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

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MINEiL DEVELoPMENT AND MINING POLICY IN GiuENJND by  KNUD SINDING B.Sc., University of Copenhagen, 1984 M.Sc., University of Copenhagen, 1988 B.Coimn., Copenhagen Business School, 1988  A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY in THE FACULTY OF GRADUATE STUDIES Department of Mining and Mineral Process Engineering We accept this thesis as conforming to the required standard  THE UNIVERSITY OF BRITSH COLUMBIA  December 16th, 1993 © Knud Sinding, 1993  In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission.  (Signature)  Department of  Afininj 4hd  The University of British Columbia Vancouver, Canada Date  DE.6 (2188)  gj  a Pnii iw;, i 1  ABSTRAcT  The present document analyzes the economy of Greenland, a Danish self-governing territory and highlights the narrow resource base of the Greenlandic economy. To provide the founda tion for an analysis of the mineral policies that have been followed in the past, and for the pro posed reform of these policies, three areas of relevance are identified, economic impact and longterm sustainability, taxation and economic regulation, and technical regulation. In each of these areas, 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, which concludes that investment is insufficient, and that the structure of the policy is unsuitable in a number of areas. Based on these conclusions, and on the analysis carried out in the three areas identified, a completely new policy is proposed. This proposal includes both a detailed part dealing with the direct management issues relevant to the drafting of a new mining law, and a more general discussion of the wider management issues, including management of mineral rent under the special revenue sharing principle between Greenland and Denmark, as well as em ployment and town-site development.  11  TABLE OF CONTENTS Abstract Table of contents List of figures List of tables List of acronyms and their meaning Acknowledgements  .  iii vii ix  1. Introduction Mineral resources and the Greenland economy A rationale for research Policy objectives Rent capture, mineral taxation and economic management of mining industry Direct regulation Economic consequences of mineral operations and their management Previous research Analytical approach and structure of the dissertation A note on terminology and emphasis —  1 1 3 3 4 4 4 6 8  2. An introduction to Greenland Geography Physical features Geology Population, settlements, and towns Transport and communications History The earliest settlements Danish Colonization Postwar development policy Development plans G50 and G60 The Home Rule period Home Rule authorities and jurisdictions Economic development in Greenland Subsistence economy in the colonial period Planned econoniic development 1950-1979 Transfer of responsibilities to the Home Rule system The Greenlandic economy under Home Rule management Home Rule Administration Municipal councils State jurisdictions Production and trade Concluding remarks Economic performance and structural problems  10 10 10 12 15 17 19 19 19 21 22 23 23 24 24 25 27 27 29 31 31 32 34  3. Mineral Development Models Mineral development models Mineral based industrialization Economic rent and mineral based development  38 38 39 45  -  111  Mining sector impacts and the Dutch disease Dependency on mineral exports Mineral resources and sustainable development Non-renewable resources and optimal depletion Sustainability and non-renewable resources Sustainable mineral policy Concluding remarks Mineral development and sustainability -  4. Economic management of mineral production Taxation and capture of mineral rent Competitive bidding for leases Royalties and production taxes Corporate income taxes Resource rent tax Risk and the choice of rent tax instruments An application of the Resource Rent Tax State mineral enterprises Economic management problems Mineral exploration Environmental management Concluding remarks Mineral taxation and economic regulation -  49 54 55 56 63 68 69 71 72 75 79 80 80 86 87 89 90 92 95 99  5. Technical management of mineral activities Regulation, property rights and externalities Exploration Land use planning and land access Location, position and recording of titles Exploration titles and control over marginal deposits Regulation of the exploration process Exploration work requirements Regulation of mine development and production Project approval Regulation of mine production Closure of mines and abandonment of mine sites Temporary mine closures Permanent closure, reclamation and long term monitoring of abandoned sites On regulation design and the environmental costs of mining operations Environmental rules for mining and their place in the regulatory structure Environmental costs and benefits in mining Concluding remarks The details of mining regulation  101 102 104 105 107 110 110 113 114 114 118 120 120  6. Mineral ventures in Greenland Mining history in Greenland Cryolite at Ivittuut Coal-mining at Qutdlissat The Blyldippen lead-zinc mine at Mestersvig The Black Angel Lead-Zinc mine at Maarmorilik  129 131 131 134 135 136  -  iv  121 123 123 125 127  Mineral investment in Greenland Private exploration investment Government administration and exploration projects Government Revenues The Joint petroleum and mineral exploration company Nunaoil A/S Concluding remarks The importance of exploration -  137 137 139 142 142 145  7. Mineral policies in Greenland Regulatoryvacuum before 1965 The early mines Government equity participation The first Mineral Law Analysis of the Mineral Law commission report, 1963 The final Mineral Law text Mineral Law change and Home Rule The ownership problem Division of powers in the administration of mineral resources Options for government participation, and the creation of Nunaoil Revenue sharing between Greenland and Denmark Mining policy reform, 1991 Objectives Mineral tenure Economic terms for minerals Economic terms for petroleum production The new policies and their implementation The 1991 Greenland Mineral Law Principles, Procedures and Standard Terms Economic terms Environmental protection On the content and sufficiency of the 1991 policy reform Political and administrative organization Discrepancies and ambiguities in the reformed mineral policy Taxation and credibility Emphasis on petroleum investment Concluding remarks when policy is reactive  148 148 149 149 150 150 153 155 155 157 160 161 161 161 163 163 164 164 164 166 169 172 173 173 175 181 183 187  8. A mineral policy for Greenland Policy objectives Quantitative objectives Qualitative objectives Political and administrative organization Political control The role of the Joint Committee on Mineral Resources in Greenland Administrative organization Economic policies towards mineral firms Exploration phase Production Closure and environmental protection Technical organization  190 192 192 193 194  -  -  v  195 197 200 201 202 204 205  Land use planning Prospectors, prospecting and early exploration Exploration license and advanced exploration Development approval procedures and project operation Concluding remarks and the future shape of regulations  .  206 207 208 211 214  9. The impact of mine development and implications for Greenland The case studies Case study no. 1: Nanisivik Mines Case study no. 2: The Polaris Mine, Little Cornwallis Island, NWT Case study no. 3: The Balck Angel Mine, Greenland Discussion of case evidence Socio-economic agreements for mining projects Content of socio-economic agreements Special treatment and economic efficiency Implications for Greenland Management strategies for mining developments in Greenland Economic management, trust funds, and half ofthe mineral revenues from Greenland Employment and training of local labour Mining communities Concluding remarks some of many aspects of indirect management  216 217 217 222 224 228 229 230 232 234  10. Conclusions and suggestions for further research s situation and the potential for mining T Greenland The framework for mineral development The mineral policies of Greenland, now and in the recent past Design and implementation of direct management Indirect management Suggestions for further research  252 253 255 257 259 260 262  References  264  -  vi  235 235  247 249 235  LIST OF FIGURES Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure  2.1. 2.2. 2.3. 2.4. 2.5.  2.6. 2.7. 3.1. 3.2. 3.3. 3.4. 3.5. 5.1. 5.2. 6.1. 7.1. 7.2. 8.1. 9.1. 9.2. 9.3. 9.4.  Major geological terrains in Greenland 13 The population of Greenland since 1961 16 Age and sex distribution of the Greenlandic population 17 Map of Greenland showing principal towns and administrative divisions 18 Current public expenditures in Greenland, 1979-91 27 Public investments in Greenland, 1979-84 31 Investment expenditures by the Greenland Home Rule Authority 1987-9 1 32 The generation and flow of mineral rent 47 The spending and resource movement effects 51 of net price over time according the Hotelling rule The path to 57 Consumption profile and optimal depletion of an exhaustible resource 58 The effect of an increase in discount rate on the optimal price path 65 108 Mineral titles when surface and mineral estates are granted together (regalian) property... Mineral titles when mineral estate is vested in the state 109 Metallic mineral exploration spending in Greenland 138 Organization of the “Joint decision-making power” 157 168 Administrative processing of applications Future organization of mineral management in Greenland 196 Organization of the Alaska Permanent Fund 237 The structure of the proposed Greenland Mineral Resource Trust Fund 243 246 The Greenland Transfer Equalization Fund Possible accommodation strategies for mine developments 250 ...  vi  LIST OF TABLES Table 2.1. Table 2.2, Table 2.3. Table 2.4. Table 2.5. Table 2.6. Table 3.1. Table 5.1. Table 6.1. Table 6.2. Table 7.1. Table 7.2. Table 7.3. Table 7.4. Table 8.1. Table 9.1. Table 9.2. Table 9.3. Table 9.4. Table 9.5. Table 9.6. Table 9.7.  The earliest settlements in Greenland Employed population by occupation, 1834-1945 Comparative data showing indicators of the stage of development GNP and GNI in Greenland 1980-90 Current expenditures of the Greenland Home Rule Authority, 1988-93 Exports, imports and Greenland’s visible trade balance Mining sector growth impacts Mineral exploration requirements in Canada GGU expenditures 1988-94 Types of taxes in the Black Angel concession Annual work requirements Fees for Mining related permits Required petroleum exploration work Summary of mining taxation in selected countries Administrative tasks and the organization of the new MRA Employment at the Nanisivik Mine, NWT muir employment, Polaris Mine, Little Cornwallis Island, NWT Employment at the Black Angel Mine, Greenland Greenlandic employment at Maarmorilik according to skill level Economic impact of mining on the municipality of Uummannaq Economic impact of the Marmorilik mine on Home Rule fmances Numerical example of a trust fund based on 3 mines  vi”  19 25 28 29 30 34 49 113 141 142 169 170 172 182 198 218 223 225 226 226 227 245  LIST OF ACRONYMS AND THEIR MEANING AGIP AHSTF APF ARCO A/S GGU GM HRA KANUMAS MDR MRA PRT RRT  The Italian State Petroleum Company The Alberta Heritage Savings Trust Fund The Alaska Permanent Fund Atlantic Richfield Corporation Aktieselskab (Corporation or Public Limited Company) Grønlands Geologiske Undersøgelse (Geological Survey of Greenland) Grønlands Miljøundersøgelser (Greenland Environmental Research Institute) Home Rule Authority (Greenland) Kalaallit Nunaat Marine seismic Programme (Kalaallit Nunaat is Greenland) Mineral Development Review (British Columbia) Mineral Resources Administration Pure Rent Tax Resource Rent Tax  x  AcKNowLEDGEMENTs  I would like here to acknowledge the people who have aided and abetted me in the work presented 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 as my friends working on projects in areas related to mine, Graham Poole (Cambridge) and Mike Pretes (Calgary, currently Rovaniemi, Finland). In addition, the staff of the Mineral Resources Administration for Greenland, at the Geological Survey of Greenalnd and Mr. Erik Andersen of the Greenland Home Rule Authority have always been very helpfull when I requested information on their activities and policies. A special acknowledgement is reserved for Mrs. Lise Lyck of Copenhagen Business School, who has provided enormous help and encouragement in ways too many to describe, My colleauges, especially Niels Blomgren-Hansen, Lakis Raimondos and Mich Tvede in Copenhagen, and Douglas McDonald, and Andy Burket in Vancouver must also contributed with discussions and helpful suggestions. Without all these good people the project would have become a very messy affair, so to speak. The greatest burden, howevere, has fallen on Gerd, my wife, who has endured endless proof-reading and long, and sometimes one sided discussions about the contents of this thesis.  x  Introduction  1  INTRODUCTION  In this chapter I will present very briefly the issues related to mining policy in Greenland and the background for the research presented here. In addition, I will sketch previous research on mine ral policy in Greenland and describe briefly the structure of the dissertation, the analytical ap proach adopted in the following chapters and the terminology used throughout the thesis and the areas where most emphasis has been placed.  MINERAL RESOURCES AND THE GREENLAND ECONOMY  -  A RATIONALE FOR RESEARCH  The Danish territory of Greenland, with its extensive system of local government operating lar gely without interference from the Government of Denmark, has experienced deepening eco nomic 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 natural location of fish stocks have played significant roles. Whereas marine resources have been part of life in Greenland from prehistoric times, mi nerals have only gained prominence as the industrial era was well under way, starting with the mining of the cryolite deposit at Ivvittut from around 1860 onwards. Both this and the other 1  Introduction  mines operated in Greenland were essentially the result of surface discoveries in convenient loca tions. Attitudes to mineral development in Greenland have been hesitant since the introduc tion of Home Rule in 1979. The primary reason for this is probably that control over resources and resource revenues is shared equally with Denmark. Conflicts between Greenland and Den mark over leasing of off-shore areas for petroleum exploration in the early l970’s, over uranium exploration in the late 1970’s, and over the sharing of mineral revenues have also contributed to this uncertain state of affairs. However, the closure of Greenland’s remaining mine, the Black Angel, in 1990 and the onset of a severe economic crisis in 1989-90 led political leaders in Greenland to re-appraise past attitudes towards mineral resources and hope for rapid mineral de velopment. The result was new mineral legislation and efforts to market Greenland as a mineral exploration investment target. The contents of past and present policies will be examined in much greater detail in sub sequent chapters but the main conclusion regarding the policy changes introduced in the 1991 Mineral Law was clear: they constituted a considerable improvement. Early in the present rese arch project, attention was concentrated on the relationship between mineral investors and go vernment. The first issue of concern was one of property rights protection in the sense that in vestors faced a rather low degree of security of tenure. The second was one of rent capture poli cies and taxation of mining operations. Under the policy prior to 1991, full tenure was closely linked to rent capture through use of options for state participation in mineral projects. These issues were in part resolved by new legislation in 1991. However, although this mineral policy reform reduced the potential problems in the areas of mineral tenure and taxation of rents, it did not deal with a number of important issues. The present project, which was initiated before the 1991 policy reform began, on the working hypothesis that mineral policy in Greenland as conducted until then, was inadequate and in need of change. As the project proceeded concurrently with the changes resulting from the 1991 policy reform, the hypothesis was gradually modified. The revised hypothesis is based 2  Introduction  on a distinction between four major issues, policy objectives, taxation and rent capture methods, regulation of mineral activities, and economic consequences of mineral operations and their management. It is the principal hypothesis that each of these four areas must be analyzed comprehensively before a complete mineral policy can be developed and put in place. The following sections defines each of these areas in more detail.  Policy objectives In the documentation supporting the 1991 policy reform some limited quantitative goals are set out along with general remarks about the need for and possibilities of economic development as sociated with minerals, both petroleum and hard-rock. However, while geological reality ulti mately determines the success or failure of any mineral policy, it is important that major reforms are based on a set of realistic and internally consistent goals. In the present case four groups of goals invite further analysis. First are the operational goals already mentioned. These are, of course, open to discussion as to their underlying motiva tion (tax income, employment, etc.). Second is the organizational framework in terms of juris dictional responsibility and power. This group is particularly interesting given the curious and complicated organizational structure in the management of mineral policy in Greenland and the . The third group of policy issues is the extent of government in 1 possibility of it changing soon volvement and public perceptions of how minerals are managed (mainly to “sell” the most op timal policy to the voters, even if it conflicts with popular opinion). The fourth and final group concerns the relationship between government and investors in mineral projects. The nature of this relationship has extensive implications for the design of any element of policy.  an apparent change of policy underway in the Danish government, which seems disposed to release control over these resources to iocal governments. This has already happened with the resources of the Faeroe Islands, 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 a center-right coalition to a center-left coalition. 1 There is  3  Introduction  Rent capture, mineral taxation and economic management of mining industry The second major area dealt with is rent capture policies and other forms of economic manage ment. The net profits from mineral production are an important contributing factor in all gov ernment decisions on mineral policy. In relation to the analysis of present policies and the pro posal for a future mineral policy, the structure and impact of a tax on mineral projects is of cen tral importance. The question of mineral taxation is important both in relation to the promo tion of Greenland as an investment target, and in relation to the rest of the Greenlandic eco nomy. The other aspects of economic management are primarily related to the economic aspects of exploration and environmental regulation  Direct regulation Direct regulation of mineral operations, as opposed to economic regulation and taxation, covers the four distinct phases of mineral activity, exploration, development, production and reclama tion/abandonment. The 1991 Mineral Law for Greenland and its accompanying regulations partially deal with three phases in a “traditional” manner. The provisions range from regulation of the exploration process in terms of what can and cannot be done, over the requirement that development plans and environmental impact assessments be submitted and approved, to the provision of funds for site reclamation at the end of mineral operations. The primary interest in this area is to determine when such traditional approaches are ideal, and when they are not. At the same time it is interesting to examine the requirement in current legislation, that mineral operations be conducted according to “good mining practice”.  Economic consequences of mineral operations and their management Finally there are the economic consequences of mineral production on the economy of Green land. These can be divided in different ways depending on the observers point of view, but ulti 4  Introduction  mately 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, thro ugh payments to local factors of production or through tax payments, are managed.  PREvIous RESEARCH  Only one major research effort has looked specifically at mineral policy in Greenland. This pro ject was carried out in 1982-84 by Finn Breinholt Larsen, Karen Marie Pagh Nielsen and Jerome D. Davis at the Department of Political Science at Aarhus University, Denmark. The resulting report “Offentlig styring af olie-gasaktiviteter i Grønland (“Public management of oil and gas activities 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, which was much discussed in the early 1980’s. The report deals with issues related to the possible consequences of oil and natural gas development and examines two major issues. The first is concerned with the extent of Greenlanders political influence on mineral policies, and the second deals with taxation and economic issues related to exploration and production agreements (contracts). The report discusses various organizational forms (ranging from purely private exploration and production to a situation where a state company fully controls exploration and production), managerial resources available in Greenland to deal with mineral issues, and possible fiscal income streams accruing to Green land. The report includes some very simplified and static calculations using different tax struc tures and hypothetical costs. The emphasis in the report by Davis and co-workers is exclusively on oil and natural gas and there are few references to metallic minerals or other non-petroleum resources. This provides an added reason for the present effort which concentrates mainly on non-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 and  5  Introduction  Ross 1983; Wairond and Kumar 1986) and with mining in developing countries generally (Bosson and Varon 1977). Country-specific studies have covered Bolivia (Gillis 1978), Indone sia (Gillis 1980) and Papua New Guinea (Garnaut and Ross 1983). Much related research on more narrowly defined issues has also appeared. The chapters in part two examine the literature in these and related areas in considerable detail. Research on Greenland in non-mining areas has venerable traditions dating from the early nineteenth century onwards and is extremely wide-ranging. Geology has been covered by a separate geological survey originating in the work of Lauge Koch, who led the geological map ping of almost the entire East Greenland Caledonian orogen. The work of the survey is recogni zed internationally as being of the highest quality. In the area of social science the recent contri bution by Mark Nuttall (1992) must be singled out, as must the forthcoming work on the Greenland fisheries sector by Graham Poole (Poole 1993). The structure of the Greenland eco nomy has been extensively analyzed by Lyck (1986) as discussed further in chapter 2.  ANALYTICAL APPROACH AND STRUCTURE OF THE DISSERTATION  The present dissertation consists of 10 chapters. The first chapter following this introduction is completely descriptive and presents a background picture of Greenland. The following three chapters examine the literature on mineral development and economics and establish a theoretical framework. Chapter three examines and synthesizes the literature on mineral based development and on the sustainability issues related to mineral exploitation. Similarly, chapter four deals with the different approaches to mineral rent taxation, and with a number of other mineral resource management problems closely related to the quantity of mineral rent subject to taxation. The fifth chapter departs from the strong binding to academic literature and deals with the more technical aspects of mineral regulation. Based on mineral and related legislation in a number of jurisdictions, the analysis is founded on two theoretical requirements. These are that property rights are necessary for markets to function, and that externalities must be regulated. 6  Introduction  To set the stage for the central element in the present investigation, chapter six is an ana lysis of the history of mineral activities in Greenland. The purpose of this chapter is to provide information on the mines which have operated, as well as on the other mineral activities which have occurred in Greenland. In itself the analysis is primarily descriptive. However, the events described have a parallel in the conduct of government policy, from the date of the very first cryolite concession to the present Mining Law. Chapter seven presents a detailed analysis of these policies and argues that, despite the recent changes in Greenland’s mineral policy more change is urgently required. Following these conclusions, chapter eight de velops an alternative to the present mineral policy in Greenland, but only as it refers to metallic or “hard-rock” minerals. Petroleum is left for separate consideration and falls outside the analy sis from chapter eight onwards. The final chapter in the main body of the text takes up some of the issues related to the impacts of mineral development. This is done in chapter 9 by examining three case studies of mines in the Arctic. These are followed by an analysis of one of the approaches used in Canada to derive local benefits from mining projects. Rounding of the treatment of mineral impacts is a section dealing with specific methods of capital accumulation as adopted in two North American jurisdictions. Based on these methods a specific proposal for a capital accumulation mechanism for Greenland is presented.  In terms of analytical approach the structure is straightforward. The first chapters (3-5) are used to establish a framework for analyzing the case of mineral policy in Greenland. This framework is based on existing theory on mineral resource economics and management, and on experiences in implementing mineral policies, some of which are based on immediately recognizable theo ries. The analysis of specifically Greenlandic conditions in chapters 6 and 7 is based on the ins ights 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-con tained. 7  Introduction  The approach used throughout this thesis is based on “results” of mineral activities, mea sured in terms of mineral rent, government revenues and employment, and the means with which 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 appropriate structure of a thesis it is necessary to focus the analysis more than possible if the “system” was examined. As a result I have chosen to emphasize the results over the multitude of different pro cesses involved in any process of policymaking.  The analysis of specific Greenlandic conditions based on the exposition of economic theory and mineral 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 for Greenland. These conclusions then leads to the proposal for a complete mineral policy for Greenland which is based on the theoretical exposition in chapters 3-5 and the specific conditions in Greenland, as analyzed in chapters six and seven. To illustrate the potential impacts and problems of mineral development in polar regions three specific cases, as well as related Canadian practices, are examined. This approach is less general than elsewhere but its strength is that it focuses attention on a number of important issues.  A NOTE ON TERMINOLOGY AND EMPHASIS  Minerals are the subject of this dissertation. However, the term may be ambiguous since it is commonly used to describe both “hard-rock” or metallic mineral resources and “any naturally formed chemical element or compound having a definite chemical composition and, usually, a characteristic crystal form” (Gary and others 1974). To confuse matters further, many social scientists, particularly economists, include coal, oil, natural gas, and sometimes water, as mine rals. 8  Introduction  In an attempt to be consistent throughout the term “mineral” is used in the economist’s sense of a valuable non-renewable resource. For production of these unspecified minerals the ex pression “extraction” is used. When the matter at hand is specifically related to hard-rock or me tallic 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 im practical “hydrocarbons”. With respect to the Mineral Law for Greenland, three terms occur frequently and have special importance.  In direct translation they are “preliminary investigation permission”,  “exploration permission” and “production permission”. It is tempting to translate these terms to something less tongue-twisting. However, they are retained on the grounds that the use of this terminology reflects the attitude to mineral development which is entrenched in the administra tion of Greenland’s mineral resources.  This also brings us to the main emphasis in the succeeding pages, mines and mining as opposed to oil production which was the main focus of the contribution by Davis and co-workers. This choice of emphasis is primarily based on a technological consideration. Mining in the Arctic is by now a well accepted possibility, as witnessed by the record of the mines at Nanisivik, Maar . Oil and gas produc 2 morilik, Lupin, Red Dog and the Polaris operation on Cornwallis Island tion in the Arctic is taking place in both Alaska, Russia, and the Canadian Arctic. Conditions in those 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 production under such conditions are still in their infancy and other exploration techniques are only parti ally developed, even though some off-shore seismic work has been carried out in areas off East Greenland 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 being  the nickel and copper mines in the Norilsk area in Siberia. These are important indicators of the technical feasibility of operating mines in the Arctic, but they operate under economic conditions not comparable to the other mines mentioned. Furthermore, much information concerning these mines is still classified information in Russia (Lars Lund, personal communication, 1993)  9  Introduction  Finally, there is the terms “the Realm”, and “unity’ of the Realm”. These refer to the complete entity known as the Kingdom of Denmark or the state of Denmark. The “Realm” is defined 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 number of implicit assumptions. The first is that mineral policy, and every other economic policy, is composed of the same basic elements everywhere, regardless of whether it is applied in Greenland or in the wilds of Amazonia. 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-renewable resources has been a major source of disagreement between Greenland and Denmark) but the assumption is made in order to address the more practical problems of encouraging a mineral industry. The third assumption or constraint is that the following discussion can be conducted in terms which are mainly economic. There are clearly a number of important political and cultural issues related to mineral policy, but these are too large to include here.  10  An introduction to Greenland  2  AN INTRODUCTION TO GREENLAND  This chapter gives a brief overview of Greenland in terms of geography, history, political or ganization, economic structure and development. It will not be exhaustive on any of these matters and some of the information presented will be examined in more detailed discus sions at later stages of this study.  GEoGRAPHY  Physical features 2 or 84% are cov . of which 1,833,900 km 2 The area of Greenland is very large, 2,175,600 km ered by ice. The ice-free areas form a zone of variable width along the coast, although the ice cap reaches the sea in some places. The most northerly point is Kap Morris Jessup, at 83°39’ N, only 740 km away from the geographical North Pole, while Kap Farvel 2,670 km to the south has approximately the same latitude as Oslo, Stockholm or St. Petersburg. The ice-free coastal zone is character ized by an ice-cap which, 1 million years ago, extended beyond the present coastline and into  11  An  introduction to Greenland  the shelf areas now covered by the sea, and by geological terrains of many different origins and ages. The ice-cap has a thickness of up to 3,500 m. and its highest point is at an altitude of 3,200 m. (Berthelsen and others 1989). Considerable parts of the ice-cap rest on a basement which is up to 300 m. below sea level. The depression is probably a result of isostatic com pensation, a process by which the total thickness of the earth’s crust (including ice) at a given point determines the position of the crust in relation to the mantle beneath. The continental shelf around Greenland varies in width from the very narrow around Kap Farvel to the extremely wide on the shelf off North Greenland. Beyond the shelf, the ocean floor reaches depths of 4000 m in the southern part of the Labrador Sea. To the east, the North Atlantic has a depth of around 3000 m., while the Arctic Ocean North of Greenland varies 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 which moves sea-ice from the Arctic Ocean down along the Eastern coast to Kap Farvel, whereupon the Irminger current (a branch of the Gulf current) then moves the ice North along the West coast. As the Gulf current is warmer, the ice usually melts and disintegrates before it reaches the latitude of Nuuk (Godthb). Between Paamiut (Frederikshb) and Sisimiut (Holsteins borg) sea ice is seldom a problem at any time, while further North ice formation again be comes a problem for shipping (Berthelsen and others 1989). Whilst Greenland is generally regarded as having an “Arctic” climate, this covers enor mous climatic variability. Apart from latitude, the climate is mainly influenced by the ice cap and the sea-currents around the island. Winter is long and dark, while average tempera tures 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 cli mate.  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.  12  An introduction to Greenland The vegetation cover in Greenland ranges from sparse to non-existent. Four vegetation zones are commonly distinguished: 1. 2.  The high Arctic: arctic heath, snow beds and polar desert; Dry inland low-arctic: dwarf-scrub heath;  3. 4.  Humid coastal low-arctic: herb slopes, willow thickets and crowberries; Northern boreal birch: only in the inner fjords in the southernmost part.  Few species of terrestrial animals can survive in the harsh arctic environment. Those which have managed to adapt successfully include polar bear, polar fox, musk ox, caribou, and snow hare. Sea animals, on the other hand, abound in the waters around Greenland, including seals of many varieties, walrus and several whale species. For the Greenlandic fishing industry cod, Greenland halibut, redfish, and shrimp are the most important species, with shrimp dominating in economic importance (Poole 1992).  Geology Greenland 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, which ranges in age from 3,750 m.y. to 2,500 m.y. This block contains, in the Godthâbsfjord-Isua area, some of the oldest rocks on earth (Moorbath and others 1973). All of this block has ex perienced prolonged metamorphism (structural, mineralogical and chemical modification processes occurring deep in the crust of the earth), and repeated deformation up until around 2600 m.y. ago (Bridgewater and others 1976). The Nagssugtoqidian Mobile Belt is a 300 km wide zone north of the Archean block which consists mainly of Archean gneiss (a quartz-feldspar rock with a linear fabric). The oldest rocks have been dated at 2,860 m.y. (Escher and others 1976), and major deformation took place around 1,700-1,800 m.y. ago. North of this mobile belt follows another called the Rinkian Mobile Belt, which consists of rocks that are probably of similar age as the  13  An introduction to Greenland  Nagssugtoqidian rocks, and were deformed at a similar time 1,680-1,870 m.y. (Escher and Pulvertaft 1976). Rinkian terrains are distinguished from the Nagssugtoqidian by a marked difference in tectonic style.  Figure 2.1. Major geological terrains in Greenland (modified from Escher and Watts 1976) Located South of the Archean block is the Ketilidian Mobile Belt, which consists of a basement of age 2,600 m.y. and, laid down on top of that, sediments and volcanic rocks that were subsequently deformed and metamorphosed 1,700-1,800 m.y. ago (Allart 1976). Into this mobile Belt the alkaline igneous rocks (i.e. high in Na and K) of the Gardar period,  14  An  introduction to Greenland  dated at 1,130 to 1,330 m.y. (Emeleus and Upton 1976), were intruded. In addition to these main Precambrian terrains, rocks of Precambrian age occur as basement for younger rocks in Central East Greenland and in North Greenland. These younger rocks can be divided into two major fold belts and several areas of supracrustal deposits. The fold-belts are the Caledonian in East Greenland and the North Greenland belt. The former was formed around 320-455 m.y ago, while the latter followed at the end of the same period. It should be noted that though adjacent, the two belts are sepa rated in time and were probably caused by different tectonic events. The Caledonian oro genic event can be explained as a collision between a plate containing Greenland, and perhaps parts of the North American continent, with a plate containing much of Scandinavia and Northern Europe (Henriksen and Higgins 1976). In the case of the North Greenland fold belt only 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 af fected 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 se quences along the eastern margin of Greenland. In West Greenland, a large basin of sedimen tary rocks evolved in the period of approximately 75 m.y. to 55 m.y. ago, of which the Nugssuaq-Disko area is the smaller, on-shore part, the remainder being the extensive WestGreenland basin which extends along the entire Western margin of the island (Henderson 1976). The most recent major geological events were the extrusion of vast quantities of basalt in both West and East Greenland. These events are thought to be related to the initiation of sea-floor spreading and the formation of Baffin Bay and the Labrador Sea and the North Atlantic, respectively (Clarke and Pedersen 1976; Deer 1976). The various terrains noted above have a widely different potential for the discovery of viable mineral deposits. This is partly indicated by the uneven distribution of known de posits and occurrences, and also indicated by the variable interest accorded different parts of  15  An introduction to Greenland  Greenland by exploration managers. The famous cryolite deposit in Ivvituut represents the only mined deposit in the Gardar igneous province, while the Black Angel Lead-Zinc mine is located in metamorphosed limestones of the Rinkian Mobile Belt. The formation of the Lead-Zinc deposit at Mestersvig was related to the much more recent events in connection post-orogenic tensional tectonics in the upper Carboniferous, while the formation of the large, sub-economic molybdenum deposit called Malmbjerget (Ore mountain) was closely related to the final opening of the North Atlantic Ocean (Harpøth and others 1986). Currently, most exploration activity is concentrated in four types of terrain. The greenstones of the Ketilidian Mobile Belt in South Greenland are being investigated for gold, as is the famous Tertiary Skaergard layered basic intrusion in Central East Greenland. In central West Greenland the basic volcanic rocks of Tertiary age are explored for massive copper-nickel sulfide deposits of Norilsk type, while in the extreme North East, a remarkable discovery of sediment-hosted lead-zinc sulfide showing is attracting considerable interest.  3 Population, settlements, and towns The total population of Greenland as of January 1st 1991 numbered 55,533 persons, of which 8,842 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 has increased from a mere 12,000 to the present 55,000, with growth being particularly rapid from 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 and persons staying temporarily in Greenland (e.g. Danish civil servants working in Greenland), it  3 This section and the next relies heavily on data in the Yearbook “Greenland” published annually by the Danish Ministry for Greenland and, from 1988 onwards, by the Greenland Home Rule Authority.  16  An introduction to Greenland  is clear that the Greenlandic-born 4 population have grown significantly, whereas the Danishborn population seems to be declining slightly in the late 1980s and early 1990s. In recent decades, the demography of the Greenlandic population has changed markedly. The population living in smaller settlements has declined, in absolute terms by 1314 persons over the period 1970-1990. In relative terms, the decline is even more remark able, changing from 28% of persons born in Greenland in 1970, to 21% in 1990. The less rapid decline in settlement population after 1980 partly reflects Home Rule policies which sought to slow the depopulation of smaller settlements.  60000 50000  :  Total opulati n  -  40000  II  1111111111  -  ..—  LLLLLLLIJ  ( reenlan ic born  30000 20000 10000  4on-Gr enlandi born  -  —-___  0 1961  1967  1973  1979  1985  1991  Figure 2.2. The population of Greenland since 1961 (based on data from GrønlandArbog, 1990). The strong population growth is also reflected in figure 2.3., which shows the age and sex distribution of the Greenland population. Danish civil servants and migrant workers ap pear as a clearly defined, predominantly male group ranging in age from 20 to 54 years. The Greenlandic population is comparatively young (38% is 20 years or younger compared to . 5 26% in Denmark) and Greenland has not yet completed the demographic transition However, the life expectancy is markedly lower in Greenland (58.5 years for males and 66.0 years for females) than in Denmark (males 71.5 years, females 77.5 years).  The notion of birthplace defining ethnic origin is misleading. Figures from a 1901 census show that at the time 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 (Todaro 1989)  17  An introduction to Greenland  Age 7065-69 60-64  •FF/F  Women  IF F F F  55-59 50-54  •7f//.. .‘ ‘ ‘ Z —.. / //// / / / / / / /  —  45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14  5-9 0-4  —/////////////  —  40b0  3O00  / F  .  ..  / F F F F F F F F F F  2d00  i doo  Men F F  —  / / / / —  ,,,FFFF,F,,,FF F F F  F F  F F F F F F F J F F F F F F F F FFFFFFFF FF/F/FFF,rF  ,,,,,/,,,/,,,— //////‘//////  idoo  0  2d00  3d00  doo  Born outside Greenland Born in Greenland 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 of settlements declined slowly since 1980, in line with the stabilization in settlement popula tion. The largest town is Nuuk (also the capital of Greenland) with 12,181 inhabitants, and the 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 communications Climatic and topographic conditions dictate the structure of Greenland’s transport and com munications infrastructure. Roads exist only within towns and all other transport must use air or 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 from Denmark. Telecommunications are modern and reach all but the smallest and most remote settlements.  18  An introduction to Greenland  GREENLAND OR r  NUNAAT  Municipal boundary Regional boundary Ivittuut Qaqortoq Nanortalik  Figure 2.4. Map of Greenland showingprinczpal towns and administrative divisions.  19  An introduction to Greenland  6 HIsToRY  The history of Greenland can be divided into 5 distinct phases. The prehistory ranges from the earliest known settlers who migrated from the Western Arctic around 2500 years BC, to the almost simultaneous arrival of eskimos of the Thule culture in the North and norse Vikings in the South. The colonial phase began in 1721 with the arrival of Hans Egede, a Danish Lutheran missionary, and lasted until just after the Second World War. The fourth phase can be called the assimilation phase after the efforts to make Greenland part of the Dan ish nation. The fifth and present phase began in 1979 with the introduction of Home Rule in Greenland.  The earliest settlements The different pre-European invasions and settlements of Greenland, which originated in the Eastern Canadian Arctic, are summarized briefly in table 2.1. TABLE 2.1. THE EARLIEST SETTLEMENTS IN GREENLAND Name of settlement culture Independence I Sarqaq Independence II Dorset I Dorset II Thule Norse Vikings  Period (approximately) 2500-2000 BC 2500-1000 BC 1000-700 BC 200-0 BC 800-1000 900982-1400 Sources: Gad (1984; Lidegaard (1991)  Danish Colonization During the 15th and 16th centuries visits by European whalers (Dutch, English and Portuguese) and scientific expeditions became increasingly frequent. The whalers came to exploit the plentiful whale stocks in Greenlandic waters. While there, they also traded with the Greenlan ders. Iron (for tools) and other goods were given in exchange for whale-blubber, sealskins and ivory.  6 This section relies heavily on Gad (1984)  and Lidegaard (1991) 20  An introduction to Greenland  The whaling went on for 150-200 years, but at the beginning of the 18th century deple tion of whale stocks and lower returns to whaling investors led to conflicts between whalers and Greenlanders. These conflicts, as well as the weakening of nominal 7 Danish-Norwegian authority (at the time the two countries were one realm) caused by the extensive foreign activ ity in Greenland waters, led to the dispatch, in 1721, of a combined trade and missionary ex pedition led by the clergyman Hans Egede. Despite setbacks, the colony and the trade with Greenlanders survived (albeit subsi dized from Denmark) and developed slowly to cover most of the West coast from Frederikshb (Paamiut) to Upernavik (see figure 2.4). In 1772, however, the private trading company went bankrupt and the Danish Crown took over the management of the trade and es tablished the Royal Greenland Trading Company (KGH) for the purpose.  KGH was  provided with a firm regulatory framework in 1782 under which access to Greenland was restricted and special inspectors were appointed to oversee KGH activities and to serve as a combination of law officers and justices of the peace. The Greenland trade was interrupted by the Napoleonic wars and only became prof itable again in 1825. During the 19th century, the KGH monopoly was almost broken up, but was retained for “humanitarian” reasons (to prevent the evils of competition). Instead, pay ments for the Greenlander’s products were increased, with unfortunate results. The purpose of higher prices was to enable Greenlanders to invest in productive improvements, but the result was that the higher incomes were used exclusively for consumption, and many Greenlanders even disposed of essential possessions such as skins used for clothing and similar domestic purposes. 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 influence in both local and legislative matters. The operation of the KGH was partly separated from the administration of other government business, which was turned over to local councils. At  7 The island was considered part of Denmark’s North Atlantic territory based on the Norse colonization from 982 to around 1400.  21  An introduction to Greenland  the same time, two regional councils were set up which were to be consulted on legislative proposals.  In the first decades of the 20th century, the climate grew slightly warmer and the seal-catch declined, resulting in fundamental changes in the economic structure of Greenland society. The fishery for cod and salmon became increasingly important, but whereas seals had pro vided almost all the necessities of life, cod did not.  The subsistence-hunting primitive  society had to be replaced by a much more modern, monetized, economy. To keep pace with these changes, official policy also had to adapt. Whilst the subsistence economy required that the population be as dispersed as possible in order to utilize seal-stocks, the fishing industry required 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 the German occupation of Denmark. A centralized authority was introduced under the leadership of the Danish governor of Greenland, and at the same time the Danish ambassador to the United States negotiated a treaty which allowed the US to build bases in Greenland in return for American recognition of Danish Sovereignty in Greenland. In addition, the US helped re place the supplies which no longer arrived from Denmark.  Postwar development policy During the Second World War, the emergency administration had worked remarkably well and a return to prewar conditions was difficult. Greenland’s staunch support for the allied powers during the war had to be rewarded and at the same time the newly formed United Nations 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 for Greenland. The main changes were the partial abolition of the KGH monopoly, concentration of the population in larger centers, a more formalized legal system, separation of church and  22  An introduction to Greenland  schools, 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 the reforms and to satisfy the United Nations, Greenland formally became part of the Danish Realm when a constitutional amendment was adopted in 1953, following a referendum in Denmark. No referendum was held in Greenland but the agreement of the non-elected regional councils was obtained.  Development plans G50 and G60 The economic development envisaged in the G50 plan did not materialize, mainly because the private investments in production were much lower than anticipated. The failure of this plan served to illustrate forcefully that equality (in terms of living standards) between Den mark and Greenland was very difficult to achieve, given the much more extreme physical environment, the lack of infrastructure, lower standard of education and differences in culture 0s, and a 6 between Greenland and Denmark. These problems were recognized in the early 19 modified policy (G60) replaced G50.  Danish management, a policy to concentrate the  population in larger towns and settlements, and the forced abandonment of smaller settlements as well as the emergence of an intellectual Greenlandic elite led, in the early 1 970s, to demands of more Greenlandic influence. In the resulting negotiations the present Home Rule system (described below) was de signed, in some cases (such as the question of mineral resource ownership) only after protracted discussions.  The proposals for a Home Rule system involving gradual transfer of re  sponsibility from Danish to Greenlandic authorities were enacted as the Home Rule Law by the Danish Folketing (Parliament) in November 1978 and endorsed by a referendum in Greenland in January 1979. As a result, the new Home Rule system came into force on May 1st 1979 and the gradual transfer of responsibilities to the Home Rule Authority began.  23  An introduction to Greenland  The Home Rule period Under the Home Rule system the transfer of responsibilities happened much more rapidly than expected (Lyck 1989). The Home Rule Authority has since attempted to stop the de population of settlements through various subsidized measures. Since 1979 the highly state (i.e. Home Rule) controlled fishing industry, which has been developed since the 19 0s, has 6 continued to exist.  It never fulfilled the expectations for rapid economic development  associated with it. In political terms, the major event since the introduction of Home Rule, was the withdrawal from the European Community (EC),  which Greenland had  automatically joined in 1973 when Denmark joined. The withdrawal was based on the clear conflict 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 was controlled from Brussels (Harhoff 1983). The situation was compounded by suspicions of extensive violations of quotas by EC fishers. Despite the official withdrawal, Greenland has maintained a relationship with the EC, under which Greenland fish products are almost fully exempt from EC tariffs.  Special agreements also allow EC fishers to fish in Greenland  waters within limited quotas (Martens 1992).  The most interesting aspect of the relationship between Greenland and the EC follows indirectly from the fact that public life and policy in Greenland relies heavily on the procedures followed in Denmark. However, as Denmark becomes increasingly integrated into 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 the  introduction of a common EC currency, but many other impacts can arise from the gradual adaptation of Danish legislation to EC standards (especially in areas where Danish legislation applies in Greenland) (Martens 1992).  24  An introduction to Greenland  Home Rule authorities and jurisdictions The Greenland Home Rule system consists of a legislature (“Landsting”) currently with 27 members and these elect an executive or cabinet (“Landsstyre”), currently consisting of seven members of the legislature.  Elections for the legislature are held every four years. The  principal areas of Home Rule authority are: Fiscal policies of the Home Rule, organization of Home Rule and local (municipal) government, direct and indirect taxes, the churches (i.e. the Danish state church, which is Lutheran-evangelical in orientation), fishing, hunting, agriculture and 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 Rule include international relations (except a few areas where Greenland is directly affected), , citizenship, constitutional affairs, criminal law, and laws of 8 defense, monetary policy persons, family and inheritance, as well as contract law (Foigel 1980). Greenland is divided into 18 administrative districts, each of which is run by a district council and headed by a Mayor. The district authorities are responsible for finance, social services, education and culture, housing and labour affairs.  ECONOMIC DEVELOPMENT IN GREENLAND  The economic development of Greenland is closely related to its history. Here we take the colonization in 1721 as our starting point. Three distinct phases are recognized: colo nial subsistence economy, planned economic development after 1945, and the transfer to Home Rule in 1979. The time after this event is treated separately in the subsequent sec tion.  8 Greenland uses the Danish Krone  as currency 25  An introduction to Greenland  Subsistence economy in the colonial period The traditional way of living in Greenland at the time Hans Egede arrived in 1721 was based on whale and seal and to a lesser extent on caribou and salmon. Intensive activity by European whalers in the 17th and 18th centuries may have contributed to declining whale stocks. The Greenlandic culture, however, successfully adapted to this change by increased specialization in the seal hunt. During the colonial period depletion of whale stocks con tinued. From the arrival of Hans Egede in 1721, Greenlanders were employed in new oc cupations. The first figures shows that, in 1834, 13.8 % of the employed population had non-traditional occupations such as commercial fishing, construction, mining, and admin istration. Until the 1930s this figure varied between 12 and 19% but from 1945 the share of people in non-traditional occupations jumped to almost 34% (table 2.2). This table also reveals the increasing importance of the fishery from 1911 onwards. TABLE  2.2. EMPLOYED POPULATION BY OCCUPATION, 1834-1945 (PERcENT)  Year 1834 1860 1890 1911 1921 1930  European occupation Hunting and sealing 13.8 86.2 17.6 82.4 12.1 87.9 13.8 73.0 18.2 66.5 16.2 49.0 1945 41.6 33.9 Source: Modified from Kjr Sørensen, 1983, pp. 15 and 40.  Fishing  11.1 15.1  32.0 20.1  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 estab lishment of the monopoly in 1772. The Greenlanders used their income to buy a range of consumer 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 on seals for almost all necessities of life (Kjr Sørensen 1983).  26  An introduction to Greenland  Planned economic development 1950-1979 After the second world war it was clear that a new system of management in Greenland was both expected and much needed. The Greenland people, represented in the two re gional councils, was presented, in 1948, with one option: development of Greenland into a modern society (Kjr Sørensen 1983). The resulting policy, G50, which was imple mented from the beginning of the 1950s, included a significant increase in the standard of living, 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 ma jor investments in housing and infrastructure, it used Danish labour for these projects so as -  not to draw Greenlanders away from the occupations on which they were to rely in the fu ture. Thus there was little transfer of skills in the course of the G50 plan. Similarly, the educational policy was based on general educational improvements, rather than the encour agement 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 pro ceeded as planned during the 1950s, the hoped-for private investment in production did not take place. As the failure of G50 became increasingly evident in the early 1960s a policy re view led to a significant change of policy. The fishery was still the main commercial ac tivity, but now the development of this business was financed and managed by the Danish state. An accompanying measure, aimed at providing pools of labour at strategic loca tions for the fish processing plants, was a policy of concentration and settlement abandon ment. At the same time significant saving in the supply of goods for these settlements was used to justify the policy (Kjr Sørensen 1983). In terms of the benefits to the labour em ployed in the fishery, the wages were linked to both labour productivity and the world market price for fish products (Lyck 1986). Despite many good intentions the plan was  27  An introduction to Greenland  adversely 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 system As noted, the transfer of responsibility for specific areas was based on the principle that the grant accompanying the transfer should reflect the expenditure level under Danish state management at the time of transfer. At the same time, however, the Home Rule Adminis tration has no subsequent obligation to maintain expenditure in a specific area and can dis pose of the grant at its own discretion . The transfer of responsibility proceeded rapidly 9 after 1979, and the final transfer took place in 1992, when health service came under Home Rule management. The effect on public spending resulting from the transfer is reflected in figure 3.1, which shows the current expenditures of the Home Rule Authority, the local councils and the Danish state since 1979.  3000  I  2000 —D-—  C  • U—  HRA Councils State  1000  0 1978 1980  1982 1984 1986 1988  1990 1992  Year  Figure 2.5. Current public expenditures in Greenland, 1979-91. The large jump in spending in 1984 reflects the purchase of two new vessels for fisheries inspection. (compiledfrom Grønland Arbog 1982-90).  9 For example, if the HRA took over an area where annual expenditures were 100 million DKr, this sum was added to the net unrequited transfers while the HRA is free to use the funds as it wishes.  28  An introduction to Greenland  The Greenlandic economy under Home Rule management The 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 from Denmark. In terms of per capita gross domestic product, it resembles a developed coun try, while by other measures the country is midway between a developing country and a developed country. These characteristics are brought out by the data in table 2.3., which compares Greenland to Chile, Zimbabwe and Denmark. The Greenland economy has grown in fits and starts since the introduction of Home Rule in 1979, as shown by table 2.4. The good years for growth were 1981 and 1986-88, with quite 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 is strongly seasonal, with the highest proportion being employed in the period June to September. Furthermore it is clear that turnover on the labour market is high’°  TABLE  2.3. COMPARATIVE DATA SHOWING INDICATORS OF THE STAGE OF DE VELOPMENT FOR GREENLAND AND THREE OTHER COUNTRIES  Greenland Chile Zimbabwe Denmark 1,320 600 GDP per capita 1985 (Current US$a) 8,098 11,354 b 8 • 58 71.80c Life expectancy at birth, males (Years) 68.05 56.52 b 1 • 68 60 • 77 d Life expectancy at birth, females (Years) 56.72 60.13 Infant mortality in 1987 (age<1) per 1000 26.6 18.5 72.1 8.3 Notes: a. Calculated using an exchange rate of 1 US$ = 10.115 DKr. b. 1986-90 c. 1986-87 d. 1985-90 Sources: Figures and calculations based upon data taken from The Greenland Home Rule Treasury De partment (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 who experience periods of unemployment during the month (Grønlands Arbog, 1990). If unemployment at the end of each month is taken as an indication of the of unemployment this indicates that people move in and out of jobs rapidly.  29  An introduction to Greenland  TABLE 2.4. GNP AND GNI IN GREENLAND 1980-90 (CURRENT PRICES, 1,000 DKR) Year GNP Disposable GNIa GNP growth (%)b Disposable GNI per capita 1980 2,683 4,395 87.5 1981 3,104 4,826 8.2 94.6 1982 3,353 5,499 -5.3 106.4 1983 3,806 5,864 1.2 112.5 1984 3,929 6,303 -4.5 119.7 1985 4,375 6,708 1.8 126.2 1986 4,999 7,182 8.4 134.0 1987 5,875 8,117 14.3 150.0 1988 6,631 8,948 4.9 163.1 1989 7,072 9,283 -0.6 167.7 1990 6,732 -10.0 9,149 164.6 1991 6,568 9,181 -6.7 165.4 a. Disposable GNI includes the net unrequited transfers from Denmark b. Baseyear 1980 Source: Grønland Statistiske Kontor, 1991 and Grønland yearbook 1992/93. -  Inflation has been moderate since Home Rule was introduced, on average 7.4% an nually. However, in the first part of the 1980s the inflation rate was 14.7%, declining later to a record iow of 2.9% in 1986-87 (Grønland Arbog, 1990).  Home Rule Administration The Home Rule Administration is the major public organization in Greenland. In addi tion 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 Home Rule owned enterprises Greenland Trade/KNI, Nuna-Tek, and Royal Greenland. Greenland Trade/KNI which consists of three subsidiaries responsible for retailing in towns, supply of settlements, postal services and shipping. Nuna-tek is in charge of public utilities including electricity, telecommunications, energy supply, and also some con struction 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. The allocation 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 care  and a change in accounting procedure in 1992.  30  An introduction to Greenland  TABLE 2.5. CURRENT EXPENDITURES OF THE GREENLAND HOME RULE AuTHORITY, 1988-93 (DKR MILLIONS) Year 1988 1989 1990 1991 19931 1992 Administration 209 230 257 264 265 273 Education & culture 392 422 433 441 482 493 Social services 2 313 136 151 155 204 158 Transfers to councils 477 722 851 793 946 879 Internal air transport 43 47 52 90 112 141 Home Rule enterprises 402 152 164 256 137 251 Subsidies to businesses 130 226 289 265 243 350 Housing -41 -40 9 -50 -80 Health care 514 539 Net interest payments 54 16 67 14 Other expenses 227 55 27 67 52 75 Total current expenses 2021 2221 2271 2314 2843 3181 11993 budget 2 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 owned by the Home Rule Administration are characterized by relatively large investment pro grams. 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 generating facility in the vicinity of Nuuk (Buksefjorden). The distribution of investment expen diture 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 same grouping of expenditures, and the data had to be split into two overall groups. The change in grouping reflects the transition to Home Rule management of important parts of the economy in 1985-86 which led to a change in accounting procedures. Furthermore, the in vestments quoted are measured in current terms, and an examination of the index for cur rent and capital expenditure by the Home Rule shows that in 1990, current expenses were about 10% above their 1981 level, while investments were 14% below, having declined sharply from an index of 119 in 1989 to 86 in 1990 (Grønland Arbog p. 72, 1990).  31  An introduction to Greenland  1: 1 •  Q 0  •  1979  1980  1981  1982  1983  Other Communication Roads/utilities Housing Public Inst. Business  1984  Figure 2. 6 Public investments in Greenland, 1979-84 (modif1edfrom Lyck (1986), table 62). Municipal councils The municipal councils in Greenland are primarily responsible for the system of primary schools, a major part of the social service system and for roads, refuse collection, fire brigades, etc. While the councils are major landlords in their own right, they are also re sponsible for the administration of housing owned by the Home Rule Authority. The ma jor areas of public investment by the local councils is also housing.  The activities  undertaken by the councils are partly financed through grants from the Home Rule Administration, usually earmarked for specific purposes. In addition, the councils have the power to raise funds through income taxes.  State jurisdictions The areas retained by Denmark under the Home Rule Act of 1978 include defense, judi cial affairs and the legal system, and some activities related to weather forecasting and shipping 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 for Danish 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,  32  An introduction to Greenland  the major area of expenditure is fisheries inspection (which received 80% of investment expenditures in 1991, for new inspection vessels and helicopters). A special case is ex haustible resources, which are subject to a special joint management system (see chapter 6 &7).  Q 2000 •  Q 0 O  0  1000  •  Councils State Other Supply&transport Education Nuna-tek Trade&industry Administration  0 1987  1988  1989  1990  1991  Figure 2.7. Investment expenditures by the Greenland Home Rule Authority 1987-91 (compiled from Newsletters from the Home Rule Directorate ofEconomy). Production and trade Primary production in Greenland relies, especially after the closure of the Black Angel lead-zinc mine at Maarmorilik in 1990, almost exclusively, on fisheries. In 1988 primary production accounted for 21% of national income (including mining, 5.3%). The pri mary sector employed 10.2% of the workforce in 1987. Manufacturing (i.e. processing of fish) accounted for only 2.8% of income and 9.4% of employment. The secondary sector as a whole generated 23% of income and employed 22.5% of the workforce. The tertiary sector accounted for 58% of income and employed 65% of the workforce. Almost half of the income generated in the tertiary sector (27%) originated in the public sector or by companies wholly owned by the Home Rule Administration, a far higher share than, for example, Denmark, Norway or Sweden. To complete the description it should be noted that 5-10% of the population relies on subsistence hunting and fishing, having only limited contact with the monetized sector (Poole 1990).  33  An introduction to Greenland  The major primary industry, fishing, has been beset by problems. Prior to the mid-1980s, the dominant catch was cod, but this fishery collapsed for reasons believed to be related to climatic and oceanographic changes and possibly overfishing. Instead, in creasing emphasis has been placed on the shrimp fishery. This, however, is also having problems, mainly because a significant over-capacity in the shrimp fleet has meant that each vessel will maximize the value of limited quotas by discarding smaller size shrimps which are less valuable (Poole 1992). The problem has been recognized by the Home Rule Administration, and policy has been adjusted to encourage the retirement of older and less efficient 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 which were born outside Greenland) (Grønland Arbog, 1990). Given the extensive involvement of the Home Rule Administration in housing, infrastructure and industry, and the housing policies of the local councils, it is clear that the industry is very sensitive to changes in public investment policy. The main export commodity is fishing products. Before 1991, minerals also con tributed significantly to exports but this ended with the closure of the Black Angel mine at Maarmorilik in 1990. Table 2.7. shows exports (by main categories) and total imports as well as the visible balance of trade for the period 1984-92. The table is based on official statistics 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 reduced by 5-10%.  The dramatic improvement in the balance of trade from 1987 to 1990 reflects the very 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 that the end of mining, but the decline in fish exports is also strong.  34  An introduction to Greenland  TABLE  2.6. EXPORTs, IMPORTS AND GREENLAND’s VISIBLE TRADE BALANCE  1984 1985 1986 Exports Fish products 1064 1431 1706 Mineral concentrates 495 281 332 Other 192 91 79 Total exports 1842 1751 2078 Imports 2836 3140 2912 Visible balance of trade -1085 -1298 -850 Source: Grønland Arbog, 1986 and 1990; Advisory committee  CONCLUDING REMARKS  -  1987  1988  1989  1973 2067 2381 286 472 565 110 110 92 2369 2631 3056 3471 3495 2915 -1101 -864 141 on Greenland’s economy,  1990  1991  1992  2331 363 100 2795 2756 39 1993.  2075 0 104 2179 2609 -430  1900 0 107 2008 2737 -729  ECONOMIC PERFORMANCE AND STRUCTURAL PROBLEMS  The years 1984-85 roughly marks the time when the economic decisions by the Home Rule Authority began to influence the economy. In the years to 1987, fiscal policy was very expansionary, as witnessed by the large increase in the budget deficit of the Home Rule Authority, from being close to balancing in 1983 to a deficit of 497 million DKr in 1987. Whilst this may not sound like a large sum,  it  was, at around 10% of GDP, large  by most standards (Westerlund 1988). 1987 also became a turning point for the economic policy of the Home Rule Authority. Severe cash-flow problems and a large need to bor row brought about much tighter fiscal policies, and the short-term result is reflected in the budget improvement of more than 500 million DKr from 1987 to 1988 (Directorate of 1988). The improvement continued in 1989, when a surplus of 265 million DKr was re ported. In 1990 and 1991, budgets were close to balanced (Directorate of 1992), while in 1992 and 1993 surpluses of 16 and 151 million DKr, respectively, were expected (Det râdgivende udvalg vedrørende Grønland økonomi 1993). The economic tightening imposed in Greenland reflects a temporary improvement and is only a partial solution to the economic problems facing the country. These include the large public debt and the oversized public sector, a range of structural problems in the economy and a primary and manufacturing sector that is heavily dependent on a narrow re source base. The fact that the Home Rule Authority debt has been rising in recent years has been emphasized by Westerlund (1988) as one of the major constraints on the economic policy 35  An introduction to Greenland  of the Home Rule Authority. First of all, the debt reflects the accumulated deficits of the Home Rule Authority, beginning in 1984. However, the actual debt is larger since the Home 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 re flected in the budget (Westerlund 1988), as will be the case for future budgets (Directorate of Economy, 1991). The budgetary improvements in the period since 1987 has stopped the debt accumulation, but has not reduced it much. To achieve this, the Home Rule bud get needs to have a significant surplus (around 1,5 % of national income) for upwards of 10 years (Westerlund 1988). For 1989, the surplus was a good start but in subsequent years slightly less headway has been made with debt reduction. A further problem in relation to the debt problem is related to the combined effects of an absent domestic capital market in Greenland and the currency union with Denmark. This union implies that the two coun tries have the same currency, and that monetary policies are determined by the Danish Central Bank. Borrowing under these circumstances does not result in either higher interest rates 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 is more free to grow (Westerlund 1988). A final problem is that debt reduction depends on the rate at which the economy grows. Given the large contraction in the economy shown in table 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 edu cation and training which characterize the Greenlandic labour market. The cost to Green land results both from underemployment of the resident labour force and the high cost of importing labour. As noted above, administration takes up many resources (accounting for 26% of na tional income) and needs to be reduced (Lyck 1991). Much of the problem originates in  36  An introduction to Greenland  the transfer of power to Greenland and the use of Danish civil servants. The result has been the uncritical adoption of many Danish administrative traditions at a very high cost (Westerlund 1988). However, even if less ambitious organizational structures were to be adopted, this would be difficult due to the general lack of appropriately educated Greenlanders. A third structural problem is the settlement pattern in Greenland. The significant number of smaller settlements in Greenland dates back to a time when a large part of the population was employed in either subsistence hunting and fishing or in limited inshore fishery. The development of off-shore fisheries and the use of larger processing plants re quires a larger pool of labour in towns with production facilities. This was recognized in the Danish G60 policy, which sought to concentrate the population in the larger towns. The most dramatic example was the forced abandonment of the Qutdligsat coal-mining town in 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 demand for Home Rule (Lyck 1986), even if the mine was known to have been highly inefficient for many years. Maintaining many smaller settlements is, however, very costly and causes sig nificant inefficiencies. The reason for this is partly the way it is done. Rather than giving the settlements a direct subsidy, goods and services are provided at the same price all over Greenland. Given the long distances and extreme conditions, the costs are not reflected in the prices charged. The indirect subsidies help preserve an inefficient situation where eco nomic 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 settle ment pattern cannot be dismantled rapidly. Similarly, a large influx of people to the towns could exacerbate the already precarious social situation in Greenlandic towns. A fourth structural problem is also related to the settlement/town structure. In many of the smaller towns transport cost (though heavily subsidized) and the limited size of the market essentially prevents competition in some lines of business. There are oppor  37  An introduction to Greenland  tunities for monopoly behaviour and collusion can easily occur. In the construction sector (where much housing construction is undertaken by the local councils), inefficiencies are further compounded by the subsidies provided by the Home Rule Authority (Martinsen 1992), which remove much of the incentive for the councils to be cost conscious.  38  Mineral development models  3  MINE1L DEVELOPMENT MODELS  Mineral development commonly refers to the economic development associated with the discovery, development and operation of mineral projects. For a country possessing mineral deposits of sufficient quality and size the two main issues related to exploitation of these are the direct and indirect economic effects of exploitation, and the timing and speed with which exploitation occurs. The present chapter first examines the economic implications of mineral exploitation and development based upon it. Second, the issue of sustainability of mineral policies is taken up in relation to the timing and pace of exploitation.  MINERAL DEVELOPMENT MODELS  Traditionally, mineral commodities have been exported from less developed countries in raw form, usually as mineral concentrates or crude petroleum. However, over the past 30 years or so, there has been a slow increase in the share of mineral production processed in developing countries (Johnson and Pintz 1985), although it is difficult to determine whether this has been the result of a greater share of mineral production being located in these coun  39  Mineral development models  tries, of developing country (LCD) government policies, or if the countries in question posses some comparative advantage in mineral processing. The trend towards more domestic processing can be analyzed from different per spectives, depending on what mechanisms are thought to be at work. The literature in this area suggests that the two major approaches are related to either “resource based industrial ization”, or development based on investment of mineral revenues (not necessarily in the mineral sector). There are, however, additional problems related to the production and export of natural resources. First is the fact that the growth of a resource sector can have strong adverse effects on a country’s economy as a whole, either through the effects of the “Dutch Disease”, as defined below or because increased mineral exports will make countries more dependent on the mining sector. The following sections also examine these issues.  Mineral based industrialization A policy promoting the processing of primary commodities in their country of origin can in clude 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 hav ing the primary commodity available in the country. These advantages are transport cost sav ings, availability of subsidized capital, and low cost energy, as well as cheap labour. In addi tion to the direct effect of processing the mineral products, this strategy is expected to result in linkage effects whereby the processing of minerals leads to derived demand for goods and services, 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 of the primary commodities commonly exported by developing countries are monopolistic or oligopolistic (e.g. copper concentrate and bauxite) and by the desire to retain economic rent from minerals in the country which might otherwise be transferred (using transfer pricing mechanisms) to countries with more favourable tax regimes.  40  Mineral development models  The 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 absorb pollution, as a result of lower degrees of industrialization. Such countries may also be more willing to tolerate environmental degradation, given the potential economic benefits of doing so.  Despite the emphasis placed on mineral based development, there are, however, several strong reservations about the usefulness of such strategies, regardless of their good intentions. Imme diate concerns include higher capital costs of projects in developing countries (canceling out the supposed availability of subsidized capital), significant technological risks, and difficul ties in raising the required capital (Johnson and Pintz 1985). The value of these strategies is determined by economic mechanisms, and the assumptions on which the strategies are based.  The first assumption is the idea that processing primary commodities, which are otherwise exported, implies value added to the export goods and further, that this is beneficial to the country. 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 may be a comparative advantage in doing so. The presence of this advantage depends on a range of circumstances such as factor intensity, costs, transport costs, price of complementary inputs, availability of economies of scale, the existence of external economies, and on processes of technological change (Roemer 1979). In terms of factor intensity, most resource processing industries have high capital to labour ratios (as do the mines), indicating that developing countries with cheap and abundant labour have no competitive advantage (Balassa 1977). Only at the manufacturing stage does labour become an important input, and give advantage to developing countries (Roemer 1979). The perceived comparative advantage may also be the result of the reduction in transportation cost, as a result of weight reductions during processing of concentrate to metal.  41  Mineral development models  Some savings may be possible on this account (Radetzki 1977), but on the other hand, this may be lost again when the higher cost of handling non-bulk material (e.g. metal bars or ingots) is taken into account.  A typical example is the processing of bauxite ore into  aluminium metal. Both the bauxite and the intermediate product alumina are bulk materials and easy to handle in large volumes. Once the alumina is smelted into aluminium metal ingots handling is more complicated. Thus, despite the 50% weight reduction at both stages of the process (bauxite to alumina and alumina to aluminium metal), this is generally far less important 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 dis advantage. It is, for example, much less expensive to transport elemental sulfur than the endproduct for which it is intended, sulfuric acid. Similar disadvantages are found in iron ore and steel, where the transport of large items of steel is much more expensive than moving semi-processed iron ore pellets.  In both cases, a large part of the processing and  manufacturing will take place close to the end use market. The competitive position of developing countries is also influenced by the availability of complementary inputs. As noted above, in the smelting of alumina to aluminium, energy is the essential input and the location of aluminium smelters is primarily determined by the availability of low cost electricity. Further determinants of the competitive position of a [developing] country are the ex istence of scale economies and external economies in many resource processing industries, and processes of technological innovation (Roemer 1979). Scale economies may be difficult to achieve in developing countries for the simple reason that these countries are seldom able to supply inputs (i.e. mineral concentrates) sufficient to feed an optimally scaled processing plant. This problem may be compounded by difficulties in marketing output from large fa cilities, in markets characterized by strong vertical integration (e.g. the aluminium and petro chemicals markets). External economies, associated with the existence of markets for addi  42  Mineral development models  tional outputs from processing, are also unlikely to be present in many developing country set tings. Resource based industrialization is often put forward as a means to increase employ ment in the primary resource producing country. Given the low labour content of most re source extraction and processing, this effect must come through the linkages of the primary sector to other sectors, but even here the prospects for employment are limited (Roemer 1979).  Substitution of labour for capital may occur as a result of political pressure on  resource companies.  Even if resource industries have iow labour intensities they may  nevertheless have significant effects on the rest of the economy. This is because the resource industry is prepared to pay higher than average wages in order to get the best and most productive 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 from cost comparisons between developing country and US producers of aluminium (Adams and Duroc-Danner 1987). By comparing production costs for a wide range of products in both the member countries of the OECD (Organization for Economic Cooperation and Development) and the developing countries it was shown that, on a simple exchange-rate comparison, de veloping countries have a significant comparative advantage over US producers, with nominal operating 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 a significant advantage. This indicates that the main reason for the shift in processing of bauxite to aluminium has been the result of exchange-rate effects. A mineral industry may also produce a number of linkages to other sectors of the economy (Hirschman 1958), either forward or backward.  Backward linkages involve the  production of inputs used in the mineral industry, ranging from the food and housing con sumed by workers, to plant and equipment for the mine and mineral industry. Forward  43  Mineral development models  linkages implies that the output from the mineral industry is used for downstream manu facturing and fabrication. Both types of linkages are potentially important (Radetzki 1982), but their emergence depends on the comparative advantage of the activity in question (which may be artificially created through government policy). The fact that a mineral industry as well as linked industries may create unwanted effects in the economy as a whole is discussed further below. There is a third type of linkage which is related to the infrastructure commonly estab lished in connection with mineral projects (roads, railways, power and water supplies, schools etc.). It is seldom possible to exclude others from using such facilities, which thus create a positive externality. The preceding discussion indicates that industrialization could be based upon link ages. It is, however, difficult to find unequivocal examples of this taking place. Further more, there is considerable consensus, that such linkage effects tend to be rather weak (Bosson and Varon 1977; Emerson 1982; Gillis 1978). This follows from the “enclave nature of mineral projects due to their often remote location, their capital intensity and technical complexity (Emerson, 1982, p. 563). Mineral projects are bound by the location of mineral deposits, often far away from established centers. Most less developed countries have little or nothing in the way of capital markets and cannot supply the capital necessary for most mineral projects. countries,  Similarly, since marketing opportunities are mostly in industrialized  aai. because the degree of tariff protection tends to increase with the degree of  processing, 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 interna tional mining companies are monopsonists (i.e. they act as one buyer), and that they tend to remove mineral rents from the mineral producing countries in order to avoid taxation.  