APPENDIX 21
Memorandum by Rio Tinto
1. RIO TINTO
IN INDIA
(a) Rio Tinto has been in India since 1993
and currently has four offices there.
— Rio Tinto Exploration (RTE) has an
office in Bangalore and concentrates its exploration efforts on
diamonds.
— Rio Tinto Diamonds (RTD) has a representative
office in Mumbai, centrally positioned for its customers with
established cutting and polishing operations.
— Rio Tinto Iron Ore (RTIO), with an
office in New Delhi, has a joint venture to develop an iron ore
project with the Government of Orissa; and
— Rio Tinto Asia (RTA), also with an
office in Bangalore, is selling coking coal to steel makers and
the Group is offshoring project implementation and software development
for its business information systems.
(b) As a market, a provider of shared services
and potential asset base, India is growing in importance to Rio
Tinto. This was acknowledged with the recent appointment of Nik
Senapati as Regional Vice President India, based in New Delhi.
2. BARRIERS TO
INVESTMENT IN
INDIA BY
FOREIGN MINING
COMPANIES
The Hoda Committee
(a) Whilst India is rich in natural resources,
they are still largely undeveloped. In June 2005, Mr Montek Singh
Ahluwalia, Deputy Chairman of the Planning Commission, established
a committee to identify what measures will be needed to stimulate
the mining sector. It was asked to address the issues around procedural
and fiscal impediments, mineral policy and regulation. The commitee
has four members and is headed by Anwarul Hoda, a member of the
commission.
(b) Over the last 18 months, Rio Tinto has
had several high-level discussions with the Indian Government.
Tom Albanese, Chief Executive Copper and Exploration met Mr P
Chidambaram, Finance Minister in October 2004. Guy Elliott, Finance
Director met Mr Ahluwalia, Deputy Chairman Planning Commission
in May 2005 and more recently, Keith Johnson, Chief Executive
Diamonds met Kamal Nath, Commerce Minister in India and Paul Skinner,
the Chairman of Rio Tinto met Mr P Chidambaram at the WEF in Davos.
The Government has asked Rio Tinto for its views on what would
make India more attractive as a destination for investment.
(c) Rio Tinto has outlined its "value
proposition" to India, in which the mining sector underpins
general economic development in urban areas and also acts as a
"catalyst" for sustainable economic prosperity and social
well-being for rural communities who might otherwise be left out
of the "growth" story.
(d) Rio Tinto is engaging with the review.
The Rio Tinto India team made a detailed written submission to
the Hoda Committee in September 2005. This was followed by a presentation
in December 2005.
Framework for FDI
(e) Rio Tinto presented a framework for FDI
in mining to the Hoda Committee. The key elements were as follows:
— security of tenure through preliminary
exploration to mine development;
— speedy and transparent permitting/licensing
process;
— access to markets: enabling free
market competition for product; and
— access to market prices: allowing
investors to fully evaluate investments.
Impediments to investment
(f) Rio Tinto provided the Hoda Committee
with an analysis of the factors impeding investment and suggested
remedies. The main points are summarised below.
(i) State Expectations of Value Addition:
Certain States make downstream value addition
a pre-condition for granting Reconnaissance Permits ("RP"),
despite the Federal Government's insistence that such impositions
discourage investment and are not legally enforceable. Some States
are explicit in their policies, allocating what are described
as "captive" leases to those companies prepared to invest
in downstream assets.
Rio Tinto has proposed the international development
model, whereby competent mining companies develop the resources
needed to supply local markets efficiently. This would lead to
the development of large scale, internationally competitive operations
underpinning downstream infrastructure development.
Value addition requirements also have the knock-on
effect of imposing limitations on exports. There is perception
in India that iron ore resources are finite and must be preserved
for domestic use. However, exploration has not been undertaken
with modern techniques. As a result, the picture for iron ore
resources is incomplete. Similarly, limited mine planning and
beneficiation technologies are in use and advances could further
increase resources.
Rio Tinto accepts that local markets would always
be supplied first. However, there should also be opportunities
to export in order to meet demands for large-scale, low cost production
that can deliver a competitive offering to customers.
