Monthly Archives: October 2013

What Helium Does to the World

Hindenburg_burning

Helium  is used in a range of applications from welding and fibre-optic technology to deep-sea diving. Super-cold liquid helium is essential to making and running the superconducting magnets for MRI scanners and to manufacturing electronic devices from TVs to phones… A third of the world’s helium [ 2.1 billion cubic feet a year  out of a global market of 6.3 billion] comes from an underground reservoir in Texas built up under government auspices and run by the Bureau of Land Management. Such was the supposed strategic value of helium, a by-product of natural gas, that a reserve was created in 1925 to supply the gas to inflate airships. So jealously did America guard its helium that other countries had to fill dirigibles with flammable hydrogen—the Hindenburg was one of dozens that went up in flames as a result.

Once airships had drifted out of fashion, helium remained crucial to the space race and nuclear-weapons development. Nonetheless overall demand tapered. By the mid-1990s the cost of running the Federal Helium Reserve, which bought all the helium that gas firms could produce, was too steep to justify a buffer that was not needed. Lawmakers decided to close it and sell most of the accumulated helium to pay off debts of $1.4 billion….

Helium demand has grown by around 5% a year since 2000 with the advent of new applications, such as MRI scanners. Prices have doubled over the past five years. America’s conventional gasfields, the source of most helium, are depleting and ways to plug the gap left by the rundown of the reserve have proved difficult to develop. New plants in America and Australia are producing the gas but mishaps and technical difficulties at other new refineries in Qatar and Algeria have crimped supplies. This has encouraged firms such as Siemens and GE to look for substitutes for helium. As a result demand may expand by only 2.5% a year for the next decade or two, according to John Raquet of Spiritus Group, a consultancy.

Relief for the helium market seems destined to come from Russia, long a minor producer. The country has the wherewithal to create a reserve of its own. Gazprom appears to be gearing up to become a big supplier by 2018, just as America’s reserve is set to run dry (if it secures the cash to continue past October). Not everyone will be pleased that an arm of the Russian state may in future hold sway over their medical treatment and their children’s parties.

Helium: Inflation Warning, Economist, Sept. 28, 2013, at 68

Mining for Gold in the Dominican Republic

cyanide heap leach gold mining

The $4 billion that two Canadian companies, Barrick Gold and Goldcorp, have poured into developing Pueblo Viejo, a gold mine, since 2009 amounts to the largest single foreign investment in the history of the Dominican Republic. The companies say that the money has turned the polluted ruins of what was the state-owned Rosario mine, abandoned in 1999, into a “truly world-class” operation that should provide the country’s government with $10 billion over its 25-year life.

But the project has been controversial. Just weeks after the mining started in January 2013, President Danilo Medina, who was elected last year, declared: “For every $100 of gold exports, Barrick will receive $97 and the Dominican people $3. That is simply unacceptable.” (In fact, Pueblo Viejo Dominicana Corporation, or PVDC, the company operating the mine, is 60% owned by Barrick and 40% by Goldcorp.) Mr Medina demanded that the contract be renegotiated; otherwise, he said, he would raise taxes on the mine’s profits.

This month the two sides agreed to changes that have front-loaded tax payments and could see the government get an extra $1.3 billion in 2013-16 provided that the gold price rises and stays above $1,600 an ounce (it is now around $1,350). Gustavo Montalvo, Mr Medina’s chief of staff, tweeted: “Together we ensured that words like ‘national sovereignty’, ‘justice’ or ‘transparency’ were transformed into something more concrete.”

Yet that may not calm local unrest over the mine, sited about 100 kilometres (60 miles) north of Santo Domingo, the capital. The investment was presented by both the government and company as including a clean-up of Rosario’s toxic mess and the installation of systems to keep local watercourses clean. But residents are suing PVDC, claiming that the new mine is poisoning rivers, causing illnesses and the death of farm animals. They want the government to release the environmental-impact assessment for Pueblo Viejo, which it has so far refused to do.

One farmer, María de la Cruz Mariano, said that she began to suffer skin allergies and other ailments in 2010, after PVDC began work. Tests on her blood conducted by a private laboratory showed high levels of lead, sulphur, cyanide and zinc. Some of her cattle have died from bovine anaemia, which can be caused by ingesting cyanide. Other residents report that previously clean local rivers have become polluted since PVDC built a dam to collect water containing cyanide, which is used to leach gold from crushed rock.

