns import substitution. Import substitution may be a way of avoiding the otherproblems noted above, and international resource firms may indeed be quite interested inproducing behind high tariff walls. The problem is, however, that unless the domestic marketis very large (or economic integration between nation takes place), such production will beinefficient and cause welfare losses (Roemer 1979).That a country has a measure of comparative advantage as a result of weak or non-existentenvironmental regulation is advanced, by Johnson and Pintz (1985), as an argument for placingmineral industries, including processing facilities, in developing countries. Different45Mineral development modelsenvironmental standards may be the source of cost structure variations which give rise to comparative advantage (Nappi 1989). The corollary to this argument is that developingcountries, being less heavily industrialized, posses a greater natural assimilative capacity(Johnson and Pintz 1985) and can therefore safely adopt less stringent environmental regulation. ‘Whether governments in developing countries base policies on such an “advantage” is difficult to determine, but the emphasis industrialists in developed countries place on loss ofcompetitiveness as a result of environmental regulation suggests that the issue is widelyknown.Economic rent and mineral based developmentThe second major issue in minerals based development emphasizes the capture and use ofmineral rents. In contrast to the previously outlined strategies, where the direct effects of themineral industry were emphasized (i.e. mainly through employment of local factors of production and through linkages), the rent approach is based on analysis of four issues ofeconomic policy, which, among others, determine whether countries have successfully achievedstructural transformation (a significant decline in the primary sector share of employment,GDP and exports) or not (Lewis 1989).The first issue is the question of how the host country can capture some of the economic rent from mineral production that would otherwise accrue to mining firms. Second isthe question of how the rents, once they have been captured, are used, for investment or for consumption. Investment can be either in the same (primary) sector, in other sectors as part of adiversification policy, or in financial assets. Consumption, on the other hand, implies that therevenues from the rent capture effort are expended on current public or private consumption.The third issue concerns the linkages already mentioned above, but now in the sense of linkages resulting from the various possible uses of the rents. The fourth and final issue is that ofstability. The size of revenues from rent capture will vary with the price of commodities,46Mineral development modelsand are thus likely to be very variable over time, creating a need for specific revenuemanagement policies as well as for more general stabilization policy (Lewis 1989).Before proceeding with an examination of these issues, it is instructive briefly to notethe origins of mineral rents. This aspect will be discussed further in chapter 4, which dealswith rent capture policies. Rents from minerals are commonly defined as the difference between gross sales revenue and total costs of production and marketing, including financialcharges related to capital costs (i.e. including debt service and a “normal” return on equity).For a given mine the size of the mineral rents thus depends on the quality of the ore mined andon minimization of production costs. The flow of mineral rents, from the original source tothe final consumption, is indicated in figure 3.1. The division used in the figure indicatesthat part of the economic rent is not captured by the host country government, but is retainedby mining firms as a compensation for their willingness to carry risk. This share needs to beof a certain size, as it is that which drives investment in mineral exploration and extraction.For the purpose of the present discussion it is assumed that the host country is able to extractan optimal amount of rent. ‘When considering revenues from taxation of mineral rents it mustbe kept in mind that the nature of mineral deposits means that the time profile of revenues islikely to consist of a period after production begins with no revenues (this is when capitalinvestment is recovered), followed by a period with a relatively constant flow of revenues(depending on commodity prices and the structure of the tax regime). This lasts until themine is exhausted, although sometimes it declines as lower grade ores are mined towards theend of the life of a mine.The key questions in relation to development based on mineral rents are first the management of rents accruing to the host country and, second the linkages associated with theinvestment or consumption of the mineral rents (Lewis 1989).The theoretical problem of choosing between asset acquisition and current consumption is oneof comparing the net present value of future streams of income (if assets are acquired) to47Mineral development modelscurrent consumption. Spending will be allocated according to valuations of consumptiontoday and consumption tomorrow, evaluated at the appropriate discount rate. In manydeveloping countries the pressures on government to consume rather than invest are very strongand, combined with the apparent disregard for the economic return on projects, this indicatesvery high interest rates on the consumption side (people need a very large return before theyinvest), while they are very low on the investment side (Lewis 1989).Most of the consumption possibilities noted in figure 3.1. have negative impacts onthe mineral producing country and these will be discussed in the next section. On the investment side, however, the survey by Lewis (1989) indicates that the most important elements in successful development in mineral-exporting countries are investment in infrastructure, human capital and research. Investments which promote productivity growth anddiversification seem particularly important, even if the latter process takes place in theprimary sector. Furthermore, revenues used to mildly encourage and moderately protectFigure 3.1. The generation andflow ofmineral rent.48Mineral development modelsdomestic production (especially if the protection does not emphasize quantitative importrestrictions) is distinguished by Lewis as elements in successful development. The need formoderation in the protection provided (i.e. tariffs and/or subsidies to domestic production)follows from the requirement that the protected industry becomes competitive on its own.Too much assistance will not encourage efficient production.The option to invest in financial assets, either at home or abroad is not often considered by governments. In some ways, however, it would not be inappropriate to place at leastpart of the revenues from non-renewable resource use in a diversified portfolio of low-risk financial assets. This could serve several purposes, the first to spread over time the introductionof rents into the economy, thus reducing the problems rapid consumption (or investment) ofrents might have. Second, the income from a pool of financial assets may help secure futuregenerations a share of the benefits of a natural resource endowment. Third, investment inassets may prevent individuals or groups from appropriating part of the rents for themselvesthrough rent-seeking activities. Unfortunately, governments have only rarely been able toaccumulate financial assets for later use. The few examples include Indonesia (Harberger1984), the province of Alberta and the state of Alaska (Robinson and others 1989). Thispossibility is considered in chapter 9.Mining sector impacts and the Dutch disease‘When a mineral-rich country develops its mineral resources this will invariably have an impacton the economy of that country as a whole. Mineral production implies exports, an inflow ofinvestments and an outflow of profits, new patterns of labour use and changes in wage and income structure as well as in government structure. All these changes mean that the economyhas to adjust in a range of different ways. Lewis (1989) has distinguished seven key featuresthat characterize these changes, shown in table 3.2.49Mineral development modelsTABLE 3.1. MINING SECTOR GROWTH IMPACTS1. Higher GNP per capita2. Higher share of government revenue in GDP3. Higher wages in the modern sector compared to average GDP per capita4. Reduced incentive to invest in non-mining activities5. Foreign factors of production have a higher share of income relative to GDP6. More unequal income distribution7. More migration from rural to urban areasSource: Lewis (1989)The effects of economic booms have been the object of considerable interest in thepast 20 years, beginning with the observations of “boom” characteristics in the Australianeconomy in the 1960’s (Gregory 1976). Since then a range of models have appeared whichexamine various aspects of “booms”, many of which are related to natural resource production(Corden 1984; Corden and Neary 1982; Snape 1977). These studies all deal with theimpact of booms that are caused in one of the following ways (Corden 1984):1. An improvement in the productive technology of the sector which only occurs once andis confined to the country in question. This results in a favourable shift in the productionfunction.2. A large discovery of new resources in the country.3. An exogenous rise in the price of the export good produced by the “booming” sector,none of the goods being consumed within the country.The boom in the mining or resource sector has several effects. The main group ofthese has been called “Dutch Disease” after an article in The Economist newspaper (November26th, 1977) which described some of these effects as they occurred in the Netherlands.Additional effects are described by Lewis (1989), and many cases have been examined whichdemonstrate the occurrences of Dutch Disease in mining and other non-renewable resourcecontexts (Gelb and associates 1988; Neary and van Wijnbergen 1986; Norton 1988). Thebasic model of the impact of a booming sector described by Corden and Neary (1982)involves three sectors in the economy, the booming mineral exporting sector, a “lagging”manufacturing sector, which produces tradable goods, and a sector which produces goods50Mineral development modelsmanufacturing sector, which produces tradable goods, and a sector which produces goodswhich are consumed domestically (i.e. non-tradable goods). Each sector uses two factors ofproduction, one common to all of them (labour), and the other specific to each sector.A boom in the mineral sector caused in one of the ways mentioned above will initially raise the factor incomes in this sector. This extra income can be spent thus giving riseto a spending efftct of the boom. This effect works through higher demand for non-tradedgoods, and this in turn pushes up prices in the non-traded sector relative to the tradable goodssector (from po to p in figure 3.2.a). This means that resources will be drawn from the twoexporting sectors into the non-traded sector.At the same time the mineral sector boom means that there are gains to be made inthis sector (i.e. due to the higher factor incomes relative to the other two sectors), which drawsthe mobile factor (labour) out of the manufacturing and non-traded sectors. This is theresource movement effect. With respect to the manufacturing sector this means that productiondeclines, without the non-traded sector being involved, resulting in direct de-industrialization.Labour, however, is also drawn from the non-traded sector resulting in a lower production ofnon-traded goods, thus shifting the supply curve upwards (from S0 to S1 in figure 3.2.b), andresulting in a restriction of output (from q3 to q2 in figure 3.2.b). This effect is calledindirect de-industrialization. These are the elements in the Dutch Disease model, but in thisframework a range of other factors can be introduced as assumptions are relaxed. If capital ismobile between the manufacturing and non-traded sectors in addition to labour, then capitalcan move to the sector where it can earn the highest return.In the model, the capital intensive sector may be manufacturing, and in response to theresource movement (of labour out of both manufacturing and non-tradables) capital will flowto the capital intensive sector, causing it to expand. However, the spending effect will, at thesame time, cause both capital and labour to move to the non-traded sector (Corden andNeary 1982). Conversely, if capital is mobile internationally within each sector (but not51Mineral development modelsbetween sectors), capital will flow from manufacturing to mineral and non-traded sectors,resulting in greater dc-industrialization, while at the same time returns to capital in manufacFigure 3.2. (a) The spending effict. N’L is the price ofnon-traded goods measured in terms oftradable goods. (b) The effrct of resource movement on the output and prices of the non-tradablesector.turing are maintained. Additional effects are related first to migration, which is induced byhigher real wages in the booming sector, and which leads to at least a partial off-set of deindustrialization. Second, where the manufacturing sector produces both exports, and import-substitutes, there may be effects on world markets of mineral exports and at the same timedc-industrialization as a result of resource movement effects (Corden 1984). Furthermore, ifthe economy is constrained by wage resistance a mineral boom may have employment effects.A rigid wage structure will cause employment to rise in the mineral sector as a result of aboom (instead of the real wage increasing) and, vice versa, in the case of a contracting sectorwage rigidity would lead to unemployment. The extent of these effects depend on the natureof the workforce in individual sectors. A typical example of these effects would be resourcemovement away from a manufacturing sector combined with wage rigidity. The factormovement leads to unemployment in the sector, and this effect can be exacerbated if workers4Dp3p2q0 q1 Production ofnon-tradeables(a)q2 q3 Production ofnon-tradeables(b)52Mineral development modelsin the manufacturing sector attempts to keep up with the wages in the booming sector(Nankani 1979). In the non-tradable sector on the other hand, wage resistance combined withinitial unemployment will lead to increased employment as demand for non-tradable goodsrises in response to a boom.In the models described above, three elements noted by Lewis (1984, 1989) were not included. The first is related to the effect of excess liquidity in the economy, as a result of themineral export generated balance of payment surplus. This excess liquidity will be evengreater when the effects of fractional reserve banking on credit is also considered, so that themoney and credit levels will increase more rapidly than GDP. Unless government and thecentral bank takes corrective action, inflation will be the result, as evidence from the MiddleEast petroleum exporters indicate (Morgan 1979).Second, government revenues will increase, and with them government spending. Thisgrowth, however, is not accompanied by a corresponding increase in non-mineral revenues, andas mineral revenues level off and eventually disappear, government expenditures will have tobe reduced (which is always a painful process). This growth in spending, with many newprojects being undertaken, will also be likely to lead to carelessness in project appraisal,reduction of audit control, and a deterioration of management procedures, all factorscontributing to wasteful spending.Third, the expansion in spending on projects (mineral and others) causes the immigration and flows of international capital noted in the discussion of the Dutch Disease above.This has both economic and political implications. The immigration takes the form ofimport of services (and even more foreigners to monitor the first ones when the governmentcan no longer do this job itself). Furthermore, the presence of foreigners in sufficient quantities can have dc-stabilizing political effects. It is, however, in relation to the accounting ofcosts and benefits of a project, that these immigrants are most important economically.Whereas profits paid abroad are excluded from the calculation of project benefits, this is not53Mineral development modelsthe case for wages, salaries and benefits paid to foreigners resident in the mineral producingcountry (Lewis 1989).The existence of large mineral rents, and particularly if government succeeds inappropriating a large share of these, can create another range of problems. They can be described as “rent-seeking”1,and may occur when large unappropriated rents, for exampleoriginating from mineral production, accrue to a government or state. Different groups willtry to obtain a share in the rent by arguing that they have a special need for transfer payments.The State of Alaska is a good example of how rents are used in ways which indicate theinfluence of rent-seeking activities (Anders 1988). Despite the creation of the AlaskaPermanent Fund (which is described in chapter 9), very large revenues from oil productionhave accrued to the State of Alaska since the early 1970’s. Some of these have been expendedon creating public goods in rural areas, and on creating artificial economies whereentrepreneurship was insufficient. Considerable control over these efforts lies with the nativecorporations created as part of the Alaska Native Claims Settlement Act of 1971. However,these corporations have been unable to operate profitably, but have managed to appropriatesignificant funds for native oriented programs at the expense of coordination with stateagencies.Two additional long term effects should also be noted here. Initially, the consequences of amineral boom on the manufacturing sector will be de-industrialization, which causes thesector to decline. In the process, however, accumulated human capital (i.e. learning by doingor know-how) can be lost, leading to long-term problems, when the boom ends or peters out(van Wijnbergen 1984).11 Rent-seeking is defined as “any activity that attempts to improve a person or group’s well-being by escapingthe forces of competition in the marketplace” (Colander 1984). Rent-seekers, who invest resources in efforts tohave transferred to them through political processes, cause an overall loss of welfare because the effort expendedin obtaining a larger share in rents is not productive.54Mineral development modelsThe second long-term problem of mineral booms is related to the effects of heavy external borrowing (Mansoorian 1991). This borrowing occurs in response to a mineraldiscovery, but when the time for repayment arrives it becomes necessary to introduce austeritymeasures. Thus, after a sharp increase in aggregate expenditure based on the expected gainsfrom the resource discovery, there is a gradual return to a lower equilibrium level of expenditure. This lower level of aggregate expenditure also involves the non-traded sector, but thefactors of production thus released can then flow into the manufacturing sector and promoteindustrialization in the long term (in contrast to the prediction of traditional Dutch Diseasemodels).Dependency on mineral exportsThe concept that mineral producing developing countries are or become dependent onmineral exports to industrialized countries was at one time very popular. Roemer (1979) hassurveyed the dependency arguments and distinguishes five aspects:1. Trade dependence implies that industrial production and employment depends onexport earnings which in turn finance imports of capital and intermediate goods.2. Financial dependencies on foreign capital required to finance mineral exploitation.3. Technological dependence is a question of access to technology controlled by international companies. It contributes to dualism, since the technology in the modernsector (as opposed to the primitive rural or agricultural sector) is not compatible withfactor endowments of developing countries.4. Managerial dependence refers first to the insufficient or absent training and education ofthe workforce in mineral producing countries and second to the discrepancy betweentraining levels and the technology commonly employed in the mineral industry.5. Market dependence is the result of the market power which integrated mineral producers posses (at least in some markets).These types of dependence are additional to those associated with increased exposure to thefluctuations in world commodity prices, exchange rates and interest rates. Similarly, effects55Mineral development modelsassociated with environmental externalities and with economic adjustments in mineraleconomies can also be framed in terms of dependence (Gillis 1978). Whilst some forms ofdependence are quite important (financial, technological and managerial) in the short andmedium term, it can be argued that many of the forms noted above are useful excuses for notbeing able or willing to undertake adequate management of mineral impacts.MINERAL RESOURCES AND SUSTAINABLE DEVELOPMENTThe critical feature of mineral resources is their finite quantity - there are only those resourceson earth with which it was originally endowed. Furthermore, the stock of mineral resources isunchanging: it does not grow like forests or fish stocks. It can even be argued that while themass of mineral or non-renewable resources is constant, the law of entropy implies that masswill always tend to be dissipated and thus lost to economic use (Georgescu-Roegen 1973).The possibility of a mineral resource being depleted also implies that the popularconcept of sustainable development takes on a special meaning in relation to non-renewableresources. This is further complicated by the extent of environmental impact associated withthe production of mineral commodities. This impact becomes increasingly important asresource production moves to deposits of progressively lower quality, where more materialmust be processed to obtain a unit of commodity. A further concern is the question ofintergenerational equity in resource use and sharing of resource profits.This section first examines the economic nature of non-renewable resources and discusses the implications for mineral depletion policies. Second, definitions of sustainabledevelopment are discussed (no clear definition of this term has been agreed upon), and theimplications for the special case of non-renewable resources are reviewed. Finally, the resultof the preceding two sections are integrated to provide the foundation for a mineral policywhich is both fair and sustainable.56Mineral development modelsNon-renewable resources and optimal depletionAccording to conventional economic theory, the nature of non—renewable resources dictatesthat they will be used in a well defined way, based on the conception of a mineral resource asa (sterile) capital asset. For the owner, the basic decision rule tells him to extract the mineraland invest the proceeds if the return from doing so exceeds the appreciation in the value of themineral asset in the ground due to an increasing price. Conversely, if the return, measured asthe relative price increase, from holding the mineral asset is greater than the return, measuredas an interest rate, from investing the proceeds from mining, then the owner should keep themineral in the ground. The result is a path for the resource price (net of all costs) rising at therate of interest (see figure 3.3).This is known as “Hotelling’s rule”(Hotelling 1931), and is based on a number ofrestrictive assumptions’2. Markets must be competitive, technology unchanging and alltraders must be fully informed about present and future prices. Hotelling himself wasconcerned with the possible impact on the Pareto-optimal situation that exists when miningfirms maximize present value. Wild “rushes” to acquire and exploit mineral land, unjustifiedwindfalls to individuals with “free” access to exploration information, and the effect of highdiscount rates on the way firms choose to exploit resources may all contribute to disturb theequilibrium. Furthermore, since futures markets cannot provide information on future price,the risk of keeping an asset in the ground is higher, which may lead to more rapid depletion(Solow 1974b). Absence of future markets and contingent or commodity risk markets may,under certain price expectations, result in more rapid depletion (Heal 1975).In practice, optimal depletion rates depend on a range of factors. The Hotellingmodel must be extended to include optimal savings rules and maximization of social utility.One model developed by Partha Dasgupta and Geoffrey Heal assumes production to dependon exploitation of an exhaustible resource, as well as on a reproducible capital stock2 In algebraic form the Hotelling rule can be stated as P(t)=P(O)et, where P is the net price, t is the time fromthe beginning of the program and r is the interest rate.57Mineral development modelsPrice4P(T) --—-—P(O).—TimeTFigure 3.3. The path ofnet price over time according to the Hotelling rule(Dasgupta and Heal 1974). Some of the production is not consumed but added to the capitalstock. Consumption, however, benefits social utility, and the aim is to maximize this overtime. In the model, the central problem is whether the resource is an essential input forproducing the goods that are consumed. Further, optimal depletion depends on technological innovation which allows the development of substitutes to the non-renewable resource,and on the probability of discovering new resources. The extent to which capital cansubstitute for the non-renewable resource is similarly important. A positive rate of timepreference and the fact that the model uses a utilitarian welfare function means that futuregenerations lose out as consumption will decline to 0 (figure 3.4.).Further extensions to this type of model indicate that constraints on consumption ofthe kind noted above can be avoided if endogenous technical change occurs. This, however, requires that some resources are diverted from consumption to technological research and development (Kamien and Schwartz 1978).In all the models referred to above investment in reproducible capital plays a crucialrole. The problem, however, is to make sure that “sufficient” investment occurs. Sufficient inthis case means that there is enough investment to achieve technological advances which canoffset the declining resource stock while a constant level of consumption is maintained overtime. In other words, the essential question is whether the market will “save” enough. Theanswer is that it will, provided the social discount rate is 0 and no other distortions exist(Hartwick and Olewiler 1986). In cases where a positive discount rate applies, savings will58Mineral development modelsalways be too iow (Hartwick and Olewiler 1986, P. 165). The investment rule, known also as“Hartwick’s rule”, refers to investment of rents. These rents are the so-called “scarcity rents”(or Hotelling rents), which arise because the resource stock is constant. It is important todistinguish these rents from “differential rents”, which are due to the variable nature oforebodies. A possible and practical approximation to this rule is taxing mineral rents andinvesting the revenue in capital projects (in a wide sense, ranging from physical capital stocksuch as infrastructure and production equipment, to human capital in the form of education,research and development), in special trust funds or through nationalization of the resourceindustry (see chapter 9 for an analysis of trust funds and the possibilities for using them inGreenland).The implications of discounting derived above refer, however, to a closed economy(or to the global economy as a whole). When trade is introduced, matters are in some wayssimplified since the rate of return is exogenously given. Optimal depletion is then given byTimeFigure 3.4. Consumption profile and optimal depletion ofanexhaustible resource. The curve abd describes the case with arelatively low rate of time preference, whereas curve ebddescribes the profile for a higher rate. If a technologicalbreakthrough occurs at time T the profile jumps to fg andsettles at a fixed level ofconsumption C’1’59Mineral development modelsthe rate of return on foreign assets. When uncertainty about future demand is introduced, it isthe risk adjusted rate of return on resource assets which must be equated with the exogenouslygiven rate of return (Dasgupta and others 1978).For a developing country with substantial mineral resources the question of when to exploit becomes one of timing and discount rate. Despite the restrictive assumptions of theHotelling rule, Lewis (1984) states that the general principle is sound, and that a countryshould deplete its resources and invest the rents (those accruing to the country), in such a waythat the return on this new investment is driven down to equal that which is to be had byleaving the resource in the ground. If better returns are available on assets other than ore in theground, the rule is clear: deplete as rapidly as possible. The corollary to this is that mineralsshould be kept in the ground when prices are rising at a rate higher than the discount rate.The question of when to deplete is commonly raised in relation to the management ofa developing nation’s resources. As noted, following the Hotelling rule is one possibility, albeit fraught with uncertainties. This would in some cases imply a deferral of exploitationbased on one or more of the following arguments, that over discounting favours present generations, that developing countries lack the managerial experience needed fully to reap the benefits from exploitation, that large projects may have a undesirable market impact, or that restriction of exploitation will allow producers to exercise market power (Radetzki 1992).Adoption of too-high discounting rates is sometimes asserted to cause intergenerational inequity by depriving generations in the distant future of the resources they will need tomaintain a reasonable standard of living (Meadows and others 1972). The high rate of depletion early in the period caused by high discount rates may also lead to conservation policieson a national level. The purpose here is to retain the resources for such a time when they can beused by a domestic industry rather than exporting them now. Typical examples of suchpolicies are Canadian Uranium in the 1970’s (Radetzki 1979), and iron ore in Venezuela inthe 1980’s (Radetzki 1985).60Mineral development modelsA higher discount rate will change the price path over time in the Hotelling model,and tilt the depletion profile towards the present. The question, however, is whether themodel, on which this prediction is based, holds. With respect to timing of mineral depletion, the model has been used to argue that, since the present value of mineral depletion (i.e.net price) is independent of when extraction occurs, nothing will be lost by waiting (if this isrequired for other reasons). Marian Radetzki (1989) believes that the argument is false, andthat the Hotelling rule breaks down when assumptions are relaxed.The first problem of using the Hotelling rule to defer depletion is related to the coexistence of mines of variable quality (i.e. with different costs). The key issue is the differentroyalties such mines will earn. Radetzki (1989) envisages a sequential move to deposits ofdeclining quality, and notes that although royalties are adjusted downwards they continue toincrease at the rate of interest, thus maintaining the rationale for deferring depletion. Theproblem of different quality mines can also be seen as one of variable extraction cost forproducing one unit of output. In a modified Hotelling model with constant extraction cost,however, mines of different quality will produce alongside each other as long as they earn apositive rent (Neher 1990).The second argument questioning the usefulness of the Hotelling rule concerns theeffect of unanticipated new resource discoveries. Radetzki (1989) argues that massive discoveries cause unit discovery cost to fall and, since discovery cost must equal royalty (rent) atthe margin, leads to a lower royalty. Thus, the discovery necessitates a new price path, andmakes the increase of the royalty associated with a particular deposit quality implied by theHotelling rule impossible. This can, however, be queried by observing that any deposit maybe relegated to a lower price path without changing the shape of the path.Changing technology in exploration may also reduce unit discovery cost in contradiction to the Hotelling rule and advances in technology may make new classes of deposits farmore viable than those previously exploited while at the same time making the “old” depositsuneconomic. As an example of the latter effect, Radetzki (1989) mentions the development61Mineral development modelsof bulk mining and processing methods for copper early in this century, which marginalizedexisting copper mines based on high grade veins.The arguments, used to pronounce the Hotelling rule useless as an excuse for deferringmineral production, are backed by the observations of long term price behaviour of majormetals which shows a decline (Barnett 1979; Barnett and Morse 1963). This approach,however, does not take into account the result of modifying the Hotelling rule to taketechnology into account. A model developed by Slade (1982), for example, examinescommodity price trends and incorporates the effects of output level, grade and time (which isa measure of technological change in the industry). The model indicates that, first, price (P)equals marginal cost plus rent, and second, that the rate of change in price (P) equals the rateof change in marginal cost due to technical change (k) plus the rent multiplied by the discountrate (p):P=CQ+andP=k+pwhere CQ is marginal cost composed of an ore grade dependent element and a time dependent technology element, and 2 is the rent. Since the rent is always positive, price willincrease when there are no technical advances to lower marginal cost. Conversely, if technicalchange is rapid price may be kept down or fall for a time. The empirical data fits the modelvery well, indicating that prices for most minerals follow an U-shaped price path, and that theminimum point on this path has been passed for primary base metals and petroleum (Slade1982).Regardless of whether or not the Hotelling model provides a valid foundation for postponingmineral exploitation at a given site, it is instructive to review the situations where such a solution has been considered.62Mineral development modelsResource conservation through deferral of exploitation is advocated for two reasons, asnoted above. The pleas for conservation may, however, be based on two misconceptions(Radetzki 1992). The first is that the stock of resources is given and finite, and the second isthat technical advances or discoveries can make known deposits irrelevant. The stock ofresources is, of course, finite in a physical sense. It is more open to interpretation whether thestock is finite in an economic sense. The results of Slade (1982) shows a long-term price pathwhich has begun rising, indicating that depletion outpaces technical advances. At the sametime, however, it is worth noting that stocks measured in years of supply at the current annualrate of production have remained around 30 years for most of industrialized time (Radetzki1992). With respect to the possibility of technical obsolescence, the case for deferral requiresthat a deposit, if temporarily made uneconomic by technical advances, should later achieve anet value (rent) which, discounted to the time when deferral took place, is at least comparableto the rent obtainable by immediate exploitation.For developing countries deferral of mineral exploitation has been advocated on thegrounds that neither an institutional framework nor the necessary human capital is available forthese countries to capture the potential benefits of mineral development. The argument hassome historical relevance, witness for example the dismal experience of Zambia since thatcountry nationalized its copper industry (Auty 1991). There is, however, another side to theargument. The missed opportunities of countries like Zambia can be seen as necessary costsof “learning by doing”. The case against deferral for reasons of inadequate institutionalframework is further strengthened by considering knowledge or human capital as just anotherfactor of production. It is always possible for a country to purchase (or receive free of chargefrom the United Nations or other agencies) the necessary help for management of a mineralindustry and for training locals to do the job. The not inconsiderable success of Papua NewGuinea in managing its mineral wealth using outside help provides an instructive example.Occasionally, very large projects are candidates for deferral because they may, if putin production, depress world mineral prices. This, however, is a very short-run consideration63Mineral development modelssince very large projects are usually also low-cost producers. Thus, in the longer term, theywill force high cost producers out of the market and reestablish a higher price.The overall conclusion which emerges from the above discussion is that the pertinentcourse of action for countries with viable mineral deposits is to encourage their immediateexploitation. The possibility of following the Hotelling rule and deferring extraction cannotbe wholly dismissed, but application of the rule requires substantial consideration of the risksof waiting. These risks arise mainly from the possibilities of technical change and generaluncertainty about future discoveries.If development is deferred it is likely to be for other reasons than discussed above.Environmental considerations of projects can, when strict cost-benefit analysis is involved,lead to environmental costs (including foregone preservation benefits) exceeding the benefitsfrom a project. This brings us to the question of sustainable development, to be considered inthe next section.Sustainability and non-renewable resourcesCasual observation of non-renewable resources would suggest that their exploitation is fundamentally different from, and in conflict with the concept of sustainable development. Thisis not, however a viable assumption on which to proceed and we need to examine more closelythe meaning of sustainability and sustainable development.The term sustainable development was defined by the World Commission on Environment and Development (1989 - also known as the Brundtland report) as “development thatmeets the needs of the present without compromising the ability of future generations to meettheir own needs” (World Commission on Environment and Development 1987). Thisdefinition, however laudable it is, gives little guidance on how to accomplish the goal of sustainable development. Pearce and co-authors (1990) have