44  Mineral development models  Whilst this may be a valid strategy, its usefulness is qualified by the nature of the assumptions about 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 to obtain sufficient investment funds in order to achieve the same scale economies as com petitors; (ii) find and master the required technologies by purchasing the required equipment and employing technical manpower; (iii) find ways to market the product and find buyers (or tempt them away from the competing suppliers) if he is to survive (Roemer 1979). Second, the market structure in ocean shipping means that monopolistic shipping conferences (cartels) may discriminate against exporters, either because their demand is relatively inelastic (i.e. they need the shipping if they are to sell their minerals or processed metal), or because shipping firms attempt to obtain a share of the savings associated with weight reduction and lower material loss in bulk shipping. Third, processed goods may be subjected to increasing tariffs as the degree of pro cessing increases. These qualifications of the applicability of the “trade integration” strategy are partly offset by the argument that forward integration into manufacturing can be a way to achieve more stable prices and sales volume (Smith and Wells 1975). The fourth qualification to the trade integration motive for resource based industrial ization concerns import substitution. Import substitution may be a way of avoiding the other problems noted above, and international resource firms may indeed be quite interested in producing behind high tariff walls. The problem is, however, that unless the domestic market is very large (or economic integration between nation takes place), such production will be inefficient and cause welfare losses (Roemer 1979).  That a country has a measure of comparative advantage as a result of weak or non-existent environmental regulation is advanced, by Johnson and Pintz (1985), as an argument for placing mineral industries, including processing facilities, in developing countries.  45  Different  Mineral development models  environmental standards may be the source of cost structure variations which give rise to com parative advantage (Nappi 1989).  The corollary to this argument is that developing  countries, being less heavily industrialized, posses a greater natural assimilative capacity (Johnson and Pintz 1985) and can therefore safely adopt less stringent environmental regula tion. ‘Whether governments in developing countries base policies on such an “advantage” is dif ficult to determine, but the emphasis industrialists in developed countries place on loss of competitiveness as a result of environmental regulation suggests that the issue is widely  known.  Economic rent and mineral based development The second major issue in minerals based development emphasizes the capture and use of mineral rents. In contrast to the previously outlined strategies, where the direct effects of the mineral industry were emphasized (i.e. mainly through employment of local factors of pro duction and through linkages), the rent approach is based on analysis of four issues of economic policy, which, among others, determine whether countries have successfully achieved structural 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 eco nomic rent from mineral production that would otherwise accrue to mining firms. Second is the question of how the rents, once they have been captured, are used, for investment or for con sumption. Investment can be either in the same (primary) sector, in other sectors as part of a diversification policy, or in financial assets. Consumption, on the other hand, implies that the revenues 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 link ages resulting from the various possible uses of the rents. The fourth and final issue is that of stability. The size of revenues from rent capture will vary with the price of commodities,  46  Mineral development models  and are thus likely to be very variable over time, creating a need for specific revenue management policies as well as for more general stabilization policy (Lewis 1989). Before proceeding with an examination of these issues, it is instructive briefly to note the origins of mineral rents. This aspect will be discussed further in chapter 4, which deals with rent capture policies. Rents from minerals are commonly defined as the difference be tween gross sales revenue and total costs of production and marketing, including financial charges 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 and on minimization of production costs. The flow of mineral rents, from the original source to the final consumption, is indicated in figure 3.1. The division used in the figure indicates that part of the economic rent is not captured by the host country government, but is retained by mining firms as a compensation for their willingness to carry risk. This share needs to be of 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 extract an optimal amount of rent. ‘When considering revenues from taxation of mineral rents it must be kept in mind that the nature of mineral deposits means that the time profile of revenues is likely to consist of a period after production begins with no revenues (this is when capital investment 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 the mine is exhausted, although sometimes it declines as lower grade ores are mined towards the end of the life of a mine. The key questions in relation to development based on mineral rents are first the man agement of rents accruing to the host country and, second the linkages associated with the investment or consumption of the mineral rents (Lewis 1989).  The theoretical problem of choosing between asset acquisition and current consumption is one of comparing the net present value of future streams of income (if assets are acquired) to  47  Mineral development models  current consumption. Spending will be allocated according to valuations of consumption today and consumption tomorrow, evaluated at the appropriate discount rate.  In many  developing countries the pressures on government to consume rather than invest are very strong and, combined with the apparent disregard for the economic return on projects, this indicates very high interest rates on the consumption side (people need a very large return before they invest), while they are very low on the investment side (Lewis 1989).  Figure 3.1. The generation andflow of mineral rent.  Most of the consumption possibilities noted in figure 3.1. have negative impacts on the mineral producing country and these will be discussed in the next section. On the in vestment side, however, the survey by Lewis (1989) indicates that the most important ele ments in successful development in mineral-exporting countries are investment in infras tructure, human capital and research. Investments which promote productivity growth and diversification seem particularly important, even if the latter process takes place in the primary sector. Furthermore, revenues used to mildly encourage and moderately protect 48  Mineral development models  domestic production (especially if the protection does not emphasize quantitative import restrictions) is distinguished by Lewis as elements in successful development. The need for moderation 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 consid ered by governments. In some ways, however, it would not be inappropriate to place at least part of the revenues from non-renewable resource use in a diversified portfolio of low-risk fi nancial assets. This could serve several purposes, the first to spread over time the introduction of rents into the economy, thus reducing the problems rapid consumption (or investment) of rents might have. Second, the income from a pool of financial assets may help secure future generations a share of the benefits of a natural resource endowment. Third, investment in assets may prevent individuals or groups from appropriating part of the rents for themselves through rent-seeking activities. Unfortunately, governments have only rarely been able to accumulate financial assets for later use. The few examples include Indonesia (Harberger 1984), the province of Alberta and the state of Alaska (Robinson and others 1989). This possibility 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 impact on the economy of that country as a whole. Mineral production implies exports, an inflow of investments and an outflow of profits, new patterns of labour use and changes in wage and in come structure as well as in government structure. All these changes mean that the economy has to adjust in a range of different ways. Lewis (1989) has distinguished seven key features that characterize these changes, shown in table 3.2.  49  Mineral development models  1. 2. 3. 4.  5. 6. 7. Source: Lewis  TABLE 3.1. MINING SECTOR GROWTH IMPACTS Higher GNP per capita Higher share of government revenue in GDP Higher wages in the modern sector compared to average GDP per capita Reduced incentive to invest in non-mining activities Foreign factors of production have a higher share of income relative to GDP More unequal income distribution More migration from rural to urban areas (1989)  The effects of economic booms have been the object of considerable interest in the past 20 years, beginning with the observations of “boom” characteristics in the Australian economy in the 19 0’s (Gregory 1976). Since then a range of models have appeared which 6 examine 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 the impact 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 and is confined to the country in question. This results in a favourable shift in the production function.  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 of these has been called “Dutch Disease” after an article in The Economist newspaper (November 26th, 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 which demonstrate the occurrences of Dutch Disease in mining and other non-renewable resource contexts (Gelb and associates 1988; Neary and van Wijnbergen 1986; Norton 1988). The basic 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 goods  50  Mineral development models  manufacturing sector, which produces tradable goods, and a sector which produces goods which are consumed domestically (i.e. non-tradable goods). Each sector uses two factors of production, 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 ini tially raise the factor incomes in this sector. This extra income can be spent thus giving rise to a spending efftct of the boom. This effect works through higher demand for non-traded goods, and this in turn pushes up prices in the non-traded sector relative to the tradable goods sector (from po to p in figure 3.2.a). This means that resources will be drawn from the two exporting sectors into the non-traded sector. At the same time the mineral sector boom means that there are gains to be made in this sector (i.e. due to the higher factor incomes relative to the other two sectors), which draws the mobile factor (labour) out of the manufacturing and non-traded sectors. This is the  resource movement effect. With respect to the manufacturing sector this means that production declines, 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 of non-traded goods, thus shifting the supply curve upwards (from S 0 to S 1 in figure 3.2.b), and resulting in a restriction of output (from q 3 to q 2 in figure 3.2.b). This effect is called indirect de-industrialization. These are the elements in the Dutch Disease model, but in this framework a range of other factors can be introduced as assumptions are relaxed. If capital is mobile between the manufacturing and non-traded sectors in addition to labour, then capital can 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 the resource movement (of labour out of both manufacturing and non-tradables) capital will flow to the capital intensive sector, causing it to expand. However, the spending effect will, at the same time, cause both capital and labour to move to the non-traded sector (Corden and Neary 1982). Conversely, if capital is mobile internationally within each sector (but not  51  Mineral development models  between 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 manufac  D 4  3 p 2 p  0 q  1 q  3 2 q q  Production of non-tradeables  Production of non-tradeables  (b)  (a)  Figure 3.2. (a) The spending effict. N’L is the price ofnon-traded goods measured in terms of tradable goods. (b) The effrct of resource movement on the output and prices of the non-tradable sector. turing are maintained. Additional effects are related first to migration, which is induced by higher real wages in the booming sector, and which leads to at least a partial off-set of de industrialization. Second, where the manufacturing sector produces both exports, and importsubstitutes, there may be effects on world markets of mineral exports and at the same time dc-industrialization as a result of resource movement effects (Corden 1984). Furthermore, if the 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 a boom (instead of the real wage increasing) and, vice versa, in the case of a contracting sector wage rigidity would lead to unemployment. The extent of these effects depend on the nature of the workforce in individual sectors. A typical example of these effects would be resource movement away from a manufacturing sector combined with wage rigidity.  The factor  movement leads to unemployment in the sector, and this effect can be exacerbated if workers  52  Mineral development models  in 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 with initial unemployment will lead to increased employment as demand for non-tradable goods rises in response to a boom.  In the models described above, three elements noted by Lewis (1984, 1989) were not in cluded. The first is related to the effect of excess liquidity in the economy, as a result of the mineral export generated balance of payment surplus. This excess liquidity will be even greater when the effects of fractional reserve banking on credit is also considered, so that the money and credit levels will increase more rapidly than GDP. Unless government and the central bank takes corrective action, inflation will be the result, as evidence from the Middle East petroleum exporters indicate (Morgan 1979). Second, government revenues will increase, and with them government spending. This growth, however, is not accompanied by a corresponding increase in non-mineral revenues, and as mineral revenues level off and eventually disappear, government expenditures will have to be reduced (which is always a painful process). This growth in spending, with many new projects being undertaken, will also be likely to lead to carelessness in project appraisal, reduction of audit control, and a deterioration of management procedures, all factors contributing to wasteful spending. Third, the expansion in spending on projects (mineral and others) causes the immigra tion 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 of import of services (and even more foreigners to monitor the first ones when the government can no longer do this job itself). Furthermore, the presence of foreigners in sufficient quanti ties can have dc-stabilizing political effects. It is, however, in relation to the accounting of costs 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 not  53  Mineral development models  the case for wages, salaries and benefits paid to foreigners resident in the mineral producing country (Lewis 1989). The existence of large mineral rents, and particularly if government succeeds in appropriating a large share of these, can create another range of problems. They can be de scribed as “rent-seeking” , and may occur when large unappropriated rents, for example 1 originating from mineral production, accrue to a government or state. Different groups will try  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 the influence of rent-seeking activities (Anders 1988).  Despite the creation of the Alaska  Permanent Fund (which is described in chapter 9), very large revenues from oil production have accrued to the State of Alaska since the early 1970’s. Some of these have been expended on creating public goods in rural areas, and on creating artificial economies where entrepreneurship was insufficient. Considerable control over these efforts lies with the native corporations 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 appropriate significant funds for native oriented programs at the expense of coordination with state agencies.  Two additional long term effects should also be noted here. Initially, the consequences of a mineral boom on the manufacturing sector will be de-industrialization, which causes the sector to decline. In the process, however, accumulated human capital (i.e. learning by doing or 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 escaping the forces of competition in the marketplace” (Colander 1984). Rent-seekers, who invest resources in efforts to have transferred to them through political processes, cause an overall loss of welfare because the effort expended in obtaining a larger share in rents is not productive.  54  Mineral development models  The second long-term problem of mineral booms is related to the effects of heavy ex ternal borrowing (Mansoorian 1991).  This borrowing occurs in response to a mineral  discovery, but when the time for repayment arrives it becomes necessary to introduce austerity measures. Thus, after a sharp increase in aggregate expenditure based on the expected gains from the resource discovery, there is a gradual return to a lower equilibrium level of expendi ture. This lower level of aggregate expenditure also involves the non-traded sector, but the factors of production thus released can then flow into the manufacturing sector and promote industrialization in the long term (in contrast to the prediction of traditional Dutch Disease models).  Dependency on mineral exports  The concept that mineral producing developing countries are or become dependent on mineral exports to industrialized countries was at one time very popular. Roemer (1979) has surveyed the dependency arguments and distinguishes five aspects: 1. 2. 3.  4.  5.  Trade dependence implies that industrial production and employment depends on export earnings which in turn finance imports of capital and intermediate goods. Financial dependencies on foreign capital required to finance mineral exploitation. Technological dependence is a question of access to technology controlled by inter national companies. It contributes to dualism, since the technology in the modern sector (as opposed to the primitive rural or agricultural sector) is not compatible with factor endowments of developing countries. Managerial dependence refers first to the insufficient or absent training and education of the workforce in mineral producing countries and second to the discrepancy between training levels and the technology commonly employed in the mineral industry. Market dependence is the result of the market power which integrated mineral pro ducers posses (at least in some markets).  These types of dependence are additional to those associated with increased exposure to the fluctuations in world commodity prices, exchange rates and interest rates. Similarly, effects  55  Mineral development models associated with environmental externalities and with economic adjustments in mineral economies can also be framed in terms of dependence (Gillis 1978). Whilst some forms of dependence are quite important (financial, technological and managerial) in the short and medium term, it can be argued that many of the forms noted above are useful excuses for not being able or willing to undertake adequate management of mineral impacts.  MINERAL RESOURCES AND SUSTAINABLE DEVELOPMENT  The critical feature of mineral resources is their finite quantity there are only those resources -  on earth with which it was originally endowed. Furthermore, the stock of mineral resources is unchanging: it does not grow like forests or fish stocks. It can even be argued that while the mass of mineral or non-renewable resources is constant, the law of entropy implies that mass will 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 popular concept of sustainable development takes on a special meaning in relation to non-renewable resources. This is further complicated by the extent of environmental impact associated with the production of mineral commodities. This impact becomes increasingly important as resource production moves to deposits of progressively lower quality, where more material must be processed to obtain a unit of commodity. A further concern is the question of intergenerational equity in resource use and sharing of resource profits. This section first examines the economic nature of non-renewable resources and dis cusses the implications for mineral depletion policies. Second, definitions of sustainable development are discussed (no clear definition of this term has been agreed upon), and the implications for the special case of non-renewable resources are reviewed. Finally, the result of the preceding two sections are integrated to provide the foundation for a mineral policy which is both fair and sustainable.  56  Mineral development models  Non-renewable resources and optimal depletion According to conventional economic theory, the nature of non—renewable resources dictates that they will be used in a well defined way, based on the conception of a mineral resource as a (sterile) capital asset. For the owner, the basic decision rule tells him to extract the mineral and invest the proceeds if the return from doing so exceeds the appreciation in the value of the mineral asset in the ground due to an increasing price. Conversely, if the return, measured as the relative price increase, from holding the mineral asset is greater than the return, measured as an interest rate, from investing the proceeds from mining, then the owner should keep the mineral in the ground. The result is a path for the resource price (net of all costs) rising at the rate of interest (see figure 3.3). This is known as “Hotelling’s rule”(Hotelling 1931), and is based on a number of restrictive assumptions’ . Markets must be competitive, technology unchanging and all 2 traders must be fully informed about present and future prices.  Hotelling himself was  concerned with the possible impact on the Pareto-optimal situation that exists when mining firms maximize present value. Wild “rushes” to acquire and exploit mineral land, unjustified windfalls to individuals with “free” access to exploration information, and the effect of high discount rates on the way firms choose to exploit resources may all contribute to disturb the equilibrium. 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 Hotelling model 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 depend on exploitation of an exhaustible resource, as well as on a reproducible capital stock  2 In algebraic form the Hotelling rule can be stated as P(t)=P(O)et, where P the beginning of the program and r is the interest rate.  57  is the net price, t is the time from  Mineral development models  Price  4 P(T)  --—-—  P(O) .  —  Time  T  Figure 3.3. The path ofnet price over time ac cording to the Hotelling rule (Dasgupta and Heal 1974). Some of the production is not consumed but added to the capital stock. Consumption, however, benefits social utility, and the aim is to maximize this over time. In the model, the central problem is whether the resource is an essential input for producing the goods that are consumed. Further, optimal depletion depends on techno logical 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 can  substitute for the non-renewable resource is similarly important. A positive rate of time preference and the fact that the model uses a utilitarian welfare function means that future generations lose out as consumption will decline to 0 (figure 3.4.). Further extensions to this type of model indicate that constraints on consumption of the kind noted above can be avoided if endogenous technical change occurs. This, however, re quires that some resources are diverted from consumption to technological research and devel opment (Kamien and Schwartz 1978). In all the models referred to above investment in reproducible capital plays a crucial role. The problem, however, is to make sure that “sufficient” investment occurs. Sufficient in this case means that there is enough investment to achieve technological advances which can offset the declining resource stock while a constant level of consumption is maintained over time. In other words, the essential question is whether the market will “save” enough. The answer 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 will  58  Mineral development models  always 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”  Time  Figure 3.4. Consumption profile and optimal depletion ofan exhaustible resource. The curve abd describes the case with a relatively low rate of time preference, whereas curve ebd describes the profile for a higher rate. If a technological breakthrough occurs at time T the profile jumps to fg and ’ 1 settles at a fixed level ofconsumption C’ (or Hotelling rents), which arise because the resource stock is constant. It is important to distinguish these rents from “differential rents”, which are due to the variable nature of orebodies. A possible and practical approximation to this rule is taxing mineral rents and investing the revenue in capital projects (in a wide sense, ranging from physical capital stock such 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 resource industry (see chapter 9 for an analysis of trust funds and the possibilities for using them in Greenland). 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 ways simplified since the rate of return is exogenously given. Optimal depletion is then given by  59  Mineral development models  the rate of return on foreign assets. When uncertainty about future demand is introduced, it is the risk adjusted rate of return on resource assets which must be equated with the exogenously given rate of return (Dasgupta and others 1978). For a developing country with substantial mineral resources the question of when to ex ploit becomes one of timing and discount rate. Despite the restrictive assumptions of the Hotelling rule, Lewis (1984) states that the general principle is sound, and that a country should deplete its resources and invest the rents (those accruing to the country), in such a way that the return on this new investment is driven down to equal that which is to be had by leaving the resource in the ground. If better returns are available on assets other than ore in the ground, the rule is clear: deplete as rapidly as possible. The corollary to this is that minerals should 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 of a developing nation’s resources. As noted, following the Hotelling rule is one possibility, al beit fraught with uncertainties. This would in some cases imply a deferral of exploitation based on one or more of the following arguments, that over discounting favours present genera tions, that developing countries lack the managerial experience needed fully to reap the bene fits from exploitation, that large projects may have a undesirable market impact, or that re striction of exploitation will allow producers to exercise market power (Radetzki 1992). Adoption of too-high discounting rates is sometimes asserted to cause intergenera tional inequity by depriving generations in the distant future of the resources they will need to maintain a reasonable standard of living (Meadows and others 1972). The high rate of deple tion early in the period caused by high discount rates may also lead to conservation policies on a national level. The purpose here is to retain the resources for such a time when they can be used by a domestic industry rather than exporting them now. Typical examples of such policies are Canadian Uranium in the 1970’s (Radetzki 1979), and iron ore in Venezuela in the 1980’s (Radetzki 1985).  60  Mineral development models  A 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 the model, on which this prediction is based, holds. With respect to timing of mineral deple tion, 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 is required for other reasons). Marian Radetzki (1989) believes that the argument is false, and that the Hotelling rule breaks down when assumptions are relaxed. The first problem of using the Hotelling rule to defer depletion is related to the co existence of mines of variable quality (i.e. with different costs). The key issue is the different royalties such mines will earn. Radetzki (1989) envisages a sequential move to deposits of declining quality, and notes that although royalties are adjusted downwards they continue to increase at the rate of interest, thus maintaining the rationale for deferring depletion. The problem of different quality mines can also be seen as one of variable extraction cost for producing 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 a positive rent (Neher 1990). The second argument questioning the usefulness of the Hotelling rule concerns the effect of unanticipated new resource discoveries. Radetzki (1989) argues that massive dis coveries cause unit discovery cost to fall and, since discovery cost must equal royalty (rent) at the margin, leads to a lower royalty. Thus, the discovery necessitates a new price path, and makes the increase of the royalty associated with a particular deposit quality implied by the Hotelling rule impossible. This can, however, be queried by observing that any deposit may be relegated to a lower price path without changing the shape of the path. Changing technology in exploration may also reduce unit discovery cost in contradic tion to the Hotelling rule and advances in technology may make new classes of deposits far more viable than those previously exploited while at the same time making the “old” deposits uneconomic. As an example of the latter effect, Radetzki (1989) mentions the development  61  Mineral development models  of bulk mining and processing methods for copper early in this century, which marginalized existing copper mines based on high grade veins. The arguments, used to pronounce the Hotelling rule useless as an excuse for deferring mineral production, are backed by the observations of long term price behaviour of major metals 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 take technology into account.  A model developed by Slade (1982), for example, examines  commodity price trends and incorporates the effects of output level, grade and time (which is a 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 rate of change in marginal cost due to technical change (k) plus the rent multiplied by the discount rate (p): P=CQ+ and P=k+p where CQ is marginal cost composed of an ore grade dependent element and a time depen dent technology element, and 2 is the rent. Since the rent is always positive, price will increase when there are no technical advances to lower marginal cost. Conversely, if technical change is rapid price may be kept down or fall for a time. The empirical data fits the model very well, indicating that prices for most minerals follow an U-shaped price path, and that the minimum point on this path has been passed for primary base metals and petroleum (Slade 1982).  Regardless of whether or not the Hotelling model provides a valid foundation for postponing mineral exploitation at a given site, it is instructive to review the situations where such a solu tion has been considered.  62  Mineral development models Resource conservation through deferral of exploitation is advocated for two reasons, as noted 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 is that technical advances or discoveries can make known deposits irrelevant. The stock of resources is, of course, finite in a physical sense. It is more open to interpretation whether the stock is finite in an economic sense. The results of Slade (1982) shows a long-term price path which has begun rising, indicating that depletion outpaces technical advances. At the same time, however,  it  is worth noting that stocks measured in years of supply at the current annual  rate of production have remained around 30 years for most of industrialized time (Radetzki 1992). With respect to the possibility of technical obsolescence, the case for deferral requires that a deposit, if temporarily made uneconomic by technical advances, should later achieve a net value (rent) which, discounted to the time when deferral took place, is at least comparable to the rent obtainable by immediate exploitation. For developing countries deferral of mineral exploitation has been advocated on the grounds that neither an institutional framework nor the necessary human capital is available for these countries to capture the potential benefits of mineral development. The argument has some historical relevance, witness for example the dismal experience of Zambia since that country nationalized its copper industry (Auty 1991). There is, however, another side to the argument. The missed opportunities of countries like Zambia can be seen as necessary costs of “learning by doing”. The case against deferral for reasons of inadequate institutional framework is further strengthened by considering knowledge or human capital as just another factor of production. It is always possible for a country to purchase (or receive free of charge from the United Nations or other agencies) the necessary help for management of a mineral industry and for training locals to do the job. The not inconsiderable success of Papua New Guinea in managing its mineral wealth using outside help provides an instructive example. Occasionally, very large projects are candidates for deferral because they may, if put in production, depress world mineral prices. This, however, is a very short-run consideration  63  Mineral development models  since very large projects are usually also low-cost producers. Thus, in the longer term, they will 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 pertinent course of action for countries with viable mineral deposits is to encourage their immediate exploitation. The possibility of following the Hotelling rule and deferring extraction cannot be wholly dismissed, but application of the rule requires substantial consideration of the risks of waiting. These risks arise mainly from the possibilities of technical change and general uncertainty 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 benefits from a project. This brings us to the question of sustainable development, to be considered in the next section.  Sustainability and non-renewable resources Casual observation of non-renewable resources would suggest that their exploitation is fun damentally different from, and in conflict with the concept of sustainable development. This is not, however a viable assumption on which to proceed and we need to examine more closely the meaning of sustainability and sustainable development. The term sustainable development was defined by the World Commission on Envi ronment and Development (1989 also known as the Brundtland report) as “development that -  meets the needs of the present without compromising the ability of future generations to meet their own needs” (World Commission on Environment and Development 1987).  This  definition, however laudable it is, gives little guidance on how to accomplish the goal of sus tainable development. Pearce and co-authors (1990) have suggested that sustainable develop ment is conceived as a vector of development which is non-decreasing over time. The ele ments which describe this vector and the time horizon over which the process runs is open to  64  Mineral development models  argument, except for the requirement that intergenerational objectives must be satisfied. The elements 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 some circumstances use of nonrenewable resources can be “sustainable” in the sense described above. However, the question of sustainability in a general macroeconomic sense may be separated into three distinct issues (at last). The literature on depletion indicates that constant levels of consumption can be maintained if technological advance is sufficiently rapid.  Thus, the first issue may be  described as securing the optimal level of savings in a situation where the actual size of scarcity 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). The first is based on the idea that the standard of living can only be improved if the stock of natural capital is increased (i.e. the two are complements). When a certain standard of living has been reached it may be possible to increase it further without accumulating more natural capital. The second school of thought views standard of living and natural capital stock as substitutes, such that an improvement in living standard can only be accompanied by a reduction in the natural capital stock. Within these extremes variations are possible, for example moving along a path where standard of living and natural capital are complements  65  Mineral development models  until we reach a point where further increases in standard of living will involve reductions in the natural capital stock. The third issue to be noted here concerns distributional aspects of the composition of the total capital stock. People and countries may be at different stages in terms of standard of living, while at the same time their opportunities in the future may be constrained by the actions of other people or countries. The major distinction made by Pearce and co-authors in relation to sustainable development is between the meaning of the term itself, which is self evident, and the conditions necessary for reaching the goal. The key condition is that natural capital stock should 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 two types of stock are complements or substitutes. The essential problem according to the authors is that such questions cannot be answered without a more clear-cut valuation of the economic services provided by the environment (Pearce and others 1990) and ways of comparing dif ferent costs and benefits. As these occur at different points in time it is common procedure to discount costs and benefits to some fixed point in time in order to reach a decision. Dis counting, and especially the rate at which it occurs, however, is the source of much disagreement. Initially it is instructive to note the effect of a change in discount rate in the manage ment of non-renewable resources. The simple Hotelling rule, whereby the net price (sales price less extraction cost) increases from p(O) at the rate of interest, implies that a resource is exhausted 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 initial price, P*(0) and the price path will be steeper, ending with economic exhaustion at time T*  66  Mineral development models  Thus, resource depletion is shifted towards the present . This is the background for 13 discussions of which discount rate to apply to the evaluation of projects.  Many  environmentalists argues that it is wrong to apply the market rate, and that the social discount rate should be adjusted downwards.  Figure 3.5. The effect ofan increase in discount rate on the optimaiprice path There are good reasons for applying a lower discount rate to evaluate environmental projects with long-term impacts. Private discount rates may differ from social rates in rela tion to future generations because the consumption of these future generations is considered a public good by present generations (Fisher 1981). Similarly, the discount rate applied by private individuals can include elements that have little to do with the concept of discount rate itself (i.e. time preference and marginal productivity of capital), but are used to adjust for 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 are essentially unrelated with the discounting itself. Where discount rates are considered to be overly high, the problems are not solved by adjusting the discount rate used to evaluated projects 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). The discount rate issue frequently arises when questions of environmental risk, irreversible damage 13 The reason the price path begins at a lower P 0 is that the quantity of resource is unchanged (and foresight is still perfect) which means that only by starting at a lower price will the resource be used up (as it must be) when the choke price is reached.  