MININGAND PUBLIC POLICY IN ALASKA Mineral Policy, the Public Lands and EconomicDevelopment

by Arlan R. Tussing and Gregg K. Erickson

prepared for Office of Regional DevelopmentPlanning U. S. Department of Commerce Washington, D. C. and Federal Field Committeefor DevelopmentPlanning in Alaska Anchorage, Alaska

prepared by Institute of Social, Economicand GovernmentResearch University of Alaska College, Alaska SEGReport No. 21 June 1969

This report was prepared under contract with the Office of Regional DevelopmentPlanning. The statements, findings, conclusions, recom­ mendations, and other data in this report do not necessarily reflect the views of the Office of Regional EconomicDevelopment.

$5 FOREWORD

The report by Arlon R. Tussing and Gregg K. Erickson, Mining and Publia Poliay in Alaska, is muchmore than its brief title indicates. It is the careful formulation of a philosophy of natural resource managementwhose implications are relevant to other industries than mining and other places than Alaska. Without dwelling on "mistakes" i the 1 48 i nati affluence and changing institutions are altering the socially most desirable uses of land, minerals, and other resources. Tussing and Erickson point out that Alaska1 s present lack of economic development presents special opportunities there to make the institutions of natural resource managementresponsive to twentieth century needs, without the entanglements of vested rights which stand in the way of mining and land law reform in the older states. They find that the State of Alaska has grasped these opportunities, perhaps inconsistently, but that federal laws and institutions do not now add up to a sound program of resource development and conservation. The report presents the principles and many of the specific elements of such a managementprogram. The Federal Field Committeefor DevelopmentPlanning in Alaska originally sponsored a study of Alaska mineral policy at the University of Alaska to assist the deliberations of the Public Land Law Review Commission. I believe that this report will be exceptionally helpful to the Commissionin structuring its thinking about Alaska. It should, however, be brought to the attention of all those concerned with natural resource policy in both the federal and state governments. I personally found most of the arguments presented in Mining and Publia Poliay in Alaska very persuasive, but few readers will agree with all its premises or all its conclusions. At the time this report is released, I shall have left federal service; my strong recommendationof it should not be construed as an official endorsement of the authors• recommendationsby the Federal Field Committeefor DevelopmentPlanning in Alaska or by the federal government generally.

Joseph H. FitzGerald, Chairman Federal Field Committeefor DevelopmentPlanning in Alaska Anchorage, Alaska Apri1 29, 1969

iii AUTHORS'PREFACE, SUMMARY OF RECOMMENDATIONS, ANDACKNOWLEDGEMENTS

This report examines the relationship of Alaska's natural endowmentof minerals to the national interest, as well as the role minerals can and should play in Alaska's economic development. It attempts to define the paramount objectives of the federal and state governments in mineral development and public lands administration, and to take a broad look at the economics of the mineral industries and the private and governmental institutions which make up the system of mineral development in the United States and Alaska. The study was originally designated "Alaska Mineral Policy and Legal Analysis'' and was intended primarily as an examination of existing mining law and a consideration of specific legal reforms designed to encourage mining within the state. This limited purpose seemed well served, however, by Charles F. Herbert's A Summary Comparison of Mining Laws and Oil and Gas Laws and Practices with Recommendations for Policy [1967]. What had not been done was a critical study of government objectives in mineral policy, and an economic analysis of the institutions affecting or affected by the mineral industry. Sometreatment of these matters seemed a necessary precondition to further consideration of legal innovations. Neither the analyses nor the conclusions of this report are unconventional amongeconomists or amongnatural resource authorities; the most we can claim for their originality is that they have not all been combined in one place and that they may not have been applied with special reference to Alaska. They do occa­ sionally conflict, however, with some of the popular wisdomwithin the mining industry and within Alaska, and also conflict sharply with the development strategy implicit in the federal mining and public land laws. On the other hand, we have been surprised and pleased by the degree to which Alaska state mining law and public lands adminis­ tration have anticipated the conclusions of this report at least in spirit, limited as the scope of state jurisdiction has been in a state where 95 percent of the land remains in federal hands.