PVDC has signed the international code of practice for the handling of cyanide. It says it is “in the process of capturing all the surface flows” from the old and the new mines, sending the water to storage ponds where it is treated. PVDC says that, together with local people, it conducts regular, public tests on water and air.

But community leaders say they have no knowledge of such tests. The company has not answered requests to provide the dates on which they were conducted. Tests by the environment ministry, released only after a freedom of information request, found the water in the Margajita river downstream from the mine to be highly acidic, as well as containing sulphides and copper above legal limits. The ministry has made little effort to act on these results.

The old Rosario mine left some streams red with acid. PVDC’s clean-up obligations extend only within the mine perimeter; the rest was for the government. The firm points out that it has paid $75m ($37.5m of it a loan) to finance the government’s share of the work. It has also removed around 130,000 cubic metres (4.6m cubic feet) of contaminated soil. But Demóstenes Martínez, a congressman from the ruling party, argues that PVDC is violating both the constitution and the mining law.

It is not clear whether the pollution is being caused by PVDC’s operations, or is a legacy of the past. The government claims to have lost records of past tests on the rivers. But on its own the new agreement may not be enough to ensure that the mine regains the consent of the community. That will require greater candour.

Mining in the Dominican Republic:  Sickness and wealth, Economist, Sept. 21, 2013

The Building of Dams is not Up to Us

Ertan Dam China

Though the Chinese authorities have made much progress in evaluating the social and environmental impact of dams, the emphasis is still on building them, even when mitigating the damage would be hard. Critics have called it the “hydro-industrial complex”: China has armies of water engineers (including Hu Jintao, the former president) and at least 300 gigawatts of untapped hydroelectric potential. China’s total generating capacity in 2012 was 1,145GW, of which 758GW came from coal-burning plants.

An important motive for China to pursue hydropower is, ironically, the environment. China desperately needs to expand its energy supply while reducing its dependence on carbon-based fuels, especially coal. The government wants 15% of power consumption to come from clean or renewable sources by 2020, up from 9% now. Hydropower is essential for achieving that goal, as is nuclear power. “Hydro, including large hydro in China, is seen as green,” says Darrin Magee, an expert on Chinese dams at Hobart and William Smith Colleges in New York state.

There is also a political reason why large hydro schemes continue to go ahead. Dambuilders and local governments have almost unlimited power to plan and approve projects, whereas environmental officials have almost no power to stop them.

The problems begin with the planning for China’s rivers, which are divided into fiefs by the state-owned power companies that build dams in much the same way as the Corps of Engineers and the Bureau of Reclamation divided up American rivers in the early 20th century. Though the staff of the water-resources ministry in Beijing know a lot about the environment, they have no say. “Big hydro projects are designed and approved by everybody but the ministry of water resources,” says Mr Magee.

Local governments, meanwhile, view dams as enticing economic development projects. The dambuilders, which have special privileges to borrow, put up the financing. The extra electricity supports industrial expansion and brings in revenues. Local officials are promoted for meeting economic performance targets and some collude for personal gain with the dambuilders. Because of the decentralised nature of the industry, local officials try to include dams in their plans. Once they have done so, they can expect the environmental impact assessments that follow to be a formality—if only because the consultants who undertake them are paid by the hydropower companies.

Environmental officials who have not been financially captured by the dambuilding economy find themselves as scarce as some of the fish they are charged to protect. Environmental activists, meanwhile, can request access to public records and demand public hearings, both required by law. But they say that these avenues are barred when they are most needed—on controversial projects that face vocal opposition. For example, the authorities have rejected requests for public records on Xiaonanhai and they have not granted a public hearing.

If environmental regulators and activists want any hope of halting a project, they must go outside normal bureaucratic channels to lobby powerful Politburo members or the national media. Although that may not always work, it did in 2004, when Wen Jiabao, then prime minister, halted construction of a cascade of 13 dams on the Nu River in south-west China in order to protect the environment. Even then some work on the projects still proceeded. Meanwhile, smaller schemes race ahead unchecked. Promoted by dambuilders and local governments, nearly 100 smaller hydroelectric projects in the Nu river region went forward without needing permission from higher up. Some began before they had even received the final approval.