67  Mineral development models  and the interests of future generations are being discussed. In each case the implications of discounting 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 risk conditions 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 their occurrence (Pearce and others 1990). The possibility of irreversible damage to the environment can also be dealt with through other channels than the discount rate. This is done by including in the cost-benefit studies elements which take the benefits and costs of both a project and the status quo into ac count (Porter 1982). Thus, instead of the present value of a development being the dis counted 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. Technological advance and exhaustion will render the physical product which is the result of development less valuable over time. At the same time preservation of environmental amenities implies a growth 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 in troducing 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, and z is the rate of increase for preservation benefits, the present value of development can be written as: -(r+q)t  Pv=-i+ Jo  Pe(1)tdt  -  Jo  =-1  r+q  68  r-z  Mineral development models  The first of the two integrals here represent the present value of all development benefits dis counted at the rate (r+q), where q represents the declining value of future development bene fits. The second integral represents the future benefits of preservation which are discounted at a 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 the social discount rate falls within a certain range. If it is low, preservation benefits will domi nate because these will accrue for a long time and will receive significant weight at low dis count rates. On the other hand, if the discount rate is too high, preservation benefits receive little weight. Despite problems in estimating preservation benefits, the approach outlined above can be used by first calculating the benefits of development, and then using this as a measure of what 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 decreasing weight as the discount rate increases. Similarly, a high discount rate will discourage invest ment, reducing the capital stock available to pass on to future generations (Pearce and others 1990). While using the market discount rate as the social discount rate in relation to future generations may be a problem, the central question is whether it is reasonable to discount at all when the interests of future generations are considered. Instead, the interests of future gen erations should be taken care of in a different way, by first making an effort to measure envi ronmental damage in monetary terms and then making a set of compensating investments which serve to maintain the services that flow from a stock of environmental capital (Pearce and others 1990). The requirement for sustainability (that the discounted sum of environmental impacts should be 0 or less) is difficult to maintain for individual projects. With a program covering several projects, however, the constraint that the damage summed and discounted across the  69  Mineral development models  program be equal to or less than 0 can be achieved.  This is done by using “off-setting” pro  jects that “improve” the environment to compensate for the damage done by the other projects in the program (Klaassen and Botterweg 1976). The approach outlined above has considerable intuitive appeal. There is, however, one aspect missing: How is a program consisting of a number of environment depleting projects as well as “off-setting” projects to be implemented? While investors will be happy to invest in projects that deplete environmental resources, if it is profitable, it is more difficult to see the 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 mineral revenues, is likely to be inefficient and may also result in distortions of incentives to minimize external effects of damaging activities.  Sustainable mineral policy The mineral policy adopted by a country should, based on the issues raised above, be sus tainable and intergenerationally equitable (albeit the former may be said to involve the latter). Sustainability involves both economic and environmental concerns, and the following rules summarize the basic elements in a sustainable policy: 1. 2.  3.  Waste flows to the environment should not exceed the carrying capacity of the envi ronment (Pearce and Turner 1990); The reduction in the stock of non-renewable resources should be compensated by an increase in social capital corresponding to the value of aggregate rents from non-re newable resources (Hartwick 1977); The efficiency of resource use is increasing with technological advance, leading to decreasing intensity of material consumption (Pearce and Turner 1990).  In practical terms, this indicates the importance of the task facing the resource manager. First he must determine what the carrying capacity of the environment is, taking into account both environmental impacts over which he has influence and those impacts he has no control over  70  Mineral development models  (e.g. transborder or global pollution). The determination of the carrying capacity of an area or region or country involves both environmental capacity and the economic value of this capacity in alternative uses. Thus, economic valuation of environmental assets and services becomes an essential part of resource management. Secondly the resource manager must make sure that an optimal amount of rents are saved in order to treat future generations fairly.  The most interesting approach to this  problem seems to be accumulation of [part of] the revenues appropriated by taxing resource rents in special trust funds. It must be noted, however, that in practice it will be very difficult to determine exactly what constitutes resource rent and then to save all of the rent for posterity. The practical experiences with trust funds will be taken up in chapter 9 with a detailed discussion based on the experiences with trust funds in Alaska and Alberta.  CONCLUDING REMARKS  -  MINERAL DEVELOPMENT AND SUSTAINABILITY  In the long run mineral based development and sustainable development are very closely re lated. The essential feature of sustainable development is that it takes the opportunities of fu ture generations into account. In this chapter the concept of sustainability was viewed in terms of the total available stock of reproducible capital, capital being very broadly defined to in clude anything from resource stocks, over various production implements to financial re sources. Although this was not the initial focus of the chapter, the discussion of sustainability serves to put the various types of mineral based development into perspective. The distinction between development occurring as a direct result of mining on the one hand, and that part of development 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 spin offs” have not materialized. At the same time the potential boom from inappropriate man agement of mineral rents is very great, as the frequent occurrence of “Dutch Disease” indicates.  71  Mineral development models  There are two possible remedies. One is to set up a form of trust charged with coi lecting and managing the benefits from mineral resources in perpetuity. The real reason for advocating such an approach is mistrust in politicians and their possible inability to account for the interests of future generations. The second remedy is to trust the political system and allow it to determine the best use of rents. However, if rents are to be spent it had rather be on investment than in consumption, with investment meaning use of the mineral revenues for those opportunities which have the highest expected benefits.  72  Economic management of mineral production  4  ECONOMIC MANAGEMENT OF MINERAL PRODUCTION  Production of mineral commodities will take place from mines of variable quality. At the margin, the revenues from selling the mineral will just cover the total cost of mining, includ ing a return on initial capital investment. The mine at the margin defines the lowest quality mine. At the same time, however, there will be many mines where the revenues will exceed the cost of mining, where costs include all payments to various factors of production, includ ing the minimum returns necessary to attract the investment in the first place. The difference between 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-sur face resources is vested in the state, and national governments frequently claim the right to ap propriate the rent. In other cases mineral rights are tied to the ownership of surface land, and the landowner then becomes a claimant. Usually, none of these have the knowledge or desire to 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 the risks they take on (exploration, market and political risks), when they decide to invest.  73  Economic management of mineral production  Regardless of the way mineral ownership is structured the state will usually want to appropriate some of the mineral rent. The first part of this chapter analyze the different methods of rent capture and their implications for economic efficiency and optimal resource extraction. While mineral rent is a central issue in mineral policy design, a number of other as pects of mineral resource policymaking have important economic dimensions. Regulation of exploration, production and mine closure all involve effects which directly or indirectly in fluence the size of mineral rents available for government appropriation. These additional aspects of mineral management are discussed in the latter part of the present chapter.  TAxATIoN AND CAPTURE OF MINERAL RENT  As developed by the classical economists, rent referred to the revenue a landowner could ob tain simply by owning land, including mines (Ricardo 1911). With respect to mines, howe ver, two different views existed. In the second chapter of “The Principles of Political Econ omy and Taxation”, Ricardo takes the view that the income of a mine consists of two ele ments. The “royalty” element is the compensation to the owner for the decline in value of the mine as a result of depletion. The “rent” element is due to different costs of production, aris ing from variations in ore body quality or location. The second view of rent is expressed in the third chapter of the “Principles”, which is devoted solely to “The Rent of Mines”. Ac cording 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 a finite value (being exhaustible). All of the net surplus of the mine can be regarded as rent be cause it is part of the property value of the mine, and the total amount of rent depends on the difference between the production cost at the mine in question, relative to the highest cost mine expected to be in production at any time. In other words, the rent can be measured in  74  Economic management of mineral production  present value terms without having to distinguish between “royalty” and rent (Garnaut and Ross 1983). In discussions of rent there are two other matters deserving attention, the distinction between windfall rent and transfer rent, and the existence of quasi-rents. Windfall profits are the result of unexpected price or cost changes, while transfer rents occur in the mineral industry when holders of mineral rights are able to exclude entrants (investors) from gaining a share of the expected rents. Had there been no barrier to entry, the investors would pursue the expected rents until the return was no different from other uses of (investment) resources. Transfer rents exist for the natural and efficient reason that investment in mineral exploration, which is in herently 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 argue about. The second type of rent is the so-called “quasi-rent” which can cause problems in taxa tion. Quasi-rent can be described as a payment providing an incentive for a particular alloca tion of resources which would not occur in the absence of the quasi-rent. This type of rent is more of a payment to a factor of production. As an example, Garnaut and Ross (1983) men tion the case of mineral exploration. If there is no adequate return on the accumulated body of exploration knowledge and technology in a mining firm in the long run, then investment in this activity will cease. This can happen if rents are taxed without regard to the existence of quasi rent. ‘When these limitations have been taken into account, the remaining “pure rent” can be taxed almost with impunity, since it will be non-distortionary and efficient (assuming that all other sectors are competitive). However, if a government seeks to capture all of the rent from mines, it runs the danger of removing the mine owner’s incentive to control costs. The higher the share of rent captured, the greater the risk of “gold plating” (Anderson 1991).  75  Economic management of mineral production  Before embarking on a more detailed examination of various rent capture schemes we will look at some of the results obtained in Leland’s (1978) analysis of the mineral (specifically oil and gas on the US outer continental shelf) leasing. The important premise to keep in mind is that special circumstances (the presence of transaction costs, information asymmetries and bankruptcy costs) conspire to remove mineral leasing problems from the perfect market paradigm, 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 are optimal from the government’s point of view. What is actually optimal is a little bit ambi guous since it depends on the risk aversion characteristics of both parties (i.e. government and , 4 firm). As an example, Leland cites the likely case where Alaskan Native corporations’ which control potential oil and gas bearing lands, will be relatively risk averse as a result of their comparatively limited asset positions. When tracts are leased under such conditions, le ases should provide for lower royalty rates or lower profit-sharing rates and higher cash pay ments at the initial sale of the lease. In its simplest form the model assumes that the actions of extracting firms are unrela ted to the payment schedule used for leasing, and that information is symmetrically distribu ted between government and lessor. Under these circumstances the shape of the payment sche dule relative to the value of a tract depends on the rate of increase in government’s and firm’s risk tolerance with increasing wealth. When the information symmetry assumption is relaxed, , with increasing asymmetry. 15 the payment schedule should become increasingly convex It is, however, the other assumption, that payment schedules do not influence the firm’s decisions, which is the more important. This is also well supported by empirical  14 The cases of Alaska Native Corporations is mentioned briefly in chapter 3, while another aspect is noted in chapter 9. 15 A convex payment schedule refers to payments which increase when the value of the mine increases (i.e. when profits increase). Put differently, increasing mine profits will be taxed at progressively higher rates under a convex payment schedule. The opposite applies to a concave schedule.  76  Economic management of mineral production observations (Leland 1978). ‘Whether government can observe the actions of the firm is debatable and may not be necessary, depending on the payment schedule. If this does not affect the firm’s choice of action at the margin it will be an optimal schedule (theorem V in Leland). 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 or concave 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 cate gories of mineral taxation instruments. Each has different implications for the tax-base, and several are wasteful from a social point of view. Closely related to the matter of taxation is the allocation of property rights to minerals. The way these are allocated can have significant implications for the tax base. The first section also considers some of the implications of how property rights to mineral land are allocated. Some of the property rights issues raised here will be taken up in the second part of this chapter.  Competitive bidding for leases The three main categories of mineral right allocation are cash bidding, work program bid ding (WPB), and “first-come-first-served”. The pure cash bid system awards the mineral right to the highest bidder, and the government receives the sum of the winning bid. Given the the government objective of maximizing community well-being and securing efficient extrac tion of resources, this requires that government captures the present value of the pure rent from its mineral resources. For this, the simplest and most efficient prescription is to sell a mine ral right at an auction (Garnaut and Ross 1983). Some plots will sell below their true value and others above, and across the industry, government would receive an optimal amount of rent and there would be no “windfall profits” of the kind discussed below (Bergstrom 1984).  77  Economic management of mineral production  The central argument in favour of cash bidding is that rents, being difficult to deter mine ex ante, should be valued by the market. The only way to do this and appropriate rent is to sell the right at auction (Nellor 1984). The structure of the bidding process will natu rally influence the outcome, but it can sometimes be arranged in such a way that collusion is very 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 on the outer continental shelf (Mead 1974), but these positive results have been put down to ‘ex ceptional circumstances” such as low political risk and extensive competition in the bidding process (Garnaut and Ross 1983). More recent research (Hendricks and Porter 1988; Mead and 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 being better informed than others. The arguments against a wider use of the cash bidding approach are several in addition to the need for competition. A cash bid transfers all the risk of a project to the private inves tor. When very little information about an area is available (as is commonly the case in me tals mining) this can result in bids not reflecting the value of the area, and prevent the govern ment from capturing an optimal amount of rent (Garnaut and Ross 1983). However, if cash bidding is combined with a tax conditional on a specified minimum rate of return on a pro ject, 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 for the government to share in the risk, mainly through a tax. Such an argument ignores the fact that risk sharing in the private sector is generally easy through the mechanism of portfolio di versification (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 are  78  Economic management of mineral production  less risk averse than private investors  -  and the market would presumably be better able than  government 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 in formation will attract other bidders, who take the first bid as an indication of the value of the area without knowing the underlying information. The problem is not large since the initial -  bidder, who has the information, will bid only to his estimated market value of the area. An uninformed bidder topping such a bid will lose and will, if rational, realize this and refrain from bidding. The assessment of competitive bidding is thus ambiguous. It seems unable to deal with unexpected changes in mineral price which generate additional rents. If the mineral right is not somehow restricted, this rent will be outside the government’s reach, unless it decides to change “the rules of the game” ex-post. Adding a time limit to the mineral right will not be . The net result of a time limit is premature exploration and development of re 17 an option sources (Fane and Smith 1986). Similarly, the empirical studies noted above indicate that full 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 or work commitment bidding, more serious problems appear. If we disregard taxation for the purpose of the present discussion, a work program bid will always be topped by a bid offe ring an even larger work program, as long as the profit from doing so exceeds the return on the best alternative investment. In other words, work program bids will become increasingly ex tensive until  ll rents have been bid away (Fane and Smith 1986). This problem is compoun  must be emphasized that the risk discussed here relate to individual projects and not the risk faced by government, of fluctuations in mineral tax revenues. 16 It  17 To see this, consider an area or block, and assume that it will be released for auction as soon as someone shows an interest. These will bid and win the area and will then have a limited time to explore it. At the end of the period, 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.  79  Economic management of mineral production  ded 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 resul ting pattern of exploration becomes inefficient (Nellor 1984).  Second, the rents dissipated  by the work program bidding accrue to those who provide exploration services, with unfortu nate 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 explora tion” 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 in vestor believes that an area should be explored, he will explore it when he finds that the time is right and not before. Indeed, as pointed out by Smith and Ulph (1982), the common emp hasis on “forced” investment in mineral exploration is closely related to a preoccupation with short-term effects on employment, level of [regional] economic activity and government re venues (Smith and Ulph 1982). Work program bidding is extensively used, for example in the North Sea, although cash bidding has had some success (Dam 1976). In metallic minerals, property rights are usually allocated by open access claimstaking or through administrative discretion, combined with minimum work requirements. Bergstrom (1984) argues that under such a system, an area will either be explored too much or too little, but seldom optimally within the limited term of the mineral right. Too much refers to areas subject to rights, whereas too little refers to other areas which are starved of investment because the first areas have to be explored so much. This is because mineral areas may have cost structures or probabilities of discovery which indicate a different path of exploration investment which differs from requirements. Thus, the area will be awarded to the applicant who accepts these terms, giving the same effects as described above for work program bidding.  80  Economic management of mineral production  It can be argued that a cash bonus bid system is based too heavily on the assumption that 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 pay ment in the form of a profit share bid is preferable. The cash component is an essential ingre dient since it will deter bidders from offering very high profit shares. The advantage of the profit sharing bid is that it will transfer some of the risk to the government, a feature of profit sharing which is discussed further below.  Royalties and production taxes A royalty is a rent tax based on the amount or value of the minerals produced. Sometimes known as a severance tax (for the minerals “severed” from the mine), it is imposed on mineral output (ore mined or concentrate shipped), on price or on the gross value of production. Being most responsive to price changes, the latter is the most common. This type of ad valorem ta xes have two major advantages from a government point of view: they are very easy to admi nister, 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) ore to be left in the ground. The royalty increases the unit cost of production, and in turn forces the miner to raise his cut-off grade in order to maintain profits (assuming that the mineral is sold 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 from the two major advantages noted above, there may be several other explanations. The first is that if the royalty is applied at a low rate (usually in conjunction with other taxes) it will have only limited impact on production decisions (Kumar 1991), a result partly supported by si mulation studies (Bradley and others 1981; Walrond and Kumar 1986). An additional ad vantage of using a royalty in the case of oil is that a slower rate of extraction may increase to  81  Economic management of mineral production  tal recovery by maintaining pressure in the reservoir for a longer time. Whether this  is actu  ally an advantage depends on the discount rate used by the investor (Garnaut and Ross 1983).  Corporate income taxes Compared to both cash bidding and royalties, a corporate income tax is more complicated to administer, since it is based on income after deduction of production cost and other allo wable costs. As such it does not distort profits because the mining firm will seek to maxi mize both pre-tax and after-tax profit (Neher 1990). Instead the treatment of costs causes problems. Common deductions in addition to operating costs and royalties are taxes paid to other jurisdictions and interest payments. More problematic is the treatment of depreciation, research, training and environmental expenses. Likewise, the ability to carry losses forward and 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, the latter including current consumption of capital items. If actual depreciation rules do not re flect the true cost of capital, serious distortions are introduced (Nellor 1984). This problem can be compounded if depreciation rules are modified frequently and by inflation. Provisions allowing mining firms to carry losses forward depend on two things, the accumulation rate and the definition of the losses allowed as deductions. If all losses are al lowed for the calculation of the tax base (i.e. including exploration costs), then they should be carried at the interest rate on government bonds (Fane and Smith 1986). More frequently los ses are carried forward without an interest rate adjustment. The allowed losses, and the rate they can be carried forward at, determine whether the tax is an income tax or what is known as a “Resource Rent Tax” (RRT), as considered in the next subsection.  Resource rent tax The concept of a tax designed to capture the pure economic rent of mineral resources without distorting investment and operating decisions was first advanced in 1975 in response to a  82  Economic management of mineral production  growing need for developing countries to obtain more of the benefits associated with exploi tation 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 Rent Tax” (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 is negative, the government pays a subsidy corresponding to the tax proportion of the negative cash flow (Garnaut and Ross 1979). This type of tax, a modification of the so-called “Brown tax” (Brown 1948), in effect makes the government a partner in the project, with a share cor responding to the tax rate (Fane and Smith 1986). The advantage of a PRT is that it is fully neutral, it taxes economic rent only, and it is easy to administer. On the other hand, if it is applied 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 the project comes risk to the government, in form of possible financial ioss. Government may expose itself to the risk of substantial losses on projects which never result in production and may be unable to recover these from successful projects. Given the political problems associ ated with such a scheme, it might be just as well for the government to take an equity share in projects. These problems may also tend to make such a tax less than credible (Garnaut and Ross 1983). The variety of rent tax which comes closest to the PRT, without involving the go vernment directly, is the Resource Rent Tax. The RRT can briefly be described as a profit tax collected when a threshold internal rate of return on total cash flow has been realized. 8 is that a range of receipts and payments are defined as al The main principle of the RRT’ lowable for calculation of the RRT. These are termed “net assessable receipts” and corres ponds to the tax base. If, in the first year of a project, a net deficit occurs, this is carried for  The following description is based on Garnaut and Ross (1975). 18  83  Economic management of mineral production  ward 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 then carried forward to the third year. When net results are positive they are deducted from the net assessable receipts account, and the remainder is carried forward at the threshold rate of interest. This process continues until the account becomes positive. At that point the RRT tax rate is paid on the positive amount in the account. In subsequent periods, as long as net re sults are positive, the account is set equal to 0 and RRT is paid on the net result. If there is a negative result, the procedure for carrying forward is activated until the account is again posi tive. In calculating net assessable receipts all operational payments to and from the project are allowed, as are other taxes and income from sale of equipment. On the other hand, finan cial payments such as revenues from loans and equity offerings, interest payments, dividends and loan repayments are not allowed for net assessable receipts. In its simplest form, the RRT with one threshold rate and one tax rate, is similar to a corporate income tax with the following special features: 1. 2. 3.  No deduction for interest payments; Immediate 100 % depreciation of all investment expenditures; Unlimited carry-forward of losses at a specified interest rate.  Several tax rates and corresponding accumulation rates can be specified as a means of captur ing extreme windfall profits at a very high marginal tax rate. The RRT scheme would requ ire additional regulation to prevent investment in companies not subject to the tax, in order to prevent avoidance. Similarly, prices paid to the project would have to be monitored to pre vent tax avoidance through transfer pricing. Finally, clear definition of where the resource extraction process ends and manufacturing begins is necessary, as is a requirement that the def inition must exclude non-mining activities in order to prevent economic distortions (Garnaut and Ross 1983).  84  Economic management of mineral production  The treatment of exploration in the original RRT concept implies that all expenses in a country, by a given company, prior to the discovery of a profitable mine should be allowa ble expenditures when the tax is calculated for that mine. For subsequent exploration expen , however, a new mine would be required before they could be used as deductions 19 ses (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 pro blem, especially when a country has few mines, is the long period before any revenue accrues to government. When many mines are in operation, revenues should be relatively stable. In flation, exchange rate variations and measures to prevent double taxation are all problems which can be solved without unduly affecting the neutrality of the RRT approach (Garnaut and Ross 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 threshold rate(s) and the distortionary effect some versions of the RRT may have on exploration in vestment. The problems are basically related to the amount of risk involved in a project. Pro jects involving high risk (i.e. grass-roots exploration) will have a higher supply price of invest ment 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 same threshold rare of return ?  This problem can be seen as one of defining what exploration ex  penditures are allowable for a given project (Bradley and Watkins 1987), otherwise a fixed accumulation rate will introduce bias against riskier projects. According to Bradley and Watkins, 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. 85  Economic management of mineral production  The type of problems described here can be illustrated by looking at a simple model of rev enue 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. The probability of discovery is p. and the probability of a successful development is w (this de pends on market factors such as commodity price and costs). Here we disregard w since it is considered 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)  T V=-(E-pD)+pSe  where r is the opportunity cost of capital with no risk adjustment. The first term on the right hand side is total discovery and development cost, and the second term is the discounted va iue of income at time T. If a PRT was levied at a rate s, the expected value of the project would be: (2)  T T = _(1_s)(E+pD)+(1_s)pSer V  However, 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 on exploration as well as a subsidy on investment when the accumulation rate r* is overly gener ous. To see this, observe the difference between V1T and VT: (4)  86  Economic management of mineral production  In this equation, the second term on the right-hand side is a tax on investment which occurs be cause the RRT, as formulated here (eq. 3), only allows exploration cost as a deduction when there is a successful discovery (i.e., in the third term in eq. 3, only the expected value of ex ploration and development, p(E+D), is deductible). At the same time, the final term on the right hand side of equation 4 means that projects with low risk are favoured, whereas there is a bias against risky projects. The implication of the tax on exploration which follows from the denial of full loss offsets is important (Fane and Smith 1986). It will tend to produce inefficiently low in vestment in exploration generally, and will discourage marginal projects altogether. Furt hermore, the bias against risky projects implied by the third term on the right of eq. 4 is compounded when a generous accumulation rate is allowed, due to the incentive for mine ow ners to delay production in order to get maximum credit for accumulating losses. The gen eral effect of denying full loss offset and using an accumulation rate above the base rate unad justed 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 ex ploration credits from unsuccessful projects should be tradable if they cannot be used by the companies 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 would remove the distortionary effect of a rent tax on high-risk exploration investment. The condi tions are that the market for the credits must be competitive, that total profits subject to the RRT must exceed total losses in the market, and that exploration credits cannot be deducted elsewhere for calculation of the rent tax (Garnaut and Ross 1983).  The threshold rate at which accumulated losses are carried forward can either be set individu ally for projects (along with the tax rate), or be the same for all projects (and then possibly differentiated according to the riskiness of the type of expenditure). However, since govern  87  Economic management of mineral production  ments will be unable to obtain the information needed to set individual threshold rates, and because tax conditions fixed in advance will, ceteris paribus, tend to lower the discount rate applied by investors, Garnaut and Ross (1983) believe that both the threshold rate and the tax rate 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 to the interest rate on government bonds. The argument is that if the company is certain that it will be allowed to use the RRT exploration credit, the risk of the project as a whole is not af fected because there is no risk involved in the valuation of the exploration credits.  Risk and the choice of rent tax instruments  The risk faced by an investor in mineral exploration and subsequent exploitation comes from both technical and institutional sources. Technical risks include existence of deposits, possi bility of extracting them, and market conditions. Institutional risks refer to the environment where 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 impact on 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 best way of responding to investors and governments various responses to risk (Emerson and Gar naut 1984), with emphasis on conditional payments when the government is less averse to risk than the investor. Heavy reliance on conditional payments is also necessary when a large ele ment of sovereign risk is present. This risk basically arises when there is an expectation that the tax system will be modified, usually as a response to windfall profits accruing to inves tors. 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 mini  88  Economic management of mineral production  mum acceptable rate of return accordingly. Then, if the tax system is flQ.t modified, investors will obtain an unexpected profit because he preferred to “fear the worst”. This type of pro blem 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 discussion above 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 out above, mainly in relation to risk and the treatment of exploration cost. Second is the need to integrate what is theoretically attractive with the needs and desires of the government. The latter problem will often turn on the timing of resource revenues, and the practical solution might easily involve a combination of a small production tax and a RRT framework (Kumar 1991). ‘When a mineral rent tax is considered alone, the two better approaches which appear from the above discussion are cash bidding and a RRT with extensive loss offset, or possibly a combination of the two. The choice of instrument, however, cannot be made without refer ence to the tax system of which it will be part and the nature of the mineral resource in ques tion. Similarly, there can be a range of other issues that dictate the choice of rent tax instru ment. Some of these are considered below.  An application of the Resource Rent Tax Mineral taxes similar to the types described above have been reported from a number of coun tries (Kumar 1991), where they are frequently combined with other forms of taxation, primar ily standard corporate taxes. Here we will examine the system used in Papua New Guinea . The description is based on the 20 (PNG), the country which pioneered the RRT approach 1990 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 major developments the government has taken a minority share in the operating company (Pintz 1984; Wilson 1984)  89  Economic management of mineral production  The PNG mining tax system consists of a standard corporate tax, currently at 35% of taxable income. This income is calculated in the ordinary way, with depreciation calculated in a rather complicated way. In addition to this, an additional profits tax is applied accord ing 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,  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;  Y  where  =  Ex= Exploration in the current year; P T I  = = =  Equipment bought in the current year; Corporate taxes paid in the current year; increases in inventory of input materials.  The expenditures at the beginning of the project are carried forward at the interest rate r*, un til 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%. When the 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 the Porgera gold mine (Mining Journal Newspaper, March 19th, 1993,  90  O1). 2 p.  Economic management of mineral production  In relation to the discussion above, the PNG tax system for mines departs from the simple models in a number of ways. The most important is that it combines normal corporate taxa tion with a variant of the RRT. This approach may be preferable in relation to certain inter national standards and tax treaties. It is possible, however, that in some cases mineral in vestment is derived exclusively from overseas sources. If that is the case there is no need to place 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 enterprises State mineral firms are a special approach to capturing mineral rents. In view of the later discussion of state companies in Greenlandic setting a brief discussion of the topic is given here. 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 private firms. These are state ownership or control over the enterprise, the private goods nature of the firm’s output, and the general business orientation of the enterprise. The reasons for establis hing a state enterprise may be both economic and political. The first economic reason invol ves lack of competition on two levels: When the mining firm has market power in domestic markets (i.e. for local supplies and local skilled labour), and when the mining firm has mar ket power in mineral markets, which may be detrimental to the developing country hosting the mine. The second economic reason is that a state mineral enterprise can be used for rent capture when the general fiscal system is unsuited for this purpose. The political reasons range from the purely ideological concept that state ownership is always the best solution to more pragmatic reasons related to regional development and na tional security. In relation to developing countries, the end of colonialism and the need to break away from colonial emancipation has constituted a reason in itself.  91  Economic management of mineral production  The curious conclusion of Radetzki’s investigation is that it is not cleat that state mineral enterprises have performed significantly worse [or better] than private companies, nor do they seem to have had significant impact on mineral markets. The most clear conclusion of the study is that by 1983-84 the growth of state mineral firms has slowed almost to insignifi cance, and that the confrontation between multinational mining firms and developing country governments has been much reduced.  ECONOMIC MANAGEMENT PROBLEMS  Apart from the central issue of mineral rents, two other areas where economic considerations are important for management decisions must be analyzed. These are mineral exploration in vestment (which is a prerequisite for any later revenues), and environmental regulation, includ ing the commonly used (but difficult to define) concept of “sustainable development”. Mineral exploration investment occurs in lands where investors believe a high probabi lity of discovery exists and where other risks (of failure) are low. However, as was the case in the above discussion of cash bidding for leases, ideal conditions may not prevail. The first section below will attempt to clarify the problem and the possible implications for mineral land management. Environmental management in the mineral industries has traditionally relied on command and control styles of regulation. Only in recent years has the industry seen the use of market oriented regulation. The primary tool has been “reclamation bonds” which are used to ensure that sites are returned to an acceptable standard at the end of mining. The sec ond section below takes a closer look at this practice, its impact, and on other possibilities of market oriented instruments.  92  Economic management of mineral production  Mineral exploration Exploration investment by mining firms is motivated by two considerations. One is a desire to replace reserves as mining depletes previously discovered orebodies in order for the company to remain in mining (such that replacements are as good or better than before). The other is a search for deposits which cost less to extract (and earn higher mineral rents). In some 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 and Heal 1979; Gilbert 1979). Investment in exploration is also important to any given jurisdiction since it increases the probability of discovery, within the jurisdiction, of orebodies which may eventually gen erate some of the benefits discussed in the previous chapter. The occurrence of exploration in vestment 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 they  can fail in ensuring optimal allocation of such investment. First we must note that the infor mation produced through exploration can have both public-goods and speculative value (Gilbert 1981). The public good value can be separated into “local” information externali ties, and those which are related to the size of total stock of a resource. Here we will concen trate on the former, and on the speculative value of exploration information, since these have clear implications for the way mineral exploration is regulated. The term “local” refers to situations where the returns from exploration by one firm confers external benefits on other firms. Thus “local” is used in a non-spatial sense to cover a wide variety of situations.  