V Each successive draft of this report has been shorter than its predecessor, so that what remains is an extremely concentrated treatment of the subject. The exposition has probably been streng­ thened by the omission of theoretical excercises in economics, statistics, and geology that make up the reasoning behind some of the conclusions. While we have attempted to provide adequate documen­ tation or other support for each statement in the text, the report is already very close to a "summaryof conclusions and recommendations." It ts difficult to condense our findings further without omi something important. Nevertheless, a list of the propositions emphasized in the text may give the reader a representative overview of the report. Three individual statements which may summarizethe operationally most important conclusions are: (1) Land and mineral policy should be in the hands of the state except where earamount national interests can be demonstrated [p. 21J. (2) The merits of competitive leasing, as a general principle for the development of minerals on Alaska public lands, are overwhelming, and ... the objectives whose pursuit might favor the choice of another system can be met effectively within the frameworkof the leasing system [p. 57]. (3) Acquisition and publication of regional geologic information are likely to have an effect on private exploration expenditures out of proportion to1he public costs involved, because of the crucial role it plays in shaping the expectations held by a mineral explorer about what he will find and howmuch it will be worth [p. 82]. Someof the other statements emphasized in the text are, in the order of their appearance: (4) [The principle of national economic efficiency] supplies a straightforward general standard to determine whether a particular mineral development in Alaska is in the national interest: Is it profitable? [p. 4.] (5) The present ignorance of Alaska's geological endowment [limits] the range of policy choices available to attain any given level of insurance against shortages of strategic commodities, and thereby increases the cost of obtaining that level of security [p. 10].

vi (6) Revenuemaximization and market pr1c1ng of natural resource commodities should not be regarded as inviolable absolutes, but they should be an important policy norm. Legislators and public administrators ought to be as jealous of the potential revenues from the natural resource assets under their custody as they are of moneysactually collected from the taxpayers [p. 12]. (7) If we regard commercial and noncommercialresources use as mutually competitive, the socially optimum boundary between the two must continually shift in the direction of greater noncommercial--aesthetic and recreational--uses [p. 15]. (8) For muchof Alaska's territory, the requirements for realization of its potential scenic or recreational values will be the same as for commercial development: knowledgeand accessibility [p. 16]. (9) So long as [the mineral resources of the federal lands in Alaska are not managedto earn revenues for the federal government], there is no valid public reason for the existence, with reference to the unreserved lands, of any federal mining or mineral leasing law. Indeed, for the vast majority of land and resource uses, state managementought to be socially more rational and more effective, even from a national standpoint, than federal management[pp. 20-21]. (10) This study recommends... an authoritative joint land planning commissioncreated by Congress and the State Legislature which would systematically and simultaneously classify the public lands of Alaska, both state and federal; complete the federal "preserva­ tion" system; and select those lands to be transferred to the state [p. 23]. (11) Broadly speaking, it is likely that Alaska's mineral resources are comparable to what might be found in an . equal area in the coterminous 48 states [p. 30]. (12) [The mineral] industries are, by almost any standard, in a nationwide decline [p. 31].

vii (13) Federal and state governments should be prepared to examine substantial changes in mining law, tax policies, etc., even if they seem completely unpalatable to mining industry spokesmen. In considering objections to proposed reforms in Alaska, sight should not be lost of the fact that mineral production [except for oil and gas] under the present regime is approximately zero [p. 38]. (14) The existing exploration, mining and mining-smel ining irms are by no means the only source of capital and enterprise for the development of Alaska's mineral resources. Development strategies should not be directed only or mainly to this sector [p. 42]. (15) [Political] uncertainty ... can operate with great leverage on mining investment. Major reforms of public land policy, mining law, and mineral tax policy in Alaska should be instituted now while mining in the state is at a low ebb and vested interests in the existing arrangements are at a minimum[p. 43]. (16) Permits or leases on public lands should be of limited duration, and minerals should be transferred under some system whereby the holder of a claim or lease will incur appropriate costs for holding idle prospects or idle reserves [p. 43]. (17) A public or quasi-public institution should be estab­ lished to help smaller companies in financing mine development and operation, and to provide the scale of risk-sharing and risk-averaging which now is available only to the largest companies [p. 43].

(18) Exports of concentrates, particularly to Japan, should be encouraged as a means of circumventing rigidities in the domestic market. This last measure implies, of course, lifting certain export restrictions [p. 43]. (19) Nowherehave the authors encountered a respectable argument for giving away mineral rights ... which do have a market value when there are ••. parties who are willing to pay ••• for these rights [p. 48]1 (20) Minerals should be made available for free appropriation if, and only if, there are no obvious costs in doing so, either in terms of revenue foregone, in terms of damage to other resource values, or by requiring additional public investment or services [p. 50].

viii (21) The government should make future severance tax levels part of the lease contract, and make explicit in advance of bidding on each lease offering its regula­ tions and policies with respect to environmental protec­ tion, local hire, etc. It should either continue these regulations and policies in force for the duration of that lease contract or guarantee to take upon itself the costs imposed by any changes [p. 53]. (22) Public revenues derived from mining should be an important objective of development, and the maximiza­ tion of revenues should be the norm by which the cost of achieving other development objectives is measured. [p. 57]. (23) It is urged, even if the general complexion·of the United States mining law is not changed, that surface and mineral estate be separated ... that the patenting of the former to the holders of mining rights be ended, and that the same land managementagency have jurisdic­ tion over development of both the surface and subsurface resources on each tract [p. 64]. (24) Alaska's mineral resources generally do not remain undeveloped because of specific transportation 11bottl enecks" [p. 68]. (25) The regional development impact of mining activities in remote locations is extremely limited unless extremely large or extremely profitable, with the profits somehow remaining within the region [p. 71]. (26) If public works or transportation facilities are constructed which enhance the feasibility of private ventures in mineral development, costs of such facili­ ties can, under a competitive leasing system, be at least partly recouped through increased bonuses [p. 72]. (27) No railway trackage has ever been built into a region of the lower 48 as sparsely populated as Alaska north and west of Fairbanks is today [p. 72]. (28) So long as mineral leasing revenues in Alaska accrue almost entirely to the state, public investments in transport facilities to serve remote mineral districts should be primarily a state decision and a state financial responsibility [p. 73].

