Endowment funds created through DMFs can protect projects against price fluctuations
Financial Express | Joyita Ghose | April 19, 2019
Endowment funds created through District Mineral Foundations (DMFs) can increase the period for which funds are available and protect projects against price fluctuations.
A recent report of the Parliamentary Standing Committee on coal and steel examines the functioning of District Mineral Foundations (DMFs) and finds that fund utilisation has been much lower than expected. DMFs are district-level institutions that receive a share of mineral revenues and use these to fund projects to improve access to drinking water, healthcare, education, and sanitation, amongst others. The report of the Standing Committee states that only 23% of the total amount collected had been utilised till August 2018. More recent numbers tell a similar story, with approximately 23% of the `245.3 billion collected by DMFs across the country having been utilised till January.
High fund utilisation is not always an indicator of a scheme’s success as it does not tell us much about the quality of assets created or services provided. Nonetheless, the failure to use DMF funds seems to be a disservice to mining-affected communities. However, the issue is a larger one. While making funds available locally is a necessary first step, it is not a solution in and of itself. The capacity to use DMF funds effectively needs to be improved, while also continuing to use existing mineral revenues appropriately.
In this context, it may be worthwhile exploring a lesser known aspect of DMFs—the provision to establish endowment funds. Unlike annual budgetary funds that use mineral revenues to finance projects for the duration of mining, endowment funds invest a part of this revenue to continue to get returns on investments even after the minerals are depleted. For example, in the US, the Alaska Permanent Fund invests a certain portion of the mineral revenues to provide an annual dividend to all residents of Alaska, much like a universal basic income.
In fact, the Economic Survey 2016-17 discussed creating a permanent fund at the national level in India into which all mining revenue can be deposited, along these lines. It recommended re-distributing any income that is earned from investments to individuals affected by mining.
While this specific recommendation has not been implemented in practice, the central guidelines for DMFs permit them to keep a portion of their receipts in an endowment fund. States such as Chhattisgarh, Jharkhand, Maharashtra, and Tamil Nadu have provided for establishment of endowment funds, but without details on how they are to be operationalised. Goa, Karnataka, and Andhra Pradesh, however, have specified that 50%, 20%, and 0.5% of DMF revenues, respectively, should be transferred to an endowment fund.
Given its experience in attempting to establish the Goa Iron Ore Permanent Fund, Goa has provided the most details on operationalising the fund. Half the amount collected by DMFs is to be used to fund projects, and the rest is to be invested in a FD/government bond/bank bond. Of the interest earned, 90% may be used to fund projects and the rest must be re-invested to enable the corpus to remain financially sustainable. However, since the formulation of the Goa DMF rules in 2016, progress has been slow and mired in legal controversy due to lapses in registering the DMF appropriately.
Thus, while some states have allowed for the creation of endowment funds in their DMF rules, there is limited information on the functioning of endowment funds in these states, and the challenges which state governments face in operationalising them.
The regulatory frameworks and practices that take shape around DMFs in the coming years, including those pertaining to endowment funds created through DMFs, will determine the extent to which they are able to deliver on their promise of equitable development for mining-affected communities. Endowment funds can increase the period for which funds are available and protect projects against price fluctuations. However, they may lead to losses if they are mismanaged through faulty investments and require diverting money from projects that meet communities’ immediate requirements.
The experience with existing endowment funds shows that creating rules that outline saving, investment, and spending processes clearly, and develop a monitoring framework that encourages compliance with these rules can prevent mismanagement. Monitoring and accountability can be strengthened through making information about funds publicly available, involving key stakeholders such as representatives of affected communities in decision making, and instituting independent audit mechanisms.