For example, the discovery that certain varieties of garnet  minerals (pyrope) in kimberlite rocks indicates the presence of diamond-bearing kimberlite rocks may be made by one firm in South Africa, but may have extensive external effects in the Northwest Territories of Canada.  93  Economic management of mineral production  The consequences of the externality depends on the degree of public availability of the information. If the public (other firms) have no access to the information, firms will explore separately 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 py rope garnet indicator, mineral firms would undertake research separately to develop the knowledge. 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 be distorted. Exploration may be delayed as firms wait for useful and free information to be come available. At the same time the public availability of information may lead firms to explore 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 re sult of regulation) may be explored too early and too intensively.  The other cause of market failure in exploration comes from the speculative value of informa tion. This problem has been examined primarily in relation to competitive bidding for le ases (Gaskins and Teisberg 1976; Gilbert 1981), and has stimulated much research on auc tions and their design (Hendricks and Porter 1988; McAfee and McMillan 1987). In rela tion to lease sales by auction, Gilbert (1981) notes two possible effects. The first concerns location (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 take place as early as possible, Gilbert finds that the possibility of obtaining monopoly rents leads to more information in relatively unexplored areas (i.e. having the auction early, other firms are less able to value the land and put in a winning bid). Similarly, Gilbert finds that a com petitive bidding market may provide incentives for too early exploration.  94  Economic management of mineral production  In 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 at auction are probably not important, whereas the distortions related to information externali ties remain unchanged. In fact, their presence seems clearly indicated by the regular occur rence of “staking rushes” in the vicinity of new discoveries. The distortions resulting from the public-goods and speculative nature of exploration information has a number of implications for mineral leasing and title disposition. The re search on auctions mentioned above has led to the design of auctions which to some extent can discourage investment in exploration for speculative purposes (McAfee and McMillan 1987). Some of the distortions apply specifically to auctions or to claim-staking, while others apply to both. First is the diligence requirements occurring in both forms of disposition. These specify that the holder must undertake production or exploration within a specified time after the lease was issued or the claim recorded. However, in cases where the lease or mineral right was issued prior to the time when the firm holding it considered exploration or production optimal, such requirements leads to a combination of over- or under investment in the sense that areas subject to leases or rights are explored too much, whereas other areas are starved of investment (Bergstrom 1984; Gilbert 1981). The incentive to wait until a discovery is made and then rush in has been observed in relation to oil reservoirs, where, after the initial discovery, firms rush in and try to pump as much as possible from a reservoir which is really common to many firms. The result is a si tuation where even very large common-pool losses were an insufficient incentive for the firms to reach a unitization agreement (Wiggins and Liebcap 1985). The problem can be addressed by 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 value captured by the seller, and to reduce the incentives for private accumulation of information  95  Economic management of mineral production  for speculative purposes. Whether this is a useful approach depends on firms ability to cir cumvent disclosure (e.g. by randomizing the data), and on the lower value of bids resulting from 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 deci sions made by a government-run structure are not necessarily more optimal than those made by and in-optimal market process. Furthermore, exploration by government may not pursue as 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 al ternative. However, governments in all countries engage in research which is closely related to mineral exploration. There is little information available on why governments find the main tenance of extensive geological surveys necessary, but we can speculate that markets are unable to allocate investment to the kind of basic research carried out by the surveys. One possible explanation may be that investment in the early phases of exploration is provided by private investors, because the information, and the acquisition of title to the tract being explored, rep resents prohibitively large sunk cost. It is important to keep in mind, though, that support for such purposes can expand into activities that are clearly subsidization. In the short run, exploration promotion policies may result in new discoveries but the main 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 sub sidies of the past, and the resulting tax-increases can be distortionary and can so undermine in vestor confidence that investment in exploration and development is reduced sharply. For the regulating government the problems associated with diligence requirements poses the question, what are the alternatives ? From the discussion in the previous sections it is clear that cash auctions are a strong possibility. However, while this solution is frequently  96  Economic management of mineral production  used in the petroleum industry, it is very rare in mining . Therefore it is also unfamiliar to 21 most mining firms. An alternative solution would be to lease tracts to mining exploration firms from the earliest stages of exploration. The positive cost of holding the tract would then be an incen tive for the firm to hand back areas not deemed interesting to the firm. However, this leaves unresolved the problem of determining the price of the lease. Finally, the most sensible solution appears to involve the old-fashioned system with diligence requirements, but in such a way that distortions are minimized. This may be possi ble by keeping the amount of required work low, by allowing concentration (“grouping”) of work 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 re ducing distortions could be the use of tradable exploration credits.  Environmental management The economic management of mineral production can, at least conceptually, be said to in clude that part of environmental management which has economic implications for the mining enterprise. Several issues are considered here. First is the indirect effects of environmental regulations as a whole on investment decisions. Second is the question of how actual environ mental regulations are structured (i.e. whether they use direct regulation or economic incenti ves). Third are the possibilities of using market based incentives to achieve more efficient  environmental protection in the mining industry.  Strict environmental policies will generally increase operating cost at a mine. How mining companies deal with such rising costs is not well known, but there are three possible paths they  21 Advertisements announcing such auctions for hard rock minerals appear occasionally in the Northern Miner newspaper. One jurisdiction which uses this approach is the State of Michigan, in the United States. These auctions must be distinguished from those where the assets of bankrupt individuals or companies are sold.  97  Economic management of mineral production  can follow in order to maintain their level of profits. The first is simply to raise the price of their product to compensate for the higher costs. This is perhaps the best solution, since the end-users will be forced to pay the full cost of their consumption. It is, however, not possible for a firm to do this in a competitive industry unless all firms are subject to the same higher costs. The second way is to modify the production, such that each unit of mineral output has value that is higher by an amount that equals the added environmental cost. To achieve this, it is necessary to increase the cut-off grade of the ore mined. In exactly the same way as for the production royalty, valuable mineralized material is left in the ground. The third possible reaction to the imposition of environmental costs is to engage in research and development activities that leads to a reduction in the environmental costs. To do so, however, is not a unique response for the mining industry, but depends on the innovative qualities of the individual 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 phase of 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 merely respond 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 of new 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 may explain the concentration of exploration investment in just three countries (Australia, Canada and the United States) in the years since 1970 (Johnson 1990; Eggert 1992). This supports the inference drawn from the concentration of exploration investment (Warhurst 1991; Warhurst 1992), that environmental regulation in the target country is not a serious concern compared to overall political stability.  In economic terms it is common to distinguish between direct regulation, whereby environ mental standards are set by government, and various forms of market-based incentive systems  98  Economic management of mineral production  for environmental control. While economists often advocate the use of economic management instruments in environmental policy, it is important to keep in mind that such an approach has its limitations. Emergencies and other situations where swift regulatory action is necessary to protect 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 su perior long-term solutions in terms of economic efficiency. Incentives usually fall in one of two categories. The first is the “charges and standards” type, which basically involve a fee or tax  on emissions set (and possibly adjusted) so that a certain environmental standard is achie  ved. In this way the attainment of the standard can be achieved at something approaching mi nimum cost to society. The second category of incentives uses the price mechanism in a dif ferent way, by assigning rights to pollute, either to current polluters or by auction, and subse quently by allowing the permits to be traded. The latter approach is in some ways more fle xible 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 to deal with what can be termed a “base load” pollution and direct regulation for use in the event of “peaks” in emissions.  The need for a variety of economic and regulatory tools is closely related to the diverse na ture of environmental impacts. For mineral production these range from the disturbance cau sed by exploration teams over the enormous open pits and waste rock heaps of lowgrade/high-tonnage mines to the sulfur emissions of base metal smelting processes. In relation to well-defined and measurable emissions, for example from smoke stacks or within drainage systems, economic incentives are potentially useful instruments. More dif ficult, however, is the application of economic incentives to some of the other environmental effects of exploration and mining.  A typical example of the difficulties is tailings and  waste rock disposal.  99  Economic management of mineral production  Mining involves the excavation and processing of mineralized material. In the pro cess, vast quantities of non-mineralized material is removed to gain access to the orebody and this material must be deposited somewhere. Similarly, only a fraction of the ore has any va lue but all the ore is ground to a fine powder in order to liberate the valuable minerals. The residue 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 sometimes results in both technical (slope stability) and environmental (acid run-off and landscape da mage) problems. Tailings, being suspended in water, are usually deposited in an impound ment area where the water can drain away, again at the risk of contaminating runoff with acid and heavy metals. When problems occur in these areas the cause may be poor engineering, in sufficient investment or inappropriate regulation, or a combination of these. Using economic incentives to deal with this type of problems has not yet been investi gated. An effluent fee can be imposed, which would provide an incentive to treat effluents prior to their release. The other impacts, in this example most notably the generation of waste dumps is inevitable unless significantly different mining methods are adopted. Here a shift from open pits to underground mining may hold some promise. However, only where in-situ  mining is possible can real headway be made in dealing with the areal impact of mi  nes. An example of such methods is direct extraction of coalbed methane with surface disturbance being limited to drill sites. One often used approach to environmental management of mines is to require the mine developer to post a bond at the beginning of mining, that can provide for the expense of reha bilitating a mining site at the end of mining in the event of the mining company being unable to finance such measures (Warhurst 1992). This practice is standard procedure in Canada and a number of other countries. There are, however, a number of problems associated with using such an approach. First is the determination of the amount of the bond. For a major project with an extended life it will be difficult to predict the requirements for rehabilitation, espe cially when changing environmental standards are taken into account. Furthermore, the con-  100  Economic management of mineral production  cept of using a bond needs careful analysis if it is to provide the desired incentives for the mi ning company to minimize environmental impacts over the life of a mine. In principle this would require that the mining company is allowed to keep any part of the bond not used for site rehabilitation.  CONCLUDING REMARKS  -  MINERAL TAXATION AND ECONOMIC REGULATION  The issue of taxation of mineral rents is paramount in this chapter, with exploration and envi ronmental issues being pushed to the end. Nevertheless, taxation and efficient economic regu lation 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 pie and on the other hand maximizing the economic benefits occurring to a given group. For ex ample, if the government was only concerned with short term benefits in the form of large re venues, then it could apply high tax-rates, obtain the large revenues but then watch as mines close and investment moves elsewhere. Thus, the challenge for the government as a tax author ity is to maximize total revenues subject to the constraint that the total tax-base is affected by the severity of taxation. The choice of tax instruments also involves the risk to the State of variable tax reve nues. This involves a tradeoff between smaller, but stable revenues from an inflexible tax sys tem, and larger but unstable revenues from a flexible system. The RRT involves such flexibi lity but allows the government to capture more rent in the long run. Furthermore, the fluctua tions 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 dissipa ted, as a result of inefficient regulations of exploration procedures and environmental protec tion. For exploration the possibilities of rent dissipation are the greatest in the case of work commitment bidding. However, neither this, nor the misallocation of exploration expendi ture as a result of work requirements has ever been analyzed.  101  Economic management of mineral production  The possibilities for rent dissipation also exist in relation to environmental regula tion. In this case, however, one must be careful to distinguish between mining firms having to pay some (or all) of the external costs they impose on their surroundings, and doing it in an inefficient way. Getting the most effective environmental protection at the lowest price has always been a central element in environmental economic analysis.  In real life it is not always possible to follow recommendations based solely on economic ef ficiency 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 royalty in return for immediate revenues. For exploration, traditions in the industry pay an important role. It would thus be distinctly possible to frighten investors in exploration for metallic mi nerals away by adopting a pure cash bidding approach to leasing of mineral land. A similar problem of implementation occurs in relation to use of economic regulation tools for mine operations. Here the problem is to determine the efficient streams which can be measured and taxed. In many cases these problems lead back to existing regulatory tools. This does not mean that the discussion has been futile. Rather, realization of the potential problems associa ted with these forms of regulation, may help designing them to be less inefficient than would otherwise be the case.  102  Technical management of mineral activities  5  TECHNICAL MANAGEMENT OF MINERAL ACTIVITIES  The topics covered in the previous two chapters concerned a range of economic issues related to non-renewable resource extraction, ending with some remarks on the relationship between pro duction economics, environmental protection, and the possibility of using economic incentives to reach environmental goals. Having considerable knowledge of the economic effects of mineral development and of the economic incentive effects of taxes and other regulations does not, however, allow considera tion of a complete mineral policy. The tax and other regulations must be comprehensible and consistent, and take into account situations where economic incentives are unable to secure inte rests other than those of a purely profit maximizing mining firm. This chapter describes the regulations necessary to manage a mineral industry, with em phasis on the technical, practical and “non-market” (environmental) issues in the mining pro cess. The description is divided in sections along a time line, beginning with exploration and covering development, production and abandonment. Despite the emphasis on technical regu lation, the question of economic implications of such regulations will be raised at various points.  103  Technical management of mineral activities  The regulations dealt with here are not concerned with regulation of the derived effects of mine ral development. These are discussed further in chapter 9. One of the principal themes discussed below is the question of when environmental val ues should be protected. This issue is never easy to settle. In principle it can be reduced to one dominated by economic costs and benefits. In that case the stringency of environmental stan dards depends on the time-horizon adopted in analyzing costs and benefits, and on the period and rate at which future benefits are discounted. In relation to the different environmental im pacts of mineral exploration described below, their evaluation also depends on the time it takes nature to reestablish disturbance caused by exploration activity. For the subsequent stages of the mining process, in which extensive disturbance can occur (at least for open pits) it is clear that some permanent changes in the environmental status quo are unavoidable. In these cases the economic valuation of costs and benefits becomes even more important. From a practical point of view, however, it is clear that while balancing environmental costs and development benefits in each case is highly preferable, such a task may be difficult to implement in practice (see Poulin and Sinding (1993) for a discussion). As a result the second best alternative may be to use a balanced set of environmental regulations. Before embarking on the substance of the present chapter, a brief digression concerning the underlying reasons for in troducing regulations at all must be made.  REGULATION, PROPERTY RIGHTS AND EXTERNALITIES  The regulations described in the following sections serve two distinct purposes. One is to allo cate property rights to minerals, while the other is to deal with environmental externalities ari sing as a result of mineral activities. The existence of property rights in general can be viewed as a necessary institution for markets to function. A model of an economy without property rights has been developed (Bush and Mayer 1974) which shows that an equilibrium is possible. The model also shows, however, 104  Technical management of mineral activities  that welfare can be improved by establishing property rights and allocating resources for their enforcement. Thus each individual is better of when he allows his behaviour to be constrained in 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 special nature 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 observation of Ostrom (1990), that neither the state nor the market is uniformly able to devise a framework where long-term use of natural resource systems can be sustained. The market approach involves assigning property rights such that the so-called “tragedy of 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 property rights are allocated, regardless of the owner. The problem with the “market” approach is that in a number of situations (high transaction costs or many involved parties) it is not possible to ascertain exactly what the property right applies to. This means that, as the unit value of the resource declines, so does the effort expended on defining property rights. in practical terms this means that for resources of iow unit value (water for example), property rights are less precisely defined 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 may be possible using this approach, it depends on the information available to the regulator, his abi lity to monitor events, the sanctions which can be imposed on transgressors, and the cost of ope rating such a system (Ostrom 1990). The choice is not, however, necessarily between these two extremes. Ostrom (1990) argues that common pooi problems may be solved by a mixture of market and regulatory mechanisms, where the latter can be either private or public arbitration or enforcement mechanisms. For mineral deposits, and particularly for metallic minerals, this approach is similar to the one used by Libecap (1989) to explain the variety of outcomes in different types of resources. 105  Technical management of mineral activities  For minerals, Libecap argues that the clarity with which miners observed common pooi losses during 1849 California gold rush (where open access and anarchy was the norm) resulted in lo cal contracting to allocate property rights. The features which characterized the smooth process leading to these private mineral rights included large expected aggregate gains from the de velopment of a mining industry, broad access to mineral lands, positive individual shares in ag gregate gains from institutional change, few information asymmetries in valuing and assigning individual rights and lack of competing (non-mining) vested interests. To summarize, the need for defined property rights arises from the needs of the market and the common pooi nature of natural resources. A set of rules can evolve under favourable conditions, as described by Libecap (1989). The problems arise when competing interests are important. These can be diverse but can be considered together as they all arise from the exter nal effects of mineral activities. This brings us to the other reason for applying rules and regulations to mining. This ac tivity has external effects which must somehow be dealt with. The government regulation or market operation discussion applies here, but only leads to one or more of the standard prescriptions of environmental economics. However, the areas where tools other than traditio nal regulation can be applied in relation mining are very few and very little research has been conducted on how to use economic tools to deal with mining environmental problems.  EXPLORATION  The 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 fundamentals such as the commodity(-ies) to look for, geological environment in which to do so, and selection of regions where such environments exist. Some of these fundamentals may be given as part of corporate policy. In addition, the selection of a target area depends on geology, available infras  106  Technical management of mineral activities  tructure, and a component which is a function of the economic, regulatory and political condi tions in the target area.  For a government wishing to attract investment, infrastructure as well as economic, regu latory, and political conditions are within its control to varying degrees, although improving in frastructure is a much more long term undertaking than improving the regulatory package offe red to investors. In the present section we examine the technical elements in the package which have direct bearing on the exploration phase.  Land use planning and land access Investment in exploration is in many ways an irreversible or sunk cost. The information acqui red is closely related to the tract in which it was collected. The close relationship between in formation and location means that tenure, and the possibility of being able to extract any disco vered minerals, is important  .  At the same time the problem facing mining firms now, and in  the future, is that mining is an activity which must compete with alternative land uses. This contrasts with earlier times, when mining was usually considered the highest and best use of the land and permission to mine was not an issue. -  In many industrialized mining countries recent years have witnessed the final demise of the preferential status of mining as the most valuable land use. One of the most compelling ex amples of this has been the creation of a “World Heritage site” in the Tatshenshini-Alsek River area 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 took from the original staking of the Windy Craggy claims to the emergence of the environmental  107  Technical management of mineral activities  debate which led to the creation of the World Heritage Site . Thus it was only when the threat 22 of mining became imminent that action was taken.  The insecurity surrounding many projects as a result of such events highlight the reduced value of traditional mineral rights. For the small and new mining country wishing to attract in vestment, it is important to send a signal to investors that mineral rights are very secure once as signed, 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 diffi cult to implement. Mineral rights should be issued only in areas where the government is fully committed to protecting these rights. In areas with significant other values, which cannot be protected without total exclusion of mineral activities, access should be denied with such clarity that there is no incentive to speculate in a reversal of policy. The problems of implementation are admittedly severe. First is the fact that government commitment may last only until the next election. The uncertainty about commitment can be reduced, if there is broad political agreement about such a policy. The second problem is one of information availability. For a land use policy of this kind to be credible, it is necessary that the government (and the public as well) is well informed about the environmental values which ne cessitate a ban on mineral activity. Thus, an approach of this kind may only be possible in countries or regions where the information base on these matters is already well established . 23 The various mineral resource assessment techniques, especially those relying on multivariate  22  The claims were staked in 1958, but the exploration which led to the mining proposal and thus to the demands for denial of permission to develop and mine, was only initiated by Geddes Resources from 1981 onwards. The decision 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 the emergence of the problem when mining becomes a real possibility, is applicable in all cases where alternative land uses (parks and wilderness areas) are imposed on top of existing rights. The more aggressively a government pursues protection policies, the more adversarial will be the attitude taken by owners of existing rights. The implementation of alternative land use decisions based on the turnover rate of mineral claims and the probability of discovery is discussed briefly by Poulin and Sinding (1993b). 108  Technical management of mineral activities  geostatistics (Harris 1984), and the discovery process model (Barouch and Kaufman 1976) may be useful in estimating the mineral potential of an area. However, such estimates needs to be supplemented by estimates of the value of other environmental assets.  Location, position and recording of titles The legal right to mineral deposits is a central element in any project and the system under which such rights are issued is very important for how investors perceive a country as an invest ment target. In order to understand various types of mineral rights it is necessary to examine briefly the traditions in the area of mineral title disposition. Initially, a distinction must be made between on the one hand Anglo-Saxon common law tradition, and on the other hand Roman and continental (i.e. European) civil law. In the Anglo-Saxon tradition the subsurface and surface estates follow one another. In contrast, the Roman law tradition separates the two estates, and commonly vests the mineral estate in the Crown or state. However, present-day mineral laws are to some extent a mixture of the two traditions, and the developments they have undergone over the centuries. As in most areas of law, the distinction between Anglo-Saxon common-law tradition and continental civil (Roman) law tradition also applies in mining. The Anglo-Saxon approach has been noted above. The Roman Law tradition includes two important aspects not found in An glo-Saxon legal tradition. The first is the concept of “regalian property”. This implies that kings and other potentates reserved for themselves the right to gold, silver and precious stones found within their respective realms. The second concept is the “res nullius”, that some things are not owned by anyone until found and appropriated by someone. The regalian property as used in central Europe was gradually expanded to include all sub-surface minerals, and is the precursor for modern-day state ownership of mineral resources (Kuehne and Trelease 1984). The development of Anglo-Saxon mineral law was marked by the gradual adoption of some of the principles of Roman and continental legal tradition, and a movement away from the combined nature of the surface and mineral estates. The res nullius is evident in the “free miner” 109  Technical management of mineral activities  concept, and also in the widely used claim staking approach to mineral title disposition used in the US, Canada and Australia. A number of other features of modern Anglo-American mineral law 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 countries in the Anglo-American tradition applies only to certain lands. On privately owned land the original unity of the two estates may remain, the owner may have created a mineral estate in another 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 is also a possibility (Kuehne and Trelease 1984). For lands owned by the state, access to claim sta king still exists in some countries (the US. and Canada). Staking can, in principle, be done on any Crown land in Canada, or any federal land in the United States, unless the land has been withdrawn (i.e. for urban areas, parks, reservations etc.)  One of the interesting contrasts to the above description is the Australian procedure. In the states of Australia the practice of including minerals in Crown land grants was eliminated in the last quarter of the nineteenth century. Some mineral rights granted earlier have even been re-expropriated (Crommelin 1988). A further feature which distinguishes Australian mineral legislation from the Anglo-American tradition is that in many states the power to grant mineral 110  Technical management of mineral activities  rights is fully discretionary, as seen for example in the Western Australia Mining Act . This in 24 effect moves the Australian procedure closer to the “regalian property” approach. A similar trend 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 mineral rights is necessary. Figure 5.2. outlines a considerable range of options. It should be noted that these are all equally applicable to allocation of mineral rights within a state property/regalian property regime. The term “title” used above does not imply anything about the quality of the right allocated to the holder. The most proper description is to refer to the title as a contract between the [present] owner of the mineral estate and another party, who either buys the entire mineral 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 large fraction of state or Crown land has been transferred to private owners. If such a transfer has not taken 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 currently  undergoing reform. The observation applies, however to several other states, including Tasmania, Northern Territory and New South Wales.  111  Technical management of mineral activities  Exploration titles and control over marginal deposits A special aspect of mineral titles is the way they treat properties, or cases where exploration has indicated an anomaly or mineral occurrence which is not currently economic. In such situations the investor may want to retain the right to mine the deposit at some future date, if commodity prices or extraction costs so favour. Most mining laws do not have provisions which cover such cases specifically. The Cana dian jurisdictions examined (British Columbia, Ontario and Quebec) are examples of this. For most of these, however, the tenure can be maintained for a long time by the accumulated value of exploration work carried out by the holder of the title. Australia, in contrast, provides two examples of specific regulation of this issue. In Western Australia the Mining Act 1978 allows exploration licenses an exemption from the normal work requirements in a number of cases, for example when the title is in dispute, when time for further investigations is needed, when a de posit is presently uneconomic, or when the holder has problems obtaining the necessary per . Similarly, the Northern Territory of Australia has included a special “Exploration Re 25 mits tention License” in the Mining Act in order to deal with presently uneconomic deposits . 26  Regulation of the exploration process Distinct from the matter of mineral titles and the way they are allocated is the question of regu lating how prospectors should go about their work of discovering mineral deposits. To provide the foundation for the mineral policy design for Greenland in chapter 8, it is necessary to discuss briefly the possible impacts of mineral exploration activities. These can be divided into three main categories, surface disturbance (on site and for accessing the site), environmental problems on site (storage of supplies and disposal of waste materials), and general impact of exploration activity on plant and animal life in an area.  25 Western Australia Mining Act 1978, section 102.  26 Northern Territory of Australia Mining Act section 38. 112  Technical management of mineral activities  Surface disturbance may occur when more advanced exploration involving diamond or reverse circulation drilling, trenching, and bulk sampling from shallow pits is undertaken. To this category must also be added the use of blasting to obtain fresh rock samples or to gain access in other ways, and the construction of underground access to an orebody. These can all be ma jor impacts if sites are not reclaimed. It is not clear, however, how far reclamation should pro ceed. One thing is to fill in trenches and pits, but more difficult, and itself a matter of degree, is the question of whether disturbed areas should be revegetated. Another type of surface disturbance can be involved when roads and culverts are con structed for the purpose of establishing road access. In this case there are two options. One is to remove the road which involves the risk of disturbing an even larger area than occupied by the road itself. The other is to leave the road in place. This is a particularly relevant option in cases where the road can be used to access more than one exploration site. The operations involved in mineral exploration may also have the potential for other environmental 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 regu latory responses range from non-action to rules prescribing the use of approved containers for supplies, 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 envi ronmental impact”, for want of a better term. This refers to the impact on plant and animal life of the presence of humans looking for minerals. These impacts depends on the extent and in tensity of activities. Most are, however, highly localized as a result of the spatially limited extent of an exploration area (in most cases) and the fraction of sites explored intensively (e.g. by dia mond drilling) is very small relative to the total number of sites examined in an exploration pro gram.  113  Technical management of mineral activities  The 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 the case of British Columbia, a province in Canada (Resource Management Branch 1992)27. With the exception of actions to be taken if acid generating rocks are encountered, environmental as pects are primarily mentioned in section 10.1.1 of the Code. This section emphasizes that plans filed for approval pursuant to section 10[1] of the Mines Ac6 28 must show how reclamation is expected to proceed In the case of Ontario, another Canadian province, the most recent revisions to the Mm 29 includes regulation of “advanced” exploration projects, defined as those activities which ingAct resemble actual mining operations. This type of activities require the operator to give notice to the 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 considerably more brief on the matter of exploration regulation, stating that holders of mining tenements ° 3 “chall not allow detritus, dirt, sludge, refuse, garbage mine water or pollutant from the tenement to become an inconvenience....to the public... ‘s’. The Northern Territory ofAustralia is more explicit. Section 24 of the Mining Act spec ifies that licensees must notify the proper authority in advance when an exploration program in volves 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, regarding camp location, disposal of camp waste, discovery of water underground, installations and histo ric sites . 32  27 The rules are found in part 11 of the health, 28 Statutes of British Columbia, Chapter 56.  safety and reclamation code for mines in British Columbia.  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 are  required 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 to notice, however, is that exploration is allowed at all. This also applies in the case of Tasmania and the logical consequence is that mining is possible in conservation areas, at least in principle.  114  Technical management of mineral activities  Still 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 Mm ingAct 1929 (Tsamenyi 1989). The general environmental conditions imposed on exploration includes the following:  1. 2.  Written permission to use mechanical excavators must be obtained; Filling in of non-required excavations is necessary;  3. 4.  Approval to light fires must be obtained;  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; Any proposed construction of roads or airstrips must be reported;  7. 8.  No interference with aboriginal and historical sites or objects is permitted;  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 requirements The matter of required exploration work was discussed from an economic point of view in the previous 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 jurisdictions mentioned elsewhere in the text. These are considered fairly representative of the terms one is likely to encounter.  TABLE 5.1. MINERAL EXPLORATION REQUIREMENTS IN CANADA NORMALIZED TO  C$ PER  STANDARD UNIT (16HA) Year 1 2 4 6 3 7 5 British Columbia 64 64 64 128 128 128 128 Ontario 0 400 400 400 400 400 400 Quebec 250 250 250 250 250 250 375 Source: British Columbia Mineral Tenure Act Regulations, Section 19, Ontario Regulation bec Mining Act.  115  10 8 9 128 128 128 400 400 400 375 375 375 116/91, Section 2, Que  Technical management of mineral activities  These 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. . In the Northern Territory of 33 Australia the work requirement is fixed in individual exploration licenses 34 and no information is available on their size.  REGULATION OF MINE DEVELOPMENT AND PRODUCTION  Following 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 prin ciple, mean that mine development can proceed subject to current rules and regulations. The decision to allow mineral exploration is not necessarily identical to complete laissezfaire policy. The actual process of mine development may still be regulated in order to deal with various types of external effects associated with mines. These are not only those associated with environmental 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 drawn from the Province of British Columbia is used extensively.  Project approval The regulator dealing with one or more applications for permission to develop a mine is faced with two options. He can devise a regulatory framework specifying precisely what criteria any project must meet, await applications, and check whether or not they are in compliance. The  33 Western Australia Mining Regulations, Section 21. Northern Territory of Australia Mining Act, Section 24.  116  Technical management of mineral activities  problem with detailed regulation is that such a system may have difficulty in dealing with widely differing projects unless all possible situations have been taken into account when regulations were designed. The extent to which this approach is possible and reasonable depends on many factors. The most important is probably the size of the industry in question, the amount of knowledge and information the regulating agency has accumulated, and the efficiency of the method relative to other approaches. Alternatively, the regulator can adopt a case-by-case approach, setting out only general guidelines for application documents, and then use a three-sided process to define precisely what must go into an application document. An example of this approach is provided by the British Columbia Mine Development Assessment Process , as described below. This example may not 35 be 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 an additional one for “complex” projects. The first level consists of 3 phases. First the pre-applica tion phase is used to define the terms of reference to be followed in the application for a certifi cate allowing mine development. Then comes the application phase, in which the applicant tai lors his document to the terms of reference already defined. The third phase involves a govern ment decision on the application. The first phase requires the submission and publication of a  prospectus 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. 