ix (29) There is a strong presumption that the lack of broad geological information is a key bottleneck to Alaska's mining development, and that the social returns--and probably the returns to government finances--more than justify an accelerated program of broad regional geologic mapping [p. 82]. (30) The striking difference between Alaskan and Canadian levels of information density [particularly in published geological maps] constitute the most persuasive hypothesis the authors have encountered to explain the corresponding differences in mineral development [p. 88]. Acknowledgementsare due to Joseph Rudd, of Ely, Guess, Rudd and Havelock, Anchorage, Alaska, who provided the investigators with an early outline of the essentials of Alaska mineral law; also to the following persons who responded to review drafts with written comments, some of them in great detail: James L. Agee, Regional Director, Federal Water Pollution Control Administration, Portland, Oregon; Earl Beistline, Dean of the College of Earth Sciences and Mineral Industries, University of Alaska, Fairbanks; Lieutenant-General R. A. Breitweiser, U. S. Air Force, Commanderin Chief, Alaskan Command,Anchorage; Lyle K. Brown, Director, Federal Aviation Administration, Anchorage; Lawrence E. Heiner, Assistant Mineral Engineer, Mineral Industries Research Laboratory, University of Alaska, Fairbanks; Charles F. Herbert, Anchorage; W. HowardJohnson, Regional Forester, U. S. Forest Service, Juneau; Ralph W. Johnson, Professor of Law, University of Washington, Seattle; Douglas N. Jones, (former) Assistant to the Secretary for Regional EconomicCoordination, U. S. Department of Commerce,Washington, D. C.; Gus Norwood,Administrator, Alaska Power Administration, Juneau; H. Dean Pilkington, Associate Professor, Department of Geology, University of Alaska, Fairbanks; Burton W. Silcock, State Director, Bureau of Land Management,Anchorage; and AndrewR. Thompson,Professor of Law, University of Alberta, Edmonton. The following persons contributed to developing or sharpening the conceptions in this report, in personal conversations with one or both of the authors: The late United States Senator 11 11 E. L. ( Bob ) Bartlett; Paul Bradley, Assistant Professor of Economics, University of British Columbia, Vancouver; ComeCarbonneau, President, Societe Quebecoise d'Exploration Miniere, Ste.-Foy,Quebec; Pedro Denton, Chief, Minerals Section, Alaska State Division of Lands, Anchorage; Victor Fischer, Director, Institute of Social, Economicand Government Research of the University of Alaska, Fairbanks; Joseph H. FitzGerald, (former) Chairman, Federal Field Committeefor DevelopmentPlanning in Alaska, Anchorage; Robert Forbes, Professor of Geology, University of

X Alaska, Fairbanks; George Gryc, Chief, Alaskan Geology Branch, U. S. Geological Survey, Menlo Park, California; Perry Hagenstein, Project Officer, Public Land Law Review Commission,Washington, D. C.; Orris Herfindahl, Acting Director, Energy and Mineral Resources Program, Resources for the Future, Inc., Washington, D. C.; Gordon Herreid, Mining Geologist, Alaska State Division of Mines and Minerals, Fairbanks; Richard A. Hilliker, Forest Resource Economist, University of Wisconsin, Madison; and Philip Holdsworth, Anchorage. Also, Harold James, Chief, Geologic Division, U. S. Geological Survey, Washington, D. C.; the late Leo H. Loll, Comptroller and Vice President for Finance, University of Alaska, Fairbanks; Wallace F. Lovejoy, Professor of Economics, Southern Methodist Univer­ sity, Dallas; Walter J. Mead, Professor of Economics, University of California, Santa Barbara; Harry Morrison, Vice President and General Manager, Western Oil and Gas Association, Los Angeles; William Pecora, Director, U. S. Geological Survey, Washington, D. C.; Dennis Rapp, Chief, Resources and Evaluation Group, Public Land Law Review Commission, Washington, D. C.; Mike Rowan, Legislative Assistant to U. S. Senator Mike Gravel, Washington, D. C.; Anthony D. Scott, Professor of Economics, University of British Columbia, Vancouver; Don Seastone, Project Officer, Public Land Law Review Commission, Washington, D. C.; James Williams, Director, Alaska State Division of Mines and Minerals, Fairbanks. Undoubtedly we have overlooked one or more names to whomthanks are due. Special recognition is due to Marge Nilsson, of the University of Alaska, and Carlene Welfelt, of the Federal Field Committee, w~o typed and retyped so manydrafts of this report. The analyses, conclusions, recommendations, and opinions contained in this report are the responsibility of its authors alone, and are not necessarily those of any of the persons listed above; of the Federal Field Cormnittee for Development Planning in Alaska, sponsor of the study; the U.S. Department of Cormnerce, which financed it; nor of the State of Alaska. This report was produced with public funds and is not copyrightable, but we would appreciate appropriate acknowledge­ ment of excerpts or quotations. May, 1969 Arlan R. Tussing Washington, D. C. Gregg K. Erickson Anchorage, Alaska