(iii) Access to Market Prices:
In some cases, price setting leads to poor investment
decision making. Rio Tinto contends that exposure to exports and
realisable market prices would enable investment evaluation and
decision making to be based on economic criteria.
(iv) Stable Fiscal Regime:
In order to be sustainable, mines require fiscal
regimes at Federal and State levels that are stable, globally
competitive and enable investment evaluation and decisions to
be made. Random imposts cause concern to international investors
and deter them from investing.
Ernst & Young's 2005 comparative study of
the Indian fiscal regime for mining and that other leading mining
economies was included with the Rio Tinto submission to the Hoda
Committee.
(v) Interaction with Forestry and other
Laws:
The process from Reconnaissance Permit to mining
lease is bureaucratic and time consuming. It is further complicated
by the need to coordinate with the forestry approvals processes.
The interpretation of laws, policies and approvals
processes needed to be made consistent.
(vi) FDI Policy and Press Note I:
Press Note No 18 (1998) stipulated that Government
approval be sought for new foreign investment and technical collaboration
proposals where the foreign investor has or had any previous joint
venture or technology transfer/trademark agreement in the same
or allied field in India. The Foreign Investment Promotion Board
(FIPB) exempted the mineral sector from the conditions of Press
Note 18. In so doing, it recognised the special challenges of
the mineral sector. The exemption is subject to a declaration
from the applicant that it has no existing joint venture in the
"same area and/or particular mineral". The terminology
used here is so broad that where a foreign investor has an existing
joint venture he is wise to seek either a "No Objection Certificate"
(NOC) or FIPB approval before investing; to eliminate the risk
of later disruption by an Indian partner. This defeats the purpose
of the exemption.
Press Note No 1 (2005) suggests that prospective
partners may wish to agree a "conflict of interest"
provision when setting up a joint venture, and puts the onus on
both the foreign and local partner to prove damage from any new
investment outside of the existing joint venture but in the same
field. The difficulty remains that, except in specific cases,
local partners still have the potential to obstruct unreasonably
further investment by the foreign partner. Press Note 1 provides
little benefit for a foreign investor reasonably seeking to set
up a wholly owned subsidiary to explore/mine in the same field
as an existing joint venture.
Rio Tinto proposed the international development
model, whereby mining joint ventures are typically formed to explore
for and mine a specific mineral within a specific geographic area
usually defined by a granted concession. In India, this concession
would include the reconnaissance permit, prospecting license or
mining lease areas. Rio Tinto suggested that investment in the
sector would be considerably improved by tighter definitions in
FDI policy and application of the key terms, "same area",
"particular mineral" and "same field".
(vii) State Royalty on Diamond Production:
The 10% State royalty on diamond production is
high compared to other diamond-producing countries and to royalties
for other commodities in India. When combined with India's corporate
tax rate and surcharges, the effect on a project's economics can
be substantial.
Rio Tinto supported last year's decision to reduce
India's corporate tax rate to 30%.
(viii) Restrictive Regulations on Exploration
Tenure:
The conversion of Reconnaissance Permits ("RP")
to Prospecting Licenses ("PL") after a three-year period
is difficult given the current PL limit of only 25km2 per company
per State. This is too small an area and too rapid a reduction
for effective exploration to be completed.
Rio Tinto supports the proposed revisions to
the Mines & Minerals (Development and Regulation) Act that
include increasing the PL limit to approximately 500km2 per State
and automatic conversion of RPs to PLs.
(ix) Import Duties on Exploration Equipment:
The mining sector is liable for 50% of drill
rig value when moving a rig onto site, regardless of duration
of work.
Rio Tinto is seeking equal treatment to the oil
and gas sector, which is currently exempt from import duties on
exploration equipment.
Next steps
(g) The recommendations of the Hoda Committee
are expected shortly. A positive indication of the Government's
intent was provided on 25 January 2005 when Kamal Nath announced
FDI in both the mining of diamonds and precious stones, and mining
of coal and lignite will now be allowed up to 100%. This is part
of a set of wider reforms to rationalise and liberalise FDI policy.
(h) Rio Tinto will continue to encourage
Ministers in the Indian Government to aspire to having a world
class mining industry with access to capital and the skills in
exploration, mine planning and social and environmental management
that are needed to establish long life, sustainable operations.
28 February 2006
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