China’s new leaders in recent months have signalled that they want yet more dams, approving several ambitious new projects, including what would be the highest dam in the world, on the Dadu river. After Mr Wen stepped down from his posts in the party and the government, the dams on the Nu river that he blocked received the go-ahead again.

Chinese leaders have for millennia sought to tame the country’s great rivers, which have sustained and destroyed countless lives with cycles of abundance, famine and floods. Indeed their legitimacy as rulers has long been linked to their ability to do so. The Communist Party has built thousands of large dams since 1949. China is also the world’s leading builder of big dams abroad; International Rivers, a pressure group, says that Chinese companies and financiers are involved in about 300 dam projects in 66 countries.

The politics of dam-building: Opening the floodgates, Economist, Sept. 21, 2013, at 47

Offshore Tax Evasion: US versus Switzerland

switzerland tax haven

Fearful that other banks could suffer the same fate as Wegelin, a venerable private bank that was indicted in New York in 2012 and put out of business, the Swiss government has been seeking an agreement with America that would allow the industry to pay its way out of trouble in one go. Instead, it has had to make do with one covering banks that are not already under investigation, which excludes some of the country’s biggest institutions.

The deal is cleverly structured. Of Switzerland’s 300 banks, 285 will be able to avoid prosecution if they provide certain information about American clients and their advisers, and pay penalties of 20-50% of the clients’ undeclared account balances, depending on when the account was opened and other factors. Banks that persuade clients to make disclosures before the programme starts will get reduced fines. Banks will not have to take part but the legal risks are daunting for those that don’t, even if they hold little undeclared American money. Those with no foreign clients will have to produce independent reports proving they have nothing to hide if they want a clean bill of health.

One Swiss newspaper likened the deal to “swallowing toads”. Another called it “the start of an organised surrender”. The bankers’ association sees it as a necessary evil: the only way to end legal uncertainty, albeit at a cost that will strain some institutions. Small and medium-sized Swiss private banks are already struggling. In 2012 their average return on equity was 3%; the number of private banks fell by 13, to 148, mostly because of voluntary liquidations. KPMG, a consultancy, expects this to fall by a further 25-30% by 2016 as receding legal threats encourage the return of mergers.

Some of the prospective buyers in any future M&A wave still have to make their peace with the Americans. Excluded from the deal are 14 mostly large banks that have been under investigation for some time, including Credit Suisse and Julius Bär. They will have to settle individually, with fines expected to be steep, some perhaps comparable to the $780m paid by UBS in 2009. These banks are also under pressure from European countries that have suffered tax leakage, including Germany, whose parliament has rejected a deal that would have allowed the Swiss to make regular payments of tax withheld from clients while avoiding having to name names.

Swiss bankers gamely argue that bank secrecy remains intact, pointing out that privacy laws have not been dismantled. But banks are being bullied into providing enough information, short of actual client names, to allow the Americans to make robust “mutual legal assistance” requests that leave Swiss courts with no option but to order banks to provide clients’ personal details. The courts still have some flexibility because America has yet to ratify an amended tax treaty with Switzerland, thanks to blocking tactics by Rand Paul, a senator who argues it would violate Americans’ right to privacy. But this obstacle will eventually be cleared or circumvented.

All of which fuels speculation that Switzerland could lose its crown as the leading offshore financial centre, even though it is still well ahead of fast-growing rivals in Asia. It may find comfort in the fact that the Americans plan to use information harvested from the Swiss— including “leaver lists”, which contain data on account closures and transfers to banks abroad—to go after other jurisdictions. This is part of a “domino effect” strategy, says Jeffrey Neiman, a former federal prosecutor, aimed at forcing tax evaders “so far off the beaten path that they can’t be sure if the pirate waiting to take their money will be there when they return.”