xi TABLEOF CONTENTS Page

FOREWORDby Joseph H. FitzGerald .. iii AUTHORS'PREFACE, SUMMARY OF RECOMMENDATIONS,ANDACKNOWLEDGEMENTS . V

CHAPTERI:' INTRODUCTION 1 The Viewpoint of this Study ...... 1 Objectives of Mineral DevelopmentPolicy in Alaska . 4 National EconomicGrowth and EconomicEfficiency 4 Alaska's Regional EconomicDevelopment ...... 7 National Strategic Self-Sufficiency in Crude Materials 9 Balance of Payments ...... 10 Revenuesfor Federal and State Governments . . 10 Varieties of Conservation...... 13 Federal-State Interaction: WhoseMineral Policy? 19 SomeObservations on Subsidies and Incentives 24 CHAPTERII: CHARACTERISTICSOF THE MINERAL INDUSTRIES 29 DevelopmentExpectations ...... 29 Uncertainty and the Character of Mining Enterprise . . . . 34 Discovery Versus Production ...... 40 SomePolicy Implications ...... 42 CHAPTERIII: SYSTEMSOF MINERALDEVELOPMENT 45 The Discovery System ...... 45 The Competitive Leasing System ... ~ .. 50 The Concession System ...... 54 Policy Variables in the Choice of a Leasing System. 57 A Hybrid System for Alaska ...... 61 Separation of Estates and Grants of Patent .... . 63

xiii CHAPTERIV: THEECONOMICS OF UNCERDEVELOPMENT ANDGOVERNMENT INVESTMENT .... 65 Transportation and Other "Social Overhead"Investments . 65 GovernmentInvestment in Mining Enterprise. . . . . 73 Investment in Topographicand Geologic Information . 75 Topographic Information 76 Geologic Information 79 Investment in Technology. 88 BIBLIOGRAPHY 91 APPENDIXI: A NOTEON GOLD by Gregg K. Erickson 103 APPENDIXII: ALASKAAS A POLICYLABORATORY ... 107 The "Proof of Our Conclusions ...... 1Q7 Opportunities for Controlled Experiments 108 APPENDIXIII: ORGANIZATIONANDOBJECTIVES OF QUEBECMINING EXPLORATIONCOMPANY (SOQUEM} by C. Carbonneau, President ...... 111 APPENDIXIV: EDITORIALREPRINTED FROM THE SEPTEMBER, 1966, ISSUEOF MINING IN CANADA...... 119 APPENDIXV: FIGURESON MINERAL PRODUCTION IN ALASKA 121 VITA ...... 125

xiv LIST OF TABLES Page

1 : 19 Mi Kilometer Selected Countries ...... 29 TABLE2: Comparisonof Systems of Natural Resource Development ...... 58 TABLE3: Percent of Area Covered by Geologic Mappingin Five Countries and Country Rank in Terms of Coverage at Various Scales Correlated with Value of Mineral Production ...... 84 Appendix V TABLEV-1: Mineral Production in Alaska, 1967 and 1968. 122 TABLEV-2: Production of Major CommoditiesSince 1949 123 TABLEV-3: Physical Volumeof Alaska Mineral Production 124

LIST OF FIGURES

FIGUREl: Extent of Large Scale Topographic Mapping in Alaska ...... 78 FIGURE2: Extent of Small Scale Geological Mapping in Alaska ...... 85 FIGURE3: YukonTerritory and British Columbia Bedrock GeologyMap Coverage .... 86 FIGURE4: YukonTerritory and British Columbia Surficial GeologyMap Coverage ... 87 FIGURE5: YukonTerritory and British Columbia Aeromagnetic and Sea Magnetic MapCoverage 89