4.  Nature of workings (pit or underground, location, design etc.); Location, design and size of mine rock dumps, tailings disposal areas, and ore stockpile areas; Ore processing facilities (crushing, milling, and concentration facilities);  5. 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, Land and Parks, is regulated by the Mine Development Assessment Act of 1990, S.B.C Chapter 55.  117  Technical management of mineral activities  8.  Summary of environmental and socio-economic baseline information and propo sed study program;  9. 10.  Review of likely environmental and socio-economic impacts; Proposed consultation program.  The consultation at this level is intended to identifr possible information gaps prior to the submission of a formal application. In the second phase the information already recorded in the prospectus is supplemented by additional information on project impact: 11.  36 from which potential impacts can be determined and im Baseline information pact management strategies developed;  12.  An assessment of environmental and socio-economic impacts and a plan for mi tigation 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 as part of the consultation process. The third phase is the review by a management committee ap pointed by the two ministers (i.e. mines and environment). The committee must recommend to the minister one of four options:  A. B.  Refer the application to an independent assessment panel (i.e. take it to level 2); Accept the application and issue Mine Development Certificate which allows the applicant to proceed with obtaining permits, licenses etc. The certificate identi fies the terms and conditions under which it is issued, including any follow-up program and/or mitigation measures to be implemented in connection with the  C.  development; Return application for upgrading;  D.  Reject application.  36 field information must cover at least one full year, Environmental representative.  118  and possibly more, in order to be sufficiently  Technical management of mineral activities  The second level of the assessment process is activated if a project application is referred to a pa nel review. This involves an extensive further round of public consultation using a choice of in formation programs, negotiation, mediation, informal hearings and formal hearings. Based on these activities, the panel makes a recommendation to the minister(s), who must then reject or accept the application. In practice, the panel review must often take place as a joint review with the federal government. This additional level of review (the Environmental Assessment and Re view Process) is activated whenever a project may have a significant impact on an area of Cana dian 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 on land use planning, blocking projects at the development stage is logically inconsistent, potenti ally very wasteful, and may lead to significant distortions in the allocation of exploration expen diture. 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 adequate land use planning in earlier times. A clear statement of where development of mines is desirable as a matter of principle would help direct exploration investment to those areas where develop ment 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 in formation which, if not available, must be obtained when development is proposed. This high lights the problem associated with any planning associated with mineral development: the highly specific nature of all exploration information. If information is collected in advance of explora tion, in order to be prepared, there is a high risk of it being redundant where there are no mine ral deposits to be found. On the other hand, the alternative is to submit all projects to the risk of 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 very high degree of public involvement in the process. While this may to some extent be a special 119  Technical management of mineral activities  Canadian phenomenon, it reflects the fear that the political and administrative system of gov ernment is unable to adopt optimal solutions. The answer in the Canadian approach is additio nal layers of “public consultation”. Despite its ability to supply decision-makers with informa tion about different views on a resource development the consultation process may give the pu blic a false feeling of having influence on decisions.. The consultation process can also become dominated by individuals and groups with narrow special interests, leading to what is essentially rent seeking activities (Poulin and Sinding 1993).  Apart from the environmental perspective, the Health, Safety and Reclamation Code for British Columbia, as well as the Mine Management Act of Australia’s Northern Territory exemplifies the wide range of practical issues involved in the development phase. These include mine de sign, industrial hygiene, personnel safety, use of explosives and various types of equipment, as well as the duties of both the mine manager and employees and inspection, testing and approval procedures.  Regulation of mine production Regulation 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 should have 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 first is related to the regional development aspect of mining. From a government point of view it may be desirable to extend the life of a mine in order to justify various public investments, or to preserve jobs. The problem faced by government is that mining firms frequently do not define ore 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-  120  Technical management of mineral activities  centive for a regulator to demand an extension of mine-life by specifying production levels and/or cut-off grades lower than those preferred by the mining company . 37 The argument is questionable, however. The business of mining is characterized by considerable variability, especially in mineral commodity prices. These translate into fluctua tions in the fortunes of mines, especially if they are only marginally profitable. These fluctua tions may then lead to “boom and bust” cycles in mining communities, causing temporary hard ship. These problems may be temporary, but will eventually emerge as the ore reserves of a mine are depleted. The question is whether regulation of mining rate and/or of cut-off grade will al leviate the “boom-bust” problem or the depletion problem. Given that such regulation has the potential of being inoptimal (not profit-maximizing) for the mining firm, it is likely that firms will 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 on environmental considerations. The level and impact of a mine may depend on the level of pro duction of various types of waste. To the extent that emissions are a function of the level of production, and when the environmental impact of a mine depends on the emissions, then regu lating mine production may be necessary. The bottleneck here is the carrying capacity of the environment, and the regulative approach needs to share this capacity among all who wishes to produce. This problem is faced by all human activities and is highly dependent on how envi ronmental regulation is approached generally. The conclusion must be that if, for some reason, governments choose to subsidize mine projects to a significant degree, they become partners in the project. They can then reasonably pursue other objectives than profit maximization. In general, however, it is not optimal to inter fere with operations.  An example of this is the development of the Nanisivik Mine described in chapter 9. There the Government of Canada insisted on a longer planned mine life as a condition for providing subsidies for infrastructure (Wojciechowski 1982).  121  Technical management of mineral activities  CLOSURE OF MINES AND ABANDONMENT OF MINE SITES  When a mine closes, the reason is always lack of ore in some form. The events resulting is this lack, can be many and varied, ranging from true exhaustion of reserves to cost increases, price declines, accidents, and political upheaval, which may occur separately or in conjunction with one another. The key feature is that change the basic operating parameters of the mine, and thus the quantity of ore. The closure may be permanent or temporary, again depending on what combination of events precipitate it. In both cases, however, a number of regulations are relevant. The following sections examine three aspects of mine closure: temporary closure, du ring which the mine is put on a care and maintenance basis, permanent closure and site recla mation, and long-term management of abandoned sites.  Temporary mine closures Mining 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 economics of a mine depends on the price of mineral outputs and the cost of extraction. All of these factors vary over time. As a result the definition of valuable ore and worthless waste also changes over time. In some cases the movement of commodity prices and extraction costs conspire to move large fractions of the ore reserves into the waste category. When this occurs, the mining firm is faced with three options. If it is possible to respond to lower prices or higher costs of supplies by improving productivity, then the mine may both recover “lost” reserves, and be better placed, if and when prices increase. In some cases, particularly in the short term, a mine will not be able to react in this way. It can then respond by limiting losses by closing the mine operations until prices recover. This is not a cost-free exercise, but may in some cases also allow time to restruc ture production and increase productivity or, simply, await better prices. For the regulator who has made sure that provision has been made for permanent closure, the goal should be to mini mize the cost of temporary closures. 122  Technical management of mineral activities  Permanent closure, reclamation and long term monitoring of abandoned sites In 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 regulations covering the exploration phase. That trend continues into the production phase. As above, the following description is based primarily on three examples for which data are available: British Columbia, Ontario and Tasmania.  The exception to the environmental preoccupation in the case of British Columbia is the requi rement that in case of permanent mine closure, all mine openings must be made safe against inadvertent access. Otherwise environmental protection dominates. The chief concern is reflec ted in section 1O.1.2[4] of the British Columbia Code, which requires the mine manager to submit  “a program for the protection and reclamation ofthe land and watercourses during construction and operatingphases, with particular refirence to (a) environmental monitoring and surveillance, (b) a detailed reclamation program, including research, Jhr the nextfive years Section 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 ofthe mine) including the cost oflong term monitoring and abatement”  The range of possible content of closure and rehabilitation plans can be extremely wide, as shown by the guidelines for mine rehabilitation published by the Ontario Ministry of Northern Development and Mines (1992). These guidelines give a very good impression of the content and function of such plans. The three objectives of a rehabilitation can be summarized under  123  Technical management of mineral activities  the following headings, protect public health and safety; alleviate or eliminate environmental damages, 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 che mical 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 ensuring protection in perpetuity by stating that, ideally, physical structures must be able to withstand er osion of any kind, regardless of how extreme conditions may be. This requirement is expressed in 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 no subsequent work or monitoring is required. The “passive care” design implies that only minimal and occasional maintenance and monitoring is necessary. The “active care” design category ind icates that ongoing operation of abatement measures and constant monitoring and maintenance is necessary. The elements of the Ontario rehabilitation system briefly noted above are remarkable in one way: They do not seem to take into account an overall economic view of the need, desirabil ity or otherwise, for rehabilitated sites. The need is partly explained with reference to public health 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 that the effects of mining are externalities imposed on public, and thus the problem is one of valuing the associated economic loss. All these programs and estimates are to be submitted as part of an application for a permit to mine in British Columbia. Such a permit is issued by the Chief Inspector of Mines under sec  124  Technical management of mineral activities  tion 10 [3] of the Mines Act . A permit may specify that it is a condition for the permit that the 38 mine owner, agent or manager gives security for an amount considered necessary to carry out mine reclamation (Mines Act, Section 1014]). To secure that reclamation is carried, out the owner “  may further be required to add to the security already given, on an annual basis. The 1989 amendment to the Ontario Mining Act basically takes the same approach, although more emphasis is devoted to bringing existing operations under the reclamation provisions. In Tas mania elements similar to those described are used, but are implemented administratively under the general power of the minister to include conditions in mineral permits (Tsamenyi 1989).  ON REGUlATION DESIGN AND THE ENVIRONMENTAL COSTS OF MINING OPERATIONS  The question of how technical regulations related to environmental protection are designed, and where in the overall regulatory structure they are placed, is a matter of considerable interest. It has been addressed by Tsamenyi (1989) in a specific context, but a number of general points of interest 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 environ mental benefits are obtained at the lowest cost, the special nature of mining means that the costs of environmental compliance involves the regulator in a difficult tradeoff between revenues and environmental quality. This issue is the subject of the second section below.  Environmental rules for mining and their place in the regulatory structure The discussion of environmental issues by Tsamenyi (1989) in relation to his review of the Tas mania Mining Act 1929 provides a good framework for addressing the problem of how envi ronmental aspects of mineral activities are best dealt with. Three different options are possible:  38 Mines Act, S.B.C. 1989, Chapter 56.  125  Technical management of mineral activities  1. 2. 3.  Include detailed environmental regulations in the mining act; Include only general environmental regulations, and give the minister discretion in detai led regulation; Place environmental regulations in the relevant environmental protection legislation.  The three options reflects the dilemma faced by a regulator over the proper place of environmen tal regulation of mining activities. Detailed regulation have the advantage of placing all project under 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 of projects, the possibility of Over—regulation (as the rules must be able to deal with all possible cases), and the more frequent (relative to general regulations) need to amend a highly detailed set of 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 environmental costs. The extent to which this is a problem depends on how much of the regulatory burden is decided on an individual project basis, and how much is specified in rules issued administrati vely under the discretionary powers of the minister. The third possibility is to place all types of environmental regulation under the same leg islation. This still leaves the problem of detailed vs. general rules, and may add internal com munication problems between government departments. On the other hand the possible objec tion 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 responsible must take into account that it can be manipulated by special interests. For example, the envi ronmental agency may be influenced by preservation groups, while the mining agency may be influenced by the people from the mining industry, with whom it is in contact. The degree to which such “regulatory capture” is a problem depends on how much actual influence interest groups have on the policies of the respective ministries, and that in turn is related to the scope the ministries have to influence decisions. If they are allocated wide administrative discretion, 126  Technical management of mineral activities and have a tradition for impartiality, there is no real problem. If, however, bureaucrats are not impartial, 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 en vironmental regulation of mining, and between detailed and general regulations depends on the circumstances in each case. If the mining industry is relatively small, then the special nature of the industry indicates that environmental regulation should be placed under the mining legisla tion. If the industry is large, regulation should be part of the general environmental protection legislation. Except in rare cases the combination of general rules in the legislation, specific rules determined administratively and some discretion in individual cases would be the most flexible approach which did not prevent investors from having a good idea of cost determined by envi ronmental regulation. Where an individual approach is adopted, the “Environmental Impact Assessment” (EIA) (option 7) becomes an important tool in determining project impacts and the regulatory responses. In this context it should be noted that an “EIA” can be many things, and that its content must either be specified generally or individually in each case.  Environmental costs and benefits in mining It is a weH known fact that private economic activity can impose unwanted costs on other peo ple. These costs are external to the decision unit, and will not be taken into account in its ac tions unless it is forced to do so. Environmental regulation is one of the ways in which external effects are re-imposed on their originator. Regardless of their form the various possible environmental regulations are all characteri zed by the fact that they impose an additional cost on mining firms relative to situations without regulation. Regulations are introduced to make the mining firm pay the full (or at least more) of the social cost of their operation. The problem facing government is that on the one hand it seeks to impose environmen tal regulations, while on the other hand those regulations may have a strong impact on the 127  Technical management of mineral activities  flues resulting from taxation of mineral rent. Restrictive environmental policies essentially in volve an internalization of external costs, such that the unit production costs reflect the full so cial costs. However, higher cost can transform a mineral deposit into a worthless occurrence of mineralized material. Alternatively it may reduce the amount of mineral rent which is the base for mining tax revenues. The reason for this is that the principal mineral commodities are tra ded in competitive markets where the individual producer does not have the power to influence prices (Slade 1991). This means that producers can not pass on their additional costs to consu mers, but must instead take the cost out of profits. Given that investors are unlikely to accept a lower 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 informed about the environmental loss resulting from unregulated economic activity. The problem facing an environmental regulator is to determine how strict regulations should be. In order to do so some way of quantifying the loss associated with development is required. The general approach presented in chapter 3 involves both benefit and cost of development, as well as the benefits which could have been enjoyed if development were not to occur. Thus, the problem facing a regulator 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, both temporary and permanent. Once it has been determined what the cost-benefit equation looks like, it is then possible to determine how the unacceptable impacts are to be eliminated. The solution presented above is not, however, explicit on the manner in which unacceptable externa lities are to be internalized. Unfortunately, due to the uncertainty associated with exploration, lack of information on those locations where mineral deposits happen to be discovered frequently means that de termination of environmental values must take place after discovery, thus basically challenging 128  Technical management of mineral activities  the right to develop a discovery which we prefer for other reasons. This information problem brings 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 stringency applies, to provide investors with a reasonable quantity of information on costs related environ mental compliance.  CONCLUDING REMARKS  -  THE DETAILS OF MINING REGULATION  In contrast to the preceding two chapters, the emphasis has been much more on details and on procedures. One of the most important aspects is the link between investment in exploration and mineral titles. It is clear that if mining title is to be a useful instrument it must give the holder security and protection. If the right is subsequently encroached upon for external reasons a 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 be came prominent remain. The strategy of the future seems to involve a heavy emphasis on land zoning, attended by explicitly stated guidelines on the level of environmental protection applicable in a given zone. This will allow investors to base their decisions on facts rather than on conjecture about the severity of future regulation. Much of the discussion of exploration regulation, development devices and closure plans is based on environmental protection requirements. The project review process, in particular, serves to define environmental constraints during and after mining operations. Some of the overall issues about mining being allowed could be resolved before exploration begins by adopt ing land use zones. It is unlikely, however, that all details can be dealt with in this way. There fore, project reviews may still have a function in determining exactly what quantity of external effects is acceptable to the mining firm, the government and other major interested parties.  129  Technical management of mineral activities Both here, and in relation to the taxation area described in the previous chapter, it is highly relevant to mention two rules of conduct which are applicable to any attempt to change a policy (Tussing 1984): 1.  “Don’t mess with the rules without a iiy good reason  2.  “Ifyou ‘ye got to mess with them, do it and get it over with; but don’t KEEP messing around”  130  ‘  Mineral ventures in Greenland  6  MINEiL VENTURES IN GREENLAND  Some primitive forms of mining have taken place in Greenland since 2-300 BC., when the Dorset culture developed the use of iron tools. Their source of iron was the iron meteorites which could be found on the sparsely vegetated ice-free surface (where larger blocks are brought to the surface by the action of permafrost). Later, in the 18th and 19th centuries, Euro pean explorers were often drawn to Greenland by rumors of rich mineral opportunities, but they were all disappointed (Lidegaard 1991). It was only from the middle of the nineteenth century that mining, in the ordinary sense of the word, came to Greenland. This was at the famous cryolite deposit in Ivittuut in SW Greenland. In the 20th century, other significant mines followed: coal at Qutdlissat on Disko Island, lead and zinc at Blyklippen near Mestersvig in Central East Greenland, and also at the Black Angel mine at Maarmorilik in the Ummanaq district. These are the mines that have had an impact on Greenland’s history and on its mineral policies. There have been other mines operating, most of them around the turn of the century: Copper at Kobbermine Bugt and near Qaqortoq (Julianehâb), graphite at Amitsoq near Nanortalik and Sisimiut  131  Mineral 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 examines private investment in mineral exploration as well as publicly funded research related to mineral resources.  This chapter is designed to provide information on the extent and scope of mineral activity in Greenland, from the early cryolite activities to the present efforts to discover mineral deposits which can replace the Black Angel.  The underlying purpose in collecting and  reporting the information given in the following sections is to provide a background for the discussion in chapter 7 of mineral policies pursued in Greenland. The connection between economic theory and the present chapter is tentative. For the discussion of mineral activities the principal area of interest is rent capture and rent capture methods. The examination of mineral exploration investment is primarily designed to put the analysis of recent policy changes into perspective. The level of investment can be seen as an indirect indicator of investor interest, but this indicator must be used with caution since there is no obvious standard against which to measure such interest. The third part of this chapter concerns government investment in mineral research and data acquisition. The data presented in this part cannot say whether government should invest but indicates which minerals the Mineral Resources Administration has chosen to emphasize in the 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 mines are accorded much less attention. The reasons are two-fold. One is that the Ivittuut and Marmililik 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 one  132  Mineral ventures in Greenland  reference oniy. The Marmorilik mine is also extensively documented but some aspects of this case are deferred to chapter 9.  MINING HISTORY IN GREENLAND  The four important mines in Greenland have, in some ways, had considerable impact on the Greenland economy and on Greenland society. The impact ranges from employment of local factors of production and other inputs, over trade balance effects to the impact on Danish Gov ernment Revenues.  Cryolite at Ivittuut The 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 of alum) could be produced from the mineral. A production of soda was established, and responsibility 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 cryo lite deposit was extended several times in the first few years of operation. In one of several restructurings in the late 1 8 0s, the mining operation was separated from the processing opera 6 tion. The Cryolite Mining Company began selling cryolite under long-term contract to the Pennsylvania Salt Manufacturing Company, and production increased steadily to around 10,000 tons annually in 1865. The workforce was around 100 in the summers, while a much smaller number (probably around 10-15) remained during the winter to maintain the site and the equipment. In the last quarter of the 19th century cryolite production remained stable, despite di minishing importance of soda produced from the mineral. Instead, demand came from new uses of cryolite, as enamel, and as a flux for the smelting of aluminium in the Hall-Heroult This account is based on Niels Henrik Topp’s exhaustive history of the cryolite industry (Topp 1990)  133  Mineral ventures in Greenland  process. The processing operation in Copenhagen was organized under the Cryolite Company øresund AIS, and this company was also responsible for the marketing and some of the pro cessing (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 com petition when øresund A/S’s market was entered. Between 1903 and 1913, both øresund A/S and the Cryolite Mining Company A/S earned 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 form of production sharing, whereby the government was entitled to 12 % of the cryolite shipped to Copenhagen. This cryolite was then re-purchased by the Cryolite Mining Company AJS, and the payment was then the tax. The share in production had been raised to 20 % in 1864. In 1914 a new concession was negotiated which changed the tax to a fixed payment per cubic meter, the amount depending on annual production. The years of the first world war were also very profitable for the two companies, and the period of strong demand continued after the war. 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 US market drew attention to the very profitable cryolite industry. Negotiations over an amend ment to the 1914 concession began, and were concluded in 1926. It was agreed that the roy alty should be converted to a tax on mining company profits, the tax being one third of prof its. In addition, a extra progressive tax (rising in increments of 5% for each half million prof its, 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 the burden of the tax payments. The new tax regime meant that the government became more interested in the management of the cryolite industry and in the cut-off policies adopted at the mine.  134  Mineral ventures in Greenland  The 1914 concession was to expire in 1939 and the 1926 amendment provided for ne gotiations on the future of the mine to start in 1934. Again, the government wanted a still larger share in the profits, and more direct control over the two companies. After protracted negotiations, the companies and the government reached an agreement under which the two companies were merged. In the new company the government owned 50% of the shares. In re turn the government would supply an open-ended mining concession, and the private sharehold ers would pay their share by transferring the production and mining facilities and equipment in Copenhagen and at Ivittuut to the new company. Instead of taxing the company, the state shares (A-shares) were to receive 60% of dividends as well as additional percentages (on a sliding scale) of dividends in excess of 6 million DKr. The new company was to be formed on 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 waste materials, but after the first war-years, the plant was idle. In Greenland, however, mining was expanded to supply demand created by the war. The cryolite was marketed by Pennsalt and Alcan. After the war, cryolite markets were depressed for several years. The company was troubled by the recurring disagreement between government and private interests which arose as a result of unfortunate incentive effects of the dividend paymernt schedule in the 1935 con cession. This was solved by agreement on a fixed split of dividends from 1950 onwards. In the postwar period, from 1950 to 1962, the remaining cryolite reserves were mined, and high grade material, used to construct various dams and piers in the early years, was also processed and shipped to Copenhagen. Processing of material continued in Copenhagen until 1990, when low grades made further production uneconomic. The cryolite company had initially hoped to discover new mineral deposits in Green land and accumulated substantial financial reserves to enable development of discoveries.  135  Mineral ventures in Greenland  These were, however, limited to the Mestersvig Lead-Zinc mine operated by Nordisk Mine selskab, in which the cryolite company was the largest shareholder. Other projects were inves tigated and abandoned, most notably a gigantic (see below) iron ore project at Isua in the bot tom of the Godthb Fjord. During the late 1 960s and 1 970s, the hope of finding mineral deposits that would al low the company to stay in the mining business receded, and the accumulated financial reserves had to be put to better use. The company diversified into other businesses, and when process ing of various waste dumps was ending, the company had moved far away from its original business. It was natural for the government to sell its shares in the company. This was done in November 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 mean that the cryolite resource is exhausted. Shortly after the privatization, the government was criticized for its decision to privatize the company based on the fact that some cryolite re source remained at Ivittuut 40 (Grønning-Nielsen 1987). Both the pit and various waste dumps and land-fill material contain considerable quantities of low-grade cryolite. A junior mining company is currently trying to bring these reserves into production before a newly discovered cryolite deposit in Brazil begins production (Jens Gothenborg, personal communication, 1992).  Coal-mining at Qutdlissat The Cretaceous age sedimentary rocks in central West Greenland contain significant coal se ams. These have been worked in various locations on the island of Disko and on the adjacent Nuussuaq peninsula. The first mining activities are not well known, but are assumed to have  40  The political and technical argument was based on drill-results which indicated the presence of additional low-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 and inside the Mineral Resources Administration-Geological Survey of Greenland system.  136  Mineral ventures in Greenland been the work of European whalers (Schiener 1976) and sporadic mining activities for local use took place at a handful of locations. More organized mining began in 1920 under the auspices of the Royal Greenland Trade Company. Mechanization was first introduced in 1929, but it was not until 1954 pro duction was expanded above the level of previous years (when it averaged around 4,000 tons annually). 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 all the residents of the mining town were forced to resettle elsewhere in Greenland. At no time had the production yielded any profits. The economic results from this mine were not encouraging. The Danish National Accounts show that for 1959-60, early in the production expansion phase, the loss was DKr1.49 million. This rose to DKr3.02 million in 1964-65 and was DKr4.03 million in 1970-71.  The Blyldippen lead-zinc mine at Mestersvig The lead bearing veins at Mestersvig in central East Greenland were discovered in 1948 by members of a geological expedition led by Lauge Koch, and continued in 1950 and 1951. A prospecting company with Kryolitselskabet øresund, other Danish companies and the Danish government as shareholders (the latter taking a 27.5% shareholding in the venture) was formed in 1952. Nordisk Mineselskab A/S decided to develop the deposit for production. Mining began in 1956 and continued until 1962. A total of 545,600 tons of ore was mined, with an average grade of 9.3% Pb and 9.9% Zn (Harpøth and others 1986). Employment at the mine averaged between 85 and 90 men. There is no indication that any local labour was used . 41 After the end of mining in 1962 the company was engaged in various exploration ven tures, mainly in central East Greenland. The most notable result of these projects was the dis covery  of the Malmbjerget molybdenum deposit in Werner Bjerge, a short distance SW from  41 Nordisk Mineseiskab A/S Annual reports 1955-63.  137  Mineral ventures in Greenland Mestersvig. This porphyry type deposit, which is estimated to contain 150 million tons of ore with an average grade of 0.23% MoS 2 and 0.02% W0 , was investigated in several stages 3 in the 19 0s in a joint venture with AMAX Inc., and re-evaluated in 1978-81, following the 6 development 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 and molybdenum prospects in the area. During the 1 970s, Nordisk Mineseiskab became involved in on-shore oil exploration in a joint venture with Atlantic Richfield Company. This project was located in Jameson Land, the large peninsula between Mestersvig and Scoresbysund. Extensive seismic surveys and 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 joint Greenlandic-Danish State oil and mineral exploration company. Over the years of its exis tence, no dividends were ever paid to the shareholders, and the princely sum of DKr 120,000 accrued to the Danish state as royalties and taxes.  The Black Angel Lead-Zinc mine at Maarmorilik The name “Black Angel” refers to an angel-shaped outcrop of dark pelitic schist in an other wise light-coloured cliff-face opposite the small settlement of Maarmorilik in the Ummanaq district of central West Greenland. The ore deposit of the same name outcrops above the an gel figure in the same cliff, but sulphide lenses extends Eastwards for about 2 km and outlying lenses 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 Maar morilik (hence the name), but commercial testing and drilling only commenced in the 19 0s, 6 when a consortium led by Cominco Ltd. of Vancouver became interested. Development of the ore body for production began in 1971, with Cominco being the main owner of the operat ing company Greenex A/S.  138  Mineral ventures in Greenland  When mining began in 1973 the total reserves were 4.1 million tons with an average grade of 15% Zn and 5% Pb. Over the life of the mine, from 1973 to 1990, these reserves were 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 genera ted for the governments of Denmark and Greenland, but also the terms under which the mine operated. These were set out in the concession agreement between the Ministry for Greenland and Greenex, the operating company, and are in effect a detailed statement of mineral policy which 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 Comico wished to close and abandon the mine. Further regulations covering the terms for site rehabili tation were added at this time. The local impact of the mine is described in chapter 9, while government revenues are noted below.  MINERAL INVESTMENT IN GREENLAND  A factor of major importance in assessing the outlook for mineral production in Greenland is the size of investments in exploration, the extent of exploration efforts as well as the invest ments in development and exploitation.  Private exploration investment It is not possible to determine the exact expenditure on exploration before 1986. A compila tion of reported expenditures has been prepared by the Mineral Resources Administration for Greenland which indicates a significant increase in spending (even if the sums are quoted in current prices), as illustrated in figure 3.1. It is important to note that the limited statistical  139  Mineral ventures in Greenland  data means that the curves for exploration investment are affected by a few large projects. For 1989-1991, this was the case when the gold-PGM prospects at Skaergaard and Kap Edvard Holm 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 ma jor mines invested significant sums in on-site exploration for additional reserves at Maarmori lik and at Ivittuut, as well as in exploration in other parts of Greenland. All of these efforts were unsuccessful. The major projects included the investigation of the Malmbjerget deposit described above (in two phases which closely reflected the evolution of the geological under standing of this type of deposit), the Fiskensset chromite deposit, and the Isua iron-ore de posit. In terms of size and scope, the Isua project was probably the most interesting, with re serves conservatively estimated at 2 billion tons grading 38% iron. The project was aban doned in 1976 due to the depressed steel market at the time.  30000  20000 ________  Total expenses Total less mine expi.  10000  I 0•  I  1986  •  I•11’I•I•  1987  1988  1989  1990  1991  I  1992  Figure 61. Metallic mineral exploration spending in Greenland 1986-91 (fiom unpublished MRA data) in current prices.  Oil and natural gas have also received considerable attention. In the mid-1970s a licensing round for areas off-shore West Greenland led to extensive but unsuccessful seismic work and five wells. The period 1986-91 has seen three major efforts, and one smaller project under-  140  Mineral ventures in Greenland  taken. 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 Nordisk Mineseiskab A/S) and Nunaoil A/S (the latter two on a carried interest basis), which later came to include AGIP, the Italian oil company. Soon after this project was initiated, the terms (mainly the work requirements) were re-negotiated, and the total amount of required work was sharply reduced (Mineral Resources Administration for Greenland 1987). The ex ploration continued until 1989, when the operating company, ARCO Greenland A/S, an nounced that it would withdraw from the exploration concession due to poor geological prospects for discoveries (Mineral Resources Administration for Greenland 1990).  J ameson Land is still considered an area of potential interest to the international oil companies, due to the extensive quantity of geological and engineering-related information as sembled (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, ARCO and AGIP spent a sum roughly estimated at 200 million $US. During 1987-89, a group of six oil companies (Exxon, Shell, BP, Statoil, Texaco and Japan National Oil Corp.) and Nunaoil A/S set up a joint seismic exploration program. Each partner holds a 142/7% interest in the KANUMAS project (Kalaallit Nunaat Marine Seismic Program), but the interest of Nunaoil is carried by the other partners. This project involves extensive seismic surveys in the ice-filled waters off NE and NW Greenland. Total committed spending on this project is 17.4 million US$  Government administration and exploration projects Government sponsored mineral related activities in relation to Greenland are carried out by the Mineral Resources Administration and by the two agencies controlled by the MRA, the geological 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 4.2  141  Mineral ventures in Greenland  million (54%) went to salaries, and the remainder to goods and services 42 (Ministry of Finance 1993). The latter sum (DKr3.6 million) also includes the expenses of the Joint Committee on Mineral Resources. This body meets twice annually, alternating between Greenland and Denmark.  