Offshore tax evasion: Swiss finished?, Economist, Sept. 7, 2013, at 72

The Curse of Displacement: how to become a beggar

posco india

Dhinkia, in the eastern Indian state of Odisha (formerly Orissa) (India)  is a hub of protest. The women, one from every village family, are staging… a sit-in. Sisir Mohapatra, a former sarpanch or village head, makes a rousing speech. He seems respected, though his police record would suggest he is a mafia don: he says he faces 35 criminal charges, and of his 60-strong extended family in Dhinkia, 40 are also wanted by the law. They claim that the charges are all trumped up. Their real crime is to oppose the biggest single foreign-investment project India has ever attracted.

Estimated to cost $12 billion, the project, promoted by POSCO, a South Korean firm, is eventually to produce 12m tonnes of steel a year for export. It will have its own power plant, port and, 200 kilometres (125 miles) inland, its own iron-ore mine. Since an agreement on the project was signed in 2005, it has been mired in controversy—a case study in why

Environmentalists worry about air pollution, coastal erosion, the endangered olive ridley turtle and much else. Many, including the Communist Party of India (CPI), which holds the local parliamentary seat, complain that the ore will be sold too cheaply, at a royalty to the government of just 27 rupees (currently about 40 cents) a tonne. Meanwhile, residents of Dhinkia and nearby villages fear for their livelihoods.

So the project has been delayed, probed by countless committees and subjected to repeated litigation. Just this week it faced hearings in Delhi at the National Green Tribunal, an environmental court. But as so often in India, one of the biggest delays has been acquiring the land. In theory, this should be easier for POSCO than for many other investors, since most of the 1,600 hectares (4,000 acres) it needs are designated as forest (even the scrubby sand dunes) and thus government land.

The residents of Dhinkia, however, claim legal rights as people whose families have been making their living from the forest for at least 75 years (which the government disputes). Some, indeed, make a very good living. Devendra Swain, like many villages, maintains betel vines, from which he earns 50,000 rupees a month selling the leaves. Mr Swain also grows rice, mangoes, cashew nuts, bananas and papaya. He claims not to be against industrialisation—except in his fecund backyard.

The villagers’ resistance to the project has seen ugly violence. In 2010 police fired rubber bullets to clear one dharna. In February there was another clash as police entered a neighbouring village, Govindpur, and started dismantling betel vines. In March three people died in a bomb explosion—victims of pro-project goons, say the villagers. The police allege the victims were blown up while making bombs themselves. Involvement in this incident is one of 61 charges facing the CPI’s Abhay Sahoo, the protesters’ leader, who is now in jail for the third time and trying to secure his release on bail. Fearing arrest or an attack by thugs, the 1,400 others in Dhinkia facing criminal charges dare not leave the village.

Of India’s million mutinies, many involve the emotive issue of land. That is one impulse behind a new law covering land acquisition and the resettlement and rehabilitation of those affected. This week it passed through Parliament’s upper house. Few disagree that some new legislation is needed to replace a much-abused British-era law from 1894.

The new bill, however, has drawn fierce criticism. Business is predictably aghast at what it sees as a populist law timed ahead of looming elections.. Some businessmen think it is simply “unworkable”.

Even some who support the principles behind the bill think their implementation has been botched. N.C. Saxena, a former senior civil servant who sits on a National Advisory Council [claims]  that it does not even cover government land. In other words, it would have no relevance for projects such as POSCO’s. Even if it did, legislation would not solve the fundamental difficulty, a total distrust of government.

“After 66 years of independence,” says Mr Mohapatra, the former sarpanch, “no one has ever been compensated properly. Whoever gave his land and his home later became a beggar.” He points to what he says is the unhappy lot of those displaced by two other projects in Odisha. One is the Hirakud dam across the Mahanadi river. It is India’s longest dam, for which Jawaharlal Nehru poured the first concrete in 1948. As many as 180,000 people had to move. Another is just down the road from Dhinkia, where a big oil refinery has been under construction since 2000. An empty field outside Dhinkia has drains and electricity, put in when plots were offered as compensation to those forced to shift. People found it so unappealing that the field is still empty. Moreover, 52 families who supported the POSCO project, many forced out of Govindpur in 2008, are still in reportedly miserable conditions in a transit camp. Add in heavy-handed police, and those agitating against the project have plenty of ammunition. Even the best-drafted law would find the going tough

This Land is Whose Land? A new law may do little to break India’s land-acquisition logjam, Economist, Sept 7, 2013, at 44