xv CHAPTERI: INTRODUCTION

The correctness or effectiveness of any set of public policies must be tested against their objectives. In few areas of national life are the controversies over the ends of government policy as deep and as bitter as they are in the areas of mining and public lands administration. This study advances several broad categories of objectives which include the major part of the public interest in Alaska mineral development: national economic growth and economic efficiency; Alaska's regional economic development; national self-sufficiency in strategic materials; the earning or conservation of foreign exchange; revenues for federal and state government; and a variety of objectives often tossed together under the heading 11conservation. 11 Even the most complete knowledgeof Alaska's geological endowmentand the best understanding of economics would not, however, open a clear path from an agreed-upon list of objectives to recommenda­ tions for public policy,because the public is composedof many diverse groups, each with different definitions of the items on the list and different rankings and weights amongthem. Any strategy recommended for mineral development or nondevelopmentin Alaska will meet vehement opposition quite independently of the accuracy of the facts or the quality of the analyses on which it is grounded. Groups which have an absolute, even religious, view of some of the issues still play an important role in the formation of mineral law in the United States. Somehold that each existing tract of wilderness is so unique that there is no benefit in terms of other objectives that would justify its violation. On the other hand, the traditional view of the mining industry is that open access to minerals on the public lands is a Natural Right coequql with those enshrined in the Declaration of Independence. One problem in coming to grips with such fundamentalist positions is thatthey immediately preclude asking important questions like, 11Howmuch wilderness and what kind of wilderness should we have?11 and 11What useful function do prospectors and mine speculators play; how big a role should they have in our economy?11 2

The viewpoint of this study is that policy making is in part a process of balancing competing objectives and interest groups, including wilderness purists and free-enterprise fundamentalists, and that the 11best 11 outcome may be one which is not wholly satisfactory to anyone. The authors do not necessarily regard wilderness preserva­ tion or conservation of renewable resources, or free enterprise, or promotion of mining, or opening up the North, as ends in themselves. In consequence, the faithful and the highly committed may find this i i i us ions unacceptable. The report does, however, assume that there is a broad area of qualitative consensus about the ends of policy in which precise rates of tradeoff amongcompeting objectives are not demanded. Within the limits of that consensus, a study of this type can address itself to whether and how effectively policies and institutions actually advance the ends for which they are established. As economists, the authors cannot speak with authority on whether it is in the public interest to subsidize mining in Alaska at the expense of the United States Treasury. But they can and do consider whether a particular tax or land policy is in effect a hidden subsidy, and whether it subsidizes particularly efficiently or inefficiently. A great deal of nonsense exists in popular discussions of mineral policy. One widespread notion is that we are rapidly 11running out of 11 valuable minerals. The earth's stock of mineral resources is indeed fixed, and its humanpopulation and per capita consumption of raw materials are both increasing. Popular writers frequently associate these facts to produce foreboding pictures of the consequences of resource exhaustion. The fear of ever more serious res~Orce scarcity dates to Malthus and Ricardo and is amongthe premises of an influential tradition in conservationist thought, but it has little support today amongeconomists or resource specialists.1 The lack of impact on Alaska from 11exhaustion 11 of mineral deposits elsewhere is considered at length later in this report; the authors' conclusion generally is that the prospect of absolute exhaustion is not a relevant consideration in the formulation of public policy toward the mineral industries. lcuriously, the presumption of general scarcity is used by some writers to support 11conserving11 exhaustible resources for future generations, and by others to argue for accelerating mineral explora­ tion and development. Barnett and Morse [1963] offer an excellent summaryand analysis of the traditional 11scarcity hypothesis, 11 together with the most definitive single presentation of the contemporary economic view of natural resource availability. See also Fisher and Potter [1964], and Krutilla [1968]. 3

While the demandfor crude materials, measured in terms of physical output, in the United States and in the world is rapidly increasing [Landsberg, et al., l963; Fisher and Potter, l964], economically their significance is actually declining, despite the growth of population and of income. In the United States, both the share of national income and the constant-dollar value of minerals (measured either at the mine mouth or wellhead, or as inputs to manufacturing} and of manyother basic resource stocks are falling. These may be di cult facts to grasp, today i fear of the "population explosion," but these trends are the result of fundamental and probably irreversible economicforces: the progress of science and technology is continuing to increase the variety and quantity of material inputs available, lowering the grades acceptable for processing, and is more than keeping pace with the rate at which expanding population and income are increasing the physical quantity of materials demanded. A more realistic consideration than general scarcity is.the possibility of long-term upward movementsin the relative prices of specific industrial raw materials. Most crude materials have exhibited long-term declines in their constant-dollar prices,2 but there maywell be increases which will call for special concern; silver may be one such case [Burke and Levy, l969]. On the whole, however, increases in relative prices are their own best correctives because they ration materials to their 1~ighest uses 11--those for which they are relatively irreplaceable--and at the same time enhance the economic attractiveness of the search for new supplies, of lower grade sources of supply, substitutes, and new techniques. In any case, general scarcity is not nowa central problem in mineral policy; and new sources of minerals like the sea, transmutation of elements, or space will almost certainly.be available economically long before the conventional forms of minerals begin to "run out. 113