suggested that sustainable development is conceived as a vector of development which is non-decreasing over time. The elements which describe this vector and the time horizon over which the process runs is open to64Mineral development modelsargument, except for the requirement that intergenerational objectives must be satisfied. Theelements of the vector could include:Increases in real income per capita;Improvements in health and nutritional status;Educational achievement;Access to resources;A “fairer” income distribution;Increases in basic freedoms;The preceding discussion of optimal depletion and savings rules indicates that under somecircumstances use of nonrenewable resources can be “sustainable” in the sense described above.However, the question of sustainability in a general macroeconomic sense may be separatedinto three distinct issues (at last).The literature on depletion indicates that constant levels of consumption can bemaintained if technological advance is sufficiently rapid. Thus, the first issue may bedescribed as securing the optimal level of savings in a situation where the actual size ofscarcity rents are unknown.The second issue is related to the first, but may be described as a stock problem.This refers to the relative shares of natural and manmade capital in the total capital stock.There are two schools of thought in this area as described by Pearce and Turner (1990). Thefirst is based on the idea that the standard of living can only be improved if the stock ofnatural capital is increased (i.e. the two are complements). When a certain standard of livinghas been reached it may be possible to increase it further without accumulating more naturalcapital. The second school of thought views standard of living and natural capital stock assubstitutes, such that an improvement in living standard can only be accompanied by areduction in the natural capital stock. Within these extremes variations are possible, forexample moving along a path where standard of living and natural capital are complements65Mineral development modelsuntil we reach a point where further increases in standard of living will involve reductions inthe natural capital stock.The third issue to be noted here concerns distributional aspects of the composition ofthe total capital stock. People and countries may be at different stages in terms of standardof living, while at the same time their opportunities in the future may be constrained by theactions of other people or countries.The major distinction made by Pearce and co-authors in relation to sustainabledevelopment is between the meaning of the term itself, which is self evident, and theconditions necessary for reaching the goal. The key condition is that natural capital stockshould be held constant. Whether this leaves room for changes in the composition of the stock,from natural to man-made stock (and back) is unclear, as is the question of whether the twotypes of stock are complements or substitutes. The essential problem according to the authorsis that such questions cannot be answered without a more clear-cut valuation of the economicservices provided by the environment (Pearce and others 1990) and ways of comparing different costs and benefits. As these occur at different points in time it is common procedure todiscount costs and benefits to some fixed point in time in order to reach a decision. Discounting, and especially the rate at which it occurs, however, is the source of muchdisagreement.Initially it is instructive to note the effect of a change in discount rate in the management of non-renewable resources. The simple Hotelling rule, whereby the net price (salesprice less extraction cost) increases from p(O) at the rate of interest, implies that a resource isexhausted when the price rises enough to choke off demand at time T (see figure 3.5). If,however, the interest rate rises, price will increase more rapidly, but from a lower initialprice, P*(0) and the price path will be steeper, ending with economic exhaustion at time T*66Mineral development modelsThus, resource depletion is shifted towards the present13. This is the background fordiscussions of which discount rate to apply to the evaluation of projects. Manyenvironmentalists argues that it is wrong to apply the market rate, and that the social discountrate should be adjusted downwards.Figure 3.5. The effect ofan increase in discount rate on theoptimaiprice pathThere are good reasons for applying a lower discount rate to evaluate environmentalprojects with long-term impacts. Private discount rates may differ from social rates in relation to future generations because the consumption of these future generations is considered apublic good by present generations (Fisher 1981). Similarly, the discount rate applied byprivate individuals can include elements that have little to do with the concept of discountrate itself (i.e. time preference and marginal productivity of capital), but are used to adjustfor perceptions of risk and uncertainty. Usually, adjustments to the discount rate are not,however reasonable the case for action, the best way of dealing with problems that areessentially unrelated with the discounting itself. Where discount rates are considered to beoverly high, the problems are not solved by adjusting the discount rate used to evaluatedprojects but rather by seeking to lower interest rates in the economy as a whole (Fisher 1981;Pearce and others 1990; World Commission on Environment and Development 1987). Thediscount rate issue frequently arises when questions of environmental risk, irreversible damage13 The reason the price path begins at a lower P0 is that the quantity of resource is unchanged (and foresight isstill perfect) which means that only by starting at a lower price will the resource be used up (as it must be) whenthe choke price is reached.67Mineral development modelsand the interests of future generations are being discussed. In each case the implications ofdiscounting and, in particular, of too heavy discounting, are unfavourable and controversial.Environmental risk exists but adjusting the discount rate by a fixed amount to reflect riskconditions does not adequately provide security against basic uncertainty about future events.A possible alternative is to try to adjust future income flows to reflect the certainty of theiroccurrence (Pearce and others 1990).The possibility of irreversible damage to the environment can also be dealt withthrough other channels than the discount rate. This is done by including in the cost-benefitstudies elements which take the benefits and costs of both a project and the status quo into account (Porter 1982). Thus, instead of the present value of a development being the discounted benefits less the initial cost, the calculation must take additional factors into account.The first of these is the fact that development implies that alternative uses are lost.Secondly, the benefits B(D) and costs C(D) occurs in asymmetric streams. Technologicaladvance and exhaustion will render the physical product which is the result of developmentless valuable over time. At the same time preservation of environmental amenities implies agrowth in their value, since their supply is inelastic and demand growing (Porter 1982).These characteristics can be captured in the present value (PV) determination by first introducing an element to account for the foregone benefits of preservation B(P):PV=B(D)-C(D)-B(P)If cost of development is set at -1, q is the rate of decline in benefits from development, andz is the rate of increase for preservation benefits, the present value of development can bewritten as:Pv=-i+ -(r+q)t - Pe(1)tdtJo Jo=-1r+q r-z68Mineral development modelsThe first of the two integrals here represent the present value of all development benefits discounted at the rate (r+q), where q represents the declining value of future development benefits. The second integral represents the future benefits of preservation which are discounted ata lower rate than r (r-z), as a result of the increasing value of preservation.This implies that the discounted net benefits of development are positive only if thesocial discount rate falls within a certain range. If it is low, preservation benefits will dominate because these will accrue for a long time and will receive significant weight at low discount rates. On the other hand, if the discount rate is too high, preservation benefits receivelittle weight.Despite problems in estimating preservation benefits, the approach outlined above canbe used by first calculating the benefits of development, and then using this as a measure ofwhat the preservation benefits would have to be in order to justify blocking development(Pearce and others 1990).Finally, the question of how the interests of future generations are taken into account.The main problem is that costs and benefits which occur far into the future receive decreasingweight as the discount rate increases. Similarly, a high discount rate will discourage investment, reducing the capital stock available to pass on to future generations (Pearce and others1990). While using the market discount rate as the social discount rate in relation to futuregenerations may be a problem, the central question is whether it is reasonable to discount atall when the interests of future generations are considered. Instead, the interests of future generations should be taken care of in a different way, by first making an effort to measure environmental damage in monetary terms and then making a set of compensating investmentswhich serve to maintain the services that flow from a stock of environmental capital (Pearceand others 1990).The requirement for sustainability (that the discounted sum of environmental impactsshould be 0 or less) is difficult to maintain for individual projects. With a program coveringseveral projects, however, the constraint that the damage summed and discounted across the69Mineral development modelsprogram be equal to or less than 0 can be achieved. This is done by using “off-setting” projects that “improve” the environment to compensate for the damage done by the other projectsin the program (Klaassen and Botterweg 1976).The approach outlined above has considerable intuitive appeal. There is, however, oneaspect missing: How is a program consisting of a number of environment depleting projectsas well as “off-setting” projects to be implemented? While investors will be happy to investin projects that deplete environmental resources, if it is profitable, it is more difficult to seethe attractiveness of the off-setting projects. A second concern is that using such an approach,even where the off-setting projects are undertaken by government and financed from mineralrevenues, is likely to be inefficient and may also result in distortions of incentives tominimize external effects of damaging activities.Sustainable mineral policyThe mineral policy adopted by a country should, based on the issues raised above, be sustainable and intergenerationally equitable (albeit the former may be said to involve thelatter). Sustainability involves both economic and environmental concerns, and the followingrules summarize the basic elements in a sustainable policy:1. Waste flows to the environment should not exceed the carrying capacity of the environment (Pearce and Turner 1990);2. The reduction in the stock of non-renewable resources should be compensated by anincrease in social capital corresponding to the value of aggregate rents from non-renewable resources (Hartwick 1977);3. The efficiency of resource use is increasing with technological advance, leading todecreasing intensity of material consumption (Pearce and Turner 1990).In practical terms, this indicates the importance of the task facing the resource manager. Firsthe must determine what the carrying capacity of the environment is, taking into account bothenvironmental impacts over which he has influence and those impacts he has no control over70Mineral development models(e.g. transborder or global pollution). The determination of the carrying capacity of an areaor region or country involves both environmental capacity and the economic value of thiscapacity in alternative uses. Thus, economic valuation of environmental assets and servicesbecomes an essential part of resource management.Secondly the resource manager must make sure that an optimal amount of rents aresaved in order to treat future generations fairly. The most interesting approach to thisproblem seems to be accumulation of [part of] the revenues appropriated by taxing resourcerents in special trust funds. It must be noted, however, that in practice it will be very difficultto determine exactly what constitutes resource rent and then to save all of the rent forposterity. The practical experiences with trust funds will be taken up in chapter 9 with adetailed discussion based on the experiences with trust funds in Alaska and Alberta.CONCLUDING REMARKS - MINERAL DEVELOPMENT AND SUSTAINABILITYIn the long run mineral based development and sustainable development are very closely related. The essential feature of sustainable development is that it takes the opportunities of future generations into account. In this chapter the concept of sustainability was viewed in termsof the total available stock of reproducible capital, capital being very broadly defined to include anything from resource stocks, over various production implements to financial resources.Although this was not the initial focus of the chapter, the discussion of sustainabilityserves to put the various types of mineral based development into perspective. The distinctionbetween development occurring as a direct result of mining on the one hand, and that part ofdevelopment which is based on investment of mineral rents on the other hand, is important.In many cases the expected development due to “linkage” effects of “economic spinoffs” have not materialized. At the same time the potential boom from inappropriate management of mineral rents is very great, as the frequent occurrence of “Dutch Disease” indicates.71Mineral development modelsThere are two possible remedies. One is to set up a form of trust charged with coilecting and managing the benefits from mineral resources in perpetuity. The real reason foradvocating such an approach is mistrust in politicians and their possible inability to accountfor the interests of future generations. The second remedy is to trust the political system andallow it to determine the best use of rents. However, if rents are to be spent it had rather beon investment than in consumption, with investment meaning use of the mineral revenues forthose opportunities which have the highest expected benefits.72Economic management of mineral production4ECONOMIC MANAGEMENT OF MINERALPRODUCTIONProduction of mineral commodities will take place from mines of variable quality. At themargin, the revenues from selling the mineral will just cover the total cost of mining, including a return on initial capital investment. The mine at the margin defines the lowest qualitymine. At the same time, however, there will be many mines where the revenues will exceedthe cost of mining, where costs include all payments to various factors of production, including the minimum returns necessary to attract the investment in the first place. The differencebetween the revenues and the costs is commonly referred to as the mineral rent.Various parties may lay claim to this rent. In many countries, ownership of sub-surface resources is vested in the state, and national governments frequently claim the right to appropriate the rent. In other cases mineral rights are tied to the ownership of surface land, andthe landowner then becomes a claimant. Usually, none of these have the knowledge or desireto find and exploit the minerals, but prefer to contract out the job to mining companies.These will also argue that they need to share in the mineral rent in order to compensate for therisks they take on (exploration, market and political risks), when they decide to invest.73Economic management of mineral productionRegardless of the way mineral ownership is structured the state will usually want toappropriate some of the mineral rent. The first part of this chapter analyze the differentmethods of rent capture and their implications for economic efficiency and optimal resourceextraction.While mineral rent is a central issue in mineral policy design, a number of other aspects of mineral resource policymaking have important economic dimensions. Regulation ofexploration, production and mine closure all involve effects which directly or indirectly influence the size of mineral rents available for government appropriation. These additionalaspects of mineral management are discussed in the latter part of the present chapter.TAxATIoN AND CAPTURE OF MINERAL RENTAs developed by the classical economists, rent referred to the revenue a landowner could obtain simply by owning land, including mines (Ricardo 1911). With respect to mines, however, two different views existed. In the second chapter of “The Principles of Political Economy and Taxation”, Ricardo takes the view that the income of a mine consists of two elements. The “royalty” element is the compensation to the owner for the decline in value of themine as a result of depletion. The “rent” element is due to different costs of production, arising from variations in ore body quality or location. The second view of rent is expressed inthe third chapter of the “Principles”, which is devoted solely to “The Rent of Mines”. According to this second view, the rent of mines is directly comparable to the rent from land.To resolve this ambiguity, it is necessary to take into account the fact that a mine has afinite value (being exhaustible). All of the net surplus of the mine can be regarded as rent because it is part of the property value of the mine, and the total amount of rent depends on thedifference between the production cost at the mine in question, relative to the highest costmine expected to be in production at any time. In other words, the rent can be measured in74Economic management of mineral productionpresent value terms without having to distinguish between “royalty” and rent (Garnaut andRoss 1983).In discussions of rent there are two other matters deserving attention, the distinctionbetween windfall rent and transfer rent, and the existence of quasi-rents. Windfall profits arethe result of unexpected price or cost changes, while transfer rents occur in the mineral industrywhen holders of mineral rights are able to exclude entrants (investors) from gaining a share ofthe expected rents. Had there been no barrier to entry, the investors would pursue the expectedrents until the return was no different from other uses of (investment) resources. Transfer rentsexist for the natural and efficient reason that investment in mineral exploration, which is inherently risky, requires that the initial investor has a secure title to any discovery he makes(Garnaut and Ross 1983). Without this barrier to entry, there would have been no rent to argueabout.The second type of rent is the so-called “quasi-rent” which can cause problems in taxation. Quasi-rent can be described as a payment providing an incentive for a particular allocation of resources which would not occur in the absence of the quasi-rent. This type of rent ismore of a payment to a factor of production. As an example, Garnaut and Ross (1983) mention the case of mineral exploration. If there is no adequate return on the accumulated bodyof exploration knowledge and technology in a mining firm in the long run, then investment inthis activity will cease. This can happen if rents are taxed without regard to the existence ofquasi rent.‘When these limitations have been taken into account, the remaining “pure rent” can betaxed almost with impunity, since it will be non-distortionary and efficient (assuming thatall other sectors are competitive). However, if a government seeks to capture all of the rentfrom mines, it runs the danger of removing the mine owner’s incentive to control costs. Thehigher the share of rent captured, the greater the risk of “gold plating” (Anderson 1991).75Economic management of mineral productionBefore embarking on a more detailed examination of various rent capture schemes we willlook at some of the results obtained in Leland’s (1978) analysis of the mineral (specificallyoil and gas on the US outer continental shelf) leasing. The important premise to keep inmind is that special circumstances (the presence of transaction costs, information asymmetriesand bankruptcy costs) conspire to remove mineral leasing problems from the perfect marketparadigm, where risks are shared through perfect and complete contingent claims markets(Leland 1978).The model developed by Leland analyzes the types of payment schedule which areoptimal from the government’s point of view. What is actually optimal is a little bit ambiguous since it depends on the risk aversion characteristics of both parties (i.e. government andfirm). As an example, Leland cites the likely case where Alaskan Native corporations’4,which control potential oil and gas bearing lands, will be relatively risk averse as a result oftheir comparatively limited asset positions. When tracts are leased under such conditions, leases should provide for lower royalty rates or lower profit-sharing rates and higher cash payments at the initial sale of the lease.In its simplest form the model assumes that the actions of extracting firms are unrelated to the payment schedule used for leasing, and that information is symmetrically distributed between government and lessor. Under these circumstances the shape of the payment schedule relative to the value of a tract depends on the rate of increase in government’s and firm’srisk tolerance with increasing wealth. When the information symmetry assumption is relaxed,the payment schedule should become increasingly convex15, with increasing asymmetry.It is, however, the other assumption, that payment schedules do not influence thefirm’s decisions, which is the more important. This is also well supported by empirical14 The cases of Alaska Native Corporations is mentioned briefly in chapter 3, while another aspect is noted inchapter 9.15 A convex payment schedule refers to payments which increase when the value of the mine increases (i.e. whenprofits increase). Put differently, increasing mine profits will be taxed at progressively higher rates under aconvex payment schedule. The opposite applies to a concave schedule.76Economic management of mineral productionobservations (Leland 1978). ‘Whether government can observe the actions of the firm isdebatable and may not be necessary, depending on the payment schedule. If this does notaffect the firm’s choice of action at the margin it will be an optimal schedule (theorem V inLeland). This holds as long as the government has a way of monitoring the firm’s actions.Given this condition for optimality, Leland shows that both royalty schedules and convex orconcave schedules are not optimal, but that linear (of the form P=a÷bV, where P is payment,V is value to the firm and a and b are constants) schedules are.The following subsections extend the general principles noted above, and examines five categories of mineral taxation instruments. Each has different implications for the tax-base, andseveral are wasteful from a social point of view. Closely related to the matter of taxation isthe allocation of property rights to minerals. The way these are allocated can have significantimplications for the tax base. The first section also considers some of the implications ofhow property rights to mineral land are allocated. Some of the property rights issues raisedhere will be taken up in the second part of this chapter.Competitive bidding for leasesThe three main categories of mineral right allocation are cash bidding, work program bidding (WPB), and “first-come-first-served”. The pure cash bid system awards the mineralright to the highest bidder, and the government receives the sum of the winning bid. Given thethe government objective of maximizing community well-being and securing efficient extraction of resources, this requires that government captures the present value of the pure rent fromits mineral resources. For this, the simplest and most efficient prescription is to sell a mineral right at an auction (Garnaut and Ross 1983). Some plots will sell below their true valueand others above, and across the industry, government would receive an optimal amount ofrent and there would be no “windfall profits” of the kind discussed below (Bergstrom 1984).77Economic management of mineral productionThe central argument in favour of cash bidding is that rents, being difficult to determine ex ante, should be valued by the market. The only way to do this and appropriate rentis to sell the right at auction (Nellor 1984). The structure of the bidding process will naturally influence the outcome, but it can sometimes be arranged in such a way that collusion isvery difficult (Mead 1974), and such that bids reflect the bidders true valuation of the tract.The cash bidding approach has been applied in the United States to allocate leases onthe outer continental shelf (Mead 1974), but these positive results have been put down to ‘exceptional circumstances” such as low political risk and extensive competition in the biddingprocess (Garnaut and Ross 1983). More recent research (Hendricks and Porter 1988; Meadand others 1984) indicates that the success may not be quite as distinct as initially believed,the evidence in some cases pointing to bid-rigging or, alternatively, to some bidders beingbetter informed than others.The arguments against a wider use of the cash bidding approach are several in additionto the need for competition. A cash bid transfers all the risk of a project to the private investor. When very little information about an area is available (as is commonly the case in metals mining) this can result in bids not reflecting the value of the area, and prevent the government from capturing an optimal amount of rent (Garnaut and Ross 1983). However, if cashbidding is combined with a tax conditional on a specified minimum rate of return on a project, an optimal amount of rent may still be appropriated (Emerson and Garnaut 1984).It is sometimes argued that the risk averse nature of private investors imply a need forthe government to share in the risk, mainly through a tax. Such an argument ignores the factthat risk sharing in the private sector is generally easy through the mechanism of portfolio diversification (Bergstrom 1984). There are some risks that cannot be eliminated in this way,but these also persist when government allocate some of the risk to taxpayers. In any event,the transfer of risk to the taxpayers would only be relevant in the unlikely event that these are78Economic management of mineral productionless risk averse than private investors - and the market would presumably be better able thangovernment to allocate risk to those willing to take itI6 (Nellor 1984).Another problem in the cash bid approach is the possibility of a “free-rider” problem(Gilbert 1981; Nellor 1984), where a bid for a new area from a bidder with exclusive information will attract other bidders, who take the first bid as an indication of the value of thearea - without knowing the underlying information. The problem is not large since the initialbidder, who has the information, will bid only to his estimated market value of the area. Anuninformed bidder topping such a bid will lose and will, if rational, realize this and refrainfrom bidding.The assessment of competitive bidding is thus ambiguous. It seems unable to dealwith unexpected changes in mineral price which generate additional rents. If the mineral rightis not somehow restricted, this rent will be outside the government’s reach, unless it decides tochange “the rules of the game” ex-post. Adding a time limit to the mineral right will not bean option17. The net result of a time limit is premature exploration and development of resources (Fane and Smith 1986). Similarly, the empirical studies noted above indicate thatfull competition may not be present in some lease sales where cash bidding is used.When we turn to the other main form of right allocation by auction, work program bidding orwork commitment bidding, more serious problems appear. If we disregard taxation for thepurpose of the present discussion, a work program bid will always be topped by a bid offering an even larger work program, as long as the profit from doing so exceeds the return on thebest alternative investment. In other words, work program bids will become increasingly extensive until ll rents have been bid away (Fane and Smith 1986). This problem is compoun16 It must be emphasized that the risk discussed here relate to individual projects and not the risk faced bygovernment, of fluctuations in mineral tax revenues.17 To see this, consider an area or block, and assume that it will be released for auction as soon as someone showsan interest. These will bid and win the area and will then have a limited time to explore it. At the end of theperiod, the right will revert to the government if no discovery has been made. In order to retain the right,investors will explore it, even if the time is not considered right by the investor.79Economic management of mineral productionded by two others. First, in the course of a work program it may become clear that no more,or a different form of exploration is needed. If government insists on completion, the resulting pattern of exploration becomes inefficient (Nellor 1984). Second, the rents dissipatedby the work program bidding accrue to those who provide exploration services, with unfortunate distributional consequences.Despite the serious objections to work program bidding it remains widely used. Bergstrom(1984) suggests that claims to the effect that work requirements “will ensure vigorous exploration” and will prevent “speculation” in mineral land are misguided. It will indeed result in(too) much exploration, and there is nothing wrong in “speculating” in mineral land, if an investor believes that an area should be explored, he will explore it when he finds that the timeis right and not before. Indeed, as pointed out by Smith and Ulph (1982), the common emphasis on “forced” investment in mineral exploration is closely related to a preoccupation withshort-term effects on employment, level of [regional] economic activity and government revenues (Smith and Ulph 1982). Work program bidding is extensively used, for example inthe North Sea, although cash bidding has had some success (Dam 1976).In metallic minerals, property rights are usually allocated by open accessclaimstaking or through administrative discretion, combined with minimum workrequirements. Bergstrom (1984) argues that under such a system, an area will either beexplored too much or too little, but seldom optimally within the limited term of themineral right. Too much refers to areas subject to rights, whereas too little refers to otherareas which are starved of investment because the first areas have to be explored so much. Thisis because mineral areas may have cost structures or probabilities of discovery which indicatea different path of exploration investment which differs from requirements. Thus, the areawill be awarded to the applicant who accepts these terms, giving the same effects as describedabove for work program bidding.80Economic management of mineral productionIt can be argued that a cash bonus bid system is based too heavily on the assumptionthat firms are willing to take all the risk of the mineral exploration and production process.If firms are risk averse they will tend to explore iess, exploit too rapidly and bid too little(Leland 1974). The implication is that a combination of a bonus bid and a conditional payment in the form of a profit share bid is preferable. The cash component is an essential ingredient since it will deter bidders from offering very high profit shares. The advantage of theprofit sharing bid is that it will transfer some of the risk to the government, a feature of profitsharing which is discussed further below.Royalties and production taxesA royalty is a rent tax based on the amount or value of the minerals produced. Sometimesknown as a severance tax (for the minerals “severed” from the mine), it is imposed on mineraloutput (ore mined or concentrate shipped), on price or on the gross value of production. Beingmost responsive to price changes, the latter is the most common. This type of ad valorem taxes have two major advantages from a government point of view: they are very easy to administer, and they result in government revenue as soon as production commences (Kumar 1991).The problem with royalties is that they cause good (i.e. economically mineable) oreto be left in the ground. The royalty increases the unit cost of production, and in turn forcesthe miner to raise his cut-off grade in order to maintain profits (assuming that the mineral issold in a competitive market). Alternatively, the mine-operator may postpone production(Neher 1990).Despite the high-grading problem, the royalty instrument is very popular. Apart fromthe two major advantages noted above, there may be several other explanations. The first isthat if the royalty is applied at a low rate (usually in conjunction with other taxes) it will haveonly limited impact on production decisions (Kumar 1991), a result partly supported by simulation studies (Bradley and others 1981; Walrond and Kumar 1986). An additional advantage of using a royalty in the case of oil is that a slower rate of extraction may increase to81Economic management of mineral productiontal recovery by maintaining pressure in the reservoir for a longer time. Whether this is actually an advantage depends on the discount rate used by the investor (Garnaut and Ross 1983).Corporate income taxesCompared to both cash bidding and royalties, a corporate income tax is more complicatedto administer, since it is based on income after deduction of production cost and other allowable costs. As such it does not distort profits because the mining firm will seek to maximize both pre-tax and after-tax profit (Neher 1990). Instead the treatment of costs causesproblems. Common deductions in addition to operating costs and royalties are taxes paid toother jurisdictions and interest payments. More problematic is the treatment of depreciation,research, training and environmental expenses. Likewise, the ability to carry losses forwardand the treatment of exploration cost is of great importance (Kumar 1991).For a true profit based tax, the tax base would be current revenues less current costs, thelatter including current consumption of capital items. If actual depreciation rules do not reflect the true cost of capital, serious distortions are introduced (Nellor 1984). This problemcan be compounded if depreciation rules are modified frequently and by inflation.Provisions allowing mining firms to carry losses forward depend on two things, theaccumulation rate and the definition of the losses allowed as deductions. If all losses are allowed for the calculation of the tax base (i.e. including exploration costs), then they should becarried at the interest rate on government bonds (Fane and Smith 1986). More frequently losses are carried forward without an interest rate adjustment. The allowed losses, and the ratethey can be carried forward at, determine whether the tax is an income tax or what is known asa “Resource Rent Tax” (RRT), as considered in the next subsection.Resource rent taxThe concept of a tax designed to capture the pure economic rent of mineral resources withoutdistorting investment and operating decisions was first advanced in 1975 in response to a82Economic management of mineral productiongrowing need for developing countries to obtain more of the benefits associated with exploitation of their mineral resources (Garnaut and Ross 1975). This concept became known as a“Resource Rent Tax” (RRT) and was a modification of a simpler concept, the “Pure RentTax” (PRT).A Pure Rent Tax involves a constant proportional tax on all net cash flows of a pro—ject. ‘When net cash flow is positive, the government receives revenue, and when cash flow isnegative, the government pays a subsidy corresponding to the tax proportion of the negativecash flow (Garnaut and Ross 1979). This type of tax, a modification of the so-called “Browntax” (Brown 1948), in effect makes the government a partner in the project, with a share corresponding to the tax rate (Fane and Smith 1986). The advantage of a PRT is that it is fullyneutral, it taxes economic rent only, and it is easy to administer. On the other hand, if it isapplied at too high a rate it will remove the incentive for efficient operation.The greatest problem of a PRT, however, is that along with the defacto share in theproject comes risk to the government, in form of possible financial ioss. Government mayexpose itself to the risk of substantial losses on projects which never result in production andmay be unable to recover these from successful projects. Given the political problems associated with such a scheme, it might be just as well for the government to take an equity share inprojects. These problems may also tend to make such a tax less than credible (Garnaut andRoss 1983).The variety of rent tax which comes closest to the PRT, without involving the government directly, is the Resource Rent Tax. The RRT can briefly be described as a profittax collected when a threshold internal rate of return on total cash flow has been realized.The main principle of the RRT’8 is that a range of receipts and payments are defined as allowable for calculation of the RRT. These are termed “net assessable receipts” and corresponds to the tax base. If, in the first year of a project, a net deficit occurs, this is carried for18The following description is based on Garnaut and Ross (1975).83Economic management of mineral productionward at a predetermined rate of interest (the threshold rate). In the second year, the net result(deficit) is added to the amount carried forward from the previous year, and the total is thencarried forward to the third year. When net results are positive they are deducted from thenet assessable receipts account, and the remainder is carried forward at the threshold rate ofinterest. This process continues until the account becomes positive. At that point the RRTtax rate is paid on the positive amount in the account. In subsequent periods, as long as net results are positive, the account is set equal to 0 and RRT is paid on the net result. If there is anegative result, the procedure for carrying forward is activated until the account is again positive.In calculating net assessable receipts all operational payments to and from the projectare allowed, as are other taxes and income from sale of equipment. On the other hand, financial