When the bean counters rule

Lets face it, the world of business is the world of money. And by corollary, the entire decision making must be driven by money. yeah yeah Net present value, value creation etc are the terms bandied around all the time these days in the environs of the mines (when the cacophony surrounding the "sustainability" isnt drowning out everything)
in the midst of it all we seem to have lost track of what mining is about. the way i see it, it is the extraction of minerals within the earth and turning them into resources which are needed for human consumption aka mining and processing. but the critical part is, it is part of the extraction and processing which is the defining characteristics of mining. So mining is in the digging, its not in the money! as much as money may drive it, it is in the moeny. At the end of the day, mining is an engineering discipline. Something which requires disciplined study of sciences - from geology to chemistry to physics and applying the same to optimally extract mineral resource from the ground. something which people forget (sadly even companies who are into this sector) that there is a significant technical expertise involved in the mining industry. it is the miners and the geologists and the mining engineers who create the real value in a company.

coal-gate redux

its funny when you read your own blog after a while, sometimes it gives a rather "biased" viewpoint of a particular matter when your intention was to create a balanced view of it. Hence  this redux of the coal gate blog.  

Firstly, there have been some more developments in the news flow of the Coalgate with PMO office coming out in support of the prime minister and some loud noises being created by the opposition in this matter. My personal perspective on the whole matter seems to be rather contorted. It appears that the whole debate is rather skewed on this subject. The entire debate is focused at the moment on the "scandal" and "scam" aspects of it when one should be discussing and debating on what is an appropriate and optimum method of allocation of such natural resources.There are multiple constraint to solve this problem to get an optimum solution.

Firstly, what should be the optimum way of granting those resources so that the country gets the maximum return. This constraint has two parts, first of which is in itself a conundrum which has baffled all governments for  centuries - what is the return one is trying to optimize. Is it maximisation of a fixed quantum of money to be received by the government or it is maximisation of a "sharing of profit" with the government. Or is it a maximisation of the oft quoted "social" return including at the least "job creation" or provision of "cheap" resource to the consumers.

The second part is how?. is it through auctions and if yes what should be method of the auction. should it be, pay me a fixed payment to be made upfront such as done in the case of 3G or even some of the metro projects or bridge projects. Or should be through a profit sharing system as done in the Power sector sometimes. Or should it be through a "lowest supply cost" as it is done with the standard bidding guidelines for the power project  (which is theoritically result in the lowest cost supply to the electricity board and by corollary to the consumer). and say one has chose the method of auction, should there additional conditions on "technical qualification" such as experience of running power plants in case of power projects or "setting up of value addition facility" in case of mining. My personal view tends to be to err on the side of having the least number of restrictions (including) allowing people to sell off whatever bids they have won to some other person. The reason is simple linear programming principle - the lesser the constraints, its easier to maximise the return. so for mining companies i would prefer not to have any value addition requirements in any state (why should what is a national resource benefit only that state? not my state?). Secondly, that is especially true of mining and metals, the logistics and other resource constraints will in any case determine the closest place in proximity to the resource(or mineral deposit), resulting in a place which is best suited to exploit that resource. no sensible person would build a steel plant away from an iron ore mine if he could get a place to build it close to it. and no sensible power plant engineer would choose a plant site away from source of fuel (unless constraints by things like land, water etc). so it makes sense for the natural course of things decide the matter rather than putting constraints which could make the plant suboptimal. 

lets take an example, 

lets say the government of India decides to auction of coal blocks to anyone who is willing to setup a coal mine and has the money (that is one constraint i wont let go). and there are no restrictions so lets say a hi8gh flying entrepreneur decides to invest in coal mining projects and bids a big amount of money for taking the mine. he could hire the best technical people in the market and build the mine or he could get some other company to invest in the mine, say find a technical partner who could be happier to be involved after the upfront payment has been made and is more sure of what he is getting into lets say after a bit of exploration has had happened. If the incentive to hoard is reduced by introducing bank guarantees etc, it would also avoid any holdups in development of the assets. 

on the other hand, like it has happened with 3G, there could be situation a lot of money gets thrown into the bidding portion almost killing the industry or bringing it to chronic ill financial health. Its almost in a way the "market forces" weeding out the weak  players perhaps.

We could also have a situation where all the bids are out and then the players try to squeeze out concessions, sort of renegotiate their situation (a likely situation with newbies...sometimes common with age old players who are confident of negotiating their way out of a seemingly aggressive bid or with naive players who are confident but not capable of negotiating their way out)..

ironically, world over the mineral resources are given on the basis of "mining claims" which require nothing other than identification of areas which could contain resource. the claims result in exploration license which is the period where the lessee identifies resources through exploration. if he is successful, he would lodge a mining license application. if not, oh well, entrepreneur took a gamble and it didnt pay  off. globally, you can sell off once you discover a resource, thereby creating an excellent and big market for "junior miners" or junior exploration companies. through this budding entreprenuers (with geological understanding usually) will keep looking for new opportunities, looking for their one in a million jackpot mineral deposit which they could find and sell it one of the major miners or develop themselves into a company. its a system which seems to have worked countries like america, canada, australia which have had a very healthy development of resources.so why dont we just leave the system to work on its own?

so all in all, there are a lot of factors which need to be debated upon and sometimes even experimented with before we figure out the best way to allocate a certain resource.there is no straight answer for this question which seems have been the root question for economics since time immemorial. So we are sure in coal gate, we are asking the wrong question. Its not what went wrong, its how best we do it in the future.