2This generalization and those in the preceding paragraph are based on the authors• calculations from data in Potter and Christy [1962]; Landsberg, et al. [1963]; Lon~ Term Economic Growth [1966]; and Census of Mineral Industries Ll963]. Herfindahl [1961] explains some difficulties in identifying trends in mineral prices. 3The historical experience that technical progress and geological knowledgehave more than kept pace with crude materials demandshould not lead to complacencyabout mineral supplies. Somecrucial parts of the supply of knowledgeand techniques may not respond automatically to price changes, or may respond only very sluggishly. This is one major justification for the attention to government investment in mineral development in Chapter IV. 4

Objectives of Mineral DevelopmentPolicy in Alaska

National EconomicGrowth and EconomicEfficiency

The most important national concerns justifying attention to the mineral industries in Alaska are unique neither to those i s the goals of national economic growth and economic efficiency. Both growth and efficiency are most simply defined in terms of income per person or in product per manhour. By the second measure, growth takesplace as a result of the increase in the stock of capital goods per worker; an increase in the stock of natural resources per worker; the reallocation of labor, capital, or natural resources to more productive employments; the advance of knowledge, productive techniques, and productive organization; or some combination of the four. Econometric studies which estimate the shares of the increase in national product contributed by quantitative changes in labor, capital, and raw materials ( 11land") stocks have consistently pointed to another element altogether--namelt, technical progress--as the most important cause of recent growth. LMasseZZ, Z960; Solow, l95?; NEER, l96?.J These findings have given a theoretical justification to the current interest in research and development and in education as the most cost-effective areas of public and private investment. [Denison, l962; EtueZl, l955; Mansfield, l96~; Eakaus, l96l; Nelson, l96?; Schultz, l963.] Investment in capital goods as such and the opening up of new lands are no longer critical to the process of growth in advanced industrial countries,except as new capital, equipment may embodynew and superior technology or as new kinds of natural resource inputs and new knowledge about existing resource stocks may be essential to that technology. The national interest in opening up new regions and discovering new mineral deposits does not lie simply in adding to reserves, but in finding cheaper ways to produce and deliver useful products. The development of Alaska's mineral wealth will contribute to real national income to the extent that it somehowlowers the real delivered cost--in terms of capital and labor--of a unit of additional output. This pPinaiple supplies a stPaightfoPWaPd genePal standaPd to detePmine whetheP a partiaulaP minePal development in Alaska is in the national interest: Is it pPofitable? The merits of such a test are its simplicity, its consistency with the mores of our private-enterprise society, and its tendency to be self-enforcing. Accordingly, it seems desirable to develop Alaska's mineral deposits if and, as a general rule, only if the output from such deposits will commanda price greater than its unit cost of production. 5

Of course, the profit standard is not an "invisible hand" which automatically guarantees maximumeconomic efficiency and the optimumrate of economic growth. Externalities (spillover benefits or costs), external economies or diseconomies of scale, the existence of available but otherwise unemployedlabor, differing levels of uncertainty amongdifferent economic activities, or the absence of competitive markets may, to one extent or another, justify a departure from the strict profitability criterion.4 Every industry or region contains some or all of these conditions in some degree, and Alaska's underdevelopment, its high levels of rural unemployment,the particu­ larly high levels of uncertainty in mining enterprise, and the concen­ tration of ownership both of basic resources and processing facilities all require special attention, lest they undermine economic efficiency or other social objectives. In the United States, however, wholesale departures from the price system are generally unnecessary. Markets for labor services, for capital, for machinery, and for semi-processed crude materials are all highly developed and, even if not perfectly competitive in the textbook sense, usually result in prices in the general vicinity of those which could be expected from competition. The efforts of sellers to find high-priced markets for their products, and of buyers to find low-cost sources of supply, reduce real costs and increase real incomes by channeling labor, capital, and natural resources to their most efficient uses. The proposition above is not only good elementary economics, but part of the dogmaof American capitalism. It is remarkable that this principle of efficiency is almost always ignored in the disposal and managementof publicly ownednatural resources. The tendency of legislators, the commonlaw, and most administering agencies is to dispose of publicly owned natural resources at far less than their competitive value. The discovery system of mineral location, the system of noncompetitive leasing, mill construction and local processing requirements in Alaska timber-sale contracts, the treatment of fish as if they were free goods, and the systematic underpricing of irrigation water from federal projects and grazing rights under the Taylor Grazing Act are examples of this propensity.