payments such as revenues from loans and equity offerings, interest payments, dividendsand loan repayments are not allowed for net assessable receipts. In its simplest form, theRRT with one threshold rate and one tax rate, is similar to a corporate income tax with thefollowing special features:1. No deduction for interest payments;2. Immediate 100 % depreciation of all investment expenditures;3. Unlimited carry-forward of losses at a specified interest rate.Several tax rates and corresponding accumulation rates can be specified as a means of capturing extreme windfall profits at a very high marginal tax rate. The RRT scheme would require additional regulation to prevent investment in companies not subject to the tax, in order toprevent avoidance. Similarly, prices paid to the project would have to be monitored to prevent tax avoidance through transfer pricing. Finally, clear definition of where the resourceextraction process ends and manufacturing begins is necessary, as is a requirement that the definition must exclude non-mining activities in order to prevent economic distortions (Garnautand Ross 1983).84Economic management of mineral productionThe treatment of exploration in the original RRT concept implies that all expenses ina country, by a given company, prior to the discovery of a profitable mine should be allowable expenditures when the tax is calculated for that mine. For subsequent exploration expenses19, however, a new mine would be required before they could be used as deductions(Garnaut and Ross 1975).There are a few apparent problems associated with this type of taxation, but most(such as administration, accounting etc.) are possible to overcome. The most important problem, especially when a country has few mines, is the long period before any revenue accruesto government. When many mines are in operation, revenues should be relatively stable. Inflation, exchange rate variations and measures to prevent double taxation are all problemswhich can be solved without unduly affecting the neutrality of the RRT approach (Garnaut andRoss 1983).The preceding description of the RRT approach to capturing mineral rent is not, however,complete without a discussion of two inherent problems in the RRT, related to the thresholdrate(s) and the distortionary effect some versions of the RRT may have on exploration investment.The problems are basically related to the amount of risk involved in a project. Projects involving high risk (i.e. grass-roots exploration) will have a higher supply price of investment than will the development of low-risk projects (e.g. oil wells in a known oil-field).The question is, should these different projects be taxed under a RRT scheme using the samethreshold rare of return ? This problem can be seen as one of defining what exploration expenditures are allowable for a given project (Bradley and Watkins 1987), otherwise a fixedaccumulation rate will introduce bias against riskier projects. According to Bradley andWatkins, there is no way exploration expenditures can be attributed to particular reservoirs,and therefore exploration-intensive projects need to be awarded a higher accumulation rate.19 This must refer to exploration outside the area of the first mine.85Economic management of mineral productionThe type of problems described here can be illustrated by looking at a simple model of revenue collection based on the work of Bradley and Watkins (1987) and Fane (1986).The model involves a two-stage investment process with exploration expenditure E,and development expenditure D. There is no delay between the occurrence of the two. Theprobability of discovery is p. and the probability of a successful development is w (this depends on market factors such as commodity price and costs). Here we disregard w since it isconsidered to be of far less importance than p. If development occurs, a net ongoing income,S, accrues at time T after development (revenue net of operating cost). When there is no tax,the net expected value of the project is:(1) V=-(E-pD)+pSeTwhere r is the opportunity cost of capital with no risk adjustment. The first term on the righthand side is total discovery and development cost, and the second term is the discounted vaiue of income at time T. If a PRT was levied at a rate s, the expected value of the projectwould be:(2) VT = _(1_s)(E+pD)+(1_s)pSerHowever, if the tax were instead based on the RRT approach, using an accumulation rate of r(above r), the expected value would be:(3) VT=The difference between the PRT and the RRT is that the latter involves an additional tax onexploration as well as a subsidy on investment when the accumulation rate r* is overly generous. To see this, observe the difference between V1T and VT:(4)86Economic management of mineral productionIn this equation, the second term on the right-hand side is a tax on investment which occurs because the RRT, as formulated here (eq. 3), only allows exploration cost as a deduction whenthere is a successful discovery (i.e., in the third term in eq. 3, only the expected value of exploration and development, p(E+D), is deductible). At the same time, the final term on theright hand side of equation 4 means that projects with low risk are favoured, whereas there is abias against risky projects.The implication of the tax on exploration which follows from the denial of full lossoffsets is important (Fane and Smith 1986). It will tend to produce inefficiently low investment in exploration generally, and will discourage marginal projects altogether. Furthermore, the bias against risky projects implied by the third term on the right of eq. 4 iscompounded when a generous accumulation rate is allowed, due to the incentive for mine owners to delay production in order to get maximum credit for accumulating losses. The general effect of denying full loss offset and using an accumulation rate above the base rate unadjusted for risk is under-investment in exploration and over-investment in development.To get around the problem of full-loss offset, Fane and Smith suggest that unused exploration credits from unsuccessful projects should be tradable if they cannot be used by thecompanies themselves. A model along these lines was under consideration in the mid-i 980s,when Australia introduced a RRT type tax on-off shore oil production.Provided a number of conditions apply, trading of unused exploration credits wouldremove the distortionary effect of a rent tax on high-risk exploration investment. The conditions are that the market for the credits must be competitive, that total profits subject to theRRT must exceed total losses in the market, and that exploration credits cannot be deductedelsewhere for calculation of the rent tax (Garnaut and Ross 1983).The threshold rate at which accumulated losses are carried forward can either be set individually for projects (along with the tax rate), or be the same for all projects (and then possiblydifferentiated according to the riskiness of the type of expenditure). However, since govern87Economic management of mineral productionments will be unable to obtain the information needed to set individual threshold rates, andbecause tax conditions fixed in advance will, ceteris paribus, tend to lower the discount rateapplied by investors, Garnaut and Ross (1983) believe that both the threshold rate and the taxrate should be set in advance. Then, to avoid the dangers of having set these rates too low,there should be several thresholds with corresponding higher tax rates (e.g. first threshold 15%with a tax rate of 50%, the second at 20% and 60% tax e.t.c.).In contrast, Fane and Smith (1986) show that, provided full ioss offset is possible (i.e.all exploration expenditures are allowed as deductions), the threshold rate should be equal tothe interest rate on government bonds. The argument is that if the company is certain that itwill be allowed to use the RRT exploration credit, the risk of the project as a whole is not affected because there is no risk involved in the valuation of the exploration credits.Risk and the choice of rent tax instrumentsThe risk faced by an investor in mineral exploration and subsequent exploitation comes fromboth technical and institutional sources. Technical risks include existence of deposits, possibility of extracting them, and market conditions. Institutional risks refer to the environmentwhere discovery and extraction of minerals takes place. This type of risks, sometimes called“sovereign” because they are related to the actions of governments, have a considerable impacton investor behaviour - and thus on the size of mineral rent available for taxation.It can be argued that a RRT combined with an element of cash bidding is the bestway of responding to investors and governments various responses to risk (Emerson and Garnaut 1984), with emphasis on conditional payments when the government is less averse to riskthan the investor. Heavy reliance on conditional payments is also necessary when a large element of sovereign risk is present. This risk basically arises when there is an expectation thatthe tax system will be modified, usually as a response to windfall profits accruing to investors. The problem of sovereign risk, however, is that if a tax system appears “over generous”,the investor will expect it to change in a way unfavourable to him and will increase his mini88Economic management of mineral productionmum acceptable rate of return accordingly. Then, if the tax system is flQ.t modified, investorswill obtain an unexpected profit because he preferred to “fear the worst”. This type of problem can give rise to an unfortunate series of conflicts between investors and government(Faber and Brown 1980).That design of rent capture systems is more complicated than the simple discussionabove may suggest is emphasized by both Kumar (1991), and Bradley and Watkins (1987).The problems are two-fold, the first is to devise rules able to cope with the problems set outabove, mainly in relation to risk and the treatment of exploration cost. Second is the need tointegrate what is theoretically attractive with the needs and desires of the government. Thelatter problem will often turn on the timing of resource revenues, and the practical solutionmight easily involve a combination of a small production tax and a RRT framework (Kumar1991).‘When a mineral rent tax is considered alone, the two better approaches which appearfrom the above discussion are cash bidding and a RRT with extensive loss offset, or possiblya combination of the two. The choice of instrument, however, cannot be made without reference to the tax system of which it will be part and the nature of the mineral resource in question. Similarly, there can be a range of other issues that dictate the choice of rent tax instrument. Some of these are considered below.An application of the Resource Rent TaxMineral taxes similar to the types described above have been reported from a number of countries (Kumar 1991), where they are frequently combined with other forms of taxation, primarily standard corporate taxes. Here we will examine the system used in Papua New Guinea(PNG), the country which pioneered the RRT approach20. The description is based on the1990 form of the system reported by Kumar (1991).20 The government of PNG does not rely solely on taxation to obtain mineral rent. In a number of majordevelopments the government has taken a minority share in the operating company (Pintz 1984; Wilson 1984)89Economic management of mineral productionThe PNG mining tax system consists of a standard corporate tax, currently at 35% oftaxable income. This income is calculated in the ordinary way, with depreciation calculatedin a rather complicated way. In addition to this, an additional profits tax is applied according to the following general formula:APT = NCR(70-n),where NCR is net cash receipts and n is the corporate tax rate. The NCR is defined as:NCR = Y-D-C-Ex-P-T-I,where Y = Income in the current year from sales, stock reductions and asset sales;D Allowable deductions, QX depreciation and interest payments;C = Capital expenditures in the current year;Ex= Exploration in the current year;P = Equipment bought in the current year;T = Corporate taxes paid in the current year;I = increases in inventory of input materials.The expenditures at the beginning of the project are carried forward at the interest rate r*, until they have been offset by income. The NCR is also calculated for years with no income.Under the rules, r* can be either 20% or the average US prime interest rate plus 12%. Whenthe accumulated losses have been offset against income, the NCR is calculated as shown.When the carry-forward rule is included the APT for year t can be stated as follows:APT NCR (70-n) [NCR.i (1 ÷r*) +Y-D-C-Exr-P-T-I] (70-N),where NCRi is carried forward at r* as long as it is negative. With respect to exploration,expenditures older than 11 years are not allowable.and lately has forced Placer Dome Mining Inc., a Canadian mining firm, to part with an additional share of thePorgera gold mine (Mining Journal Newspaper, March 19th, 1993, p.2O1).90Economic management of mineral productionIn relation to the discussion above, the PNG tax system for mines departs from the simplemodels in a number of ways. The most important is that it combines normal corporate taxation with a variant of the RRT. This approach may be preferable in relation to certain international standards and tax treaties. It is possible, however, that in some cases mineral investment is derived exclusively from overseas sources. If that is the case there is no need toplace mining and other domestic industries under the same conditions to avoid distortions,and a RRT can, in principle, be used alone (Garnaut and Ross 1983).State mineral enterprisesState mineral firms are a special approach to capturing mineral rents. In view of the laterdiscussion of state companies in Greenlandic setting a brief discussion of the topic is givenhere. The classical account of state mineral enterprises is Marian Radetzki (Radetzki 1985),and the following is primarily based on his work.Three characteristic features distinguish a state [mineral] enterprise from privatefirms. These are state ownership or control over the enterprise, the private goods nature of thefirm’s output, and the general business orientation of the enterprise. The reasons for establishing a state enterprise may be both economic and political. The first economic reason involves lack of competition on two levels: When the mining firm has market power in domesticmarkets (i.e. for local supplies and local skilled labour), and when the mining firm has market power in mineral markets, which may be detrimental to the developing country hostingthe mine. The second economic reason is that a state mineral enterprise can be used for rentcapture when the general fiscal system is unsuited for this purpose.The political reasons range from the purely ideological concept that state ownership isalways the best solution to more pragmatic reasons related to regional development and national security. In relation to developing countries, the end of colonialism and the need tobreak away from colonial emancipation has constituted a reason in itself.91Economic management of mineral productionThe curious conclusion of Radetzki’s investigation is that it is not cleat that state mineralenterprises have performed significantly worse [or better] than private companies, nor do theyseem to have had significant impact on mineral markets. The most clear conclusion of thestudy is that by 1983-84 the growth of state mineral firms has slowed almost to insignificance, and that the confrontation between multinational mining firms and developing countrygovernments has been much reduced.ECONOMIC MANAGEMENT PROBLEMSApart from the central issue of mineral rents, two other areas where economic considerationsare important for management decisions must be analyzed. These are mineral exploration investment (which is a prerequisite for any later revenues), and environmental regulation, including the commonly used (but difficult to define) concept of “sustainable development”.Mineral exploration investment occurs in lands where investors believe a high probability of discovery exists and where other risks (of failure) are low. However, as was the case inthe above discussion of cash bidding for leases, ideal conditions may not prevail. The firstsection below will attempt to clarify the problem and the possible implications for mineralland management.Environmental management in the mineral industries has traditionally relied oncommand and control styles of regulation. Only in recent years has the industry seen the useof market oriented regulation. The primary tool has been “reclamation bonds” which areused to ensure that sites are returned to an acceptable standard at the end of mining. The second section below takes a closer look at this practice, its impact, and on other possibilities ofmarket oriented instruments.92Economic management of mineral productionMineral explorationExploration investment by mining firms is motivated by two considerations. One is a desireto replace reserves as mining depletes previously discovered orebodies in order for thecompany to remain in mining (such that replacements are as good or better than before). Theother is a search for deposits which cost less to extract (and earn higher mineral rents). Insome cases information on the total stock of a resource may also have value to a firm,provided the information allows the firm to speculate in the resource price (Dasgupta andHeal 1979; Gilbert 1979).Investment in exploration is also important to any given jurisdiction since it increasesthe probability of discovery, within the jurisdiction, of orebodies which may eventually generate some of the benefits discussed in the previous chapter. The occurrence of exploration investment and the way it is made depends partly on how the process is regulated.We must begin with a look at how markets influence exploration investment - and how theycan fail in ensuring optimal allocation of such investment. First we must note that the information produced through exploration can have both public-goods and speculative value(Gilbert 1981). The public good value can be separated into “local” information externalities, and those which are related to the size of total stock of a resource. Here we will concentrate on the former, and on the speculative value of exploration information, since these haveclear implications for the way mineral exploration is regulated.The term “local” refers to situations where the returns from exploration by one firmconfers external benefits on other firms. Thus “local” is used in a non-spatial sense to cover awide variety of situations. For example, the discovery that certain varieties of garnetminerals (pyrope) in kimberlite rocks indicates the presence of diamond-bearing kimberliterocks may be made by one firm in South Africa, but may have extensive external effects in theNorthwest Territories of Canada.93Economic management of mineral productionThe consequences of the externality depends on the degree of public availability of theinformation. If the public (other firms) have no access to the information, firms will exploreseparately on land where only one firm had needed to explore, if the information was public(i.e. discovery on one tract implies discovery on neighbouring tracts). In the case of the pyrope garnet indicator, mineral firms would undertake research separately to develop theknowledge. The result is a problem closely analogous to those observed in R & D generally,redundant investment. In the case of exploration, over-exploration (Gilbert 1981).When information is fully public, both timing and the pattern of exploration may bedistorted. Exploration may be delayed as firms wait for useful and free information to become available. At the same time the public availability of information may lead firms toexplore in more remote areas, where information can better be kept private (Gilbert 1981).This also means that lands where exclusion is possible for some reason (remoteness or as a result of regulation) may be explored too early and too intensively.The other cause of market failure in exploration comes from the speculative value of information. This problem has been examined primarily in relation to competitive bidding for leases (Gaskins and Teisberg 1976; Gilbert 1981), and has stimulated much research on auctions and their design (Hendricks and Porter 1988; McAfee and McMillan 1987). In relation to lease sales by auction, Gilbert (1981) notes two possible effects. The first concernslocation (in a spatial sense now), and the second concerns timing.By examining the value of being informed in advance of an auction and having it takeplace as early as possible, Gilbert finds that the possibility of obtaining monopoly rents leadsto more information in relatively unexplored areas (i.e. having the auction early, other firmsare less able to value the land and put in a winning bid). Similarly, Gilbert finds that a competitive bidding market may provide incentives for too early exploration.94Economic management of mineral productionIn mining land disposition, as opposed to oil and gas leasing, a “first come- first served”rule most commonly applies. In relation to mining, the distortions related to lease sales atauction are probably not important, whereas the distortions related to information externalities remain unchanged. In fact, their presence seems clearly indicated by the regular occurrence of “staking rushes” in the vicinity of new discoveries.The distortions resulting from the public-goods and speculative nature of explorationinformation has a number of implications for mineral leasing and title disposition. The research on auctions mentioned above has led to the design of auctions which to some extent candiscourage investment in exploration for speculative purposes (McAfee and McMillan 1987).Some of the distortions apply specifically to auctions or to claim-staking, while others applyto both.First is the diligence requirements occurring in both forms of disposition. Thesespecify that the holder must undertake production or exploration within a specified time afterthe lease was issued or the claim recorded. However, in cases where the lease or mineral rightwas issued prior to the time when the firm holding it considered exploration or productionoptimal, such requirements leads to a combination of over- or under investment in the sensethat areas subject to leases or rights are explored too much, whereas other areas are starved ofinvestment (Bergstrom 1984; Gilbert 1981).The incentive to wait until a discovery is made and then rush in has been observed inrelation to oil reservoirs, where, after the initial discovery, firms rush in and try to pump asmuch as possible from a reservoir which is really common to many firms. The result is a situation where even very large common-pool losses were an insufficient incentive for the firmsto reach a unitization agreement (Wiggins and Liebcap 1985). The problem can be addressedby compulsory unitization, although implementation of such policies can involve a long fight(Libecap 1989), if the issue has not been addressed comprehensively in advance of leasing.Disclosure of exploration information is thought to increase the share of the lease valuecaptured by the seller, and to reduce the incentives for private accumulation of information95Economic management of mineral productionfor speculative purposes. Whether this is a useful approach depends on firms ability to circumvent disclosure (e.g. by randomizing the data), and on the lower value of bids resultingfrom less exploration for speculative purposes (Gilbert 1981).The final implication concerns the role of government exploration prior to leasing.This can be a way to reduce excessive pre-sale exploration. However, the exploration decisions made by a government-run structure are not necessarily more optimal than those madeby and in-optimal market process. Furthermore, exploration by government may not pursueas widely different exploration strategies as would firms in a competitive environment(Gilbert 1981).The previous paragraph indicated that government run exploration may not be an alternative. However, governments in all countries engage in research which is closely related tomineral exploration. There is little information available on why governments find the maintenance of extensive geological surveys necessary, but we can speculate that markets are unableto allocate investment to the kind of basic research carried out by the surveys. One possibleexplanation may be that investment in the early phases of exploration is provided by privateinvestors, because the information, and the acquisition of title to the tract being explored, represents prohibitively large sunk cost. It is important to keep in mind, though, that support forsuch purposes can expand into activities that are clearly subsidization.In the short run, exploration promotion policies may result in new discoveries but themain problem of such schemes is that they become unstable in the event of major discoveries.When such discoveries are made, there will invariably be intense pressures to recover the subsidies of the past, and the resulting tax-increases can be distortionary and can so undermine investor confidence that investment in exploration and development is reduced sharply.For the regulating government the problems associated with diligence requirementsposes the question, what are the alternatives ? From the discussion in the previous sections it isclear that cash auctions are a strong possibility. However, while this solution is frequently96Economic management of mineral productionused in the petroleum industry, it is very rare in mining21. Therefore it is also unfamiliar tomost mining firms.An alternative solution would be to lease tracts to mining exploration firms from theearliest stages of exploration. The positive cost of holding the tract would then be an incentive for the firm to hand back areas not deemed interesting to the firm. However, this leavesunresolved the problem of determining the price of the lease.Finally, the most sensible solution appears to involve the old-fashioned system withdiligence requirements, but in such a way that distortions are minimized. This may be possible by keeping the amount of required work low, by allowing concentration (“grouping”) ofwork carried out in a large permit area on smaller areas as uninteresting areas are handed back,and by allowing and facilitating trade in, and transfer of mineral titles. A further aid in reducing distortions could be the use of tradable exploration credits.Environmental managementThe economic management of mineral production can, at least conceptually, be said to include that part of environmental management which has economic implications for the miningenterprise. Several issues are considered here. First is the indirect effects of environmentalregulations as a whole on investment decisions. Second is the question of how actual environmental regulations are structured (i.e. whether they use direct regulation or economic incentives). Third are the possibilities of using market based incentives to achieve more efficientenvironmental protection in the mining industry.Strict environmental policies will generally increase operating cost at a mine. How miningcompanies deal with such rising costs is not well known, but there are three possible paths they21 Advertisements announcing such auctions for hard rock minerals appear occasionally in the Northern Minernewspaper. One jurisdiction which uses this approach is the State of Michigan, in the United States. Theseauctions must be distinguished from those where the assets of bankrupt individuals or companies are sold.97Economic management of mineral productioncan follow in order to maintain their level of profits. The first is simply to raise the price oftheir product to compensate for the higher costs. This is perhaps the best solution, since theend-users will be forced to pay the full cost of their consumption. It is, however, not possiblefor a firm to do this in a competitive industry unless all firms are subject to the same highercosts. The second way is to modify the production, such that each unit of mineral output hasvalue that is higher by an amount that equals the added environmental cost. To achieve this, itis necessary to increase the cut-off grade of the ore mined. In exactly the same way as for theproduction royalty, valuable mineralized material is left in the ground. The third possiblereaction to the imposition of environmental costs is to engage in research and developmentactivities that leads to a reduction in the environmental costs. To do so, however, is not aunique response for the mining industry, but depends on the innovative qualities of theindividual mining firm. Warhurst (1991) distinguishes between such firms on the one hand,and stagnant firms on the other. The innovative firms typically innovate in the planning phaseof new projects, and push the technological frontier in the direction of lower costs generally(i.e. lower environmental cost and lower production cost), whereas the stagnant firms merelyrespond to environmental regulation by complying, without trying to do so at a lower cost.No indication why implementation of innovative features should be a special characteristic ofnew projects is given. Indeed, the examples cited by Warhurst does not support this claim.The ability to realize adequate returns on investment in one of the above ways mayexplain the concentration of exploration investment in just three countries (Australia, Canadaand the United States) in the years since 1970 (Johnson 1990; Eggert 1992). This supports theinference drawn from the concentration of exploration investment (Warhurst 1991; Warhurst1992), that environmental regulation in the target country is not a serious concern compared tooverall political stability.In economic terms it is common to distinguish between direct regulation, whereby environmental standards are set by government, and various forms of market-based incentive systems98Economic management of mineral productionfor environmental control. While economists often advocate the use of economic managementinstruments in environmental policy, it is important to keep in mind that such an approach hasits limitations. Emergencies and other situations where swift regulatory action is necessary toprotect the environment are best handled with direct regulation (Baumol and Oates 1988).Generally, market based incentives are advocated on the grounds that they result in superior long-term solutions in terms of economic efficiency. Incentives usually fall in one oftwo categories. The first is the “charges and standards” type, which basically involve a fee ortax on emissions set (and possibly adjusted) so that a certain environmental standard is achieved. In this way the attainment of the standard can be achieved at something approaching minimum cost to society. The second category of incentives uses the price mechanism in a different way, by assigning rights to pollute, either to current polluters or by auction, and subsequently by allowing the permits to be traded. The latter approach is in some ways more flexible than the charges in its impact on current polluters (Baumol and Oates 1988).Given the inability of economic incentives to deal with rare or unexpected situations,Baumol and Oates (1988) suggest a combination, with a tax or tradable permit system todeal with what can be termed a “base load” pollution and direct regulation for use in the eventof “peaks” in emissions.The need for a variety of economic and regulatory tools is closely related to the diverse nature of environmental impacts. For mineral production these range from the disturbance caused by exploration teams over the enormous open pits and waste rock heaps of low-grade/high-tonnage mines to the sulfur emissions of base metal smelting processes.In relation to well-defined and measurable emissions, for example from smoke stacksor within drainage systems, economic incentives are potentially useful instruments. More difficult, however, is the application of economic incentives to some of the other environmentaleffects of exploration and mining. A typical example of the difficulties is tailings andwaste rock disposal.99Economic management of mineral productionMining involves the excavation and processing of mineralized material. In the process, vast quantities of non-mineralized material is removed to gain access to the orebody andthis material must be deposited somewhere. Similarly, only a fraction of the ore has any value but all the ore is ground to a fine powder in order to liberate the valuable minerals. Theresidue from the separation is called tailings, and they too must be disposed of somehow.The usual procedure is to deposit waste in dumps near the mine, a practice which sometimesresults in both technical (slope stability) and environmental (acid run-off and landscape damage) problems. Tailings, being suspended in water, are usually deposited in an impoundment area where the water can drain away, again at the risk of contaminating runoff with acidand heavy metals. When problems occur in these areas the cause may be poor engineering, insufficient investment or inappropriate regulation, or a combination of these.Using economic incentives to deal with this type of problems has not yet been investigated. An effluent fee can be imposed, which would provide an incentive to treat effluentsprior to their release. The other impacts, in this example most notably the generation ofwaste dumps is inevitable unless significantly different mining methods are adopted. Here ashift from open pits to underground mining may hold some promise. However, only wherein-situ mining is possible can real headway be made in dealing with the areal impact of mines. An example of such methods is direct extraction of coalbed methane with surfacedisturbance being limited to drill sites.One often used approach to environmental management of mines is to require the minedeveloper to post a bond at the beginning of mining, that can provide for the expense of rehabilitating a mining site at the end of mining in the event of the mining company being unableto finance such measures (Warhurst 1992). This practice is standard procedure in Canada anda number of other countries. There are, however, a number of problems associated with usingsuch an approach. First is the determination of the amount of the bond. For a major projectwith an extended life it will be difficult to predict the requirements for rehabilitation, especially when changing environmental standards are taken into account. Furthermore, the con-100Economic management of mineral productioncept of using a bond needs careful analysis if it is to provide the desired incentives for the mining company to minimize environmental impacts over the life of a mine. In principle thiswould require that the mining company is allowed to keep any part of the bond not used forsite rehabilitation.CONCLUDING REMARKS - MINERAL TAXATION AND ECONOMIC REGULATIONThe issue of taxation of mineral rents is paramount in this chapter, with exploration and environmental issues being pushed to the end. Nevertheless, taxation and efficient economic regulation of exploration and environmental protection has an important thing in common.This is the struggle between on the one hand maximizing the size of the economic pieand on the other hand maximizing the economic benefits occurring to a given group. For example, if the government was only concerned with short term benefits in the form of large revenues, then it could apply high tax-rates, obtain the large revenues but then watch as minesclose and investment moves elsewhere. Thus, the challenge for the government as a tax authority is to maximize total revenues subject to the constraint that the total tax-base is affected bythe severity of taxation.The choice of tax instruments also involves the risk to the State of variable tax revenues. This involves a tradeoff between smaller, but stable revenues from an inflexible tax system, and larger but unstable revenues from a flexible system. The RRT involves such flexibility but allows the government to capture more rent in the long run. Furthermore, the fluctuations can be stabilized through the use of funds, as discussed in chapter 9.The size of the economic pie also depends on how much money is wasted, or dissipated, as a result of inefficient regulations of exploration procedures and environmental protection. For exploration the possibilities of rent dissipation are the greatest in the case of workcommitment bidding. However, neither this, nor the misallocation of exploration expenditure as a result of work requirements has ever been analyzed.101Economic management of mineral productionThe possibilities for rent dissipation also exist in relation to environmental regulation. In this case, however, one must be careful to distinguish between mining firms having topay some (or all) of the external costs they impose on their surroundings, and doing it in aninefficient way. Getting the most effective environmental protection at the lowest price hasalways been a central element in environmental economic analysis.In real life it is not always possible to follow recommendations based solely on economic efficiency considerations. For taxation the adoption of a Resource Rent Tax may be too com—plicated for some jurisdictions, who may instead prefer to pay the efficiency cost of a royaltyin return for immediate revenues. For exploration, traditions in the industry pay an importantrole. It would thus be distinctly possible to frighten investors in exploration for metallic minerals away by adopting a pure cash bidding approach to leasing of mineral land. A similarproblem of implementation occurs in relation to use of economic regulation tools for mineoperations. Here the problem is to determine the efficient streams which can be measured andtaxed.In many cases these problems lead back to existing regulatory tools. This does notmean that the discussion has been futile. Rather, realization of the potential problems associated with these forms of regulation, may help designing them to be less inefficient than wouldotherwise be the case.102Technical management of mineral activities5TECHNICAL MANAGEMENT OFMINERAL ACTIVITIESThe topics covered in the previous two chapters concerned a range of economic issues related tonon-renewable resource extraction, ending with some remarks on the relationship between production economics, environmental protection, and the possibility of using economic incentivesto reach environmental goals.Having considerable knowledge of the economic effects of mineral development and ofthe economic incentive effects of taxes and other regulations does not, however, allow consideration of a complete mineral policy. The tax and other regulations must