Systematic geological mapping in Greenland has taken place since Lauge Koch in 1928 began mapping the East coast of Greenland North of Mestersvig, in what was to be one of the most remarkable efforts in the history of geological science. The project proceeded until 1940 and was resumed in 1946-58 to complete a geological map (in 1:250,000) of the entire Caledo nian orogen in Greenland (Minelovskommissionen 1963). In the rest of Greenland a geological survey independent of Koch was established in 1946 in cooperation with University of Copenhagen. Initially the survey’s work was based on a pure research foundation (Minelovskommissionen 1963), but cooperation with the Danish Atomic Energy Commission from 1957 onwards introduced a strong element of prospecting into the survey’s work. The Mining Law Commission established in 1963 was asked to examine the future of the GGU. It firmly emphasized the survey’s role in basic research while rejecting the need for . The legislation defining the nature and tasks of the GGU 43 a state prospecting organization was enacted in 1965 along with the first Mining Law.  Despite the optimism concerning private exploration investment expressed by the Mining Law Commission, a large share of mineral exploration activities over the years have nevertheless been funded and operated by the Geological Survey of Greenland. Financial support has been  42  Using budgets of latter years is misleading because of an “over-budgeting” tradition whereby the MRA appears to be allocated significantly more resources in the annual government budgets than what is actually needed and what ends up being used. 3 The rationale in this rejection was that such an organization was unnecessary once the Mining Law proposed by the commission had been enacted.  142  Mineral ventures in Greenland  derived from GGU’s operating budget, and from external sources such as energy research grants and special appropriations by the Mineral Resources Administration for Greenland. It is difficult to separate individual projects operated by GGU from the general ac counts. Special appropriations in the petroleum field have included DKr 12.4 million in 1990, 5.5 million in 1991 and 13.2 million in 1992. These are reflected in the estimated di vision of spending on research shown in table 6.1.  The major source of funds for these petroleum projects has been accumulated savings in the MRA’s account. These funds were originally paid as concession fees by the partners in the  J ameson Land petroleum concession and were seemingly earmarked for further petroleum ac -  tivities. Funds from this savings account have also been used to finance the Danish governmen t’s share of an expansion of the equity capital of Nunaoil A/S, the joint Danish-Greenlandic petroleum and mining exploration firm.  TABLE  6.1. GGU EXPENDITURES 1988-94 (MILLIoNS DKR) 1988  Research total Geological mapping Mineral activities Petroleum activities  a 1989  1990  21,700 9,300 4,400 4,600  33,600 7,500 5,600 18,200  Glaciology 3,400 2,300 Total budget 43,200 42,200 54,900 Notes: 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)  a 1991  b 44,400  1994  1992  1993  36,659 6,910 10,531 17,275  20,300 7,200 6,800 4,700  20,900 7,200 6,600 5,950  1.94 53,563  1,600 37,000  1,150 36,700  The Greenland Environmental Research Agency was created in 1988 when the environmental service was separated from the Greenland Fisheries Research Agency. With an allocation of 12-15 full time staff and a budget of around 7.5 million DKr this agency is primarily  143  Mineral ventures in Greenland  responsible for environmental matters related to mineral activities. Environmental policy in Greenland is otherwise a Home Rule responsibility. Government Revenues As noted above, the only two operations to earn any significant revenues for the Danish and Greenland governments have been the Ivittuut cryolite mine and the Black Angel lead-zinc op eration. The data presented by Topp (1990) allows a complete time series of revenues to be constructed. By using a consumer price index for the period from 1870 to 1985 (Bjerke and Ussing 1958; OECD 1955-; OECD 1962), the annual revenues can be converted to 1985 terms. Adding this to the revenues from privatization of the Danish government’s shares in the cryolite company in 1985 (DKr 731.3 million) gives the total revenues from this mine, ex pressed in 1985 terms: DKr 3.86 billion. A similar calculation has not been carried out on the more recent data on revenues from the Black Angel mine. The types of taxation used for this mine, and their revenues are shown in table 6.2. TABLE 6.2.TYPEs OF TAXES IN THE BLACK ANGEL CONCESSION AND TOTAL REVENUES (CuRRENT  1,000 DKR)  Type of taxation  Total revenue 15,681 128,681  Area leasing charge Dividend taxa Concession tax Personal income tax from employeesb Total revenue Notes: 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).  395,296 248,565 788,223  The Joint petroleum and mineral exploration company Nunaoil A/S When petroleum exploration in Jameson Land was begun in 1985 the concession specified that a state company should participate in the project as part of the economic terms. The purpose  144  Mineral ventures in Greenland  was to “secure increased insight into, and influence over activities  and it is also an important  tool for obtaining government revenues from activities” 44 (Mineral Resources Administration for Greenland 1984). A limited company was formed in January 1985 under the name of Nunaoil A/S. The initial paid equity was DKr 25 million, ownership of which was divided equally between the Greenland Home Rule Authority and the Danish Minister of Energy. The size of the capital was such that “....the company’s expenditures in the exploration phase can be covered on the most part by returns from investment of the capital, such that gradual consumption of the capi tal is avoided” 45 (Mineral Resources Administration for Greenland 1984). Initially the company was advised by, and partially operated under a management contract by a subsidiary of the Danish National Oil Company (DONG). The legislation au thorizing the company was enacted in November 1984 by the legislative assemblies in Green land and Denmark (Mineral Resources Administration for Greenland 1985). During 1985 and 1986 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 ac tivity had been enacted (Mineral Resources Administration for Greenland 1987). The activities of Nunaoil were now determined by the option clauses inserted into ev ery new exploration concession issued in Greenland (see chapter 7). To support the company’s new activities the two shareholders agreed that the equity could be expanded to a maximum of DKr 50 million. By 1989 this expansion had been completed (Mineral Resources Admin istration for Greenland 1990). When the option clause policy was abolished in 1991, the role of the company was re considered (Mineral Resources Administration for Greenland 1990). Based on the fact that Nunaoil had accumulated considerable exploration experience and an international network of contacts, a revised role was defined. For mining projects this involved taking on the functions  Author’s translation. 5 Author’s translation, italics added.  145  Mineral ventures in Greenland  of 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 policy for state participation remains, the company will have a role both before and after licensing rounds. Before such rounds this would involve information activities, organizing consortia and interpretation of seismic data. After licensing, participation in the work of the consortium would be the main activity. Nunaoil’s board of directors agreed to these proposals but noted that expansion of mining-oriented activities would require additional capital. As a result, the shareholders 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 has been reduced somewhat by accumulated losses (which exceed the return from investment of the capital reserves of the company). The major activity of the company is now mineral explo ration. The only petroleum activity is the KANUMAS project where Nunaoil is operator but is carried by the other partners. In mineral exploration Nunaoil currently holds 5 exploration permits and is a partner in two joint ventures (Mineral Resources Administration for Green land 1993). Nunaoil has always operated at a loss. During the past 3 years, this has grown from 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 somewhere between 5 and 10 million DKr has been attracted for metallic mineral exploration (Nunaoil Annual reports 1991 and 1992; John Pedersen, pers. communication, 1993). In a very recent development Nunaoil has received DKr 30 million for off-shore seismic equipment. The investment is financed by the Danish government as part of the 1995 unrequited transfers to Greenland.  Concurrent with this development, the legislation  regulating Nunaoil A/S has been modified such that the company can operate outside Greenland (Mineral Resources Administration 1993b).  This investment is partly  counterbalanced by the decision by the Home Rule Authority to invest DKr 25 million in  146  Mineral ventures in Greenland  airborne geophysical data-acquisition specifically targeted on on-shore metallic minerals (Mineral Resources Administration 1 993c)  CONCLUDING REMARKS  -  THE IMPORTANCE OF EXPLORATION  The past history of mining in Greenland indicates that it is not a totally foreign activity, but one 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 rev enues from the mine to the Greenlandic treasury. It is therefore not an unwarranted optimism driving the desire for more mineral investment. The essential building block for future mineral development is present investment in mineral exploration. The data presented in figure 7.1. show these to be in the range DKr 2030 million annually, corresponding to roughly C$4-5 million. Unfortunately, this is a modest sum by several measures. The work by Dogget and Mackenzie (1993) on Canadian data for the period 1943-88 indicate that the average cost of discovering an economic base metal deposit in Canada is C$ 46 gold deposits, measured in constant 65 million, while it is C$ 71 million for economic 1990 terms. These costs may not be directly comparable to Greenlandic conditions because Greenland has seen much less exploration than Canada over time. Nevertheless, the annual ex ploration expenses in Greenland have, in recent years, been one tenth of the average discovery cost for a base metal deposit in Canada (Dogget and Mackenzie 1993). At this rate it would take 10 years to discover one economic deposit. The most recent (from 1991) data on worldwide exploration budgets indicate that companies with annual exploration budgets of at least US$ 1 million, expected to spend a to  46 Economic is defined by Dogget and Mackenzie as deposits with revenues of at least C$20 million and a realized rate of return of 8%.  147  Mineral ventures in Greenland  tal of US$ 1.845 billion in that year. Compared to this, investments in Greenland are very modest 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 accu rate impressions of the levels of investment. The work by Eggert (1987) suggests that explo ration investment may fluctuate considerably, depending on events both internal and external to the industry. The factors controlling these episodes of high (and low) exploration invest ment include (expected) rising prices and demand, new technologies and new geological models (Eggert 1987). To this one may add new discoveries (although they are a category of new geological models), and government subsidy policies. The exploration fever currently gripping the Northwest Territories of Canada (see any recent issue of the Northern Miner Newspaper) may be a clear example of the former, while the extraordinarily high levels of exploration for gold in Canada in 1985-88 was partly the result of a heavy subsidy given through the tax system (the so-called flow-through financing). A country wishing to attract investment must be aware of these episodes and must real ize 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 government revenues mean that it is rarely possible to base mineral policy on adjustments to episodes or cycles in the mineral supply process.  Similarly, it is important also to remember the  correlation noted by Eggert (1992), between the high share of exploration investment placed in Australia, Canada and the United States, and the high levels of publicly funded research into the mineral potential of these countries.  An issue of some concern is the recent expansion of petroleum-related activities. These have generally received a disproportionate amount of attention relative to metallic minerals. It can be argued that, given the long but unknown time which will elapse before off-shore  148  Mineral ventures in Greenland  petroleum under extreme Arctic conditions brought into production, investment of public funds should favour on-shore metallic minerals. The decision to expand the area where Nunaoil A/S can operate to include areas outside Greenland also raises a number of issues related to the activities and management of state-owned and subsidized enterprises. Space and time precludes further treatment of these problems here.  149  Past and present mineral policies in Greenland  7  MINEiL POLICIES IN GREENLAND  The five major events related to mineral policy in Greenland are the trade regulations of 1781, which regulated the activities of the Royal Greenland Trading Company, the Royal Proclamation on minerals of 1935, and the Mineral Laws of 1965, 1978, and 1991. The pre sent chapter describes these events, their implications for mineral operations, and presents an analysis of the content and adequacy of the latest regulatory effort. This is based on the framework for analysis established in chapters 4 and 5.  REGULATORY VACUUM BEFORE 1965  Mining operations in Greenland, other than occasional primitive uses of surface resources, were initiated in 1856, when the quarrying of cryolite in Ivittuut began. This operation, and a num ber of other small mines operating at the turn of the century, were all based on individual permits issued by the Danish Minister of the Interior under the 1781 regulations for the Royal Greenland Trading Company. However, during the period from the 1850s to 1965, a number of policy changes occurred, which had important consequences for the cryolite mine, and for  150  Past and present mineral policies in Greenland  the future course of regulation. This section examines the mineral policy of an era where the state was not constrained by any specific mineral legislation. The Royal Proclamation of 1935 is not discussed since it had no direct impact on policy.  The early mines The very early regulation of mining activity in the Kingdom of Denmark (which once in cluded 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 and 16th centuries, mining rights reverted to the crown. This process was gradual and probably re flected improved efficiency in mining, as well as a rent capture policy (Harhoff 1985). In Norway,  where mining was concentrated, the Crown released its control over all minerals ex  cept gold and silver in 1643. The latter minerals were released in 1783 (Harhoff 1985). The result was free access to mineral exploration, and a system of property rights similar to the mineral tenure systems of many common-law countries. The concept of “free miners”, which was 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 the rare, skilled miners of the day (Kuehne and Trelease 1984). In Greenland, however, the prin ciple of free access never applied. Under the regulations for the Royal Greenland Trading Company issued in 1781, trade in the area was reserved to a monopoly which was financed by the Crown. According to the regulations governing the operation of this monopoly, minerals were reserved for the trading company (Harhoff 1985).  Government equity participation The relationship between the cryolite company(-ies) and the government, reflects the drastic changes which a successful mining project undergoes, as it moves from the initial high-risk  151  Past and present mineral policies in Greenland  phase to a high profit phase . As cryolite profits grew to “windfall” proportions, demands 48 for a larger government share of these profits recurred every time the mining concession was renewed. Eventually, the taxation approach was changed from an additional profit tax system to 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 impor tant 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, special legislation was used to set up the operating companies, and the state’s share of equity was fixed at 27.5%, and 50%, respectively  THE FIRST MINERAL LAW  The mineral activities in Greenland after the second world war, most notably those in central East Greenland, indicated that more comprehensive regulation of mineral activities was needed. This resulted in the appointment, in 1960, of a commission to examine how a Min eral Law should be designed. The commission published its report, which included a draft Mineral Law, in 1963. It was not until 1965, however, that a Mineral Law was enacted by the Danish Parliament. This section examines the report and the final law text.  Analysis of the Mineral Law commission report, 1963 In its brief, the Mineral Law commission was directed to examine a range of issues related to mineral activities in Greenland. These included the general principles to be included in a Greenland Mineral Law, the future organization of publicly financed geological mapping and research, whether Greenland should be opened for [private] exploration access, how the local  48 The high profits in this case were partially the result of the unique monopoly on natural cryolite described in chapter 6. Incidentally, the complete records of the cryolite company have been preserved and may be a very rare record of the actions and strategies of a natural resource monopolist.  152  Past and present mineral policies in Greenland  population could be involved in mineral activities, whether standard terms for concessions should be drawn up, and how educational, social and health concerns could be provided for in relation to mineral activities (Minelovskommissionen 1963). The reasons for setting up the commission were twofold. The first was that minerals in Greenland were in principle subject to the legislation covering the Danish sub—surface, while conditions in Greenland diferred significantly from those in Denmark. The second reason was that the late 1 950s and early 1 6 9 0 s saw considerable mineral activity in Greenland which indicated the need for regulation. The report first considered the question of mineral tenure, and distinguished between full title at the outset of exploration, and separate title for the exploration and production phases. 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 prof its. Second, granting full tenure without specification of economic terms assumed that taxa tion 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 un likely in the foreseeable future, the second argument was valid, but only until a regulatory structure for taxing personal and corporate income was implemented. The first argument, on the other hand, was based on a limited understanding of the mineral industry and mining firms. It did not recognize that a range of uncertainties influence the size of future profits: The absolute size of the orebody depends on the cut-off grade applied, and this in turn depends on market prices for the commodity (-ies) mined, on production cost, and on the discovery of additional ore reserves.  In practical terms the report proposed that three phases of exploration activity should be distinguished: Prospecting, covering large areas in a preliminary fashion; Exploration, which focuses 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 to  153  Past and present mineral policies in Greenland  prospect did not give any rights (other than access to operate in Greenland) to the holder. An exploration concession, on the other hand, would provide the holder with exclusive access, and therefore 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 12 years in North and East Greenland; production: 50 years), reporting of acquired information and access for scientific personnel to all sites either for inspection purposes or for unrelated scientific work. Despite being directed to find ways to involve the local population in mineral activi ties, the commission’s proposal was insignificant and superficial. Rewards were to be offered for information which led to the discovery of a mineral deposit.  The detailed examination of possible financial terms led the commission to reject what was Canadian model described as the TT TT of mining regulation (the commission report shows little evidence of a detailed analysis of either Canadian or US mining regulations). It was further repeated, that fixing economic terms for mining is difficult without detailed information in each case. Given the fact that high risk was involved, and that some element of quasi-rent is present as a result of the special knowledge accumulated in mining firms, the report proposed a 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 in all mines developed for production, but was only to receive dividends when the other partner’s capital investment (including related exploration costs) has been recovered along with a sui table rate of return. The proposed rent capture mechanism was essentially comparable to a 50% “Resource Rent Tax” (see chapter 4), with the government partnership formalized through  equity ownership.  154  Past and present mineral policies in Greenland  The final Mineral Law text Since the 1965 Mineral Law was to regulate mineral activity until 1991, a brief summary is necessary. This also gives an impression of how the civil servants drafting the Mining Law thought about mining and mineral policy in Greenland. The Mineral Law consisted of 28 sections divided into five chapters. The first defined general principles, including free access for the local population to use surface materials. The second chapter (sections 4-7) concerned prospecting, or “preliminary investigation permits”, and defined activities which required separate permission (blasting, drilling and underground work). Preliminary investigation permissions, as well as exploration concessions could require the holder to guarantee financially any costs the State might incur in relation to the prospect ing activities, including rescue operations (section 6). Permitees also had to report their re sults 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 to applicants possessing suitable skills and financial ability, and required annual reporting of ac tivities. The concession allowed the holder to use land in the concession area for exploration purposes, but also that land not so used remained open for surface access. In contrast to pre liminary investigation permits, the exploration concession involved a duty to carry out explo ration work, as indicated in the plans submitted to the authorities (section 14[1]). If no explo ration activity was recorded for a period of 3 years, or if any of the terms in the Mineral Law were 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 reg istered in Denmark, that plans for production had to be submitted and approved, that conces sions to explore generally gave the holder a preferential status to obtain a mining concession 49 (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 exploration concession were to be compensated.  others, section 16 described how the initial holders of the  155  Past and present mineral policies in Greenland  that 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 and conditions laid down in the Mineral Law, or in the concession were not complied with (section 22). With respect to taxation of mines, section 17 simply said that concessions had to secure  the State’s share in profits after the investment and a reasonable rate of return has been recover ed. Alternatively, other forms of taxation could be applied. The final chapter gave the min ister the power to regulate in areas of mine safety, worker safety and to define a number of administrative procedures.  More than anything else, the 1965 Mineral Law is a framework into which civil servants could fill 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 regu lations, rather than in individual concessions. The use of this approach is also a powerful indi cation of the rather narrow outlook on mineral activity which appears to have prevailed in the Ministry for Greenland at the time, and the structure of the Mineral Law seems designed to handle a very limited number of cases in a highly bureaucratic manner. In terms of investor risk, three important features contributed to an overall perception that the 1965 Mineral Law was unable to provide a sufficiently low-risk investment environment. 1.  The possibility that a production concession might not be given to those who held the exploration concession for an area where a deposit has been discovered. The clause actu ally specifies that this can happen only when “very special circumstances” made it “a rea sonable course of action”. The wording of the clause is not in itself extreme when read by anyone familiar with Danish legal tradition, and seems intended to provide an escape clause with which “undesirable” operators could be screened off. The clause was pro posed by the Mineral Law commission, but the report (Minelovskommissionen 1963) gave no supporting argument, but noted that cases might occur where it is necessary to give the concession to someone other than the exploration concessionaire.  156  Past and present mineral policies in Greenland  2.  Economic terms of mining operations are not well defined in the Mineral Law. The problem is not that the need for capital recovery and a return on investment is not recog nized, but rather that the terms are not precisely defined. As noted, the lack of clarity on this point is a consequence of the mistaken belief that economic terms can only be de termined 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, in 1971, partially reflects the problem of insecure tenure and unknown economic terms. It took 4 years to negotiate and issue this concession (1967 to 1971) and during this time the explo ration of the deposit proceeded under an exploration concession issued before the enactment of the Mineral Law. The Canadian investors specifically wanted a concession which combined the 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 RULE  Greenland was granted extensive Home Rule with the enactment of the Greenland Home Rule Law in 1978. At the same time the Greenland Mineral Law was amended to reflect the changed management structure. In the area of natural resources, the negotiations which pro duced the Home Rule bill had to resolve two related issues: Who “owns” the non-renewable resources of Greenland ?, and how can a compromise on this issue be implemented in an ad ministratively practical way ?  The ownership problem In the 1965 Greenland Mineral Law, the first clause boldly states that “all minerals in Green land belongs to the State”. To many in Greenland this was an extremely offensive statement  157  Past  and present mineral policies in Greenland  (Foigel 1980), and it became one of the thorniest problems in the negotiations over the intro duction of Home Rule. Greenland representatives felt that the population of Greenland were the true owners of the country’s mineral resources by virtue of their “aboriginal rights”, and fur ther that they could claim sovereignty over natural resources as a “people” in the sense of the UN Covenant of Human Rights (Article 2). The Home Rule Commission based its work on the fundamental assumption that the power to legislate and the power to appropriate funds could not be separated (Hjemmestyrekommissionen 1978).  In relation to non-renewable  resources this involved a balance between two diametrically opposed interests. On the one hand, political independence from Denmark would require that Greenland could sustain itself financially, possibly in part through mineral revenues. On the other hand, as long as the “Unity of the Realm” remained, the Home Rule Authority would be constrained in its mineral policies, and Denmark would retain some control (Harhoff 1993).  This led to the  formulation of three main principles to govern mineral resource policy: 1.  Greenland and Denmark should have equal rights when it comes to designing and im plementing mineral policy, and in important specific matters. This equality principle reflects that mineral resources are of vital interest to both Greenland and the nation as a whole.  2.  There should be established a joint decision-making power, vested in the national author ities and the Home Rule authorities, with respect to major decisions in the area of min eral resources, such that either party can oppose a proposed resolution (the mutual right of veto)  3.  Practical cooperation was to be established between political institutions, and the admin istrative and technical agencies necessary for adequate administration of mineral re sources, 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 res ident 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-  158  Past and present mineral policies in Greenland  tween the Danish Government and the Landsstyre, and that any member of the Greenland Landsstyre (members of the Home Rule cabinet) may demand that the matter be laid before the Landsting (legislative assembly).  Division of powers in the administration of mineral resources The three principles underpinning the regulation of mineral resources determine the allocation of powers and the administrative organization described in figure 7.1.  Figure 71. Organization of the ‘joint decision-making power” in relation to mineral re sources in Greenland (modifiedfrom Foigel (1980)).  159  Past and present mineral policies in Greenland  The Minister (of Energy) has the power to issue permits (Mineral Law sections 6 and 7), pro vided an agreement on the matter has been reached with the Home Rule Administration 50 (Mineral Law section 3). The Joint Committee can give recommendations to the two governments in cases where agreements between the two must be reached (Mineral Law section 4[1]), i.e. in matters relat ing to individual permits. The Committee can also advise the two governments on other is sues related to mineral resources. In legal terms the recommendations from the committee are not binding (Harhoff 1993). The Mineral Resources Administration for Greenland (MRA) is a department in the Ministry of Energy, and is directed by a chief and a deputy chief. The chief is appointed by agreement between the two governments (Mineral Law section 5[2]). The MRA has two tasks. One is the ordinary administration of mineral rights (Mineral Law section 5[1]), while the other is its role as secretariat for the Joint Committee (Mineral Law section 4{4J). It is important to note that the MRA is subject to the Minister’s powers when carrying out its first task, whereas the power to instruct the MRA in its second role lies with the Joint Committee (Harhoff 1993)  As noted above, the mineral resources issue was one of the most difficult to resolve when Greenland 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 de partment (initially in the then existing Ministry for Greenland). The argument turned on the question of who should have the power to issue permits and concessions: The Minister, the Home Rule Authority or the Joint Committee ? The latter solution was unacceptable from the Danish point of view because releasing control 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 the linkage of control over minerals to territorial control was that only the Government of Den mark could dispose of mineral rights. The Greenland side in the negotiations was opposed to 50 This is the Joint decision making power.  160  Past and present mineral policies in Greenland  this argument as a matter of principle, but fear of an “information monopoly” also played a role. A counter-argument of a similar practical nature was that placing the MRA under the Ministry was necessary in order to have the required administrative capacity in a complicated areas’ (Harhoff 1993). A further argument for placing the operations of the MRA under the Ministry for Green land (later the Energy Ministry) was that these operations had to be subject to the governmen t’s parliamentary accountability (Hjemmestyrekommissionen 1978). Nevertheless, a number of 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 these are frequently referred to as “independent public institutions”. This implies that, if political consensus exists, then it is possible to create independent institutions (Harhoff 1993).  Options for government participation, and the creation of Nunaoil The notion of state participation in mineral projects has existed at least since the 1935 cryo lite concession was negotiated. In the 1980s it was introduced during the negotiations over the concession to explore and produce oil in Jameson Land in central East Greenland. The idea seems closely related to the developments in Danish policy towards the petroleum concessions in the North Sea, where state company involvement was heavily promoted during the late 1970s and early 1980s. During the autumn of 1986 the policy of state participation was extended to include other minerals than oil and gas and from that time onwards all prospecting permits and explo ration concessions contained an option clause allowing state participation. The extension was first 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 concessions was necessary for the DK to be able to comply with international treaties on energy supplies (Foigel 1980; Harhoff 1993).  161  Past and present mineral policies in Greenland  taming 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 1988 the option clause became more focused. It consisted of two parts, first an option for the state to acquire up to 25% of any exploration stage project in return for payment of past explo ration cost in proportion to the states share (i.e. max. 25% of exploration cost). This option had to be exercised within 2 years of the original concession issue date. Secondly, the state had 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 addi tional 20%). Whether this second option was to be carried by the private investor or not re mained unclear since the question was to be settled as part of the negotiations over the eco nomic terms of a production concession (Mineral Resources Administration for Greenland 1988)  Revenue sharing between Greenland and Denmark The revenue-sharing section in the 1979 Mineral Law provided for negotiations over the shar ing of revenues in excess of the Danish transfer payments to Greenland. However, in 1988, the Home Rule government succeeded in changing the distribution formula such that revenues iess than 500 million DKr annually were divided equally between Greenland and Denmark, while sums 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 until mineral revenues matched current net unrequitted transfers meant that the Home Rule Authority had no incentive to welcome mineral projects (Lyck 1988). Indeed, it may further be argued that the Home Rule Authority had an incentive in delaying activities until a better sharing mechanism was in place.  162  Past and present mineral policies in Greenland  MINING POLICY REFORM, 1991  Generally bleak prospects for the Greenland economy, the closure of the Black Angel mine in June 1990, and the end of petroleum exploration in Jameson Land prompted a reappraisal of mineral policies in the spring of 1990. The driving force behind this effort seems to have been the Greenland Home Rule Authority, as indicated by the official records for the Greenland Landsting. During 1988, several speakers mentioned the need to provide more attractive in vestment terms . To this end a group of experts was directed to examine the possibilities of 52 mineral policy reform. The group was specifically asked to consider the following issues (Mineral Resources Administration for Greenland 1990a):  1. 2.  The major components of a policy designed to generate significantly greater levels of mineral activity in both the short and the long term; Description of the conditions necessitating the change of policy, including the closure of the Black Angel mine and the problems facing other industries in Greenland;  3.  Analysis and design of specific measures which could promote the policy goals, includ ing changes in the terms offered to investors;  4.  Examination of the possibilities of coordinating efforts to promote mineral activity with efforts in other industries in Greenland;  5.  Address the division of administrative tasks in relation to efforts to promote mineral and other activity.  The group of experts, which all came from inside the MRA-structure, from Nunaoil or from the Greenland Home Rule Authority, was established on April 18th, 1990, and delivered it’s conclusions a little over one month later, on May 23rd, 1990.  Objectives The report (Mineral Resources Administration for Greenland 1 990b) defines two long-term goals:  52 Grønlands Landstings forhandlinger 1988, p. 713.  163  Past and present mineral policies in Greenland  1.  A significant increase in activities, both exploration and production;  2.  That society benefits from mineral activity through industrial development, employ ment, 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 and technology by offering internationally competitive terms, that the mineral sector is not iso lated from the rest of the Greenland economy, that society retains sufficient control over events in the mineral sector, such that the development process is managed and occurs in a deftnsible manner with respect to environment, safety and resource issues , and that mineral activities are 53 accepted 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 geo logical terms, and argues that, on average, 40-50 exploration projects will generate 2,000 anomalies, of which 1,000 will be examined more closely, producing 50 interesting targets which are then reduced to approximately 3 targets of economic interest. One of these is then likely to lead to production. If mining is to contribute to the Greenland economy, between two and four medium size mines need to be operating along with several smaller ones. The conclusion 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 explo ration wells and 10-15,000 km seismic lines annually, valued at 50-100 million US$. Ideally these goals should be pursued with as many companies active as possible. Since financial  53 Both the strategy report, previous legislation and the new Mineral Law note that exploitation of minerals must occur in a way which is defensible in terms of “resource issues” without ever being specific about what this means. This may refer to common-pool problems (Libecap and Wiggins 1985). However, the MRA has in the past imposed production limits on the Black Angel mine (Greenex 1990), see the discussion in chapter 9.  164  Past and present mineral policies in Greenland  commitments of this size require that terms and conditions of future operations are known, the report recommends that projects and exploration areas in various stages of advancement are promoted by the Government clearly signaling where, how and on what terms blocks will be offered for bidding/application during the next 5-10 years.  Mineral tenure The recommendations with respect to tenure and economic terms distinguish between miner als and petroleum situations. For minerals, the report recommends that the security of tenure is improved by giving the holder of an exploration concession or permit the right to develop any mineral deposit he may find. The chief obstacle to such a clause seems to have been the desire on the part of the politicians to retain some form of right to decide whether mining should occur. For petroleum, the existing type of title was to remain unchanged.  Economic terms for minerals The question of economic terms preoccupied the experts at length, the main issues being taxa tion of mining firms and state participation in operations. Key issues identified were the ef fect of corporate taxes and dividend taxes, including possibilities for tax credits in mining companies home countries, tax jurisdiction, and tax-based incentives. The discussion of state participation in projects (based on the option policy described  above) cited the advantages (improved information and influence, participation in production, acquisition of knowledge inside Nunaoil A/S), and the disadvantages (high share, private in  vestor 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 option for state participation in production remains, albeit at a much lower level than the previous 25%. The main preoccupation in this context was how to keep terms competitive. The report did not, however, include any information on what other countries are doing in this respect (Mineral Resources Administration for Greenland 1990b).  165  Past and present mineral policies in Greenland  Economic terms for petroleum production In contrast to the administrative policy pursued for metallic minerals, concessions for petroleum exploration have always been combined exploration and production concessions. The report argues that terms change over time in response to changing conditions in the world petroleum industry, and that individual licensing rounds may well differ with respect to taxa tion, state participation and work requirements. As a result, there is not the same need for fixed terms as in the case for minerals. Nevertheless, real offerings require extensive seismic investigations which again require private (i.e. oil company) investment. This will not be forthcoming unless the main terms and conditions of offerings are clearly stated.  THE NEW POLICIES AND THEIR IMPLEMENTATION  As a direct result of the report described above, a new “Greenland Mineral Law” was drafted and enacted by the Danish Folketing in May 1991. The Law itself sets out a general frame work of regulation, specifying the powers of the minister, the rights and duties of permitholders and the administrative structure. As companions for the new Law, a document specify ing “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 the more detailed regulations.  The 1991 Greenland Mineral Law The first chapter is similar to the 1979 law and regulates the administrative structure. The most important section is the third, specifying that all permits, whether they be for prospect ing or exploration/production are issued according to agreement between the Danish and Greenland governments. Thus, in principle each and every project needs political approval.  166  Past and present mineral policies in Greenland  The second chapter, on preliminary investigation permits, has an addition allowing the author ities to require various payments. Generally, more detailed regulation, some of which previ ously appeared in the corresponding chapter of the 1965 Mineral Law, is delegated to the min ister. 