4public policy departures from the profit criterion can be justified in the attainment of economic or noneconomicobjectives other than efficiency. But, to the extent success in achieving even these objectives is measurable, policy can and should be judged within a cost-effectiveness framework analogous to that of the market system. This is what the recent attention within the public sector to program budgeting and shadow prices is about. [See Subcommittee on Economy in Government, l96?; McKean, l968.] 6

Each of the above policies has its or1g1n, at least in part, in some well-meant developmental objective, and each now has a powerful constitutency of (often innocently) vested interests. But each of them reduces the overall efficiency of the economyby diverting resources from their most valuable employment, and by encouraging over­ commitmentof labor and capital in extracting, processing, or other­ wise using the underpriced resource, in relation to the same resource elsewhere or to other sectors of the economy.5 The underpricing of natural resources is a hidden subsidy; and, like many subsidies which.take the form of special tax favors, each of the policies listed is a subsidy so big Congress would certainly reject it if it were visible--if it required an appropriation from the Treasury. This fact explains why the beneficiaries of indirect subsidies prefer them to open ones, and why the former are so prevalent. Good policy making depends on a knowledgeof the effects of policy, upon an ability to see its costs as well as its benefits. There are very good reasons for some subsidies, but it is desirable to examine their justifications and to bring their general magnitude into the open. Efficiency is not an absolute virtue; our economytolerates, and can afford, many departures from maximumefficiency. Nevertheless, considerations of efficiency as well as public finance require a preswnption in favor of market pricing, preferably through competitive sale, of all rights in natural resources on the public lands and waters; and the burden of justification for any departure should be upon its advocates.

5The consequences of subsidies, open or hidden, are generally misunder­ stood by their critics and advocates alike. They seldom increase the rates of return--wage rates or rates of profit after taxes--in the affected activities in the long run. The initial windfall boost in return tends to attract additional enterprise, capital, and labor to the favored industry until the rate of return to each is about the same as it otherwise would have been. Percentage depletion allowances have not made the rate of earnings on oil stocks higher than those of other industries, nor does free access to the ocean fisheries result in higher wages for fishermen. Wesimply have more investment in oil and more fishermen than we otherwise would have. In Alaska one of the most important effects of some 11development11 subsidies, direct and indirect, has been the generation and perpetuation of regional inflation [Tussing, et al., Z969]. The redistributive effects of an open or hidden subsidy tend to be temporary; any inefficiency it fosters tends to be permanent. 7

Alaska's Regional EconomicDevelopment

The development or nondevelopmentof Alaska's mineral resources may simply not make much difference to the average level of productivity in a highly diversified and progressive economylike that of the United States; but it obviously may make a great deal of difference to total and per capita income and to their rates of growth in aska. Inves i knowl i resources are probably the most critical determinants of growth and of welfare in the state, as they are in the nation. However, the stock of natural resources economically open to development is relatively more impor­ tant to Alaska's future than it is to that of the United States, if only because it determines whether certain economic activities will be carried out in Alaska or elsewhere, and because of the state's high ratio of land to population which vastly increases the relative importance of Alaska's extractive industries. In setting forth Alaska regional development as a policy objective, there is an ambiguity not implied in the goal of national economic growth. The latter term usually takes the national population or rate of population growth as given, so that maximizing net national product and maximizing product per capita are the same thing. Regional economic development, on the other hand, implies a process of increased population growth, a process which probably implies net in-migration and an increase in the region's share of the United States' population. As a practical matter, the processes by which a region's per capita income grows and by which its net in-migration is increased (or net out-migration decreased) cannot be separated. Still, a development strategy which emphasizes the one kind of growth may not be the most effective with respect to the other. There has clearly been a commitmenton the part of federal governmentto help the nation's least developed and least populous state to attain fiscal self-sufficiency. [See Federai Fieid Committee, Z966.] There is also a national commitmentto substantial outlays in order to reduce unemploymentand poverty in low-income communities throughout the United States, and the conditions of Alaska Natives in this respect call for special attention. [Ibid., pp. ?-io.] Yet, net gains in employment, income, or public revenues for Alaska are not necessarily net gains for the nation, and some gains for Alaska clearly involve greater sacrifices elsewhere. State or local officials can be expected to judge policies on the basis of the benefits to their constituents alone, but national policy toward economic development in Alaska must consider its national costs. 8

Alaska's political and fiscal self-sufficiency is probably no longer at issue [Brady, l96B; Federal Field Committee, l96Ba; Tussing and Jones, l968], and there may not be any further national justification for federal subsidies or assistance favoring Alaska's economic development at the expense of the rest of the United States. The situation of Alaska's Natives--Eskimos, Indians, and Aleuts--is a different matter. As a class, Natives own or control only a small proportion of the state's assets, and they do not possess the accultura- • ion, ining, or experience to take advantage of the new job opportunities in the kind of economic growth now occurring in Alaska. This generalization is confirmed by a variety of statistical series which show that the economic position of Alaska Natives and of the communities in which they live are steadily falling further behind statewide and nationwide averages.6 Such evidence casts serious doubt on the commonnotion that the interests of Alaska Natives are best served by a further acceleration of general economic growth. Despite the creation of some jobs accessible to Native workers, it is not clear that an expansion of mining will on balance benefit the Natives as a group--unless a federal settlement of Native claims gives them a property interest in mineral lands. The federal interest in Alaska's economic development is expected to focus increasingly on issues of individual welfare such as real per capita incomes in the lower income groups (this criterion implies attention to the price level as well as money incomes), a reduction in the absolute number? of unemployedand underemployed, and other aspects of individual welfare such as health and education. It ought to be a matter of indifference nationally whether new supplies of copper are developed in Arizona or in Alaska, except as there may be different impacts on the welfare of disadvantaged individuals--and these differences may be very difficult to demonstrate.