be comprehensible andconsistent, and take into account situations where economic incentives are unable to secure interests other than those of a purely profit maximizing mining firm.This chapter describes the regulations necessary to manage a mineral industry, with emphasis on the technical, practical and “non-market” (environmental) issues in the mining process. The description is divided in sections along a time line, beginning with exploration andcovering development, production and abandonment. Despite the emphasis on technical regulation, the question of economic implications of such regulations will be raised at various points.103Technical management of mineral activitiesThe regulations dealt with here are not concerned with regulation of the derived effects of mineral development. These are discussed further in chapter 9.One of the principal themes discussed below is the question of when environmental values should be protected. This issue is never easy to settle. In principle it can be reduced to onedominated by economic costs and benefits. In that case the stringency of environmental standards depends on the time-horizon adopted in analyzing costs and benefits, and on the periodand rate at which future benefits are discounted. In relation to the different environmental impacts of mineral exploration described below, their evaluation also depends on the time it takesnature to reestablish disturbance caused by exploration activity. For the subsequent stages of themining process, in which extensive disturbance can occur (at least for open pits) it is clear thatsome permanent changes in the environmental status quo are unavoidable. In these cases theeconomic valuation of costs and benefits becomes even more important.From a practical point of view, however, it is clear that while balancing environmentalcosts and development benefits in each case is highly preferable, such a task may be difficult toimplement in practice (see Poulin and Sinding (1993) for a discussion). As a result the secondbest alternative may be to use a balanced set of environmental regulations. Before embarking onthe substance of the present chapter, a brief digression concerning the underlying reasons for introducing regulations at all must be made.REGULATION, PROPERTY RIGHTS AND EXTERNALITIESThe regulations described in the following sections serve two distinct purposes. One is to allocate property rights to minerals, while the other is to deal with environmental externalities arising as a result of mineral activities.The existence of property rights in general can be viewed as a necessary institution formarkets to function. A model of an economy without property rights has been developed (Bushand Mayer 1974) which shows that an equilibrium is possible. The model also shows, however,104Technical management of mineral activitiesthat welfare can be improved by establishing property rights and allocating resources for theirenforcement. Thus each individual is better of when he allows his behaviour to be constrainedin return for having the behaviour of all others similarly constrained (Comes and Sandier 1986).In relation to natural resource issues the establishment of property rights and the specialnature of these resources has received considerable attention in recent years (Barzel 1989;Bromley 1991; Libecap 1989 and Ostrom 1990). Here it is important to note the observationof Ostrom (1990), that neither the state nor the market is uniformly able to devise a frameworkwhere long-term use of natural resource systems can be sustained.The market approach involves assigning property rights such that the so-called “tragedyof the commons” problem is avoided. This approach is the implicit recommendation of Coase(1960), who argues that an optimal solution to externality problems can be achieved if propertyrights are allocated, regardless of the owner. The problem with the “market” approach is that ina number of situations (high transaction costs or many involved parties) it is not possible toascertain exactly what the property right applies to. This means that, as the unit value of theresource declines, so does the effort expended on defining property rights. in practical terms thismeans that for resources of iow unit value (water for example), property rights are less preciselydefined than for a plot of prime agricultural land (Bromley 1991).The alternative to the private solution is government regulation and resource allocation,as advocated in the famous paper by Hardin (1968). However, while an optimal solution maybe possible using this approach, it depends on the information available to the regulator, his ability to monitor events, the sanctions which can be imposed on transgressors, and the cost of operating such a system (Ostrom 1990). The choice is not, however, necessarily between these twoextremes. Ostrom (1990) argues that common pooi problems may be solved by a mixture ofmarket and regulatory mechanisms, where the latter can be either private or public arbitration orenforcement mechanisms.For mineral deposits, and particularly for metallic minerals, this approach is similar tothe one used by Libecap (1989) to explain the variety of outcomes in different types of resources.105Technical management of mineral activitiesFor minerals, Libecap argues that the clarity with which miners observed common pooi lossesduring 1849 California gold rush (where open access and anarchy was the norm) resulted in local contracting to allocate property rights. The features which characterized the smooth processleading to these private mineral rights included large expected aggregate gains from the development of a mining industry, broad access to mineral lands, positive individual shares in aggregate gains from institutional change, few information asymmetries in valuing and assigningindividual rights and lack of competing (non-mining) vested interests.To summarize, the need for defined property rights arises from the needs of the marketand the common pooi nature of natural resources. A set of rules can evolve under favourableconditions, as described by Libecap (1989). The problems arise when competing interests areimportant. These can be diverse but can be considered together as they all arise from the external effects of mineral activities.This brings us to the other reason for applying rules and regulations to mining. This activity has external effects which must somehow be dealt with. The government regulation ormarket operation discussion applies here, but only leads to one or more of the standardprescriptions of environmental economics. However, the areas where tools other than traditional regulation can be applied in relation mining are very few and very little research has beenconducted on how to use economic tools to deal with mining environmental problems.EXPLORATIONThe exploration process starts when someone begins to think about finding a mineral deposit.For the individual exploration firm the process of discovery involves definition of fundamentalssuch as the commodity(-ies) to look for, geological environment in which to do so, and selectionof regions where such environments exist. Some of these fundamentals may be given as part ofcorporate policy. In addition, the selection of a target area depends on geology, available infras106Technical management of mineral activitiestructure, and a component which is a function of the economic, regulatory and political conditions in the target area.For a government wishing to attract investment, infrastructure as well as economic, regulatory, and political conditions are within its control to varying degrees, although improving infrastructure is a much more long term undertaking than improving the regulatory package offered to investors. In the present section we examine the technical elements in the package whichhave direct bearing on the exploration phase.Land use planning and land accessInvestment in exploration is in many ways an irreversible or sunk cost. The information acquired is closely related to the tract in which it was collected. The close relationship between information and location means that tenure, and the possibility of being able to extract any discovered minerals, is important . At the same time the problem facing mining firms now, and inthe future, is that mining is an activity which must compete with alternative land uses. Thiscontrasts with earlier times, when mining was usually considered the highest and best use of theland - and permission to mine was not an issue.In many industrialized mining countries recent years have witnessed the final demise ofthe preferential status of mining as the most valuable land use. One of the most compelling examples of this has been the creation of a “World Heritage site” in the Tatshenshini-Alsek Riverarea of NW British Columbia, in an area with high mineral potential, no previous development,and one well explored major (“World Class” according to some) copper deposit (CORE 1993).One of the most important lessons which can be drawn from this case is the long time it tookfrom the original staking of the Windy Craggy claims to the emergence of the environmental107Technical management of mineral activitiesdebate which led to the creation of the World Heritage Site22. Thus it was only when the threatof mining became imminent that action was taken.The insecurity surrounding many projects as a result of such events highlight the reduced valueof traditional mineral rights. For the small and new mining country wishing to attract investment, it is important to send a signal to investors that mineral rights are very secure once assigned, and that environmental policy will not be used to block projects expost.Part of the solution to the problems exemplified above is conceptually simple, but possibly difficult to implement. Mineral rights should be issued only in areas where the government is fullycommitted to protecting these rights. In areas with significant other values, which cannot beprotected without total exclusion of mineral activities, access should be denied with such claritythat there is no incentive to speculate in a reversal of policy.The problems of implementation are admittedly severe. First is the fact that governmentcommitment may last only until the next election. The uncertainty about commitment can bereduced, if there is broad political agreement about such a policy. The second problem is one ofinformation availability. For a land use policy of this kind to be credible, it is necessary that thegovernment (and the public as well) is well informed about the environmental values which necessitate a ban on mineral activity. Thus, an approach of this kind may only be possible incountries or regions where the information base on these matters is already well established23.The various mineral resource assessment techniques, especially those relying on multivariate22 The claims were staked in 1958, but the exploration which led to the mining proposal and thus to the demandsfor denial of permission to develop and mine, was only initiated by Geddes Resources from 1981 onwards. Thedecision to create a World Heritage site was made in the summer of 1993.23 The example from British Columbia, showing the delay from the recording of the initial mineral right, and theemergence of the problem when mining becomes a real possibility, is applicable in all cases where alternative landuses (parks and wilderness areas) are imposed on top of existing rights. The more aggressively a government pursuesprotection policies, the more adversarial will be the attitude taken by owners of existing rights. The implementationof alternative land use decisions based on the turnover rate of mineral claims and the probability of discovery isdiscussed briefly by Poulin and Sinding (1993b).108Technical management of mineral activitiesgeostatistics (Harris 1984), and the discovery process model (Barouch and Kaufman 1976) maybe useful in estimating the mineral potential of an area. However, such estimates needs to besupplemented by estimates of the value of other environmental assets.Location, position and recording of titlesThe legal right to mineral deposits is a central element in any project and the system underwhich such rights are issued is very important for how investors perceive a country as an investment target. In order to understand various types of mineral rights it is necessary to examinebriefly the traditions in the area of mineral title disposition.Initially, a distinction must be made between on the one hand Anglo-Saxon commonlaw tradition, and on the other hand Roman and continental (i.e. European) civil law. In theAnglo-Saxon tradition the subsurface and surface estates follow one another. In contrast, theRoman law tradition separates the two estates, and commonly vests the mineral estate in theCrown or state. However, present-day mineral laws are to some extent a mixture of the twotraditions, and the developments they have undergone over the centuries.As in most areas of law, the distinction between Anglo-Saxon common-law tradition andcontinental civil (Roman) law tradition also applies in mining. The Anglo-Saxon approach hasbeen noted above. The Roman Law tradition includes two important aspects not found in Anglo-Saxon legal tradition. The first is the concept of “regalian property”. This implies that kingsand other potentates reserved for themselves the right to gold, silver and precious stones foundwithin their respective realms. The second concept is the “res nullius”, that some things are notowned by anyone until found and appropriated by someone. The regalian property as used incentral Europe was gradually expanded to include all sub-surface minerals, and is the precursorfor modern-day state ownership of mineral resources (Kuehne and Trelease 1984).The development of Anglo-Saxon mineral law was marked by the gradual adoption ofsome of the principles of Roman and continental legal tradition, and a movement away from thecombined nature of the surface and mineral estates. The res nullius is evident in the “free miner”109Technical management of mineral activitiesconcept, and also in the widely used claim staking approach to mineral title disposition used inthe US, Canada and Australia. A number of other features of modern Anglo-American minerallaw can be traced to this continental influence, including the concept of extra-latteral rights(“the law of the apex”) (Leshy 1987), and many standard terms such as “drift”, “stope”, “strike”,etc. (Kuehne and Trelease 1984).Despite the fact that the res nullius still exists, the ability to stake and record a claim in countriesin the Anglo-American tradition applies only to certain lands. On privately owned land theoriginal unity of the two estates may remain, the owner may have created a mineral estate inanother person or may have sold the surface right while reserving the mineral estate for himself(see figure 5.1.). The creation of lesser property rights by “leasing” the minerals to an operator isalso a possibility (Kuehne and Trelease 1984). For lands owned by the state, access to claim staking still exists in some countries (the US. and Canada). Staking can, in principle, be done onany Crown land in Canada, or any federal land in the United States, unless the land has beenwithdrawn (i.e. for urban areas, parks, reservations etc.)One of the interesting contrasts to the above description is the Australian procedure. Inthe states of Australia the practice of including minerals in Crown land grants was eliminated inthe last quarter of the nineteenth century. Some mineral rights granted earlier have even beenre-expropriated (Crommelin 1988). A further feature which distinguishes Australian minerallegislation from the Anglo-American tradition is that in many states the power to grant mineral110Technical management of mineral activitiesrights is fully discretionary, as seen for example in the Western Australia Mining Act24. This ineffect moves the Australian procedure closer to the “regalian property” approach. A similartrend for Canada and other common law countries has been noted by Eggert (1992).The trend in common law countries towards regalian or state property in minerals(Eggert 1992) means that an alternative to the disposition of combined surface and mineralrights is necessary. Figure 5.2. outlines a considerable range of options. It should be noted thatthese are all equally applicable to allocation of mineral rights within a state property/regalianproperty regime. The term “title” used above does not imply anything about the quality of theright allocated to the holder. The most proper description is to refer to the title as a contractbetween the [present] owner of the mineral estate and another party, who either buys the entiremineral estate within a defined area, or the right to extract minerals under specified conditions.The distinction between regalian and res nuiius property regimes matters only if a largefraction of state or Crown land has been transferred to private owners. If such a transfer has nottaken place the distinction is irrelevant because the state owns both surface and subsurface.Figure 5.2. Ivlineral titles when mineral estate is vested in the state (regalian) property.24 According to the MiningJournal newspaper of July 16th, 1993, the Western Australia Mining Law is currentlyundergoing reform. The observation applies, however to several other states, including Tasmania, NorthernTerritory and New South Wales.111Technical management of mineral activitiesExploration titles and control over marginal depositsA special aspect of mineral titles is the way they treat properties, or cases where exploration hasindicated an anomaly or mineral occurrence which is not currently economic. In such situationsthe investor may want to retain the right to mine the deposit at some future date, if commodityprices or extraction costs so favour.Most mining laws do not have provisions which cover such cases specifically. The Canadian jurisdictions examined (British Columbia, Ontario and Quebec) are examples of this. Formost of these, however, the tenure can be maintained for a long time by the accumulated valueof exploration work carried out by the holder of the title. Australia, in contrast, provides twoexamples of specific regulation of this issue. In Western Australia the Mining Act 1978 allowsexploration licenses an exemption from the normal work requirements in a number of cases, forexample when the title is in dispute, when time for further investigations is needed, when a deposit is presently uneconomic, or when the holder has problems obtaining the necessary permits25. Similarly, the Northern Territory of Australia has included a special “Exploration Retention License” in the Mining Act in order to deal with presently uneconomic deposits26.Regulation of the exploration processDistinct from the matter of mineral titles and the way they are allocated is the question of regulating how prospectors should go about their work of discovering mineral deposits. To providethe foundation for the mineral policy design for Greenland in chapter 8, it is necessary to discussbriefly the possible impacts of mineral exploration activities. These can be divided into threemain categories, surface disturbance (on site and for accessing the site), environmental problemson site (storage of supplies and disposal of waste materials), and general impact of explorationactivity on plant and animal life in an area.25 Western Australia Mining Act 1978, section 102.26 Northern Territory ofAustralia Mining Act section 38.112Technical management of mineral activitiesSurface disturbance may occur when more advanced exploration involving diamond orreverse circulation drilling, trenching, and bulk sampling from shallow pits is undertaken. Tothis category must also be added the use of blasting to obtain fresh rock samples or to gain accessin other ways, and the construction of underground access to an orebody. These can all be major impacts if sites are not reclaimed. It is not clear, however, how far reclamation should proceed. One thing is to fill in trenches and pits, but more difficult, and itself a matter of degree, isthe question of whether disturbed areas should be revegetated.Another type of surface disturbance can be involved when roads and culverts are constructed for the purpose of establishing road access. In this case there are two options. One is toremove the road which involves the risk of disturbing an even larger area than occupied by theroad itself. The other is to leave the road in place. This is a particularly relevant option in caseswhere the road can be used to access more than one exploration site.The operations involved in mineral exploration may also have the potential for otherenvironmental impacts at the exploration site. These are related to the storage of supplies(primarily fuel and chemicals), and the disposal of waste (non-combustible). The possible regulatory responses range from non-action to rules prescribing the use of approved containers forsupplies, the nature of storage sites and requiring total removal of all wastes, garbage, sludge etc.(burial is an option but this involves surface disturbance).The final problem associated with the exploration phase is referred to as “general environmental impact”, for want of a better term. This refers to the impact on plant and animal lifeof the presence of humans looking for minerals. These impacts depends on the extent and intensity of activities. Most are, however, highly localized as a result of the spatially limited extentof an exploration area (in most cases) and the fraction of sites explored intensively (e.g. by diamond drilling) is very small relative to the total number of sites examined in an exploration program.113Technical management of mineral activitiesThe actual regulation of the mineral exploration process varies from one jurisdiction to the next.In some cases regulations are primarily concerned with occupational health issues, as seen in thecase of British Columbia, a province in Canada (Resource Management Branch 1992)27. Withthe exception of actions to be taken if acid generating rocks are encountered, environmental aspects are primarily mentioned in section 10.1.1 of the Code. This section emphasizes that plansfiled for approval pursuant to section 10[1] of the Mines Ac628 must show how reclamation isexpected to proceedIn the case of Ontario, another Canadian province, the most recent revisions to the MmingAct29 includes regulation of “advanced” exploration projects, defined as those activities whichresemble actual mining operations. This type of activities require the operator to give notice tothe proper authorities, and to submit a closure plan to the Director of Mine Reclamation.The Mining Regulations 1981 of the Western Australia Mining Act 1978 are considerablymore brief on the matter of exploration regulation, stating that holders of mining tenements3°“chall not allow detritus, dirt, sludge, refuse, garbage mine water or pollutantfrom the tenement tobecome an inconvenience....to the public... ‘s’.The Northern Territory ofAustralia is more explicit. Section 24 of the Mining Act specifies that licensees must notify the proper authority in advance when an exploration program involves substantial surface disturbance, and must comply with directions issued by that authority.Section 24 also specifies that notice must be given, and directions complied with, regardingcamp location, disposal of camp waste, discovery of water underground, installations and historic sites32.27 The rules are found in part 11 of the health, safety and reclamation code for mines in British Columbia.28 Statutes of British Columbia, Chapter 56.29 Revised Statutes of Ontario, chapter 268.30 A tenement is a common term for various types of mineral title in Australia.31 Western Australia Mining Regulations section 98. The following section of the regulations adds that holders arerequired to make adequate provision for preservation of decency on the tenement.32 Generally much more stringent limitations apply in Australian conservation areas. The important thing tonotice, however, is that exploration is allowed at all. This also applies in the case of Tasmania and the logicalconsequence is that mining is possible in conservation areas, at least in principle.114Technical management of mineral activitiesStill more detailed regulations are found in Tasmania, the smallest of Australia’s states.These are issued administratively under the power given in section 15 [1] of the Tasmania MmingAct 1929 (Tsamenyi 1989). The general environmental conditions imposed on explorationincludes the following:1. Written permission to use mechanical excavators must be obtained;2. Filling in of non-required excavations is necessary;3. Approval to light fires must be obtained;4. No interference with aboriginal and historical sites or objects is permitted;5. No interference with native fauna and bird life is permitted;6. Surface area disturbed must be minimized and grasses and soil removed must be replaced;7. Any proposed construction of roads or airstrips must be reported;8. All waste and rubbish must be removed or buried.These regulations are further expanded where mineral leases are located in conservation areas,and the regulations are considerably stricter (Tsamenyi 1989).Exploration work requirementsThe matter of required exploration work was discussed from an economic point of view in theprevious chapter, but little was made of the actual size of work requirements in monetary terms.The following table gives an idea of these requirements in some of the Canadian jurisdictionsmentioned elsewhere in the text. These are considered fairly representative of the terms one islikely to encounter.TABLE 5.1. MINERAL EXPLORATION REQUIREMENTS IN CANADA NORMALIZED TO C$ PERSTANDARD UNIT (16HA)Year 1 2 3 4 5 6 7 8 9 10British Columbia 64 64 64 128 128 128 128 128 128 128Ontario 0 400 400 400 400 400 400 400 400 400Quebec 250 250 250 250 250 250 375 375 375 375Source: British Columbia Mineral Tenure Act Regulations, Section 19, Ontario Regulation 116/91, Section 2, Quebec Mining Act.115Technical management of mineral activitiesThese levels of required work can be contrasted with the amount required in Western Australia.There the minimum amount of work is A$300 per square km.33. In the Northern Territory ofAustralia the work requirement is fixed in individual exploration licenses34 and no informationis available on their size.REGULATION OF MINE DEVELOPMENT AND PRODUCTIONFollowing the discussion above, the fact that mineral exploration in an area has been allowed,must normally be taken to indicate that mining activities are considered an acceptable activity,possibly subject to conditions laid out when exploration title was obtained. This must, in principle, mean that mine development can proceed subject to current rules and regulations.The decision to allow mineral exploration is not necessarily identical to complete laissez-faire policy. The actual process of mine development may still be regulated in order to deal withvarious types of external effects associated with mines. These are not only those associated withenvironmental impacts, but can also be caused by socio-economic impacts.The present section examines three phases of mining, development and project approval,operation and monitoring and, finally, closure, site abandonment and long-terms monitoring.For the discussion of problems associated with project approval procedures an example drawnfrom the Province of British Columbia is used extensively.Project approvalThe regulator dealing with one or more applications for permission to develop a mine is facedwith two options. He can devise a regulatory framework specifying precisely what criteria anyproject must meet, await applications, and check whether or not they are in compliance. The33 Western Australia Mining Regulations, Section 21.Northern Territory ofAustralia Mining Act, Section 24.116Technical management of mineral activitiesproblem with detailed regulation is that such a system may have difficulty in dealing with widelydiffering projects unless all possible situations have been taken into account when regulationswere designed. The extent to which this approach is possible and reasonable depends on manyfactors. The most important is probably the size of the industry in question, the amount ofknowledge and information the regulating agency has accumulated, and the efficiency of themethod relative to other approaches.Alternatively, the regulator can adopt a case-by-case approach, setting out only generalguidelines for application documents, and then use a three-sided process to define precisely whatmust go into an application document. An example of this approach is provided by the BritishColumbia Mine Development Assessment Process35,as described below. This example may notbe one worth following, but it serves to indicate the issues involved in the project approval phase.The British Columbia process consists of two levels, one for “simple” projects, and anadditional one for “complex” projects. The first level consists of 3 phases. First the pre-application phase is used to define the terms of reference to be followed in the application for a certificate allowing mine development. Then comes the application phase, in which the applicant tailors his document to the terms of reference already defined. The third phase involves a government decision on the application. The first phase requires the submission and publication of aprospectus containing basic information on the project, organized along the following lines:1. Corporate information and property history;2. Geology, reserves, proposed pilot operations, production levels and reserve life;3. Nature of workings (pit or underground, location, design etc.);4. Location, design and size of mine rock dumps, tailings disposal areas, and orestockpile areas;5. Ore processing facilities (crushing, milling, and concentration facilities);6. Infrastructure (site layout, power supply, site access, housing);7. Development timetable;35 The process, described in the document “A guide to the review and certification of mine developments”published by the B.C. Ministry of Energy, Mines and Petroleum Resources and the Ministry of Environment, Landand Parks, is regulated by the Mine Development Assessment Act of 1990, S.B.C Chapter 55.117Technical management of mineral activities8. Summary of environmental and socio-economic baseline information and proposed study program;9. Review of likely environmental and socio-economic impacts;10. Proposed consultation program.The consultation at this level is intended to identifr possible information gaps prior to thesubmission of a formal application. In the second phase the information already recorded in theprospectus is supplemented by additional information on project impact:11. Baseline information36from which potential impacts can be determined and impact management strategies developed;12. An assessment of environmental and socio-economic impacts and a plan for mitigation of identified impacts;13. Plans and strategies for public consultation;14. List of all anticipated permits, approvals and licenses (provincial and federal).The full application must be made available to the public, and this fact must be advertised, all aspart of the consultation process. The third phase is the review by a management committee appointed by the two ministers (i.e. mines and environment). The committee must recommend tothe minister one of four options:A. Refer the application to an independent assessment panel (i.e. take it to level 2);B. Accept the application and issue Mine Development Certificate which allows theapplicant to proceed with obtaining permits, licenses etc. The certificate identifies the terms and conditions under which it is issued, including any follow-upprogram and/or mitigation measures to be implemented in connection with thedevelopment;C. Return application for upgrading;D. Reject application.36Environmental field information must cover at least one full year, and possibly more, in order to be sufficientlyrepresentative.118Technical management of mineral activitiesThe second level of the assessment process is activated if a project application is referred to a panel review. This involves an extensive further round of public consultation using a choice of information programs, negotiation, mediation, informal hearings and formal hearings. Based onthese activities, the panel makes a recommendation to the minister(s), who must then reject oraccept the application. In practice, the panel review must often take place as a joint review withthe federal government. This additional level of review (the Environmental Assessment and Review Process) is activated whenever a project may have a significant impact on an area of Canadian federal responsibility.The procedure involved in the case of the British Columbia Mine Development Review (MDR)is very long, especially if the second level is activated. Following the discussion in the section onland use planning, blocking projects at the development stage is logically inconsistent, potentially very wasteful, and may lead to significant distortions in the allocation of exploration expenditure. The question is, however, why the review occurs at this late stage in a project history.One factor explaining the Mineral Development Review approach is the lack of adequateland use planning in earlier times. A clear statement of where development of mines is desirableas a matter of principle would help direct exploration investment to those areas where development is certain to be allowed if a discovery is made.A second factor is lack of information. The land use planning required is based on information which, if not available, must be obtained when development is proposed. This highlights the problem associated with any planning associated with mineral development: the highlyspecific nature of all exploration information. If information is collected in advance of exploration, in order to be prepared, there is a high risk of it being redundant where there are no mineral deposits to be found. On the other hand, the alternative is to submit all projects to the riskof being blocked, ifpost-discovery information indicated that a mine should not be built.The MDR process described above also has another inherent problem. This is the veryhigh degree of public involvement in the process. While this may to some extent be a special119Technical management of mineral activitiesCanadian phenomenon, it reflects the fear that the political and administrative system of government is unable to adopt optimal solutions. The answer in the Canadian approach is additional layers of “public consultation”. Despite its ability to supply decision-makers with information about different views on a resource development the consultation process may give the public a false feeling of having influence on decisions.. The consultation process can also becomedominated by individuals and groups with narrow special interests, leading to what is essentiallyrent seeking activities (Poulin and Sinding 1993).Apart from the environmental perspective, the Health, Safety and Reclamation Code for BritishColumbia, as well as the Mine Management Act of Australia’s Northern Territory exemplifiesthe wide range of practical issues involved in the development phase. These include mine design, industrial hygiene, personnel safety, use of explosives and various types of equipment, aswell as the duties of both the mine manager and employees and inspection, testing and approvalprocedures.Regulation of mine productionRegulation of mine production involves two separate aspects. One is related to production itself,the other to environmental protection. For production the issue is whether a regulator shouldhave any powers to influence production decisions, especially mining rate and cut-off grade.There are two arguments in favour of providing a regulator with such powers. The firstis related to the regional development aspect of mining. From a government point of view itmay be desirable to extend the life of a mine in order to justify various public investments, or topreserve jobs. The problem faced by government is that mining firms frequently do not defineore reserves beyond a 10 year planning period, while many public investment projects(infrastructure, health care, schools) have considerably longer life spans. This provides an in-120Technical management of mineral activitiescentive for a regulator to demand an extension of mine-life by specifying production levelsand/or cut-off grades lower than those preferred by the mining company37.The argument is questionable, however. The business of mining is characterized byconsiderable variability, especially in mineral commodity prices. These translate into fluctuations in the fortunes of mines, especially if they are only marginally profitable. These fluctuations may then lead to “boom and bust” cycles in mining communities, causing temporary hardship. These problems may be temporary, but will eventually emerge as the ore reserves of a mineare depleted. The question is whether regulation of mining rate and/or of cut-off grade will alleviate the “boom-bust” problem or the depletion problem. Given that such regulation has thepotential of being inoptimal (not profit-maximizing) for the mining firm, it is likely that firmswill not invest in inframarginal projects, if such regulations are in force.The second argument for giving a regulator the power to limit production is based onenvironmental considerations. The level and impact of a mine may depend on the level of production of various types of waste. To the extent that emissions are a function of the level ofproduction, and when the environmental impact of a mine depends on the emissions, then regulating mine production may be necessary. The bottleneck here is the carrying capacity of theenvironment, and the regulative approach needs to share this capacity among all who wishes toproduce. This problem is faced by all human activities and is highly dependent on how environmental regulation is approached generally.The conclusion must be that if, for some reason, governments choose to subsidize mineprojects to a significant degree, they become partners in the project. They can then reasonablypursue other objectives than profit maximization. In general, however, it is not optimal to interfere with operations.An example of this is the development of the Nanisivik Mine described in chapter 9. There the Government ofCanada insisted on a longer planned mine life as a condition for providing subsidies for infrastructure(Wojciechowski 1982).121Technical management of mineral activitiesCLOSURE OF MINES AND ABANDONMENT OF MINE SITESWhen a mine closes, the reason is always lack of ore in some form. The events resulting is thislack, can be many and varied, ranging from true exhaustion of reserves to cost increases, pricedeclines, accidents, and political upheaval, which may occur separately or in conjunction withone another. The key feature is that change the basic operating parameters of the mine, andthus the quantity of ore. The closure may be permanent or temporary, again depending onwhat combination of events precipitate it. In both cases, however, a number of regulations arerelevant. The following sections examine three aspects of mine closure: temporary closure, during which the mine is put on a care and maintenance basis, permanent closure and site reclamation, and long-term management of abandoned sites.Temporary mine closuresMining is based on the presence of mineralized material in sufficient quantity and quality(grade) to allow profitable extraction to take place within a certain time horizon. The economicsof a mine depends on the price of mineral outputs and the cost of extraction. All of these factorsvary over time. As a result the definition of valuable ore and worthless waste also changes overtime. In some cases the movement of commodity prices and extraction costs conspire to movelarge fractions of the ore reserves into the waste category. When this occurs, the mining firm isfaced with three options. If it is possible to respond to lower prices or higher costs of supplies byimproving productivity, then the mine may both recover “lost” reserves, and be better placed, ifand when prices increase. In some cases, particularly in the short term, a mine will not be ableto react in this way. It can then respond by limiting losses by closing the mine operations untilprices recover. This is not a cost-free exercise, but may in some cases also allow time to restructure production and increase productivity or, simply, await better prices. For the regulator whohas made sure that provision has been made for permanent closure, the goal should be to minimize the cost of temporary closures.122Technical management of mineral activitiesPermanent closure, reclamation and long term monitoring of abandoned sitesIn cases of permanent closure of mines, environmental aspects dominate the regulatory picture.As mentioned in the examples given above, reclamation issues are often part of the regulationscovering the exploration phase. That trend continues into the production phase. As above, thefollowing description is based primarily on three examples for which data are available: BritishColumbia, Ontario and Tasmania.The exception to the environmental preoccupation in the case of British Columbia is the requirement that in case of permanent mine closure, all mine openings must be made safe againstinadvertent access. Otherwise environmental protection dominates. The chief concern is reflected in section 1O.1.2[4] of the British Columbia Code, which requires the mine manager tosubmit“a program for the protection and reclamation ofthe land and watercourses during construction andoperatingphases, with particular refirence to(a) environmental monitoring and surveillance,(b) a detailed reclamation program, including research, Jhr the nextfive yearsSection 1O.1.2[5-6] continues the list of what the manager must submit:“[5] a conceptualfinal reclamation plan fbr the closure or abandonment ofthe mining operation...”