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 not give any exclusive right. Alternatively permits can be issued giving the holder the exclusive right to explore and mine. The remaining sections of chapter 3 allows the minister to charge fees and other payments, to require state participation , to require use of local labour and 54 suppliers, and to specify that development plans must be approved. This chapter thus sets out the general principles and ministerial powers in all mineral resource questions. The fourth and fifth chapters contain specific regulation of petroleum and minerals, re spectively.  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 purposes are for a term of 30 years). Otherwise, the main special provision for petroleum allows the minister wide powers to make companies with adjacent blocks covering the same reservoir cooperate. 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 exploration permit 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, royal ties, rental fees and state participation to the extent that these were set out in the exploration permit. 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] state participation have been specified in exploration permits, or where exemptions from taxation has been  167  granted.  Past and present mineral policies in Greenland  Abandonment plans must be provided when mine development is proposed, and developers must show that provision has been made for their implementation. Chapter 9 of the Mineral Law describes the formula for sharing mineral revenues between Greenland and Denmark, which is unchanged from the 1988 revision of the Mineral Law, and defines the types of revenue subject to the sharing agreement. The sections in chapter 10 vests a range of powers in the minister, and defines the duty of the concessionaire to operate in an environmentally and operationally safe manner, such that exploitation takes place in a “sound” way with respect to resource use . 55 The minister can issue regulations in respect of these matters, and must approve any construction 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 of miscellaneous provisions. Individual concessions must set out the extent of the concessionaires duties after the expiry of his concession. Danish laws of compensation apply, and concession aires can be required to take out special insurance coverage. In cases where mining occurs without permission, where concessionaires fail to obtain proper permissions, disregard the terms of their concession, or fail to observe orders issued under the Law, the appropriate sanc tions may be fines or jail sentences.  Principles, Procedures and Standard Terms The new Greenland Mineral Law leaves many details to be regulated in each permit. The ap proach adopted by the Mineral Resources Administration is one of issuing a document speci fying “Principles and Procedures”(Mineral Resources Administration for Greenland 1992d), accompanied by sets of “Standard Terms” for preliminary investigation permits, and explo ration permits, respectively. Each license or permit consists of a page defining the area in question 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.  168  Past and present mineral policies in Greenland  The Principles and Procedures document describes in detail how applications should be made, how they are formally processed, how competing applications for exploration licenses are treated, and further a number of points also contained in the Standard Terms. The impor tant 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 political review, and then the Minister and the Home Rule Authority makes a decision and the Minister issues the permit. However, in practice the procedure can be much simpler. According to the rules of procedure of the Joint Committee applications can be processed by the Chairman and the two deputy chairmen of the Joint Committee, and their recommendation can then be en dorsed at the next full meeting of the Committee (Mineral Resources Administration for Greenland 1992b). The Standard Terms then provide the detailed rules for the mineral activity, including area definitions, term limits, charges and fees, activities of others in the area, work require ments and allowable expenses, approval of activities, inspection, abandonment of sites, report ing, use of local labour and suppliers, the transfer from exploration to production, transfer of permits, the forfeiture of permits, liability, dispute resolution, and remaining liabilities after the expiry of a permit. For exploration permits the Principles and Procedures document (Mineral Resources Administration for Greenland 1992d) sets out the normal items: The term of the license, its extent, 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 un der no obligation to conduct work in order to keep their permit in good standing, and need not refund administration costs. The MRA can, however, require payment for the cost of site inspections.  169  Past and present mineral policies in Greenland  Formal procedure  Informal prodedure  Application for prospecting permit or exploration licence  Application for prospectingpermit or exploration licence  Mineral Resources Administration  Mineral Resources Administration  4  mtion  mon  Joint Danish-Greenlandic committee on mineral resources  For endorsement  Preliminary decision  Recommendation  Home Rule Authori  Mimster ror Energy  Decision Permit  issued Figure 7.2.  Administrative processing ofapplications  Work requirements for exploration permits are based on a combination of a fixed sum per 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 exploration licenses are allowed for the calculation of work . Special provision is made for exploration 56 in 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 keep licenses in good standing.  56 To improve the attractiveness of Greenland, the calculation of allowable expenses has recently  been modified  such that total allowable expenditures can now be inflated by 50%. This applies to expenditures in 1993 and subsequent years (Mineral Resources Administration for Greenland 1993). 170  Past and present mineral policies in Greenland  TABLE 7.1. ANNuAL WORK REQUIREMENTS (DKR) Year  Work per license  1-2 3-5 6-10 11-  Work per km 2 100,000 1,000 200,000 5,000 400,000 10,000 To be agreed between applicant and the MRA  Source: (Mineral Resources Administration for Greenland 1 992d) Work requirements are to be inflated by the Danish Consumer Price Index  Following section 7 of the 1991 Mineral Law, the Minister for Energy can issue permits to ex plore and produce minerals. In “Principles and procedures” and the Standard Terms for ex ploration licenses, this is interpreted to mean that an exploration license can be converted to a production license, if certain conditions are fulfilled. The application to convert must be ac companied by the following documents:  1.  A statement from the holder of the exploration permit stating that a deposit is com mercially 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 can be used to obtain finance for development (i.e. a “bankable” feasibility report). The report must include a geological assessment of the deposit, as well as specification of the technical, economic and environmental parameters on which the statement (1) is based;  3.  The licensee’s proposal for the area to be covered by the mining lease.  Economic terms The Standard Terms attached to exploration permits specify a number of fees applicable at various stages of the exploration process (table 7.2). The main form of taxation occurs, how ever, under the Greenland Income Tax Law. This was changed during 1991 as part of the min eral policy reform, and the tax regulations facing a mine operator are now fairly simple.  171  Past and present mineral policies in Greenland  Firms domiciled in Greenland are fully liable for taxation in Greenland, whereas foreign firms carrying out mining operations are subject to limited tax liability.  TABLE 7.2. FEES FOR MINING RELATED PERMITS Activity Fee (1992 DKr, inflatable at Danish CPI) Issue of preliminary investigation permit 15,000 Transfer of preliminary investigation permit 7,500 Issue of exploration permit 25,000 Annual fee, years 6-10 25,000 Transfer of exploration permit 12,500 Issue of mining permit 100,000 Administration of mining permit actual cost Source: 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 transac tion. For firms with limited tax liability, only income derived from the activity in question is liable, and only deductions related to that activity are possible. Income is determined us ing the arm’s length principle, such that transactions between affiliated enterprises are adjusted to reflect normal commercial conditions (in order to prevent transfer pricing). Depreciation can 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 with the shareholder, at 35% if the shareholder is a licensee under the Greenland Mineral Law). If taxable income is negative, the amount may be carried forward until offsetting positive in come occurs, or it may, upon special application, be carried backwards. Two special deduc tions 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 of the investment in plant and equipment for such secondary processing. This deduction is appar ently available for an unlimited number of years. For the computed tax-base, the current tax rate 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 m . The value is to be determined in relation to a 3  172  Past and present mineral policies in Greenland  standard crude product (Brent Blend, fob., Sullom Voe). For production less than the 79.5 million m ’ the royalty is set at 1%. In addition to the royalty, however, there is a state par 3 ticipation clause. Under this, Nunaoil A/S will participate with a 15% share in any project on a carried interest basis. In a production phase, defined to begin when a development plan has been approved, Nunaoil will not be carried. The private partners can be required to pur chase 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 are listed 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 (total area up to approx. 2,400 km ; 2  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 explo ration requirements have been met;  5.  A number of fees are payable. In the production phase permitees contribute the cost of administration to the MRA;  6.  If a viable deposit is found the permit can be extended, for the area in question, for a pe riod 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 sub mitted.  173  Past and present mineral policies in Greenland  TABLE  7.3. REQUIRED PETROLEUM EXPLORATION WORK  Year Minimum work required 1-3 250 km multi-channel reflection seismics per block.  Minimum expenditure 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 protection All matters of environmental protection related to mineral activities are regulated through the Greenland Mineral Law, and through the Standard Terms for various types of permit. The general power to issue regulations on environmental matters is contained in section 24 of the Mineral Law (Mineral Law 1991): “The minister can issue regulations for activities governed by 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 dur ing, and after exploration activities. The rules of conduct which are collected in a separate 60page booklet includes both environmental protection rules and regulation of other aspects of the exploration process. The former specifv what types of equipment may be used, and activi ties undertaken without separate permission from the MRA. The rules also imply that permi tees have a general duty to minimize the environmental impact of exploration on landscape and vegetation. The general principle for ending exploration projects is that sites must be left in the condition they were found (i.e. all installations must be removed, and all damage to na ture repaired).  57 Authors translation. Regulations of technical, safety and resource conditions have not been issued.  174  Past and present mineral policies in Greenland  When a production decision is being made, section 14 of the Standard Terms for explo ration 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 during negotiations with the MRA concerning the detailed planning and implementation of the de velopment and production phase (Mineral Resources Administration for Greenland 1992e).  ON THE CONTENT AND SUFFICIENCY OF THE 1991 POLICY REFORM  Mineral policy in Greenland exhibits incomplete understanding of the nature of the mineral industries. The problem seems most acute in the case of mining regulation, while petroleum policy appears generally more assured. This may be explained by the fact that Danish admin istration has considerable knowledge in relation to petroleum in the North Sea, but virtually no experience with mining. The following sections analyze four areas where serious problems exist. The first is the political and administrative organization. The second treats the discrepancies and ambiguities found in the existing regulatory framework. The third area of concern is taxation, where pol icy credibility plays an important role. Fourth is the matter of emphasis placed on petroleum resources, and government investment in mineral exploration.  Political and administrative organization The argument about who “owns” the resources has had unfortunate consequences. It seems that the importance of mineral rights has been overly dramatized when in fact these rights are little more than leasing contracts. In other words, the amount of control given up by issuing a per mit is limited. It can be argued that the legalistic preoccupation with control, for example in the event of severe energy shortages which would activate international treaty obligations on energy supply, has legitimized a refusal to view the operation of market forces in relation to mineral rights as the normal and preferable allocative mechanism. The energy-treaty argu  175  Past and present mineral policies in Greenland  ment is, however, a remote possibility under most circumstances. A more plausible explana tion is that Denmark wanted to retain some control over the only reasonable chance of recover ing 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 clear that the Joint Committee plays an important role . Several observers have noted, however, 58 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 Green land, has a long history but it only became an issue when Greenland itself became an interested party, 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 in Greenland as part of the Home Rule Administration (this can be seen from statements made by Greenland’s Premier, Mr. Lars Emil Johansen, in the course of a recent debate on mineral ), but that raises exactly the same problem, with Greenland and Denmark in reversed 59 policy roles. The natural solution is to place the MRA directly under the Joint Committee, but this has never been seriously considered (Harhoff 1993). The importance and influence of the MRA has been investigated by Davis and co-work ers (Davis and others 1984). Their analysis 60 confirm the high concentration of information at the MRA, and the MRA’s ability to control, and shape the information provided and the agenda of the Joint Committee. This conclusion is supported by Harhoff (1993), who argues that, because the Joint Committee is dependent on the MRA, the latter can influence the  58 The recommendations from the committee are always followed by both governments, as can be seen in the annual reports from the Joint Committee. It is, however, difficult to determine the extent of discussions taking place 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.  176  Past and present mineral policies in Greenland  Committee’s decisions.  This necessitates a loyal cooperation between the MRA and the  Committee.  Discrepancies and ambiguities in the reformed mineral policy The various regulations issued by the MRA in the form of “Principles and Procedures”, “Standard Terms”, etc. contain numerous discrepancies and ambiguities. The first can be found in part A of the document “Principles and Procedures” (Mineral Resources Administra tion for Greenland 1 992d), and concerns the priority given to a holder of a preliminary inves tigation 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 special right, 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 place in the area applied for, a “discovery” must have been reported, and the basis for exploration must have been established. The interpretation of these rules is difficult. It is unclear whether the exploration must have taken place in the area applied for, or just in the area of the prelimi nary investigation permit. The concept of a “discovery of possible economic significance” is not defined, and it will be difficult to asses whether a permitee has established a “basis for further exploration”. These omissions create an incentive for holders of preliminary investiga tion permits to report anything which may be of economic potential. In extreme cases, with heavy prospecting activity in an area, each permitee will report any anomaly, in writing, in order to protect his investment. Even if things are clear up to this point, there is still the possibility that two holders of preliminary investigation permits have done all the correct  61 Author’s translation. The preferential status applies for a period of 6 months after field program.  177  the end of the permitee’s  Past and present mineral policies in Greenland  things to obtain preferential status. There is no way of determining how the conflict between these will be resolved . 62  In “Principles and Procedures”, both part A on general issues (section 2), part B on preliminary investigation permits (section 3), and part C on exploration permits (section 3) contain ex plicit and very detailed descriptions of the timing of issuance of permits, and the term of the permit. These rules mean two things. First, no exploration permits will be issued for areas covered by a preliminary investigation permit during the months of July, August and Septem ber, in order to allow holders of the latter type of permit to apply for an exploration permit themselves. Second, if a permit is issued before October 1st, that year will be year 1 of the term, which runs to December 31st in year 5. If permits are issued after October 1st, the fol lowing calendar year will be year one. These rules are unduly complicated and also unnecessary. The first rule is designed to give a holder of a preliminary investigation permit protection during the field season (Mineral Resources Administration for Greenland 1 992d). Both this and the priority rules discussed above indicates the ambiguity associated with this type of permit. On the one hand section 6[2] of the Greenland Mineral Law specifies that a preliminary investigation permit can be given to more than one party for the same area. On the other hand the “Principles and Procedures” document gives a number of rights and exemptions from the general rule. Rather than having a type of permit which is ill defined, there should be a clear distinction between preliminary prospecting activities involving no rights, and “proper” exploration rights which are 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 confusing  62 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.  178  Past and present mineral policies in Greenland way (Mineral Resources Administration for Greenland 1992d). Section 7[1] reads: “A spe cial personal preliminary investigation permit can be issued to an individual who intends to prospect on his own account, and at his own risk i.e. conduct prospecting which does not in -  volve employment or contractual relations with others  “63•  There is little doubt that this  provision has been made with the intention of promoting local participation, and eventually develop a prospector culture in Greenland. Unfortunately, it is very difficult for individual prospectors to exist in a vacuum. The prospectors business is based on the information he can produce and sell. If a prospector cannot enter into contractual agreements, as prohibited by section 7[1], the prospector’s permit is meaningless. If the intent with this restrictions is to prevent individuals from subcontracting work from mining firms this should be more clearly stated, 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, respec tively (Mineral Resources Administration for Greenland 1 992e; Mineral Resources Adminis tration for Greenland 19920. While the general progression, as shown in table 7.1, is compa rable to for example Canadian mining legislation , it reflects a strange conception of dili 64 gence provisions. The obligation to carry out the required amount of exploration (section 6 in the standard Terms for exploration permits) rests on the holder of the permit. The Standard Terms em phasize that work carried out before a permit changes hands cannot be counted as work by the new permitee. In “mainstream” Mineral Laws, as expressed for example in Canadian provin cial Mineral Laws, the work required to keep a mineral title in good standing is related to the 63 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).  179  Past and present mineral policies in Greenland  title itself, not its owner. In addition, it is not clear from the Standard Terms how a new permitee will be placed on the scale of increasing work requirements. Exploration expenses exceeding the required amount can be carried forward for up to 3 years. 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 in Canadian mineral legislation. It might be argued that it does not matter whether exploration expenditures follow the firm or the permit: the value of contract for the transfer of the permit to a new permitee will reflect the lack of transferability. On the other hand it might be argued that valuing the real information 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 en courage redundant exploration expenditures, as discussed in chapter 4.  The structure of the Mineral Law is also ambiguous on the question of state participation. Sec tion 8 [2] gives the Minister the power to make such participation part of the conditions for a permission to explore and produce. For metallic minerals, section 16, limits this power to cases 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 provi sion in the Greenland Income Tax Law. For petroleum, the minister’s powers to require state participation remains. For all practical purposes, state participation in mining projects cannot be required, as specified in section 16 of the Mineral Law. However, given the structure of the Law, it stands out as the general rule. For mining a departure is then made, but only in certain cases. The fact that the participation rule has been placed in chapter 3 of the Mineral Law, which contains general rules for exploration and production permits, indicates another inconsistency. If the purpose is to use the rule only for petroleum permits, why was it not placed in the chapter (chapter 4) dealing specifically with this area ?  180  Past and present mineral policies in Greenland  The standard Terms and the rule-book for preliminary investigation and exploration permits are 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 specifying that a satisfactory EIA must be submitted as part to the permitting process. The rule-book covering various types of exploration activity is extremely comprehen sive. It contains primarily environmental protection rules, but includes a number of rules for reporting, safety and communications as well. Many of the latter refer to current regulations in Greenland (these the permitee must obtain and comply with). In general the practical rules are 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 ve hicles and aircraft. In most cases the rules appear intended to secure near-complete restoration of any disturbance of natural conditions resulting from exploration activities. In a small num ber of areas in Greenland the use of aircraft is specifically regulated in terms of minimum fly ing altitude, frequency of flights, and periods of applicability, in order to protect specific species, including birds, muskox and polar bear. In other areas, however, some restrictions ap ply in areas with “rich animal life”. It is very difficult to asses the relevance of such rules. It is likely that they are well founded on biological considerations, whereas it is less likely that the relative values of disturbing animal life, and minimizing exploration cost have been con sidered (if this is at all possible). The special rules which govern use of aircraft reflect the problems inherent in environmental regulation of mineral activities. First is the information problem. The specific restrictions noted above apply in 3 lim ited areas in Greenland. The emphasis on these areas does not indicate that they are the only places where a rich animal life is found, but rather that information happen to be available about these areas. Given that the areas with explicit regulations have all recently seen explo  181  Past and present mineral policies in Greenland ration activity (Mineral Resources Administration for Greenland 1991; Mineral Resources Administration for Greenland 1992a), it is likely that the information on which the regula tions are based was acquired as a result of the interest in the area. If there had been no activity there 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 fol lowing story. Consider an area covered by an exploration permit. As exploration proceeds two  things become clear: the area hosts a “world-class” nickel deposit, and one of the three  known nesting colonies of a rare bird. If the deposit is developed it will be a great threat to the bird. And if the bird is protected, it will be the end of the mining company. The only two  ways the situation could have been prevented was if the government had not issued the  permit, 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: environmental constraints may prevent the development of discoveries, and the investment in information about the deposit will be redundant . With full knowledge about environmental resources and 65 their value it would not be difficult to set up a framework of environmental regulations re lated to the sensitivity of different areas. By establishing such a framework, and integrating it with the way mineral titles are issued, a country can in fact create a high degree of protection for the investor. This can then be used in the competition to attract mineral investment. In most cases, however, information about the environment is highly imperfect, and becomes known only when some external event prompts its acquisition. There appears no easy way of solving this problem. Some countries may have sufficient information to implement the land use planning approach discussed in chapter 5, where prospectors must observe the rules of conduct applicable in a given zone,  4 evaluate their re  65 In some cases the government may compensate owners of a deposit if their title is expropriated for other use of the land (e.g. as wilderness). However, strict environmental regulation may have the same effect but without compensation being paid.  182  Past and present mineral policies in Greenland  suits in the light of general environmental constraints applicable in that particular zone. Unfor tunately, 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 arises from the fact that some exploration projects leads to the discovery of mineral deposits which are economically marginal. Such deposits may eventually move into the “economically mineable” category, for example as a result of technological advances or price increases. Under the rules discussed above, however, there is no provision for such cases. A permit can be main tained in good standing by continued exploration (or by direct payments to the MRA). It cannot be converted to a production permit because it cannot obtain a bankable feasibility study. As a result the asset (the marginal ore and the information about it) will revert to the state.  Taxation and credibility The special provisions for taxing mineral companies were noted above. Mining companies pay 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 very inviting. Comparisons with other tax regimes reveal, however, that most less developed coun tries have some form of provision for taxing additional profits. Table 7.3. indicates that Greenland is more attractive in tax terms than many of the other 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 the tax  rate will be changed they will base their decisions, not on the present tax rate, but on what  they expect it to be. When seen in this more dynamic perspective, Greenland may not appear as attractive, as it would like to. The problem can be described by borrowing a concept from price theory, the “rational expectations hypothesis” (Muth 1961). This is the assumption that firms will utilize all the information available to them to predict the future price of a prod uct. In this case the “price” is the rate of taxation on mining profits.  183  Past and present mineral policies in Greenland  TABLE  7.4.  SUMMARY OF MINING TAXATION IN SELECTED COUNTRIES  Country  CotCapital allowance porate tax rate %a Accelerated depreciation Australia 39 %a 34  Canada  Chile  32.5%  Papua  35%  Residual divided by remaining life of operation, or by a fixed factor, whichever is the lesser.  56%  Capital cost fully deductible in the year incurred. Unused depreci ation can be carried forward. 40% in year 1 10% in each of years 2-7 Benefication allowance: 20% of capital cost and 15% of operating cost of further processing facili ties. Current capital cost deductible in year incurred. Special concessions for new mines. Capital cost fully deductible in the year incurred. Unused depreci ation can be carried forward.  New  Guinea  South  Africa Tanzania  22.5%  yrs 1-4; 50% from year 5  Zimbab  45%  we  Green land  30% of pool, development cost 20% of pool, machinery cost 100% of pool, exploration cost. Straight line over useful life (some agreements for accelerated depreciation).  35%  Loss carryforward  Additional profit tax  Indefinite  No  7 years  No  3 years back ward Indefinite, No adjusted at cost of living index 7 years  Indefinite  35% of accumulated value of net cash re ceipts. Accumula-tion rate is 20% or average US prime rate + 12%. Adjustment for cur rency fluctuations 33.3% of undistributed profits  Withholding taxesb Dividends: 15-30% Interest: 10% 10-25%  Dividends: 32.5% Interest: 40%  Dividends: 10% Interest: 30%  Dividends: 15%  Interest: Nil  Indefinite  APT payable on net Dividends: 10-20% cash flow in excess of Interest: 12.5-20% that needed for a threshold rate of return  Indefinite  No  Dividends: 5 or 20% Interest: 10%  Indefinite  No  No  Notes: a. Effective average tax rate b. Depends on double taxation treaties Sources: Corporate taxes: A Worldwide Summary, Price Waterhouse, London 1990, Kumar, 1991, MRA, 1992.  The experience in the mining industry seems to be that tax regimes are stable oniy as long as profits remain moderate (i.e. not far above the returns on other assets). If mines sud denly begin to earn large additional profits the state will be tempted to demand a share of these. The cases of the Bougainville re-negotiation (Pintz 1984), and lately the forced change  184  Past and present mineral policies in Greenland  in ownership in the Porgera project 66 are clear illustration of this experience. Even the agree ment on the 1935 cryolite concession shows that the idea is neither recent nor foreign to Green land. 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 the lines discussed in chapter 4 (see also chapter 8).  Emphasis on petroleum investment The investment by government in different types of exploration activities in Greenland was summarized in table 6.1 for the period 1986-1994. It is clear that considerable emphasis has been placed on petroleum relative to metallic minerals. It is questionable, however, whether this has been an entirely wise policy. Exploration activities undertaken by government rather than by private investors indicate that the government believes that markets are not working properly. It was argued in Chapter 4 that government exploration or subsidies for exploration could be motivated by excessive pre-sale exploration, or by higher than normal risk in explo ration. The first argument was qualified by reservations about the efficiency of government exploration, while the second was dismissed primarily because the risk could be diversified. In practical terms the apparent need for government provision of basic geological information was explained by the sunk cost nature of much of the information and of the titles acquired to protect the investment during exploration. The most important argument in favour of government exploration, reduction of pre-sale or pre-disposition exploration, requires that the problem is present. This is not the case in Greenland. If the high-risk argument is accepted for a moment, Greenland petroleum explo  66 Mining Journal newspaper, March 19th, 1993. The dispute arose over large increases in the reserves and profitability of the mine. The Government of Papua New Guinea forced the other partners in the project to sell a total of 15% of the equity to the government, the cost to be financed out of after tax proceeds to the government share.  185  Past and present mineral policies in Greenland  ration certainly fits the description. But the risk [relative to expected returns] is high only compared to other areas with petroleum potential. Thus it can be argued that the absence of private exploration in Greenland reflects not any form of market failure, but rather the oppo site. 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 explo ration solely on the above criteria. The funds used for the two major off-shore seismic cam paigns in 1990-92 came from a savings account in which the MRA had placed the revenues from the Jameson Land concession from 1986 to 1990 (Ministry of Finance 1986; Ministry of Finance 1990). It is probable that this account was not immune to the attentions of the Finance Ministry, and they had to be used before they were directed elsewhere. This interpretation is supported by the fact that this account was also used to finance the Danish government’s share in the equity expansion of Nunaoil A/S (Mineral Resources Administration for Greenland 1992a; Ministry of Finance 1991).  With respect to the policies adopted for petroleum it is difficult to asses whether the terms and conditions offered are competitive. However, the combination of a 35% corporate tax, a royalty of 5% (initially 1%) and a state participation of 15% on a non-carried basis, appears very moderate compared to the terms in the Danish sector of the North Sea. Corporate tax there is 34% (down from 50% a few years ago), and no royalty. In addition, a form of APT is payable on profits after an investment allowance which allows operators to deduct 25% of total investments annually for 10 years (Arbejdsgruppen vedrørende kulbrintebeskatning 1992).  None of the observations made so far in this section explain whether all the attention and ef fort involved in preparing a licensing round, such as the one held for the West Greenland Shelf areas South of 66°N in 1992 (which did not attract any interest (Mineral Resources Adminis tration for Greenland 1993)), was justified. Examination of the latest annual report of the  186  Past and present mineral policies in Greenland  Joint Committee reveals that the decision to proceed with the licensing round was based on a single argument. The initial realization presented is that exploration for petroleum during the 1990s can only be expected to occur in the off-shore West Greenland area. This was first signaled to the petroleum industry in January 1991. The Joint Committee formalized this by proposing a number of initiatives (Mineral Resources Administration for Greenland 1992a): 1. 2. 3.  A first licensing round for areas South of 66°N to take place in 1992-93; That the model permit be used (terms outlined above); 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 ex ploration carried out during the 1 970s, very ambiguous. The data indicated the existence of possible host structures for petroleum and natural gas, but these conclusions were considered highly uncertain. In addition, knowledge of the general types of source rock in the area, as well as experience from wells on the Labrador shelf, indicated that the area was more likely to contain gas than oil. Given the transport problems associated with gas this resource was con sidered 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, that significant technical advances in production technology must be achieved before any discovery is exploitable (Mineral Resources Administration for Greenland 1992a). According to the MRA, the essential reason for proceeding with the licensing round is the need to ci the level of interest. This need is apparently stronger than the reservations noted above (limited knowledge, non-existence of production technology). A further argu ment advanced by the MRA in favour of initiating the licensing round is that experience gained in the first round will be important in later rounds. Finally the MRA outlines the  187  Past and present mineral policies in Greenland  pected timetable for subsequent rounds. This is expected to provide an added incentive for investors to take an interest in the first round.  Based on the statements from the MRA and the Joint Committee it can be concluded that the decision to start a sequence of licensing rounds is based solely on the need to “test” the level of interest. If unsuccessful, “the consequences of such a situation [lack of response] are without greater importance for the area [in general], except that it will be necessary to wait some time before a new attempt to offer the [rejected] area is made” 67 (Mineral Resources Administra tion for Greenland 1992a). None of the statements in the annual report from the Joint Committee reveal whether the alternative to the policy adopted has been considered. The alternative is nQt to begin any li censing rounds until such a time when technology and also price makes a round relevant. Simi larly, the question raised by the lack of interest in exploration off-shore West Greenland has not been addressed by the Joint Committee and the MRA. This is whether the later licensing rounds 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 logical consequence of the absence of bids is then postponement of further rounds until interest in the area is renewed. Given the technological constraints noted above, and the low likelihood of increasing 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 and adds that despite the lack of interest in the first round, and despite the possibility of similar results in the next round, the MRA is of the opinion that planned rounds in West Greenland wa ters 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.  188  Past and present mineral policies in Greenland  3.  It is important to maintain the attention of oil companies and contacts established with  4.  them, and to appear credible by keeping to the announced schedule; Indefinite postponement of further rounds precludes testing the market.  These further arguments, which are uncharacteristically detailed for a statement from the MRA, are inconsistent and cling to the model of licensing rounds used in the past, and well known from the Danish North Sea licensing rounds. The first argument is true in theory, but must, in order to be applicable to the Greenland situation, take the current circumstances into account. This would primarily involve a more detailed analysis of oil companies investment strategies, and especially of the likely changes in oil prices. There is no evidence that such analysis has been carried out. Both the first and second reasons for continuing the planned rounds could be accommodated with a more flexible approach to the way licensing rounds are conducted. Here a postponement of the next round, for example for 5 years would be a solu tion which would not damage whatever credibility the MRA might have, while allowing new information to become available.  CONCLUDING REMARKS  -  WHEN POLICY IS REACTIVE  The process of making mineral policy in Greenland consisted of a number of phases, starting in earnest with the enactment of the 1965 Mineral Law for Greenland. Major changes were in troduced at the time Home Rule was established in Greenland in 1979, while a number of modifications during the 1980’s made Greenland an increasingly unattractive target for min eral investment. During these years, the Black Angel mine was operating with considerable success, yet nothing was done to follow up this success, nor was any attention paid to the conspicuous lack of new exploration investment. The levels of investment noted in chapter 6, which are low by any standard, were only recorded from 1986 onwards. It seems that the opportunity to capi talize on being a mining country was missed. 189  Past and present mineral policies in Greenland  Then in 1990, when it became impossible to ignore the rapidly approaching closure of the Black Angel mine, an effort to review the Mineral Law was launched. It is important to emphasize that this review came about primarily at the instigation of the Greenland Home Rule Authority. The resulting changes in the mineral policy was primarily a clarification of taxation rules, removal of the option clause, and improved security of tenure. However, a number of important inconsistencies were noted above, as was a number of more fundamental problems related to the long—term credibility of tax policy and the wisdom of the investment strategy for publicly funded research in mineral resources. These problems can, to some extent, be attributed to the recent implementation of many and far-reaching changes in both policy and regulations. It is possible, however, to point to a number of special circumstances which may also have contributed to the problems. First is the fact that the regulatory system has generally existed without the moderating presence of a domestic mining industry. A mining industry would bring out the practical problems arising from the ambiguities and inconsistencies discussed above. Thus there has been little opportu nity 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 the mining industry, and only limited exposure to the petroleum industry. Thirdly, the principle of staff rotation within each ministry means that the term in office of each case officer is lim ited to a few years. This means that the burden of carrying the accumulated body of experi ence about mining falls mainly on the department executives. Finally there is the problem pointed out by Davis and co-workers (Davis and others 1984) whose highly detailed analysis of the organization of mine