“[6] an estimate ofthe total cost ofoutstanding reclamation obligations over the planned lfè ofthemine) including the cost oflong term monitoring and abatement”The range of possible content of closure and rehabilitation plans can be extremely wide, asshown by the guidelines for mine rehabilitation published by the Ontario Ministry of NorthernDevelopment and Mines (1992). These guidelines give a very good impression of the contentand function of such plans. The three objectives of a rehabilitation can be summarized under123Technical management of mineral activitiesthe following headings, protect public health and safety; alleviate or eliminate environmentaldamages, and allow productive use of land in its original condition or in an alternative use.The key factors which determine whether these objectives can be achieved are physical and chemical stability of physical structures remaining after mine closure. The Ontario guidelines(Ontario Ministry of Northern Development and Mines 1992) go very far in terms of ensuringprotection in perpetuity by stating that, ideally, physical structures must be able to withstand erosion of any kind, regardless of how extreme conditions may be. This requirement is expressedin the direction that a rehabilitation plan must consider:1. Naturally occurring physical hazards;2. The level of environmental impacts;3. Expected subsequent land use.Finally the guidelines consider three types of design. The “walk away” design implies that nosubsequent work or monitoring is required. The “passive care” design implies that only minimaland occasional maintenance and monitoring is necessary. The “active care” design category indicates that ongoing operation of abatement measures and constant monitoring and maintenanceis necessary.The elements of the Ontario rehabilitation system briefly noted above are remarkable inone way: They do not seem to take into account an overall economic view of the need, desirability or otherwise, for rehabilitated sites. The need is partly explained with reference to publichealth and safety, but that only applies to part of the impacts of mines. The other arguments,level of environmental impact, and expected subsequent land use, are different in the sense thatthe effects of mining are externalities imposed on public, and thus the problem is one of valuingthe associated economic loss.All these programs and estimates are to be submitted as part of an application for a permit tomine in British Columbia. Such a permit is issued by the Chief Inspector of Mines under sec124Technical management of mineral activitiestion 10 [3] of the Mines Act38. A permit may specify that it is a condition for the permit that themine owner, agent or manager gives security for an amount considered necessary to carry out minereclamation “ (Mines Act, Section 1014]). To secure that reclamation is carried, out the ownermay further be required to add to the security already given, on an annual basis. The 1989amendment to the Ontario Mining Act basically takes the same approach, although moreemphasis is devoted to bringing existing operations under the reclamation provisions. In Tasmania elements similar to those described are used, but are implemented administratively underthe general power of the minister to include conditions in mineral permits (Tsamenyi 1989).ON REGUlATION DESIGN AND THE ENVIRONMENTAL COSTS OF MINING OPERATIONSThe question of how technical regulations related to environmental protection are designed, andwhere in the overall regulatory structure they are placed, is a matter of considerable interest. Ithas been addressed by Tsamenyi (1989) in a specific context, but a number of general points ofinterest emerge from this discussion. These are examined in the first section below.Environmental regulations in most cases involve additional cost to the mine operator.Apart from the advantage of designing environmental regulations such that the most environmental benefits are obtained at the lowest cost, the special nature of mining means that the costsof environmental compliance involves the regulator in a difficult tradeoff between revenues andenvironmental quality. This issue is the subject of the second section below.Environmental rules for mining and their place in the regulatory structureThe discussion of environmental issues by Tsamenyi (1989) in relation to his review of the Tasmania Mining Act 1929 provides a good framework for addressing the problem of how environmental aspects of mineral activities are best dealt with. Three different options are possible:38 Mines Act, S.B.C. 1989, Chapter 56.125Technical management of mineral activities1. Include detailed environmental regulations in the mining act;2. Include only general environmental regulations, and give the minister discretion in detailed regulation;3. Place environmental regulations in the relevant environmental protection legislation.The three options reflects the dilemma faced by a regulator over the proper place of environmental regulation of mining activities. Detailed regulation have the advantage of placing all projectunder equal constraints, they give investors detailed information in advance of any investment,and ministers and civil servants have little or no discretion. On the other hand, the variability ofprojects, the possibility of Over—regulation (as the rules must be able to deal with all possiblecases), and the more frequent (relative to general regulations) need to amend a highly detailed setof rules, are negative aspects to consider.Using general rules combined with administrative discretion is a more flexible approach,although it introduces a higher degree of uncertainty about the magnitude of environmentalcosts. The extent to which this is a problem depends on how much of the regulatory burden isdecided on an individual project basis, and how much is specified in rules issued administratively under the discretionary powers of the minister.The third possibility is to place all types of environmental regulation under the same legislation. This still leaves the problem of detailed vs. general rules, and may add internal communication problems between government departments. On the other hand the possible objection that environmental laws are unsuited to deal with the special case of mining does not hold.Regardless of how management responsibility is placed, the regulating agency responsiblemust take into account that it can be manipulated by special interests. For example, the environmental agency may be influenced by preservation groups, while the mining agency may beinfluenced by the people from the mining industry, with whom it is in contact. The degree towhich such “regulatory capture” is a problem depends on how much actual influence interestgroups have on the policies of the respective ministries, and that in turn is related to the scopethe ministries have to influence decisions. If they are allocated wide administrative discretion,126Technical management of mineral activitiesand have a tradition for impartiality, there is no real problem. If, however, bureaucrats are notimpartial, then discretionary powers may not be preferable to detailed regulation.With these remarks in mind it must be said, that the choice between alternative locations for environmental regulation of mining, and between detailed and general regulations depends on thecircumstances in each case. If the mining industry is relatively small, then the special nature ofthe industry indicates that environmental regulation should be placed under the mining legislation. If the industry is large, regulation should be part of the general environmental protectionlegislation. Except in rare cases the combination of general rules in the legislation, specific rulesdetermined administratively and some discretion in individual cases would be the most flexibleapproach which did not prevent investors from having a good idea of cost determined by environmental regulation. Where an individual approach is adopted, the “Environmental ImpactAssessment” (EIA) (option 7) becomes an important tool in determining project impacts and theregulatory responses. In this context it should be noted that an “EIA” can be many things, andthat its content must either be specified generally or individually in each case.Environmental costs and benefits in miningIt is a weH known fact that private economic activity can impose unwanted costs on other people. These costs are external to the decision unit, and will not be taken into account in its actions unless it is forced to do so. Environmental regulation is one of the ways in which externaleffects are re-imposed on their originator.Regardless of their form the various possible environmental regulations are all characterized by the fact that they impose an additional cost on mining firms relative to situations withoutregulation. Regulations are introduced to make the mining firm pay the full (or at least more) ofthe social cost of their operation.The problem facing government is that on the one hand it seeks to impose environmental regulations, while on the other hand those regulations may have a strong impact on the127Technical management of mineral activitiesflues resulting from taxation of mineral rent. Restrictive environmental policies essentially involve an internalization of external costs, such that the unit production costs reflect the full social costs. However, higher cost can transform a mineral deposit into a worthless occurrence ofmineralized material. Alternatively it may reduce the amount of mineral rent which is the basefor mining tax revenues. The reason for this is that the principal mineral commodities are traded in competitive markets where the individual producer does not have the power to influenceprices (Slade 1991). This means that producers can not pass on their additional costs to consumers, but must instead take the cost out of profits. Given that investors are unlikely to accept alower rate of return, this in turn means that each mine will have to mine ore with a higher grade,in order to cover environmental costs and a normal rate of return (Poulin and Sinding 1 993a).This special characteristic of mineral resources comes on top of the general need to be informedabout the environmental loss resulting from unregulated economic activity. The problem facingan environmental regulator is to determine how strict regulations should be. In order to do sosome way of quantifying the loss associated with development is required. The general approachpresented in chapter 3 involves both benefit and cost of development, as well as the benefitswhich could have been enjoyed if development were not to occur. Thus, the problem facing aregulator is how to value environmental benefits which are typically not traded in any market.Chapter 3 suggested that methods do exist, and are applied in some cases. In relation to mining,the information required is an economic valuation of the changes in nature a mine creates, bothtemporary and permanent. Once it has been determined what the cost-benefit equation lookslike, it is then possible to determine how the unacceptable impacts are to be eliminated. Thesolution presented above is not, however, explicit on the manner in which unacceptable externalities are to be internalized.Unfortunately, due to the uncertainty associated with exploration, lack of informationon those locations where mineral deposits happen to be discovered frequently means that determination of environmental values must take place after discovery, thus basically challenging128Technical management of mineral activitiesthe right to develop a discovery which we prefer for other reasons. This information problembrings us back to the land use planning approach discussed in the beginning of this chapter.The possibility exists under a zoning scheme, where different levels of environmental stringencyapplies, to provide investors with a reasonable quantity of information on costs related environmental compliance.CONCLUDING REMARKS - THE DETAILS OF MINING REGULATIONIn contrast to the preceding two chapters, the emphasis has been much more on details and onprocedures. One of the most important aspects is the link between investment in explorationand mineral titles. It is clear that if mining title is to be a useful instrument it must give theholder security and protection. If the right is subsequently encroached upon for external reasonsa good case for compensation may exist.The essential problem is that the use of land for mining is no longer taken for granted,while at the same time the problem of many mineral titles issued before other resource values became prominent remain. The strategy of the future seems to involve a heavy emphasis on landzoning, attended by explicitly stated guidelines on the level of environmental protectionapplicable in a given zone. This will allow investors to base their decisions on facts rather than onconjecture about the severity of future regulation.Much of the discussion of exploration regulation, development devices and closure plansis based on environmental protection requirements. The project review process, in particular,serves to define environmental constraints during and after mining operations. Some of theoverall issues about mining being allowed could be resolved before exploration begins by adopting land use zones. It is unlikely, however, that all details can be dealt with in this way. Therefore, project reviews may still have a function in determining exactly what quantity of externaleffects is acceptable to the mining firm, the government and other major interested parties.129Technical management of mineral activitiesBoth here, and in relation to the taxation area described in the previous chapter, it ishighly relevant to mention two rules of conduct which are applicable to any attempt to change apolicy (Tussing 1984):1. “Don’t mess with the rules without a iiy good reason ‘2. “Ifyou ‘ye got to mess with them, do it andget it over with; but don’t KEEP messing around”130Mineral ventures in Greenland6MINEiL VENTURES IN GREENLANDSome primitive forms of mining have taken place in Greenland since 2-300 BC., when theDorset culture developed the use of iron tools. Their source of iron was the iron meteoriteswhich could be found on the sparsely vegetated ice-free surface (where larger blocks arebrought to the surface by the action of permafrost). Later, in the 18th and 19th centuries, European explorers were often drawn to Greenland by rumors of rich mineral opportunities, butthey were all disappointed (Lidegaard 1991).It was only from the middle of the nineteenth century that mining, in the ordinarysense of the word, came to Greenland. This was at the famous cryolite deposit in Ivittuut inSW Greenland. In the 20th century, other significant mines followed: coal at Qutdlissat onDisko Island, lead and zinc at Blyklippen near Mestersvig in Central East Greenland, and alsoat the Black Angel mine at Maarmorilik in the Ummanaq district. These are the mines thathave had an impact on Greenland’s history and on its mineral policies. There have been othermines operating, most of them around the turn of the century: Copper at Kobbermine Bugt andnear Qaqortoq (Julianehâb), graphite at Amitsoq near Nanortalik and Sisimiut131Mineral ventures in Greenland(Holsteinsborg), and marble at Maarmorilik. Common to all of these was their small size,brief life and limited profitability.In addition to the treatment of the four important mines the present chapter examinesprivate investment in mineral exploration as well as publicly funded research related tomineral resources.This chapter is designed to provide information on the extent and scope of mineral activity inGreenland, from the early cryolite activities to the present efforts to discover mineraldeposits which can replace the Black Angel. The underlying purpose in collecting andreporting the information given in the following sections is to provide a background for thediscussion in chapter 7 of mineral policies pursued in Greenland.The connection between economic theory and the present chapter is tentative. For thediscussion of mineral activities the principal area of interest is rent capture and rent capturemethods. The examination of mineral exploration investment is primarily designed to putthe analysis of recent policy changes into perspective. The level of investment can be seen as anindirect indicator of investor interest, but this indicator must be used with caution since thereis no obvious standard against which to measure such interest.The third part of this chapter concerns government investment in mineral research anddata acquisition. The data presented in this part cannot say whether government should investbut indicates which minerals the Mineral Resources Administration has chosen to emphasize inthe case of Greeenland.The four sections on former mines in Greeland are quite variable in terms of length and scope.The cases of Ivittuut and Marmorilik are discussed extensively while the the two other minesare accorded much less attention. The reasons are two-fold. One is that the Ivittuut andMarmililik mines were large compared to the other two, and therefore better documented.This is particularly true in the Ivittuut case, although the section on this mine relies on one132Mineral ventures in Greenlandreference oniy. The Marmorilik mine is also extensively documented but some aspects of thiscase are deferred to chapter 9.MINING HISTORY IN GREENLANDThe four important mines in Greenland have, in some ways, had considerable impact on theGreenland economy and on Greenland society. The impact ranges from employment of localfactors of production and other inputs, over trade balance effects to the impact on Danish Government Revenues.Cryolite at IvittuutThe cryolite deposit at Ivittuut in South West Greenland had been known for some time when,in 1850, it was discovered that soda and aluminium oxide (the latter known under the name ofalum) could be produced from the mineral. A production of soda was established, andresponsibility for mining was given to the Royal Greenland Trading Company in 1853.The first cryolite company was founded in 1857, and its concession to mine the cryolite deposit was extended several times in the first few years of operation. In one of severalrestructurings in the late 1860s, the mining operation was separated from the processing operation. The Cryolite Mining Company began selling cryolite under long-term contract to thePennsylvania Salt Manufacturing Company, and production increased steadily to around10,000 tons annually in 1865. The workforce was around 100 in the summers, while a muchsmaller number (probably around 10-15) remained during the winter to maintain the site andthe equipment.In the last quarter of the 19th century cryolite production remained stable, despite diminishing importance of soda produced from the mineral. Instead, demand came from newuses of cryolite, as enamel, and as a flux for the smelting of aluminium in the Hall-HeroultThis account is based on Niels Henrik Topp’s exhaustive history of the cryolite industry (Topp 1990)133Mineral ventures in Greenlandprocess. The processing operation in Copenhagen was organized under the Cryolite Companyøresund AIS, and this company was also responsible for the marketing and some of the processing (very little was actually done since the grade from the mine was often closer to 100%cryolite than to 90%). øresund A/S had a world monopoly on the sale of natural cryolite,and potential competitors wishing to sell synthetic cryolite were met with strong price competition when øresund A/S’s market was entered.Between 1903 and 1913, both øresund A/S and the Cryolite Mining Company A/Searned large profits and this led to increased pressure for a greater government share of these.In the original concessions from the 1850s, the method of revenue collection had been a formof production sharing, whereby the government was entitled to 12 % of the cryolite shipped toCopenhagen. This cryolite was then re-purchased by the Cryolite Mining Company AJS, andthe payment was then the tax. The share in production had been raised to 20 % in 1864. In1914 a new concession was negotiated which changed the tax to a fixed payment per cubicmeter, the amount depending on annual production. The years of the first world war were alsovery profitable for the two companies, and the period of strong demand continued after thewar. During this period, the relations between the two companies became increasingly close,øresund A/S becoming the only seller of cryolite outside the United States.An attempt in 1924 by another Danish firm to replace Pennsalt as the seller on the USmarket drew attention to the very profitable cryolite industry. Negotiations over an amendment to the 1914 concession began, and were concluded in 1926. It was agreed that the royalty should be converted to a tax on mining company profits, the tax being one third of profits. In addition, a extra progressive tax (rising in increments of 5% for each half million profits, from 10% of profits above DKr 4 million to 35% of profits in excess of DKr 6.5 million)was imposed. At the same time, the mining company and øresund A/S agreed to share theburden of the tax payments. The new tax regime meant that the government became moreinterested in the management of the cryolite industry and in the cut-off policies adopted at themine.134Mineral ventures in GreenlandThe 1914 concession was to expire in 1939 and the 1926 amendment provided for negotiations on the future of the mine to start in 1934. Again, the government wanted a stilllarger share in the profits, and more direct control over the two companies. After protractednegotiations, the companies and the government reached an agreement under which the twocompanies were merged. In the new company the government owned 50% of the shares. In return the government would supply an open-ended mining concession, and the private shareholders would pay their share by transferring the production and mining facilities and equipment inCopenhagen and at Ivittuut to the new company. Instead of taxing the company, the stateshares (A-shares) were to receive 60% of dividends as well as additional percentages (on asliding scale) of dividends in excess of 6 million DKr. The new company was to be formedon January 1st, 1940.The German occupation of Denmark on April 9th, 1940 cut transport links with Greenland.The øresund plant in Copenhagen could process remaining stocks and reprocess various wastematerials, but after the first war-years, the plant was idle. In Greenland, however, mining wasexpanded to supply demand created by the war. The cryolite was marketed by Pennsalt andAlcan.After the war, cryolite markets were depressed for several years. The company wastroubled by the recurring disagreement between government and private interests which aroseas a result of unfortunate incentive effects of the dividend paymernt schedule in the 1935 concession. This was solved by agreement on a fixed split of dividends from 1950 onwards. Inthe postwar period, from 1950 to 1962, the remaining cryolite reserves were mined, and highgrade material, used to construct various dams and piers in the early years, was also processedand shipped to Copenhagen. Processing of material continued in Copenhagen until 1990, whenlow grades made further production uneconomic.The cryolite company had initially hoped to discover new mineral deposits in Greenland and accumulated substantial financial reserves to enable development of discoveries.135Mineral ventures in GreenlandThese were, however, limited to the Mestersvig Lead-Zinc mine operated by Nordisk Mineselskab, in which the cryolite company was the largest shareholder. Other projects were investigated and abandoned, most notably a gigantic (see below) iron ore project at Isua in the bottom of the Godthb Fjord.During the late 1 960s and 1 970s, the hope of finding mineral deposits that would allow the company to stay in the mining business receded, and the accumulated financial reserveshad to be put to better use. The company diversified into other businesses, and when processing of various waste dumps was ending, the company had moved far away from its originalbusiness. It was natural for the government to sell its shares in the company. This was done inNovember 1985, and the net revenue of DKr 731,250,000 was transferred to the state.Despite the withdrawal of the cryolite company from Greenland, this does not meanthat the cryolite resource is exhausted. Shortly after the privatization, the government wascriticized for its decision to privatize the company based on the fact that some cryolite resource remained at Ivittuut40 (Grønning-Nielsen 1987). Both the pit and various waste dumpsand land-fill material contain considerable quantities of low-grade cryolite. A junior miningcompany is currently trying to bring these reserves into production before a newly discoveredcryolite deposit in Brazil begins production (Jens Gothenborg, personal communication,1992).Coal-mining at QutdlissatThe Cretaceous age sedimentary rocks in central West Greenland contain significant coal seams. These have been worked in various locations on the island of Disko and on the adjacentNuussuaq peninsula. The first mining activities are not well known, but are assumed to have40 The political and technical argument was based on drill-results which indicated the presence of additionallow-grade cryolite material at the bottom of the pit. The inquiry revealed that the distinction between “ore” and“mineralized material” had not been understood by many of the involved individuals, both politicians andinside the Mineral Resources Administration-Geological Survey of Greenland system.136Mineral ventures in Greenlandbeen the work of European whalers (Schiener 1976) and sporadic mining activities for local usetook place at a handful of locations.More organized mining began in 1920 under the auspices of the Royal GreenlandTrade Company. Mechanization was first introduced in 1929, but it was not until 1954 production was expanded above the level of previous years (when it averaged around 4,000 tonsannually). The production reached a peak in 1963, when around 39,500 tons were produced.Since then, the production fell steadily and was discontinued in 1972 (Schiener 1976), and allthe residents of the mining town were forced to resettle elsewhere in Greenland. At no timehad the production yielded any profits.The economic results from this mine were not encouraging. The Danish NationalAccounts show that for 1959-60, early in the production expansion phase, the loss was DKr1.49million. This rose to DKr3.02 million in 1964-65 and was DKr4.03 million in 1970-71.The Blyldippen lead-zinc mine at MestersvigThe lead bearing veins at Mestersvig in central East Greenland were discovered in 1948 bymembers of a geological expedition led by Lauge Koch, and continued in 1950 and 1951. Aprospecting company with Kryolitselskabet øresund, other Danish companies and the Danishgovernment as shareholders (the latter taking a 27.5% shareholding in the venture) was formedin 1952.Nordisk Mineselskab A/S decided to develop the deposit for production. Miningbegan in 1956 and continued until 1962. A total of 545,600 tons of ore was mined, with anaverage grade of 9.3% Pb and 9.9% Zn (Harpøth and others 1986). Employment at the mineaveraged between 85 and 90 men. There is no indication that any local labour was used41.After the end of mining in 1962 the company was engaged in various exploration ventures, mainly in central East Greenland. The most notable result of these projects was the discovery of the Malmbjerget molybdenum deposit in Werner Bjerge, a short distance SW from41 Nordisk Mineseiskab A/S Annual reports 1955-63.137Mineral ventures in GreenlandMestersvig. This porphyry type deposit, which is estimated to contain 150 million tons ofore with an average grade of 0.23% MoS2 and 0.02% W03,was investigated in several stagesin the 1960s in a joint venture with AMAX Inc., and re-evaluated in 1978-81, following thedevelopment of new exploration models for this type of deposit (Harpøth and others 1986).During this period, the company was also involved in EC sponsored research into tungsten andmolybdenum prospects in the area.During the 1 970s, Nordisk Mineseiskab became involved in on-shore oil explorationin a joint venture with Atlantic Richfield Company. This project was located in JamesonLand, the large peninsula between Mestersvig and Scoresbysund. Extensive seismic surveysand geological mapping was carried out but the project was finally abandoned in 1991.Shortly afterwards, the assets of Nordisk Mineselskab were turned over to Nunaoil, the jointGreenlandic-Danish State oil and mineral exploration company. Over the years of its existence, no dividends were ever paid to the shareholders, and the princely sum of DKr 120,000accrued to the Danish state as royalties and taxes.The Black Angel Lead-Zinc mine at MaarmorilikThe name “Black Angel” refers to an angel-shaped outcrop of dark pelitic schist in an otherwise light-coloured cliff-face opposite the small settlement of Maarmorilik in the Ummanaqdistrict of central West Greenland. The ore deposit of the same name outcrops above the angel figure in the same cliff, but sulphide lenses extends Eastwards for about 2 km and outlyinglenses have been found in the vicinity, including one beneath the inland ice (Thomassen 1991).The deposit was first discovered in the 1930s, when marble quarrying began at Maarmorilik (hence the name), but commercial testing and drilling only commenced in the 1960s,when a consortium led by Cominco Ltd. of Vancouver became interested. Development ofthe ore body for production began in 1971, with Cominco being the main owner of the operating company Greenex A/S.138Mineral ventures in GreenlandWhen mining began in 1973 the total reserves were 4.1 million tons with an averagegrade of 15% Zn and 5% Pb. Over the life of the mine, from 1973 to 1990, these reserveswere more than doubled, to 13.6 million tons with an average grade of 12.3% Zn and 4.0%Pb. Of this, 83% was recovered at the mining stage, the remainder being tied up in pillars(Thomassen 1991).The interesting aspect of this mine is not only the considerable revenues that it generated for the governments of Denmark and Greenland, but also the terms under which the mineoperated. These were set out in the concession agreement between the Ministry for Greenlandand Greenex, the operating company, and are in effect a detailed statement of mineral policywhich served to define the rather loosely formulated Mining Law for Greenland from 1965(See chapter 7 for a discussion). This complex set of rules was further extended when, in 1986,Greenex was taken over by the Swedish mining company Boliden AB, at a time when Comicowished to close and abandon the mine. Further regulations covering the terms for site rehabilitation were added at this time. The local impact of the mine is described in chapter 9, whilegovernment revenues are noted below.MINERAL INVESTMENT IN GREENLANDA factor of major importance in assessing the outlook for mineral production in Greenland isthe size of investments in exploration, the extent of exploration efforts as well as the investments in development and exploitation.Private exploration investmentIt is not possible to determine the exact expenditure on exploration before 1986. A compilation of reported expenditures has been prepared by the Mineral Resources Administration forGreenland which indicates a significant increase in spending (even if the sums are quoted incurrent prices), as illustrated in figure 3.1. It is important to note that the limited statistical139Mineral ventures in Greenlanddata means that the curves for exploration investment are affected by a few large projects. For1989-1991, this was the case when the gold-PGM prospects at Skaergaard and Kap EdvardHolm in the Kangerdlugssuaq area on the East coast were being investigated.Prior to 1986 no aggregate statistics are available, but it can be noted that the two major mines invested significant sums in on-site exploration for additional reserves at Maarmorilik and at Ivittuut, as well as in exploration in other parts of Greenland. All of these effortswere unsuccessful. The major projects included the investigation of the Malmbjerget depositdescribed above (in two phases which closely reflected the evolution of the geological understanding of this type of deposit), the Fiskensset chromite deposit, and the Isua iron-ore deposit. In terms of size and scope, the Isua project was probably the most interesting, with reserves conservatively estimated at 2 billion tons grading 38% iron. The project was abandoned in 1976 due to the depressed steel market at the time.0•Figure 61. Metallic mineral exploration spending in Greenland 1986-91 (fiom unpublishedMRA data) in current prices.Oil and natural gas have also received considerable attention. In the mid-1970s a licensinground for areas off-shore West Greenland led to extensive but unsuccessful seismic work andfive wells. The period 1986-91 has seen three major efforts, and one smaller project under-300002000010000I________ Total expensesTotal less mine expi.I • I•11’I•I• I1986 1987 1988 1989 1990 1991 1992140Mineral ventures in Greenlandtaken. The first of these was the Jameson Land project, an ambitious joint venture between At—lantic Richfield Company (ARCO), Arktisk Minekompagni A/S (a subsidiary of NordiskMineseiskab A/S) and Nunaoil A/S (the latter two on a carried interest basis), which latercame to include AGIP, the Italian oil company. Soon after this project was initiated, theterms (mainly the work requirements) were re-negotiated, and the total amount of requiredwork was sharply reduced (Mineral Resources Administration for Greenland 1987). The exploration continued until 1989, when the operating company, ARCO Greenland A/S, announced that it would withdraw from the exploration concession due to poor geologicalprospects for discoveries (Mineral Resources Administration for Greenland 1990).Jameson Land is still considered an area of potential interest to the international oilcompanies, due to the extensive quantity of geological and engineering-related information assembled (and preserved by GGU), and partly due to the existing ground facilities in the area(the Constabel Pynt air-strip and supply base). To obtain these disappointing results, ARCOand AGIP spent a sum roughly estimated at 200 million $US.During 1987-89, a group of six oil companies (Exxon, Shell, BP, Statoil, Texaco andJapan National Oil Corp.) and Nunaoil A/S set up a joint seismic exploration program.Each partner holds a 142/7% interest in the KANUMAS project (Kalaallit Nunaat MarineSeismic Program), but the interest of Nunaoil is carried by the other partners. This projectinvolves extensive seismic surveys in the ice-filled waters off NE and NW Greenland. Totalcommitted spending on this project is 17.4 million US$Government administration and exploration projectsGovernment sponsored mineral related activities in relation to Greenland are carried out bythe Mineral Resources Administration and by the two agencies controlled by the MRA, thegeological survey (GGU) and the environmental research agency (GM).Of these the MRA is responsible for administration, and also acts as secretariat for the“joint committee”. The annual MRA budget in 1991 was DKr 7.8 million, of which 4.2141Mineral ventures in Greenlandmillion (54%) went to salaries, and the remainder to goods and services42 (Ministry ofFinance 1993). The latter sum (DKr3.6 million) also includes the expenses of the JointCommittee on Mineral Resources. This body meets twice annually, alternating betweenGreenland and Denmark.Systematic geological mapping in Greenland has taken place since Lauge Koch in 1928 beganmapping the East coast of Greenland North of Mestersvig, in what was to be one of the mostremarkable efforts in the history of geological science. The project proceeded until 1940 andwas resumed in 1946-58 to complete a geological map (in 1:250,000) of the entire Caledonian orogen in Greenland (Minelovskommissionen 1963).In the rest of Greenland a geological survey independent of Koch was established in1946 in cooperation with University of Copenhagen. Initially the survey’s work was based ona pure research foundation (Minelovskommissionen 1963), but cooperation with the DanishAtomic Energy Commission from 1957 onwards introduced a strong element of prospectinginto the survey’s work.The Mining Law Commission established in 1963 was asked to examine the future ofthe GGU. It firmly emphasized the survey’s role in basic research while rejecting the need fora state prospecting organization43. The legislation defining the nature and tasks of the GGUwas enacted in 1965 along with the first Mining Law.Despite the optimism concerning private exploration investment expressed by the Mining LawCommission, a large share of mineral exploration activities over the years have neverthelessbeen funded and operated by the Geological Survey of Greenland. Financial support has been42 Using budgets of latter years is misleading because of an “over-budgeting” tradition whereby the MRA appearsto be allocated significantly more resources in the annual government budgets than what is actually needed andwhat ends up being used.3 The rationale in this rejection was that such an organization was unnecessary once the Mining Law proposedby the commission had been enacted.142Mineral ventures in Greenlandderived from GGU’s operating budget, and from external sources such as energy researchgrants and special appropriations by the Mineral Resources Administration for Greenland.It is difficult to separate individual projects operated by GGU from the general accounts. Special appropriations in the petroleum field have included DKr 12.4 million in1990, 5.5 million in 1991 and 13.2 million in 1992. These are reflected in the estimated division of spending on research shown in table 6.1.The major source of funds for these petroleum projects has been accumulated savings in theMRA’s account. These funds were originally paid as concession fees by the partners in theJameson Land petroleum concession - and were seemingly earmarked for further petroleum activities. Funds from this savings account have also been used to finance the Danish government’s share of an expansion of the equity capital of Nunaoil A/S, the joint Danish-Greenlandicpetroleum and mining exploration firm.Research totalGeological mappingMineral activitiesPetroleum activitiesGlaciologyTotal budgetNotes:a. No data are available for the years 1989 and 1991;b. For 1991, petroleum expenses were at least 5.5 million;Expected budget.Source: Finance Bill, 1993 (Government of Denmark)The Greenland Environmental Research Agency was created in 1988 when the environmentalservice was separated from the Greenland Fisheries Research Agency. With an allocation of12-15 full time staff and a budget of around 7.5 million DKr this agency is primarilyTABLE 6.1. GGU EXPENDITURES 1988-94 (MILLIoNS DKR)1988 1989a 1990 1991a 1992 1993 199421,700 33,600 36,659 20,300 20,9009,300 7,500 6,910 7,200 7,2004,400 5,600 10,531 6,800 6,6004,600 18,200 b 17,275 4,700 5,9503,400 2,300 1.94 1,600 1,15043,200 42,200 54,900 44,400 53,563 37,000 36,700143Mineral ventures in Greenlandresponsible for environmental matters related to mineral activities. Environmental policy inGreenland is otherwise a Home Rule responsibility.Government RevenuesAs noted above, the only two operations to earn any significant revenues for the Danish andGreenland governments have been the Ivittuut cryolite mine and the Black Angel lead-zinc operation.The data presented by Topp (1990) allows a complete time series of revenues to beconstructed. By using a consumer price index for the period from 1870 to 1985 (Bjerke andUssing 1958; OECD 1955-; OECD 1962), the annual revenues can be converted to 1985terms. Adding this to the revenues from privatization of the Danish government’s shares in thecryolite company in 1985 (DKr 731.3 million) gives the total revenues from this mine, expressed in 1985 terms: DKr 3.86 billion.A similar calculation has not been carried out on the more recent data on revenues fromthe Black Angel mine. The types of taxation used for this mine, and their revenues are shownin table 6.2.TABLE 6.2.TYPEs OF TAXES IN THE BLACK ANGEL CONCESSIONAND TOTAL REVENUES (CuRRENT 1,000 DKR)Type of taxation Total revenueArea leasing charge 15,681Dividend taxa 128,681Concession tax 395,296Personal income tax from employeesb 248,565Total revenue 788,223Notes:a. Not payable for shareholders not resident in Denmark or Greenland.b. Not normally counted as mineral revenue (see also tables 9.5 and 9.6).Source: (Mineral Resources Administration for Greenland 1991).The Joint petroleum and mineral exploration company Nunaoil A/SWhen petroleum exploration in Jameson Land was begun in 1985 the concession specified thata state company should participate in the project as part of the economic terms. The purpose144Mineral ventures in Greenlandwas to “secure increased insight into, and influence over activities and it is also an importanttool for obtaining government revenues from activities”44 (Mineral Resources Administrationfor Greenland 1984).A limited company was formed in January 1985 under the name of Nunaoil A/S. Theinitial paid equity was DKr 25 million, ownership of which was divided equally between theGreenland Home Rule Authority and the Danish Minister of Energy. The size of the capitalwas such that “....the company’s expenditures in the exploration phase can be covered on themost part by returns from investment of the capital, such that gradual consumption of the capital is avoided”45 (Mineral Resources Administration for Greenland 1984).Initially the company was advised by, and partially operated under a managementcontract by a subsidiary of the Danish National Oil Company (DONG). The legislation authorizing the company was enacted in November 1984 by the legislative assemblies in Greenland and Denmark (Mineral Resources Administration for Greenland 1985). During 1985 and1986 it was further discussed whether the company should also participate in mining projects.By March 1987 the legislative amendment allowing this expansion of Nunaoil’s sphere of activity had been enacted (Mineral Resources Administration for Greenland 1987).The activities of Nunaoil were now determined by the option clauses inserted into every new exploration concession issued in Greenland (see chapter 7). To support the company’snew activities the two shareholders agreed that the equity could be expanded to a maximumof DKr 50 million. By 1989 this expansion had been completed (Mineral Resources Administration for Greenland 1990).When the option clause policy was abolished in 1991, the role of the company was reconsidered (Mineral Resources Administration for Greenland 1990). Based on the fact thatNunaoil had accumulated considerable exploration experience and an international network ofcontacts, a revised role was defined. For mining projects this involved taking on the functionsAuthor’s translation.5 Author’s translation, italics added.145Mineral ventures in Greenlandof a junior mining company, including both project initiation and continuation of more ad—vanced projects in partnership with private investors. For petroleum, where the option policyfor state participation remains, the company will have a role both before and after licensingrounds. Before such rounds this would involve information activities, organizing consortia andinterpretation of seismic data. After licensing, participation in the work of the consortiumwould be the main activity. Nunaoil’s board of directors agreed to these proposals but notedthat expansion of mining-oriented activities would require additional capital. As a result, theshareholders agreed to supply a further 12.5 million DKr each.The current status of the company is that the nominal equity of DKr 75 million hasbeen reduced somewhat by accumulated losses (which exceed the return from investment of thecapital reserves of the company). The major activity of the company is now mineral exploration. The only petroleum activity is the KANUMAS project where Nunaoil is operator butis carried by the other partners. In mineral exploration Nunaoil currently holds 5 explorationpermits and is a partner in two joint ventures (Mineral Resources Administration for Greenland 1993). Nunaoil has always operated at a loss. During the past 3 years, this has grownfrom DKr 1.9 million in 1990 to DKr 3.4 million in 1991 and to DKr 6.3 million in 1992.However, the company has managed to attract considerable external investment in the process.The KANUMAS project has seen a total of DKr 85.8 million spent, while somewherebetween 5 and 10 million DKr has been attracted for metallic mineral exploration (NunaoilAnnual reports 1991 and 1992; John Pedersen, pers. communication, 1993).In a very recent development Nunaoil has received DKr 30 million for off-shoreseismic equipment. The investment is financed by the Danish government as part of the 1995unrequited transfers to Greenland. Concurrent with this development, the legislationregulating Nunaoil A/S has been modified such that the company can operate outsideGreenland (Mineral Resources Administration 1993b). This investment is partlycounterbalanced by the decision by the Home Rule Authority to invest DKr 25 million in146Mineral ventures in Greenlandairborne geophysical data-acquisition specifically targeted on on-shore metallic minerals(Mineral Resources Administration 1 993c)CONCLUDING REMARKS - THE IMPORTANCE OF EXPLORATIONThe past history of mining in Greenland indicates that it is not a totally foreign activity, butone which have in the past given considerable benefits, mostly revenue to the Danish treasury,but also significant employment of Greenlanders at Maarmorilik, and a small share of the revenues from the mine to the Greenlandic treasury. It is therefore not an unwarranted optimismdriving the desire for more mineral investment.The essential building block for future mineral development is present investment inmineral exploration. The data presented in figure 7.1. show these to be in the range DKr 20-30 million annually, corresponding to roughly C$4-5 million. Unfortunately, this is a modestsum by several measures.The work by Dogget and Mackenzie (1993) on Canadian data for the period 1943-88indicate that the average cost of discovering an economic base metal deposit in Canada is C$65 million, while it is C$ 71 million for economic46 gold deposits, measured in constant1990 terms. These costs may not be directly comparable to Greenlandic conditions becauseGreenland has seen much less exploration than Canada over time. Nevertheless, the annual exploration expenses in Greenland have, in recent years, been one tenth of the average discoverycost for a base metal deposit in Canada (Dogget and Mackenzie 1993). At this rate it wouldtake 10 years to discover one economic deposit.The most recent (from 1991) data on worldwide exploration budgets indicate thatcompanies with annual exploration budgets of at least US$ 1 million, expected to spend a to46 Economic is defined by Dogget and Mackenzie as deposits with revenues of at least C$20 million and arealized rate of return of 8%.147Mineral ventures in Greenlandtal of US$ 1.845 billion in that year. Compared to this, investments in Greenland are verymodest in size.The measures against which the Greenlandic investment record has been judged must, however,be taken with some reservations. The budgeted exploration in any year does not give an accurate impressions of the levels of investment. The work by Eggert (1987) suggests that exploration investment may fluctuate considerably, depending on events both internal and externalto the industry. The factors controlling these episodes of high (and low) exploration investment include (expected) rising prices and demand, new technologies and new geologicalmodels (Eggert 1987). To this one may add new discoveries (although they are a category ofnew geological models), and government subsidy policies. The exploration fever currentlygripping the Northwest Territories of Canada (see any recent issue of the Northern MinerNewspaper) may be a clear example of the former, while the extraordinarily high levels ofexploration for gold in Canada in 1985-88 was partly the result of a heavy subsidy giventhrough the tax system (the so-called flow-through financing).A country wishing to attract investment must be aware of these episodes and must realize that in most cases they are outside any one country’s control, the exception being subsidies.Furthermore, the lags involved from the initiation of exploration to the arrival of governmentrevenues mean that it is rarely possible to base mineral policy on adjustments to episodes orcycles in the mineral supply process. Similarly, it is important also to remember thecorrelation noted by Eggert (1992), between the high share of exploration investment placed inAustralia, Canada and the United States, and the high levels of publicly funded research intothe mineral potential of these countries.An issue of some concern is the recent expansion of petroleum-related activities. These havegenerally received a disproportionate amount of attention relative to metallic minerals. Itcan be argued that, given the long but unknown time which will elapse before off-shore148Mineral ventures in Greenlandpetroleum under extreme Arctic conditions brought into production, investment of publicfunds should favour on-shore metallic minerals.The decision to expand the area where Nunaoil A/S can operate to include areasoutside Greenland also raises a number of issues related to the activities and management ofstate-owned and subsidized enterprises. Space and time precludes further treatment of theseproblems here.149Past and present mineral policies in Greenland7MINEiL POLICIES IN GREENLANDThe five major events related to mineral policy in Greenland are the trade regulations of1781, which regulated the activities of the Royal Greenland Trading Company, the RoyalProclamation on minerals of 1935, and the Mineral Laws of 1965, 1978, and 1991. The present chapter describes these events, their implications for mineral operations, and presents ananalysis of the content and adequacy of the latest regulatory effort. This is based on theframework for analysis established in chapters 4 and 5.REGULATORY VACUUM BEFORE 1965Mining operations in Greenland, other than occasional primitive uses of surface resources, wereinitiated in 1856, when the quarrying of cryolite in Ivittuut began. This operation, and a number of other small mines operating at the turn of the century, were all based on individualpermits issued by the Danish Minister of the Interior under the 1781 regulations for the RoyalGreenland Trading Company. However, during the period from the 1850s to 1965, a numberof policy changes occurred, which had important consequences for the cryolite mine, and for150Past and present mineral policies in Greenlandthe future course of regulation. This section examines the mineral policy of an era where thestate was not constrained by any specific mineral legislation. The Royal Proclamation of1935 is not discussed since it had no direct impact on policy.The early minesThe very early regulation of mining activity in the Kingdom of Denmark (which once included most of Norway, Sweden, Iceland, and Greenland) vested mining rights in the Crown,as distinct from the free-access which had existed in medieval times. During the 15th and16th centuries, mining rights reverted to the crown. This process was gradual and probably reflected improved efficiency in mining, as well as a rent capture policy (Harhoff 1985). InNorway, where mining was concentrated, the Crown released its control over all minerals except gold and silver in 1643. The latter minerals were released in 1783 (Harhoff 1985). Theresult was free access to mineral exploration, and a system of property rights similar to themineral tenure systems of many common-law countries. The concept of “free miners”, whichwas part of the Danish Crown’s opening of access, can also be traced, both forward to this day,and backward to a tradition in which sovereigns had to allow free access in order to attract therare, skilled miners of the day (Kuehne and Trelease 1984). In Greenland, however, the principle of free access never applied. Under the regulations for the Royal Greenland TradingCompany issued in 1781, trade in the area was reserved to a monopoly which was financed bythe Crown. According to the regulations governing the operation of this monopoly, mineralswere reserved for the trading company (Harhoff 1985).Government equity participationThe relationship between the cryolite company(-ies) and the government, reflects the drasticchanges which a successful mining project undergoes, as it moves from the initial high-risk151Past and present mineral policies in Greenlandphase to a high profit phase48. As cryolite profits grew to “windfall” proportions, demandsfor a larger government share of these profits recurred every time the mining concession wasrenewed. Eventually, the taxation approach was changed from an additional profit tax systemto a joint venture approach, where the government owned half the cryolite company.The model with state equity participation was also used in the two cases where important mineral concessions were issued before 1965, i.e. for the lead-zinc mine at Mestersvig,and for the exploration of the Malmbjerget Mo-W porphyry deposit. In both cases, speciallegislation was used to set up the operating companies, and the state’s share of equity was fixedat 27.5%, and 50%, respectivelyTHE FIRST MINERAL LAWThe mineral activities in Greenland after the second world war, most notably those in centralEast Greenland, indicated that more comprehensive regulation of mineral activities wasneeded. This resulted in the appointment, in 1960, of a commission to examine how a Mineral Law should be designed. The commission published its report, which included a draftMineral Law, in 1963. It was not until 1965, however, that a Mineral Law was enacted by theDanish Parliament. This section examines the report and the final law text.Analysis of the Mineral Law commission report, 1963In its brief, the Mineral Law commission was directed to examine a range of issues related tomineral activities in Greenland. These included the general principles to be included in aGreenland Mineral Law, the future organization of publicly financed geological mapping andresearch, whether Greenland should be opened for [private] exploration access, how the local48 The high profits in this case were partially the result of the unique monopoly on natural cryolite describedin chapter 6. Incidentally, the complete records of the cryolite company have been preserved and may be a veryrare record of the actions and strategies of a natural resource monopolist.152Past and present mineral policies in Greenlandpopulation could be involved in mineral activities, whether standard terms for concessionsshould be drawn up, and how educational, social and health concerns could be provided for inrelation to mineral activities (Minelovskommissionen 1963).The reasons for setting up the commission were twofold. The first was that minerals inGreenland were in principle subject to the legislation covering the Danish sub—surface, whileconditions in Greenland diferred significantly from those in Denmark. The second reason wasthat the late 1 950s and early 1960s saw considerable mineral activity in Greenland whichindicated the need for regulation.The report first considered the question of mineral tenure, and distinguished betweenfull title at the outset of exploration, and separate title for the exploration and productionphases. The first option was rejected for two reasons. First, it was argued that the exact(economic) terms for a concession could not be determined without knowledge of future profits. Second, granting full tenure without specification of economic terms assumed that taxation of mineral profits could be handled by ordinary tax regulations.To the extent that tax regulations did not exist in Greenland at the time and were unlikely in the foreseeable future, the second argument was valid, but only until a regulatorystructure for taxing personal and corporate income was implemented. The first argument, onthe other hand, was based on a limited understanding of the mineral industry and miningfirms. It did not recognize that a range of uncertainties influence the size of future profits: Theabsolute size of the orebody depends on the cut-off grade applied, and this in turn depends onmarket prices for the commodity (-ies) mined, on production cost, and on the discovery ofadditional ore reserves.In practical terms the report proposed that three phases of exploration activity should bedistinguished: Prospecting, covering large areas in a preliminary fashion; Exploration, whichfocuses on specific areas; Production, which is closely tied to small areas. For prospecting,limitation in area size or work requirements were not considered necessary, since a permit to153Past and present mineral policies in Greenlandprospect did not give any rights (other than access to operate in Greenland) to the holder. Anexploration concession, on the other hand, would provide the holder with exclusive access, andtherefore some form of work requirement was considered necessary.The remaining proposals with respect to the design of mineral rights were unremarkable,covering the length of each type of permit (prospecting: 5 years; exploration: 8 years, or 12years in North and East Greenland; production: 50 years), reporting of acquired informationand access for scientific personnel to all sites either for inspection purposes or for unrelatedscientific work.Despite being directed to find ways to involve the local population in mineral activities, the commission’s proposal was insignificant and superficial. Rewards were to be offeredfor information which led to the discovery of a mineral deposit.The detailed examination of possible financial terms led the commission to reject what wasdescribed as the TTCanadian modelTT of mining regulation (the commission report shows littleevidence of a detailed analysis of either Canadian or US mining regulations). It was furtherrepeated, that fixing economic terms for mining is difficult without detailed information ineach case. Given the fact that high risk was involved, and that some element of quasi-rent ispresent as a result of the special knowledge accumulated in mining firms, the report proposeda financial structure very similar to that described from the cryolite concession of 1935.In the version proposed by the commission the State was to have a 50% equity share inall mines developed for production, but was only to receive dividends when the other partner’scapital investment (including related exploration costs) has been recovered along with a suitable rate of return. The proposed rent capture mechanism was essentially comparable to a50% “Resource Rent Tax” (see chapter 4), with the government partnership formalized throughequity ownership.154Past and present mineral policies in GreenlandThe final Mineral Law textSince the 1965 Mineral Law was to regulate mineral activity until 1991, a brief summary isnecessary. This also gives an impression of how the civil servants drafting the Mining Lawthought about mining and mineral policy in Greenland.The Mineral Law consisted of 28 sections divided into five chapters. The first definedgeneral principles, including free access for the local population to use surface materials. Thesecond chapter (sections 4-7) concerned prospecting, or “preliminary investigation permits”,and defined activities which required separate permission (blasting, drilling and undergroundwork). Preliminary investigation permissions, as well as exploration concessions could requirethe holder to guarantee financially any costs the State might incur in relation to the prospecting activities, including rescue operations (section 6). Permitees also had to report their results to the authorities within 6 months of the expiry of the permit (section 7)Chapter three concerned the terms for exploration concessions. These could be issued toapplicants possessing suitable skills and financial ability, and required annual reporting of activities. The concession allowed the holder to use land in the concession area for explorationpurposes, but also that land not so used remained open for surface access. In contrast to preliminary investigation permits, the exploration concession involved a duty to carry out exploration work, as indicated in the plans submitted to the authorities (section 14[1]). If no exploration activity was recorded for a period of 3 years, or if any of the terms in the Mineral Lawwere not complied with, the concession would expire automatically (section 14[2]).The fourth chapter, on production, set out that the applicant had to be a corporation registered in Denmark, that plans for production had to be submitted and approved, that concessions to explore generally gave the holder a preferential status to obtain a mining concession49(section 15), and specified the content of the concession. This included the term (50 years),that some minerals could be excluded from the concession, that annual reporting was required,49 In cases where the mining concession was given to others, section 16 described how the initial holders of theexploration concession were to be compensated.155Past and present mineral policies in Greenlandthat activities were subject to inspection, that employment of local labour could be required,and that the concession lapsed if production stopped for more than two years, or if terms andconditions laid down in the Mineral Law, or in the concession were not complied with (section22). With respect to taxation of mines, section 17 simply said that concessions had to securethe State’s share in profits after the investment and a reasonable rate of return has been recovered. Alternatively, other forms of taxation could be applied. The final chapter gave the minister the power to regulate in areas of mine safety, worker safety and to define a number ofadministrative procedures.More than anything else, the 1965 Mineral Law is a framework into which civil servants couldfill all the necessary details by using the concession texts as the outlet for specific regulation.This practice is widely used in Danish legislation, although details are usually set out in regulations, rather than in individual concessions. The use of this approach is also a powerful indication of the rather narrow outlook on mineral activity which appears to have prevailed in theMinistry for Greenland at the time, and the structure of the Mineral Law seems designed tohandle a very limited number of cases in a highly bureaucratic manner.In terms of investor risk, three important features contributed to an overall perceptionthat the 1965 Mineral Law was unable to provide a sufficiently low-risk investmentenvironment.1. The possibility that a production concession might not be given to those who held theexploration concession for an area where a deposit has been discovered. The clause actually specifies that this can happen only when “very special circumstances” made it “a reasonable course of action”. The wording of the clause is not in itself extreme when readby anyone familiar with Danish legal tradition, and seems intended to provide an escapeclause with which “undesirable” operators could be screened off. The clause was proposed by the Mineral Law commission, but the report (Minelovskommissionen 1963)gave no supporting argument, but noted that cases might occur where it is necessary togive the concession to someone other than the exploration concessionaire.156Past and present mineral policies in Greenland2. Economic terms of mining operations are not well defined in the Mineral Law. Theproblem is not that the need for capital recovery and a return on investment is not recognized, but rather that the terms are not precisely defined. As noted, the lack of clarityon this point is a consequence of the mistaken belief that economic terms can only be determined when the value of a deposit is well known.3. The general possibility that a concession could be revoked if any condition in the Mm—eral Law, or in a concession, was not observed, was an added element of uncertainty.The concession for the Black Angel deposit issued to the Cominco subsidiary Greenex AIS, in1971, partially reflects the problem of insecure tenure and unknown economic terms. It took 4years to negotiate and issue this concession (1967 to 1971) and during this time the exploration of the deposit proceeded under an exploration concession issued before the enactment ofthe Mineral Law. The Canadian investors specifically wanted a concession which combinedthe exploration and production phases in order to carry out a feasibility study of the deposit(E. Dragsted, cited in Bruun and Mortensen (1991)).MINERAL LAW CHANGE AND HOME RULEGreenland was granted extensive Home Rule with the enactment of the Greenland Home RuleLaw in 1978. At the same time the Greenland Mineral Law was amended to reflect thechanged management structure. In the area of natural resources, the negotiations which produced the Home Rule bill had to resolve two related issues: Who “owns” the non-renewableresources of Greenland ?, and how can a compromise on this issue be implemented in an administratively practical way ?The ownership problemIn the 1965 Greenland Mineral Law, the first clause boldly states that “all minerals in Greenland belongs to the State”. To many in Greenland this was an extremely offensive statement157Past and present mineral policies in Greenland(Foigel 1980), and it became one of the thorniest problems in the negotiations over the introduction of Home Rule. Greenland representatives felt that the population of Greenland werethe true owners of the country’s mineral resources by virtue of their “aboriginal rights”, and further that they could claim sovereignty over natural resources as a “people” in the sense of theUN Covenant of Human Rights (Article 2). The Home Rule Commission based its work onthe fundamental assumption that the power to legislate and the power to appropriate fundscould not be separated (Hjemmestyrekommissionen 1978). In relation to non-renewableresources this involved a balance between two diametrically opposed interests. On the onehand, political independence from Denmark would require that Greenland could sustain itselffinancially, possibly in part through mineral revenues. On the other hand, as long as the “Unityof the Realm” remained, the Home Rule Authority would be constrained in its mineralpolicies, and Denmark would retain some control (Harhoff 1993). This led to theformulation of three main principles to govern mineral resource policy:1. Greenland and Denmark should have equal rights when it comes to designing and implementing mineral policy, and in important specific matters. This equality principlereflects that mineral resources are of vital interest to both Greenland and the nation as awhole.2. There should be established a joint decision-making power, vested in the national authorities and the Home Rule authorities, with respect to major decisions in the area of mineral resources, such that either party can oppose a proposed resolution (the mutual right ofveto)3. Practical cooperation was to be established between political institutions, and the administrative and technical agencies necessary for adequate administration of mineral resources, such that the parties had equal access to all information.These principles were laid down in section 8 of the Home Rule Law which states that “the resident population of Greenland has fundamental rights to the natural resources of Greenland”.The rest of the section specifies that regulation of mineral resources is to be by agreement be-158Past and present mineral policies in Greenlandtween the Danish Government and the Landsstyre, and that any member of the GreenlandLandsstyre (members of the Home Rule cabinet) may demand that the matter be laid beforethe Landsting (legislative assembly).Division of powers in the administration of mineral resourcesThe three principles underpinning the regulation of mineral resources determine the allocationof powers and the administrative organization described in figure 7.1.Figure 71. Organization of the ‘joint decision-making power” in relation to mineral resources in Greenland (modifiedfrom Foigel (1980)).159Past and present mineral policies in GreenlandThe Minister (of Energy) has the power to issue permits (Mineral Law sections 6 and 7), provided an agreement on the matter has been reached with the Home Rule Administration50(Mineral Law section 3).The Joint Committee can give recommendations to the two governments in cases whereagreements between the two must be reached (Mineral Law section 4[1]), i.e. in matters relating to individual permits. The Committee can also advise the two governments on other issues related to mineral resources. In legal terms the recommendations from the committeeare not binding (Harhoff 1993).The Mineral Resources Administration for Greenland (MRA) is a department in the Ministryof Energy, and is directed by a chief and a deputy chief. The chief is appointed by agreementbetween the two governments (Mineral Law section 5[2]). The MRA has two tasks. One isthe ordinary administration of mineral rights (Mineral Law section 5[1]), while the other isits role as secretariat for the Joint Committee (Mineral Law section 4{4J). It is important tonote that the MRA is subject to the Minister’s powers when carrying out its first task, whereasthe power to instruct the MRA in its second role lies with the Joint Committee (Harhoff1993)As noted above, the mineral resources issue was one of the most difficult to resolve whenGreenland was granted Home Rule in 1978. The compromise described above involved,however, an important argument used to justify the location of the MRA as a Ministerial department (initially in the then existing Ministry for Greenland). The argument turned on thequestion of who should have the power to issue permits and concessions: The Minister, theHome Rule Authority or the Joint Committee ?The latter solution was unacceptable from the Danish point of view because releasingcontrol of any territorial area would interfere with the principle of the “Unity of the Realm”which is laid down in the Danish constitution (Harhoff 1993). The logical consequence of thelinkage of control over minerals to territorial control was that only the Government of Denmark could dispose of mineral rights. The Greenland side in the negotiations was opposed to50 This is the Joint decision making power.160Past and present mineral policies in Greenlandthis argument as a matter of principle, but fear of an “information monopoly” also played arole. A counter-argument of a similar practical nature was that placing the MRA under theMinistry was necessary in order to have the required administrative capacity in a complicatedareas’ (Harhoff 1993).A further argument for placing the operations of the MRA under the Ministry for Greenland (later the Energy Ministry) was that these operations had to be subject to the government’s parliamentary accountability (Hjemmestyrekommissionen 1978). Nevertheless, a numberof institutions in Denmark operate outside this accountability. These include the central bank,the national radio and television network, and the national oil company (DONG), and theseare frequently referred to as “independent public institutions”. This implies that, if politicalconsensus exists, then it is possible to create independent institutions (Harhoff 1993).Options for government participation, and the creation of NunaoilThe notion of state participation in mineral projects has existed at least since the 1935 cryolite concession was negotiated. In the 1980s it was introduced during the negotiations over theconcession to explore and produce oil in Jameson Land in central East Greenland. The ideaseems closely related to the developments in Danish policy towards the petroleum concessionsin the North Sea, where state company involvement was heavily promoted during the late1970s and early 1980s.During the autumn of 1986 the policy of state participation was extended to includeother minerals than oil and gas and from that time onwards all prospecting permits and exploration concessions contained an option clause allowing state participation. The extension wasfirst proposed by the Mineral Resources Administration in order to deal with a deposit con-51 An additional argument for having the MRA as a ministerial department was that control over concessionswas necessary for the DK to be able to comply with international treaties on energy supplies (Foigel 1980;Harhoff 1993).161Past and present mineral policies in Greenlandtaming uranium as a by-product (Mineral Resources Administration for Greenland 1986).Subsequently, the idea was extended to cover all non-petroleum minerals.Initially, the option was vague on the extent of the participation, but from January 1988the option clause became more focused. It consisted of two parts, first an option for the stateto acquire up to 25% of any exploration stage project in return for payment of past exploration cost in proportion to the states share (i.e. max. 25% of exploration cost). This optionhad to be exercised within 2 years of the original concession issue date. Secondly, the statehad an option for an additional share of up to 25%, depending on the size of the first option(i.e. if the first option was for a 20% share, the second option could be no larger than an additional 20%). Whether this second option was to be carried by the private investor or not remained unclear since the question was to be settled as part of the negotiations over the economic terms of a production concession (Mineral Resources Administration for Greenland1988)Revenue sharing between Greenland and DenmarkThe revenue-sharing section in the 1979 Mineral Law provided for negotiations over the sharing of revenues in excess of the Danish transfer payments to Greenland. However, in 1988, theHome Rule government succeeded in changing the distribution formula such that revenues iessthan 500 million DKr annually were divided equally between Greenland and Denmark, whilesums in excess of the 500 million were to be distributed according to later agreement.The fact that Greenland was to receive no benefits from mineral exploitation untilmineral revenues matched current net unrequitted transfers meant that the Home RuleAuthority had no incentive to welcome mineral projects (Lyck 1988). Indeed, it may furtherbe argued that the Home Rule Authority had an incentive in delaying activities until a bettersharing mechanism was in place.162Past and present mineral policies in GreenlandMINING POLICY REFORM, 1991Generally bleak prospects for the Greenland economy, the closure of the Black Angel mine inJune 1990, and the end of petroleum exploration in Jameson Land prompted a reappraisal ofmineral policies in the spring of 1990. The driving force behind this effort seems to have beenthe Greenland Home Rule Authority, as indicated by the official records for the GreenlandLandsting. During 1988, several speakers mentioned the need to provide more attractive investment terms52. To this end a group of experts was directed to examine the possibilities ofmineral policy reform. The group was specifically asked to consider the following issues(Mineral Resources Administration for Greenland 1990a):1. The major components of a policy designed to generate significantly greater levels ofmineral activity in both the short and the long term;2. Description of the conditions necessitating the change of policy, including the closure ofthe Black Angel mine and the problems facing other industries in Greenland;3. Analysis and design of specific measures which could promote the policy goals, including changes in the terms offered to investors;4. Examination of the possibilities of coordinating efforts to promote mineral activitywith efforts in other industries in Greenland;5. Address the division of administrative tasks in relation to efforts to promote mineraland other activity.The group of experts, which all came from inside the MRA-structure, from Nunaoil or fromthe Greenland Home Rule Authority, was established on April 18th, 1990, and delivered it’sconclusions a little over one month later, on May 23rd, 1990.ObjectivesThe report (Mineral Resources Administration for Greenland 1 990b) defines two long-termgoals:52 Grønlands Landstings forhandlinger 1988, p. 713.163Past and present mineral policies in Greenland1. A significant increase in activities, both exploration and production;2. That society benefits from mineral activity through industrial development, employment, education, tax revenue, infrastructure, technology transfer, and internationalization,while the disadvantages associated with such activities are minimized.According to the report, these goals require that Greenland is able to attract investment andtechnology by offering internationally competitive terms, that the mineral sector is not isolated from the rest of the Greenland economy, that society retains sufficient control over eventsin the mineral sector, such that the development process is managed and occurs in a deftnsiblemanner with respect to environment, safety and resource issues53,and that mineral activities areaccepted and understood in Greenland as a necessary part of life.The goals are further described in separate sections on “hard” (metallic) minerals and“hydrocarbons”, respectively. The report outlines the main goals for metallic minerals in geological terms, and argues that, on average, 40-50 exploration projects will generate 2,000anomalies, of which 1,000 will be examined more closely, producing 50 interesting targetswhich are then reduced to approximately 3 targets of economic interest. One of these is thenlikely to lead to production. If mining is to contribute to the Greenland economy, betweentwo and four medium size mines need to be operating along with several smaller ones. Theconclusion is that Greenland needs to attract much investment in “hard” mineral exploration.However, the investment needed to reach this goal is not estimated.The report set out the general goals in the petroleum area as between two and four exploration wells and 10-15,000 km seismic lines annually, valued at 50-100 million US$. Ideallythese goals should be pursued with as many companies active as possible. Since financial53 Both the strategy report, previous legislation and the new Mineral Law note that exploitation of mineralsmust occur in a way which is defensible in terms of “resource issues” without ever being specific about what thismeans. This may refer to common-pool problems (Libecap and Wiggins 1985). However, the MRA has in thepast imposed production limits on the Black Angel mine (Greenex 1990), see the discussion in chapter 9.164Past and present mineral policies in Greenlandcommitments of this size require that terms and conditions of future operations are known, thereport recommends that projects and exploration areas in various stages of advancement arepromoted by the Government clearly signaling where, how and on what terms blocks will beoffered for bidding/application during the next 5-10 years.Mineral tenureThe recommendations with respect to tenure and economic terms distinguish between minerals and petroleum situations. For minerals, the report recommends that the security of tenureis improved by giving the holder of an exploration concession or permit the right to developany mineral deposit he may find. The chief obstacle to such a clause seems to have been thedesire on the part of the politicians to retain some form of right to decide whether miningshould occur. For petroleum, the existing type of title was to remain unchanged.Economic terms for mineralsThe question of economic terms preoccupied the experts at length, the main issues being taxation of mining firms and state participation in operations. Key issues identified were the effect of corporate taxes and dividend taxes, including possibilities for tax credits in miningcompanies home countries, tax jurisdiction, and tax-based incentives.The discussion of state participation in projects (based on the option policy describedabove) cited the advantages (improved information and influence, participation in production,acquisition of knowledge inside Nunaoil A/S), and the disadvantages (high share, private investor loss of control, difficulties in obtaining financing and lopsided distribution of risk).The recommendation was that options in the exploration phase be removed, but that an optionfor state participation in production remains, albeit at a much lower level than the previous25%. The main preoccupation in this context was how to keep terms competitive. The reportdid not, however, include any information on what other countries are doing in this respect(Mineral Resources Administration for Greenland 1990b).165Past and present mineral policies in GreenlandEconomic terms for petroleum productionIn contrast to the administrative policy pursued for metallic minerals, concessions forpetroleum exploration have always been combined exploration and production concessions.The report argues that terms change over time in response to changing conditions in the worldpetroleum industry, and that individual licensing rounds may well differ with respect to taxation, state participation and work requirements. As a result, there is not the same need forfixed terms as in the case for minerals. Nevertheless, real offerings require extensive seismicinvestigations which again require private (i.e. oil company) investment. This will not beforthcoming unless the main terms and conditions of offerings are clearly stated.THE NEW POLICIES AND THEIR IMPLEMENTATIONAs a direct result of the report described above, a new “Greenland Mineral Law” was draftedand enacted by the Danish Folketing in May 1991. The Law itself sets out a general framework of regulation, specifying the powers of the minister, the rights and duties of permit-holders and the administrative structure. As companions for the new Law, a document specifying “Principles and Procedures” as well as different sets of Standard Terms and conditions,covering petroleum exploration, mineral prospecting and mineral exploration/production,were drawn up. Here we first describe the principal features of the Mineral Law, and then themore detailed regulations.The 1991 Greenland Mineral LawThe first chapter is similar to the 1979 law and regulates the administrative structure. Themost important section is the third, specifying that all permits, whether they be for prospecting or exploration/production are issued according to agreement between the Danish andGreenland governments. Thus, in principle each and every project needs political approval.166Past and present mineral policies in GreenlandThe second chapter, on preliminary investigation permits, has an addition allowing the authorities to require various payments. Generally, more detailed regulation, some of which previously appeared in the corresponding chapter of the 1965 Mineral Law, is delegated to the minister.Exploration and mining are covered by chapter 3. The first type of permit is a“preliminary investigation permit” which allows the holder to prospect but which does notgive any exclusive right. Alternatively permits can be issued giving the holder the exclusiveright to explore and mine. The remaining sections of chapter 3 allows the minister to chargefees and other payments, to require state participation54,to require use of local labour andsuppliers, and to specify that development plans must be approved. This chapter thus sets outthe general principles and ministerial powers in all mineral resource questions.The fourth and fifth chapters contain specific regulation of petroleum and minerals, respectively. With respect to petroleum, the term of each type of activity is defined(exploration can go on for a maximum of 16 years, while extensions for production purposesare for a term of 30 years). Otherwise, the main special provision for petroleum allows theminister wide powers to make companies with adjacent blocks covering the same reservoircooperate.The special provisions for metallic minerals also set out the length of concessions(exploration 16 years; production 30 years), and emphasize that the holder of an explorationpermit has the right to obtain a mining concession. The final section in chapter 5 (section 16)specifies that the economic conditions for mineral production can only include taxes, royalties, rental fees and state participation to the extent that these were set out in the explorationpermit.The new Mineral Law has special provisions for the protection of environmental values,including one which allows the minister to require developers to post reclamation bonds.5 This is the general rule. Section 16 then limits this power to situations where [options for] stateparticipation have been specified in exploration permits, or where exemptions from taxation has been granted.167Past and present mineral policies in GreenlandAbandonment plans must be provided when mine development is proposed, and developersmust show that provision has been made for their implementation.Chapter 9 of the Mineral Law describes the formula for sharing mineral revenues betweenGreenland and Denmark, which is unchanged from the 1988 revision of the Mineral Law, anddefines the types of revenue subject to the sharing agreement. The sections in chapter 10 vests arange of powers in the minister, and defines the duty of the concessionaire to operate in anenvironmentally and operationally safe manner, such that exploitation takes place in a “sound”way with respect to resource use55.The minister can issue regulations in respect of these matters, and must approve anyconstruction or changes in plans according to the terms set out in the concession. Inspection,reporting etc. is also subject to separate sections. The final chapter contains a number ofmiscellaneous provisions. Individual concessions must set out the extent of the concessionairesduties after the expiry of his concession. Danish laws of compensation apply, and concessionaires can be required to take out special insurance coverage. In cases where mining occurswithout permission, where concessionaires fail to obtain proper permissions, disregard theterms of their concession, or fail to observe orders issued under the Law, the appropriate sanctions may be fines or jail sentences.Principles, Procedures and Standard TermsThe new Greenland Mineral Law leaves many details to be regulated in each permit. The approach adopted by the Mineral Resources Administration is one of issuing a document specifying “Principles and Procedures”(Mineral Resources Administration for Greenland 1992d),accompanied by sets of “Standard Terms” for preliminary investigation permits, and exploration permits, respectively. Each license or permit consists of a page defining the area inquestion and that the terms are the Standard Terms for the type of permit in question.55 As in the 1965 Mineral Law and later amendments the meaning of this is not elaborated.168Past and present mineral policies in GreenlandThe Principles and Procedures document describes in detail how applications should bemade, how they are formally processed, how competing applications for exploration licensesare treated, and further a number of points also contained in the Standard Terms. The important rules in this document concern the administrative processing of applications. Figure 7.2.gives an impression of the process. It basically involves both an administrative and a politicalreview, and then the Minister and the Home Rule Authority makes a decision and the Ministerissues the permit. However, in practice the procedure can be much simpler. According to therules of procedure of the Joint Committee applications can be processed by the Chairman andthe two deputy chairmen of the Joint Committee, and their recommendation can then be endorsed at the next full meeting of the Committee (Mineral Resources Administration forGreenland 1992b).The Standard Terms then provide the detailed rules for the mineral activity, includingarea definitions, term limits, charges and fees, activities of others in the area, work requirements and allowable expenses, approval of activities, inspection, abandonment of sites, reporting, use of local labour and suppliers, the transfer from exploration to production, transfer ofpermits, the forfeiture of permits, liability, dispute resolution, and remaining liabilities afterthe expiry of a permit.For exploration permits the Principles and Procedures document (Mineral ResourcesAdministration for Greenland 1992d) sets out the normal items: The term of the license, itsextent, as well as inspection (applies only where major operations such as drilling or blasting,are undertaken), and work requirements. Holders of preliminary investigation permits are under no obligation to conduct work in order to keep their permit in good standing, and neednot refund administration costs. The MRA can, however, require payment for the cost of siteinspections.169Past and present mineral policies in GreenlandFormal procedure Informal prodedureApplicationforprospectingpermit Application forprospectingpermitor exploration licence or exploration licence_____4Mineral Resources Administration Mineral Resources Administrationmtion monJoint Danish-Greenlandic For Preliminarycommittee on mineral resources endorsement decisionRecommendationHome RuleMimster ror EnergyAuthoriDecisionPermitissuedFigure 7.2. Administrative processing ofapplicationsWork requirements for exploration permits are based on a combination of a fixed sumper license, and an additional amount depending on the size of the permit area, see table 7.1.Only those activities and types of expenditures defined in the Standard Terms for explorationlicenses are allowed for the calculation of work56. Special provision is made for explorationin remote regions (North of 78°N in West Greenland and East of 44°W in East Greenland).In these areas, longer time is allowed for exploration, and less work is required to keeplicenses in good standing.56 To improve the attractiveness of Greenland, the calculation of allowable expenses has recently been modifiedsuch that total allowable expenditures can now be inflated by 50%. This applies to expenditures in 1993 andsubsequent years (Mineral Resources Administration for Greenland 1993).170Past and present mineral policies in GreenlandTABLE 7.1. ANNuAL WORK REQUIREMENTS (DKR)Year Work per license Work per km21-2 100,000 1,0003-5 200,000 5,0006-10 400,000 10,00011- To be agreed between applicant and the MRASource: (Mineral Resources Administration for Greenland 1 992d) Work requirements are to be inflated bythe Danish Consumer Price IndexFollowing section 7 of the 1991 Mineral Law, the Minister for Energy can issue permits to explore and produce minerals. In “Principles and procedures” and the Standard Terms for exploration licenses, this is interpreted to mean that an exploration license can be converted to aproduction license, if certain conditions are fulfilled. The application to convert must be accompanied by the following documents:1. A statement from the holder of the exploration permit stating that a deposit is commercially viable, and that the holder intends to exploit it;2. A feasibility report on the deposit, upon which the statement (1) is based, and which canbe used to obtain finance for development (i.e. a “bankable” feasibility report). Thereport must include a geological assessment of the deposit, as well as specification ofthe technical, economic and environmental parameters on which the statement (1) isbased;3. The licensee’s proposal for the area to be covered by the mining lease.Economic termsThe Standard Terms attached to exploration permits specify a number of fees applicable atvarious stages of the exploration process (table 7.2). The main form of taxation occurs, however, under the Greenland Income Tax Law. This was changed during 1991 as part of the mineral policy reform, and the tax regulations facing a mine operator are now fairly simple.171Past and present mineral policies in GreenlandFirms domiciled in Greenland are fully liable for taxation in Greenland, whereas foreignfirms carrying out mining operations are subject to limited tax liability.TABLE 7.2. FEES FOR MINING RELATED PERMITSActivity Fee (1992 DKr, inflatable at Danish CPI)Issue of preliminary investigation permit 15,000Transfer of preliminary investigation permit 7,500Issue of exploration permit 25,000Annual fee, years 6-10 25,000Transfer of exploration permit 12,500Issue of mining permit 100,000Administration of mining permit actual costSource: Standard Terms for prospecting (MRA 11 March 1992) and for exploration (MRA 16 December 1991)Taxable income is computed annually as total income from any activity or type of transaction. For firms with limited tax liability, only income derived from the activity in questionis liable, and only deductions related to that activity are possible. Income is determined using the arm’s length principle, such that transactions between affiliated enterprises are adjustedto reflect normal commercial conditions (in order to prevent transfer pricing). Depreciationcan occur immediately or be deferred to later years, depending on the preference of the firm.Dividends are allowable deductions for companies with full tax liability, (but are taxed withthe shareholder, at 35% if the shareholder is a licensee under the Greenland Mineral Law). Iftaxable income is negative, the amount may be carried forward until offsetting positive income occurs, or it may, upon special application, be carried backwards. Two special deductions are available. One is for funds set aside for implementation of the abandonment plan,and the other is for further processing of mineral concentrates in Greenland, at 10% annually ofthe investment in plant and equipment for such secondary processing. This deduction is apparently available for an unlimited number of years. For the computed tax-base, the current taxrate is 35%. There are no withholding taxes on dividend payments to foreign shareholders.Petroleum permits provide for a royalty of 5% of the value of liquid hydrocarbons for(total) quantities in excess of 79,5 million m3. The value is to be determined in relation to a172Past and present mineral policies in Greenlandstandard crude product (Brent Blend, fob., Sullom Voe). For production less than the 79.5million m3’ the royalty is set at 1%. In addition to the royalty, however, there is a state participation clause. Under this, Nunaoil A/S will participate with a 15% share in any projecton a carried interest basis. In a production phase, defined to begin when a development planhas been approved, Nunaoil will not be carried. The private partners can be required to purchase Nunaoil’s share of production at reasonable terms which reflect market prices.For petroleum a separate set of rules and procedures has been prepared. Work requirements arelisted in table 7.3, and the most important terms can be summarized as follows:1. Maximum exploration area consists of 6 blocks each made up of 25 sub-blocks (totalarea up to approx. 2,400 km2;2. One fourth of the area must be returned at the end of year 6 of the permit, a further 25%must be returned in year 8;3. The term of the permit is 10 years, with up to 3 extensions of 2 years each;4. The permit can be terminated by the permitee at the end of any year, provided exploration requirements have been met;5. A number of fees are payable. In the production phase permitees contribute the cost ofadministration to the MRA;6. If a viable deposit is found the permit can be extended, for the area in question, for a period of 30 years;7. Nunaoil will have a 15% share in any project, carried during the exploration phase;8. Royalty will be 1% of the production value for the first 500 million barrels, then 5%.Royalties can be waived if necessary for operations to remain competitive;9. In the event of production, an acceptable Environmental Impact Statement must be submitted.173Past and present mineral policies in GreenlandTABLE 7.3. REQUIRED PETROLEUM EXPLORATION WORKYear Minimum work required Minimum expenditure1-3 250 km multi-channel reflection seismics per block. Minimum work per block: $US 0.55 mill.Minimum work per permit: $US1.65 mill.4-6 1 exploration well to basement (or 3500 m.). Minimum work per permit: $US 30 mill.7-8 1 exploration well if less than 50 subblocks are kept; Minimum work per permit: $US 30 mill.2 exploration wells if less than 100 subblocks are kept; Minimum work per permit: $US 60 mill.3 exploration wells if more than 100 subblocks are kept. Minimum work per permit: $US 90 miii.9-10 1 exploration well if less than 30 subblocks are kept; Minimum work per permit: $US 30 mill.2 exploration wells if less than 60 subblocks are kept; Minimum work per permit: $US 60 mill.3 exploration wells if more than 60 subblocks are kept. Minimum work per permit: $US 90 mill.Source: (Mineral Resources Administration for Greenland 1 992c)Environmental protectionAll matters of environmental protection related to mineral activities are regulated through theGreenland Mineral Law, and through the Standard Terms for various types of permit. Thegeneral power to issue regulations on environmental matters is contained in section 24 of theMineral Law (Mineral Law 1991): “The minister can issue regulations for activities governedby permits issued under sections 6 and 7 of this Law.. .including regulation of technical, safety,environmental and resource conditions”57.These powers are implemented through the regulations for the permitee’s conduct during, and after exploration activities. The rules of conduct which are collected in a separate 60-page booklet includes both environmental protection rules and regulation of other aspects ofthe exploration process. The former specifv what types of equipment may be used, and activities undertaken without separate permission from the MRA. The rules also imply that permitees have a general duty to minimize the environmental impact of exploration on landscapeand vegetation. The general principle for ending exploration projects is that sites must be leftin the condition they were found (i.e. all installations must be removed, and all damage to nature repaired).57 Authors translation. Regulations of technical, safety and resource conditions have not been issued.174Past and present mineral policies in GreenlandWhen a production decision is being made, section 14 of the Standard Terms for exploration permits requires the permitee to prepare an environmental impact assessment (hereafter“ETA”). The content of the ETA must be approved by the MRA, and then submitted duringnegotiations with the MRA concerning the detailed planning and implementation of the development and production phase (Mineral Resources Administration for Greenland 1992e).ON THE CONTENT AND SUFFICIENCY OF THE 1991 POLICY REFORMMineral policy in Greenland exhibits incomplete understanding of the nature of the mineralindustries. The problem seems most acute in the case of mining regulation, while petroleumpolicy appears generally more assured. This may be explained by the fact that Danish administration has considerable knowledge in relation to petroleum in the North Sea, but virtuallyno experience with mining.The following sections analyze four areas where serious problems exist. The first is thepolitical and administrative organization. The second treats the discrepancies and ambiguitiesfound in the existing regulatory framework. The third area of concern is taxation, where policy credibility plays an important role. Fourth is the matter of emphasis placed on petroleumresources, and government investment in mineral exploration.Political and administrative organizationThe argument about who “owns” the resources has had unfortunate consequences. It seems thatthe importance of mineral rights has been overly dramatized when in fact these rights are littlemore than leasing contracts. In other words, the amount of control given up by issuing a permit is limited. It can be argued that the legalistic preoccupation with control, for example inthe event of severe energy shortages which would activate international treaty obligations onenergy supply, has legitimized a refusal to view the operation of market forces in relation tomineral rights as the normal and preferable allocative mechanism. The energy-treaty argu175Past and present mineral policies in Greenlandment is, however, a remote possibility under most circumstances. A more plausible explanation is that Denmark wanted to retain some control over the only reasonable chance of recovering some of the vast sums Greenland has received in net unrequited transfers over the years.In terms of political influence on policy formation as well as on permit decisions it is clearthat the Joint Committee plays an important role58. Several observers have noted, however,that the MRA is equally or more important than the Committee (Davis and others 1984;Harhoff 1993).The concentration of knowledge within the MRA, and before it the Ministry for Greenland, has a long history but it only became an issue when Greenland itself became an interestedparty, as Home Rule was introduced. The fear in Greenland of an “information monopoly”has been noted above. The solution desired in Greenland is to have the MRA located inGreenland as part of the Home Rule Administration (this can be seen from statements madeby Greenland’s Premier, Mr. Lars Emil Johansen, in the course of a recent debate on mineralpolicy59), but that raises exactly the same problem, with Greenland and Denmark in reversedroles. The natural solution is to place the MRA directly under the Joint Committee, but thishas never been seriously considered (Harhoff 1993).The importance and influence of the MRA has been investigated by Davis and co-workers (Davis and others 1984). Their analysis60 confirm the high concentration of information atthe MRA, and the MRA’s ability to control, and shape the information provided and theagenda of the Joint Committee. This conclusion is supported by Harhoff (1993), who arguesthat, because the Joint Committee is dependent on the MRA, the latter can influence the58 The recommendations from the committee are always followed by both governments, as can be seen in theannual reports from the Joint Committee. It is, however, difficult to determine the extent of discussions takingplace at the closed Committee meetings (minutes of the committee meetings are not available to the public).59 Minutes of the Greenland Landsting, April 27, 1993, item 13.60 This was based on detailed questioning of members of the Joint Committee.176Past and present mineral policies in GreenlandCommittee’s decisions. This necessitates a loyal cooperation between the MRA and theCommittee.Discrepancies and ambiguities in the reformed mineral policyThe various regulations issued by the MRA in the form of “Principles and Procedures”,“Standard Terms”, etc. contain numerous discrepancies and ambiguities. The first can befound in part A of the document “Principles and Procedures” (Mineral Resources Administration for Greenland 1 992d), and concerns the priority given to a holder of a preliminary investigation permit. When two or more parties apply for an exploration permit for a given area,“....priority will be given to that party who has conducted exploration in the area applied for,and who has reported in writing [to the MRA], a discovery of possible economic significance,and who thereby has established a basis for further exploration”61.Thus a preliminary investigation permit, which does not otherwise imply any specialright, takes on such rights when there are more than one applicant for an exploration permit.However, this happens only when three conditions are met: prospecting must have taken placein the area applied for, a “discovery” must have been reported, and the basis for explorationmust have been established. The interpretation of these rules is difficult. It is unclear whetherthe exploration must have taken place in the area applied for, or just in the area of the preliminary investigation permit. The concept of a “discovery of possible economic significance” isnot defined, and it will be difficult to asses whether a permitee has established a “basis forfurther exploration”. These omissions create an incentive for holders of preliminary investigation permits to report anything which may be of economic potential. In extreme cases, withheavy prospecting activity in an area, each permitee will report any anomaly, in writing, inorder to protect his investment. Even if things are clear up to this point, there is still thepossibility that two holders of preliminary investigation permits have done all the correct61 Author’s translation. The preferential status applies for a period of 6 months after the end of the permitee’sfield program.177Past and present mineral policies in Greenlandthings to obtain preferential status. There is no way of determining how the conflict betweenthese will be resolved62.In “Principles and Procedures”, both part A on general issues (section 2), part B on preliminaryinvestigation permits (section 3), and part C on exploration permits (section 3) contain explicit and very detailed descriptions of the timing of issuance of permits, and the term of thepermit. These rules mean two things. First, no exploration permits will be issued for areascovered by a preliminary investigation permit during the months of July, August and September, in order to allow holders of the latter type of permit to apply for an exploration permitthemselves. Second, if a permit is issued before October 1st, that year will be year 1 of theterm, which runs to December 31st in year 5. If permits are issued after October 1st, the following calendar year will be year one.These rules are unduly complicated and also unnecessary. The first rule is designed togive a holder of a preliminary investigation permit protection during the field season(Mineral Resources Administration for Greenland 1 992d). Both this and the priority rulesdiscussed above indicates the ambiguity associated with this type of permit. On the one handsection 6[2] of the Greenland Mineral Law specifies that a preliminary investigation permitcan be given to more than one party for the same area. On the other hand the “Principles andProcedures” document gives a number of rights and exemptions from the general rule. Ratherthan having a type of permit which is ill defined, there should be a clear distinction betweenpreliminary prospecting activities involving no rights, and “proper” exploration rights whichare exclusive to the holder.A special form of permit is available for individual prospectors which meets this requirement.Unfortunately, the section providing for this personal permit is worded in a highly confusing62 The event which can precipitate this problem is the discovery of a major orebody. Once this becomes known,other prospectors will rush into the area and try to obtain control over ground adjacent to the discovery.178Past and present mineral policies in Greenlandway (Mineral Resources Administration for Greenland 1992d). Section 7[1] reads: “A special personal preliminary investigation permit can be issued to an individual who intends toprospect on his own account, and at his own risk - i.e. conduct prospecting which does not involve employment or contractual relations with others “63• There is little doubt that thisprovision has been made with the intention of promoting local participation, and eventuallydevelop a prospector culture in Greenland. Unfortunately, it is very difficult for individualprospectors to exist in a vacuum. The prospectors business is based on the information he canproduce and sell. If a prospector cannot enter into contractual agreements, as prohibited bysection 7[1], the prospector’s permit is meaningless. If the intent with this restrictions is toprevent individuals from subcontracting work from mining firms this should be more clearlystated, and such a clause should then also specifr whether the prospector could employ others.In any case, there is no record or mention of the “prospector rule” having been used.The rules for exploration work requirements are outlined in “Principles and Procedures”(Mineral Resources Administration for Greenland 1992d), and elaborated further in the“Standard Terms” for preliminary investigation permits and exploration permits, respectively (Mineral Resources Administration for Greenland 1 992e; Mineral Resources Administration for Greenland 19920. While the general progression, as shown in table 7.1, is comparable to for example Canadian mining legislation64,it reflects a strange conception of diligence provisions.The obligation to carry out the required amount of exploration (section 6 in the standardTerms for exploration permits) rests on the holder of the permit. The Standard Terms emphasize that work carried out before a permit changes hands cannot be counted as work by thenew permitee. In “mainstream” Mineral Laws, as expressed for example in Canadian provincial Mineral Laws, the work required to keep a mineral title in good standing is related to the63 Author’s translation. These permits are valid for one calendar year and require payment of a 1,000 DKr fee.64 British Columbia Mineral Tenure Act Regulations, Section 19 (B.C. Reg 297/88).179Past and present mineral policies in Greenlandtitle itself, not its owner. In addition, it is not clear from the Standard Terms how a newpermitee will be placed on the scale of increasing work requirements.Exploration expenses exceeding the required amount can be carried forward for up to 3years. It is unclear whether unused exploration expenses can be concentrated on a smaller area,when the area of the permit is reduced. Grouping provisions allowing this are also common inCanadian mineral legislation.It might be argued that it does not matter whether exploration expenditures follow thefirm or the permit: the value of contract for the transfer of the permit to a new permitee willreflect the lack of transferability. On the other hand it might be argued that valuing the realinformation contained in an active exploration project does not need further complication.The problem with linking work requirements to the firm, and not the land is that it may encourage redundant exploration expenditures, as discussed in chapter 4.The structure of the Mineral Law is also ambiguous on the question of state participation. Section 8 [2] gives the Minister the power to make such participation part of the conditions for apermission to explore and produce. For metallic minerals, section 16, limits this power tocases where explicit provision has been made for state participation in the exploration permit,or where a permitee has been made exempt from taxation under section 8 [3] or similar provision in the Greenland Income Tax Law. For petroleum, the minister’s powers to require stateparticipation remains.For all practical purposes, state participation in mining projects cannot be required, asspecified in section 16 of the Mineral Law. However, given the structure of the Law, it standsout as the general rule. For mining a departure is then made, but only in certain cases. Thefact that the participation rule has been placed in chapter 3 of the Mineral Law, which containsgeneral rules for exploration and production permits, indicates another inconsistency. If thepurpose is to use the rule only for petroleum permits, why was it not placed in the chapter(chapter 4) dealing specifically with this area ?180Past and present mineral policies in GreenlandThe standard Terms and the rule-book for preliminary investigation and exploration permitsare very specific about which activities are allowed during exploration, and which are not.They are much less clear about what happens in the event of a discovery, except by specifyingthat a satisfactory EIA must be submitted as part to the permitting process.The rule-book covering various types of exploration activity is extremely comprehensive. It contains primarily environmental protection rules, but includes a number of rules forreporting, safety and communications as well. Many of the latter refer to current regulationsin Greenland (these the permitee must obtain and comply with). In general the practical rulesare sound and sensible. There is, however, a large number of repetitions, and some sections(e.g. on driving on ice and on glaciers) could well be shorter and less patronizing.The environmental rules are wide in scope, covering such diverse areas as storage of fuels,archeological sites, camp-sites, waste materials and site rehabilitation, as well as the use of vehicles and aircraft. In most cases the rules appear intended to secure near-complete restorationof any disturbance of natural conditions resulting from exploration activities. In a small number of areas in Greenland the use of aircraft is specifically regulated in terms of minimum flying altitude, frequency of flights, and periods of applicability, in order to protect specificspecies, including birds, muskox and polar bear. In other areas, however, some restrictions apply in areas with “rich animal life”. It is very difficult to asses the relevance of such rules. Itis likely that they are well founded on biological considerations, whereas it is less likely thatthe relative values of disturbing animal life, and minimizing exploration cost have been considered (if this is at all possible). The special rules which govern use of aircraft reflect theproblems inherent in environmental regulation of mineral activities.First is the information problem. The specific restrictions noted above apply in 3 limited areas in Greenland. The emphasis on these areas does not indicate that they are the onlyplaces where a rich animal life is found, but rather that information happen to be availableabout these areas. Given that the areas with explicit regulations have all recently seen explo181Past and present mineral policies in Greenlandration activity (Mineral Resources Administration for Greenland 1991; Mineral ResourcesAdministration for Greenland 1992a), it is likely that the information on which the regulations are based was acquired as a result of the interest in the area. If there had been no activitythere would have been no need for data, and none would have been collected.The relationship between information and mineral titles can be illustrated by the following story. Consider an area covered by an exploration permit. As exploration proceedstwo things become clear: the area hosts a “world-class” nickel deposit, and one of the threeknown nesting colonies of a rare bird. If the deposit is developed it will be a great threat tothe bird. And if the bird is protected, it will be the end of the mining company. The onlytwo ways the situation could have been prevented was if the government had not issued thepermit, or if the company had realized early on, that the bird was a potential obstacle.The story highlights the problem facing both investors and regulators: environmentalconstraints may prevent the development of discoveries, and the investment in informationabout the deposit will be redundant65.With full knowledge about environmental resources andtheir value it would not be difficult to set up a framework of environmental regulations related to the sensitivity of different areas. By establishing such a framework, and integrating itwith the way mineral titles are issued, a country can in fact create a high degree of protectionfor the investor. This can then be used in the competition to attract mineral investment. Inmost cases, however, information about the environment is highly imperfect, and becomesknown only when some external event prompts its acquisition.There appears no easy way of solving this problem. Some countries may have sufficientinformation to implement the land use planning approach discussed in chapter 5, whereprospectors must observe the rules of conduct applicable in a given zone, 4 evaluate their re65 In some cases the government may compensate owners of a deposit if their title is expropriated for other use ofthe land (e.g. as wilderness). However, strict environmental regulation may have the same effect but withoutcompensation being paid.182Past and present mineral policies in Greenlandsuits in the light of general environmental constraints applicable in that particular zone. Unfortunately, in most places lack of information makes such an approach very difficult.Finally, there is the problem of what is left unsaid in the various regulations. It arisesfrom the fact that some exploration projects leads to the discovery of mineral deposits whichare economically marginal. Such deposits may eventually move into the “economically mine-able” category, for example as a result of technological advances or price increases. Under therules discussed above, however, there is no provision for such cases. A permit can be maintained in good standing by continued exploration (or by direct payments to the MRA). Itcannot be converted to a production permit because it cannot obtain a bankable feasibilitystudy. As a result the asset (the marginal ore and the information about it) will revert to thestate.Taxation and credibilityThe special provisions for taxing mineral companies were noted above. Mining companiespay a flat rate of corporate tax, whereas petroleum production is also liable to pay a royalty,and accept a degree of state participation. The mining tax terms in particular appear veryinviting. Comparisons with other tax regimes reveal, however, that most less developed countries have some form of provision for taxing additional profits.Table 7.3. indicates that Greenland is more attractive in tax terms than many of theother countries which have a more enticing geological potential. The question is, however,whether so simple a tax will be seen by investors as permanent. If mining firms think that thetax rate will be changed they will base their decisions, not on the present tax rate, but on whatthey expect it to be. When seen in this more dynamic perspective, Greenland may not appearas attractive, as it would like to. The problem can be described by borrowing a concept fromprice theory, the “rational expectations hypothesis” (Muth 1961). This is the assumption thatfirms will utilize all the information available to them to predict the future price of a product. In this case the “price” is the rate of taxation on mining profits.183Past and present mineral policies in GreenlandTABLE 7.4. SUMMARY OF MINING TAXATION IN SELECTED COUNTRIESCanada 34%a 30% of pool, development cost20% of pool, machinery cost100% of pool, exploration cost.Chile 32.5% Straight line over useful life(some agreements for accelerateddepreciation).7 years3 years backwardIndefinite,adjusted atcost of livingindex35% Residual divided by remaininglife of operation, or by a fixedfactor, whichever is the lesser.South 56% Capital cost fully deductible inAfrica the year incurred. Unused depreciation can be carried forward.Tan- 22.5% 40% in year 1Notes:10% in each of years 2-7Benefication allowance: 20% ofcapital cost and 15% of operatingcost of further processing facilities.45% Current capital cost deductible inyear incurred. Special concessions35% Capital cost fully deductible inthe year incurred. Unused depreciation can be carried forward.7 years 35% of accumulatedvalue of net cash receipts. Accumula-tionrate is 20% or averageUS prime rate + 12%.Adjustment for currency fluctuations33.3% of undistributedprofitsIndefinite APT payable on netcash flow in excess ofthat needed for athreshold rate of returnDividends: 10%Interest: 30%Dividends: 15%Interest: NilDividends: 10-20%Interest: 12.5-20%Dividends: 5 or 20%Interest: 10%a. Effective average tax rateb. Depends on double taxation treatiesSources: Corporate taxes: A Worldwide Summary, Price Waterhouse, London 1990, Kumar, 1991, MRA, 1992.Country Cot- Capital allowance Loss carry- Additional profit Withholdingporate forward tax taxesbtax rateAustralia 39%a Accelerated depreciation Indefinite No Dividends: 15-30%Interest: 10%10-25%NoNoPapuaNewGuineaDividends: 32.5%Interest: 40%Indefinitezania yrs 1-4;50%fromyear 5ZimbabweGreenlandfor new mines.Indefinite NoIndefinite No NoThe experience in the mining industry seems to be that tax regimes are stable oniy aslong as profits remain moderate (i.e. not far above the returns on other assets). If mines suddenly begin to earn large additional profits the state will be tempted to demand a share ofthese. The cases of the Bougainville re-negotiation (Pintz 1984), and lately the forced change184Past and present mineral policies in Greenlandin ownership in the Porgera project66 are clear illustration of this experience. Even the agreement on the 1935 cryolite concession shows that the idea is neither recent nor foreign to Greenland.Given the uncertainty associated with a tax regime investors may perceive as incomplete,some sort of provision for taxing additional profits should be made, for example along thelines discussed in chapter 4 (see also chapter 8).Emphasis on petroleum investmentThe investment by government in different types of exploration activities in Greenland wassummarized in table 6.1 for the period 1986-1994. It is clear that considerable emphasis hasbeen placed on petroleum relative to metallic minerals. It is questionable, however, whetherthis has been an entirely wise policy. Exploration activities undertaken by government ratherthan by private investors indicate that the government believes that markets are not workingproperly.It was argued in Chapter 4 that government exploration or subsidies for explorationcould be motivated by excessive pre-sale exploration, or by higher than normal risk in exploration. The first argument was qualified by reservations about the efficiency of governmentexploration, while the second was dismissed primarily because the risk could be diversified.In practical terms the apparent need for government provision of basic geological informationwas explained by the sunk cost nature of much of the information and of the titles acquired toprotect the investment during exploration.The most important argument in favour of government exploration, reduction of pre-saleor pre-disposition exploration, requires that the problem is present. This is not the case inGreenland. If the high-risk argument is accepted for a moment, Greenland petroleum explo66 Mining Journal newspaper, March 19th, 1993. The dispute arose over large increases in the reserves andprofitability of the mine. The Government of Papua New Guinea forced the other partners in the project to sella total of 15% of the equity to the government, the cost to be financed out of after tax proceeds to the governmentshare.185Past and present mineral policies in Greenlandration certainly fits the description. But the risk [relative to expected returns] is high onlycompared to other areas with petroleum potential. Thus it can be argued that the absence ofprivate exploration in Greenland reflects not any form of market failure, but rather the opposite. Government exploration can then be explained only as pure subsidization.In relation to the present case it is unfair to judge the investments in petroleum exploration solely on the above criteria. The funds used for the two major off-shore seismic campaigns in 1990-92 came from a savings account in which the MRA had placed the revenuesfrom the Jameson Land concession from 1986 to 1990 (Ministry of Finance 1986; Ministry ofFinance 1990). It is probable that this account was not immune to the attentions of the FinanceMinistry, and they had to be used before they were directed elsewhere. This interpretation issupported by the fact that this account was also used to finance the Danish government’s sharein the equity expansion of Nunaoil A/S (Mineral Resources Administration for Greenland1992a; Ministry of Finance 1991).With respect to the policies adopted for petroleum it is difficult to asses whether the termsand conditions offered are competitive. However, the combination of a 35% corporate tax, aroyalty of 5% (initially 1%) and a state participation of 15% on a non-carried basis, appearsvery moderate compared to the terms in the Danish sector of the North Sea. Corporate taxthere is 34% (down from 50% a few years ago), and no royalty. In addition, a form of APTis payable on profits after an investment allowance which allows operators to deduct 25% oftotal investments annually for 10 years (Arbejdsgruppen vedrørende kulbrintebeskatning1992).None of the observations made so far in this section explain whether all the attention and effort involved in preparing a licensing round, such as the one held for the West Greenland Shelfareas South of 66°N in 1992 (which did not attract any interest (Mineral Resources Administration for Greenland 1993)), was justified. Examination of the latest annual report of the186Past and present mineral policies in GreenlandJoint Committee reveals that the decision to proceed with the licensing round was based on asingle argument.The initial realization presented is that exploration for petroleum during the 1990s canonly be expected to occur in the off-shore West Greenland area. This was first signaled to thepetroleum industry in January 1991. The Joint Committee formalized this by proposing anumber of initiatives (Mineral Resources Administration for Greenland 1992a):1. A first licensing round for areas South of 66°N to take place in 1992-93;2. That the model permit be used (terms outlined above);3. That the preparations be made for later rounds in the West Greenland shelf area.The geological assessment of these areas were, based on limited seismic work, and exploration carried out during the 1 970s, very ambiguous. The data indicated the existence ofpossible host structures for petroleum and natural gas, but these conclusions were consideredhighly uncertain. In addition, knowledge of the general types of source rock in the area, aswell as experience from wells on the Labrador shelf, indicated that the area was more likely tocontain gas than oil. Given the transport problems associated with gas this resource was considered without economic interest (Mineral Resources Administration for Greenland 1992a).Consultants to the MRA have judged the area of potential interest to the petroleum industry,provided the terms offered are sufficiently attractive. They have also stressed, however, thatsignificant technical advances in production technology must be achieved before any discoveryis exploitable (Mineral Resources Administration for Greenland 1992a).According to the MRA, the essential reason for proceeding with the licensing round isthe need to ci the level of interest. This need is apparently stronger than the reservationsnoted above (limited knowledge, non-existence of production technology). A further argument advanced by the MRA in favour of initiating the licensing round is that experiencegained in the first round will be important in later rounds. Finally the MRA outlines the187Past and present mineral policies in Greenlandpected timetable for subsequent rounds. This is expected to provide an added incentive forinvestors to take an interest in the first round.Based on the statements from the MRA and the Joint Committee it can be concluded that thedecision to start a sequence of licensing rounds is based solely on the need to “test” the level ofinterest. If unsuccessful, “the consequences of such a situation [lack of response] are withoutgreater importance for the area [in general], except that it will be necessary to wait some timebefore a new attempt to offer the [rejected] area is made”67 (Mineral Resources Administration for Greenland 1992a).None of the statements in the annual report from the Joint Committee reveal whether thealternative to the policy adopted has been considered. The alternative is nQt to begin any licensing rounds until such a time when technology and also price makes a round relevant. Similarly, the question raised by the lack of interest in exploration off-shore West Greenland hasnot been addressed by the Joint Committee and the MRA. This is whether the later licensingrounds should be postponed if the first round is unsuccessful.The first round went ahead based on a need to “test” the level of interest. The logicalconsequence of the absence of bids is then postponement of further rounds until interest in thearea is renewed. Given the technological constraints noted above, and the low likelihood ofincreasing oil prices in general (Adelman 1990), the waiting period could be quite long.The 1992-93 annual report from the Joint Committee reiterates these arguments at length andadds that despite the lack of interest in the first round, and despite the possibility of similarresults in the next round, the MRA is of the opinion that planned rounds in West Greenland waters should proceed as planned. Four reasons are given:1. Exploration strategies are not static, but changes over time and across firms;2. New data can improve assessments of the area;67 Authors translation. Additional clarifying remarks in square brackets.188Past and present mineral policies in Greenland3. It is important to maintain the attention of oil companies and contacts established withthem, and to appear credible by keeping to the announced schedule;4. Indefinite postponement of further rounds precludes testing the market.These further arguments, which are uncharacteristically detailed for a statement from theMRA, are inconsistent and cling to the model of licensing rounds used in the past, and wellknown from the Danish North Sea licensing rounds. The first argument is true in theory, butmust, in order to be applicable to the Greenland situation, take the current circumstances intoaccount. This would primarily involve a more detailed analysis of oil companies investmentstrategies, and especially of the likely changes in oil prices. There is no evidence that suchanalysis has been carried out. Both the first and second reasons for continuing the plannedrounds could be accommodated with a more flexible approach to the way licensing rounds areconducted. Here a postponement of the next round, for example for 5 years would be a solution which would not damage whatever credibility the MRA might have, while allowing newinformation to become available.CONCLUDING REMARKS - WHEN POLICY IS REACTIVEThe process of making mineral policy in Greenland consisted of a number of phases, startingin earnest with the enactment of the 1965 Mineral Law for Greenland. Major changes were introduced at the time Home Rule was established in Greenland in 1979, while a number ofmodifications during the 1980’s made Greenland an increasingly unattractive target for mineral investment.During these years, the Black Angel mine was operating with considerable success, yetnothing was done to follow up this success, nor was any attention paid to the conspicuous lackof new exploration investment. The levels of investment noted in chapter 6, which are low byany standard, were only recorded from 1986 onwards. It seems that the opportunity to capitalize on being a mining country was missed.189Past and present mineral policies in GreenlandThen in 1990, when it became impossible to ignore the rapidly approaching closure ofthe Black Angel mine, an effort to review the Mineral Law was launched. It is important toemphasize that this review came about primarily at the instigation of the Greenland HomeRule Authority.The resulting changes in the mineral policy was primarily a clarification of taxationrules, removal of the option clause, and improved security of tenure. However, a number ofimportant inconsistencies were noted above, as was a number of more fundamental problemsrelated to the long—term credibility of tax policy and the wisdom of the investment strategyfor publicly funded research in mineral resources.These problems can, to some extent, be attributed to the recent implementation of manyand far-reaching changes in both policy and regulations. It is possible, however, to point to anumber of special circumstances which may also have contributed to the problems. First is thefact that the regulatory system has generally existed without the moderating presence of adomestic mining industry. A mining industry would bring out the practical problems arisingfrom the ambiguities and inconsistencies discussed above. Thus there has been little opportunity for dialogue with the users of the system about the regulations coming from the MRA.Second is the fact that the members of the civil service in Denmark have had no exposure to themining industry, and only limited exposure to the petroleum industry. Thirdly, the principleof staff rotation within each ministry means that the term in office of each case officer is limited to a few years. This means that the burden of carrying the accumulated body of experience about mining falls mainly on the department executives.Finally there is the problem pointed out by Davis and co-workers (Davis and others1984) whose highly detailed analysis of the organization of mineral resource managementstrongly emphasized the high concentration of information and resources at the MRA, and theability of the MRA to control the information provided to the Joint Committee. While it isdifficult to determine whether this situation persists, it is clear from the inconsistencies notedabove that the MRA has been unable to provide clear guidance for the political decision-mak190Past and present mineral policies in Greenlanders. This applies both in situations where the policies embarked upon by the Joint Committeehave been inappropriate or misguided, as well as in cases where the MRA has failed to providethe information and recommendations necessary for a long-term mineral policy. The adoption of options for state participation in metallic mineral exploration projects, and the emphasis on petroleum exploration are two such cases, while the failure to realize the grave lackof investment in exploration shows a clear lack of understanding of the nature of the mineralindustry.The current mineral policy is not sufficient. Given the substantial problems described above,a further review of mineral policy is needed. Instead of being based on the efforts of an internal working group, which is given one month to report, the next effort should be based on a farmore thorough review of how other jurisdictions have organized their mineral policy. In addition such a review must take into account relevant aspects of economic, legal and organizational theory.191A mineral policy for Greenland8A MINERAL POLICY FOR GIuENIANDThe analysis of the current Greenland mineral policy and its administration in chapter 7 suggestseither another extensive round of modifications to the 1991 Mineral Law for Greenland, or acompletely new mineral policy, including a new Mining Law which deals only with mining operations, as well as new legislation covering petroleum resources separately. At the same time theorganization of political and administrative functions should be considered. The present chapteris a detailed policy discussion and proposal. Each subsection ends with a set of recommendations summarizing the issues raised in the preceding discussion. In drawing up the proposal, sixdistinct principles have been followed.The first and most important concerns the nature of the whole policy. As it is to be a policy forGreenland, and because the time will come when it will not be managed by the Government ofDenmark from Copenhagen, the policy must reflect the concerns of both Greenland and Denmark, as well as the administrative capabilities available where the MRA is located in the future(most probably in Nuuk, Greenland). At the same time the new policy must take into accountthat Denmark retains an [economic] interest in Greenland’s mineral resources, and is likely tocontinue to do so as long as Greenland receives net unrequited transfers from Denmark.192A mineral policy for GreenlandThe second principle is that the policies adopted must conform as closely as possible to the concept of sustainability. Given the nature of the mineral extraction process, where some exchangeof natural capital for manmade capital is unavoidable, this requires that both environmental andeconomic considerations are taken into account, particularly in relation to the efforts made tosecure sufficient accumulation of capital in Greenland.The third principle to be adhered to in the new policy is that Greenland should maintain and,improve its ability to attract mineral investment. This implies not only that economic termsshould be competitive relative to other countries, but also that other parameters influencing investor decisions must be chosen to make investment attractive. Parameters in this case includethe regulatory framework in general, security of tenure, predictability of environmental regulations, and the availability of necessary inputs.The fourth principle is that the policies adopted should promote economic efficiency such thatthe net benefits in which Greenland can share are maximized.The fifth principle is that government revenues should be maximized subject to the constraintimposed by the need to be competitive, and to the fact that full capture of mineral rents is verydifficult to achieve.The sixth and final principle is that attention should be concentrated in the area where Greenland has the greatest likelihood of finding viable mineral deposits.The need to concentrate on the area where Greenland has the greatest potential for attracting investment, and discovering mineral resources, must be recognized. It was argued in the previouschapter that the logical consequence of the lack of interest shown in the 1992-93 petroleum li193A mineral policy for Greenlandcensing round must be a postponement of future rounds, and a reduction of activities in the petroleum field until market conditions makes new activities relevant. The present chapter proceeds with an analysis of what the objectives of a mineral policy should be, both in quantitative,and in qualitative terms. After a discussion of political and administrative organization, the design of a mining policy then takes up three principal areas of regulation: economics, technicaland environmental. The analysis and discussions of these areas will overlap one another, sincethe instruments are closely related. For each of these areas the exposition in chapters 4 and 5forms the basis for the discussion and recommendations.POLICY OBJECTIVESThe first element of any mineral policy is to establish a consistent set of objectives. These can beframed in either quantitative or qualitative terms. To be comprehensive, the former must bespecific and detailed, and will therefore also be inflexible, whereas the latter can be both flexibleand comprehensive. Here we examine each in turn, and argue that a qualitative approach ispreferable.Quantitative objectivesWhen quantitative goals are set, they can apply, and be measured, at different stages in the mining cycle, and with the use of various measures of success. For metallic mineral exploration, thiscan be number of geochemical or geophysical anomalies (departures from background values,e.g. in gravity or electromagnetic field measurements) recorded or tested. In the productionphase, the number and size of mines, the value of mineral output, and mining employment areall possible measures, as are the revenues of government.Using quantitative measures is not, however, a superior approach. Defining objectives insuch terms assumes implicitly, that some degree of control over the outcome can be exercised.In a world of highly mobile capital, the only instrument (apart from direct subsidies) govern-194A mineral policy for Greenlandment can use to influence activity in the mineral sector is the bundle of terms and conditions, itcan offer to investors. Other factors determining investment (commodity prices, technology,and terms offered by other jurisdictions) lie outside the control of individual governments.Thus, when an important part of conditions determining the outcome of a policy cannot becontrolled, quantitative objectives lose some of their meaning. Furthermore, there is no guidance in quantitative objectives about what to do if the goal is exceeded.In the case of Greenland, a set of quantitative objectives were formulated when the latestrevision of the Mineral Law was initiated (Mineral Resources Administration for Greenland1990). For metallic minerals, between 2 and 4 medium size operations (e.g. producing between500,000 and 1,000,000 tons of ore annually), as well as a number of smaller ones, were considered sufficient to make a reasonable contribution to the local economy (Mineral Resources Administration for Greenland 1990).Qualitative objectivesThe alternative to quantitative objectives is to use a qualitative approach. In the mineral strategyreport (Mineral Resources Administration for Greenland 1990), a general objective was to have a“separate [non-renewable] resource industry making a significant contribution to the Greenlandeconomy”68 This led to the statement of four qualitative objectives:1. To attract investment in exploration and development by offering competitive terms andconditions;2. To integrate a future mineral industry with other sectors of the economy, through employment, local downstream processing, and local investment participation;3. To retain influence and control over resource development [in Greenlandic hands], suchthat development proceeds in a controlled way, and such that activities are conducted responsibly with respect to environmental, safety and resource concerns;68 Author’s translation195A mineral policy for Greenland4. To create a broad understanding and acceptance in Greenland society of mineral activitiesas a necessary part of the country’s economic development, and of the costs and benefits ofsuch activities.These four objectives are a good point of departure for considering what Greenland wants fromits minerals. Again, however, the implicit assumption is that government has significant controlover events. The extent of this control depends on the views of government. Sometimes a highdegree of intervention is favoured, sometimes not. In the short term, very extensive control canbe exercised, for example over the conduct of operations, and the use of locally available factorsof production and supplies. Short term regulation decisions requiring mineral firms to makedecisions which are not based on market considerations will, however, adversely affect investment in the longer term, and it is advisable to avoid statements which can indicate that government intends to make such decisions.Recommendation on policy objectives: To avoid ambiguities about the relative importance ofthefhurobjectives, Greenland should adopt a policy objective as follows:“The purpose of Greenlandc mineralpolicy is to provide terms and conditions formineral investments which are internationally competitive, internally consistent,and safiguards the interests ofGreenland”POLITICAL AND ADMINISTRATIVE ORGANIZATIONOne of the strange features of the current mineral management system is the mixture of politicaland administrative decisions involved in the issuing of permits. Figure 7.2. outlines both theformal and informal process whereby mineral permits are issued. The discrepancy, between thestated procedure and actual functioning of the system, raises the question of how the mineral196A mineral policy for Greenlandmanagement area is to be organized. The same can be said of the dual roles of the two agenciesunder the MRA, the geological survey (GGU), and the environmental agency (GM). The firstof these roles is in applied research, which to some extent is based on a subsidy policy, whereasthe other role is as advisor and inspector for the MRA. The sections below analyzes the organizational problems, and proposes a solution.Political control - The role of the Joint Committee on Mineral Resources in GreenlandThe creation of the Joint Committee was a compromise following from the Danish refusal torelease control over mineral resources for reasons of sovereign control, and Greenland’s demandsfor such control based on legal and moral rights. However, as noted in chapter 7, the balancebetween future independence considerations and the existing “Unity of the Realm” led to thecurrent system of joint management. It follows from the fact that Greenland is likely to continue to receive transfer payments from Denmark for a long time, that Denmark will retain aneconomic interest in any resource projects. The natural consequence of this is that any change ofthe political organization must take the information asymmetry, inherent in the current organization, into account, and locate the power to issue permits with neither of the two governments.The first part of the solution is to separate overall policy design from day-to day administration. The second part of the solution concerns the interests of the two parties. As long asboth have substantial economic interests in mineral resources, these must [continue to] be jointlymanaged. From this follows the third part, that the administration should be under the jointcontrol of the two governments, in order to avoid problems of asymmetric information.The elements of a solution outlined here does not mention the Joint Committee, whoserole in a solution, if any, must be considered. In its present form this body officially has anadvisory role which is not clearly defined. On the one hand, such great store is set in itsopinions that all matters of permit issuance are laid before the committee, regardless of the factthat it has no legal powers. On the other hand, three facts indicate that the role of theCommittee in relation to permits is minimal. First, permits can be issued by the committee197A mineral policy for Greenlandchairman and his deputy chairmen. Secondly, by tradition the chairman of the committee isalso the Premier of Greenland, and the Greenlandic deputy is a member of the governing partyin Greenland. Thirdly, mineral resource issues are placed in the Greenlandic Premier’s office.The conclusion, that in routine permit cases, the Chairman acts more in his capacity of Premier,and agrees to proposals for permits coming from the MRA (by implication from the Minister), isnot unreasonable. If this is indeed the case, there is no need for the Committee to reviewpermits afterwards, except possibly to make sure that a consistent policy is followed.The solution proposed here is based on the three parts noted above, separation of policy formation from implementation, elimination of information asymmetries and creation of a true jointmanagement approach. The model involves a simplified version of figure 7.1., with fewer involved entities (figure 8.1.)DENMARK I I GREENLAND IFOLKETING Appoint LANDSTING Iembers .InformationppointInformation membersJOINTCOMMITTEEInstruction InformationInformationApplicantsAppiMRAto the ublicThe publicFigure 8.1. Future organization ofmineral management in GreenlandIt is important to note that in setting up this model the two parliaments, the Danish Folketingand the Greenlandic Landsting, must have full insight into and control over the actions of theproposed joint committee. Similarly, the members of the committee must be qualified to dealwith mineral resource issues. and not necessarily be members of the respective legislativeassemblies. The essential feature of the model is, however, that each delegation on the198A mineral policy for Greenlandcommittee is given a mandate to negotiate by the respective governments. Then it is up to thecommittee to determine a compromise (if such is needed), which is then to be approved by thetwo governments.Recommendations on political orc’anization:[1] Retain the principle ofjoint management, andplace the MRA underjoint management;[2] Separate policyformation from administration ofthe mineral industry;[3] Create an advisory, review and monitoring rolefor the Joint Committee;[4] Consider the capacities ofappointees to the Committee, and possibly appoint experienced andrespected individuals with knowledge ofthe mining industry.Administrative organizationOne of the strengths of the current regulatory system is that it is unified in its relations to themining industry. All permitting and administration is handled through the MRA. The alternative is to let various aspects of the mining activity be handled by the ordinary administrativestructure (e.g. environmental protection, and occupational health and safety in separate departments). The principal argument in favour of this approach is that it will treat mining firms inexactly the same way as any other firm. The alternative approach, as outlined below, is to havean integrated mining administration. With an industry above a certain critical size, the formersolution has the potential of higher efficiency through a higher level of specialization within theenvironmental management side. For the time being the size of Greenland’s mining industry isnot sufficiently large to justify a well-informed environmental section outside the administrativestructure, which deals with other aspects of the mining industry. The most flexible approach isto design environmental regulations to conform with current Greenlandic practice, thus facilitating a later transfer.A successful transfer of the MRA to joint management, as proposed above, requires thata number of issues are resolved. These include definition of administrative tasks, the [physical]location of the administration (in Greenland or in Denmark), staffing levels, availability of qua!199A mineral policy for Greenlandified staff, and definition of the relationship with the Home Rule administration and the Danishadministration.In terms of administration a list of specific tasks can be drawn up (table 8.1). These arenot all relevant to Greenland’s situation at present, but reflect future needs if mineral productionbecomes a reality. The second column in the table outlines the organization on which the fol—lowing discussion is based.TABLE 8.1. ADMINISTRATIVE TASKS AND THE ORGANIZATION OF THE NEW MRAActivity DepartmentGeneral managementPolicy issues Executive officeMRA budget and financial managementLand management strategyIssue prospectors permits and exploration licensesIssue production leases Mineral titles departmentRenew mineral titlesMaintain recordsApprove exploration work creditsReview projects and EIAsMine safety Operations control departmentEnvironmental safetyTraining programsGeological R&D (exploration)Engineering R&D Mineral resources research departmentEnvironmental R&DTaxation of mining firmsTransfers to Greenland Tax and economics departmentTransfers to DenmarkMRA budget and accountsThe functions of each department are fairly clear. However, there will be some overlaps. Records of titles will, for example, be kept by the titles department, whereas specific informationabout site conditions will be kept by the research department. Similarly, there will be an overlapbetween the operations control department, which through its operations experience is best qualified to review projects, and the titles department, which issues the production permit. Finallyit should be noted that the inclusion of “Land management strategy” is intended to vet [land]200A mineral policy for Greenlandareas before they are opened to exploration, such that highly sensitive areas may be excludedfrom access.One of the purposes of using a functional organization is that this allows a much morecomprehensive, integrated and efficient approach to complex mineral resource problems. In theearly phases, the research department is to encourage a multidiciplinary approach to exploration.By taking geology, environment and engineering into account from an early stage, there will begood opportunity to asses the feasibility of projects at each stage, and early detection of projectswhich are stunning in geological terms, but impossible for environmental or engineering reasonswill be possible69The proposed organization is quite different from the present MRA and agency structure. The two major parts of the present administrative structure (the MRA on the one hand,and the GGU/GM complex on the other) are to be divided such that the MRA mainly falls intothe executive and titles departments, while the GGU mainly falls into the research department,along with part of the GM70. Those parts of the GGU and the GM w