6Indicators showing this tendency include average unemploymentand average wage and salary income. See Sullivan [1969], Brady [1968], Federal Field Committee[1968b]. For a regional evaluation of economic prospects for Alaska Natives, see Tussing [1968] and Tussing and Erickson [1968]. 7The proper measure is numbers of unemployed rather than rates of unemployment. A fall in the latter may be simply the result of workers migrating into the region to fill new jobs and thereby conceal the absence of any improvementsfor the resident labor force. This type of development is exactly what now seems to be taking place in Alaska. 9

National Strategic Self-Sufficiency in Crude Materials

Although industrial techniques and the economyas a whole can generally adjust to changes in the relative abundance or scarcity of specific inputs, these adjustments do not occur instantaneously. Both the supply and the demandfor specific raw materials are much 1 sensitive to price changes in the short run than they are over a longer period. Where existing patternsof economic activity on overseas sources, interruption of supplies from these sources can cause sharp increases in cost and serious economic dislocation. In addition, some specific "minor metals, 11 like tungsten and platinum, are technically very strategic and almost completely unavailable at home. The possible effect of shortages of these commodities, especially in wartime, has been a persistent theme in the considera­ tion of tax policy, international trade policy,and government programs concerning the mineral industries. An examination of the strategic requirements of the United States for particular products in particular kinds of national emergencies is not within the scope of this study. Whatever combina­ tion of material stockpiling, excess reserves, excess productive capacity, or other measures is chosen as the national strategy for material self-sufficiency will require some sacrifice in economic efficiency in comparison with free trade, but it is not likely to call for any action with respecttn Alaska different from the policy pursued for the rest of the United States. The measures taken nationally in the name of strategic self-sufficiency will, however, have a serious impact on the outlook for mineral development and production in Alaska: petroleum import quotas and copper export controls are now amongthe most important factors stimulating the development of the crie industry, and discouraging the development of the other.8

8The authors are not pursuaded that all those mineral policies adopted under the justification of strategic self-sufficiency are actually responsive or even relevant to national needs, and regard much of the argument on strategic grounds as disingenuous. Oil import quotas and copper export restrictions, for instance, are probably better explained by the distribution of private benefits resulting from them. See testimony of M.A. Adelman, Paul Bradley, Walter Mead, and Henry Steele in Subcommitteeon Anti-Trust and Monopoly[1969]; also Lovejoy and Homan[1966]; Tussing, et al. [1968], p. 72-74. 10

The present ignoranae of Alaska's geologiaal endowment does, of aourse, limit the range of poliay ahoiaes available to attain any given level of insuranae against shortages of strategia aommodities, and thereby inareases the aost of obtaining that level of seaurity.

Balance of Payments

In recent years the United States has suffered a deficit position in its overall balance of payments and a positive but deteriorating position in its balance of commoditytrade. The balance of payments problem has two aspects: the immediate consequences of the VietnamWar with its contribution to increased inflationary pressures at homeand spending abroad, and the persistent deficiencies and rigidities of the international monetary system. While both situa­ tions naturally focus attention on means by which the United States can develop new sources of exports and substitutes for present imports, there seems to be little which Alaska's mineral industries (except for oil and gas, whose development is already proceeding very rapidly) uniquely can contribute to the resolution of either the short-run or the long-run problem. Since any policy adopted today to foster mineral exports from Alaska will probably not bear significant fruit for several years, it is difficult to justify such policies on the basis of their help with the immediate balance of payments difficulties. The fundamental problem is a structural one involving the system of fixed exchange rates, the position of the dollar as an international reserve currency, the inelasticity of gold supply9, and the world balance of economic power. Its resolution will require muchmore fundamental changes than the marginal shifts in the balance of commoditytrade of which Alaska's mineral development might be a part.

Revenues for Federal and State Governments

The natural resources of government-ownedlands and waters in Alaska are a capital asset of immensevalue and are capable of earning their owners--the people of the United States and of Alaska-­ substantial revenues. It has been remarked earlier in this chapter

9united States and world supplies of monetary gold are indeed an important issue, and their impact on prospective Alaska gold mining is discussed in Appendix I. 11 that the treatment by government of its resources as earning assets is an exception rather than the rule. The federal government in particular does not attempt a businesslike managementof its minerals, timber, grazing lands, fish stocks, and waters as would a rational private landlord.lo One of the most conspicuous instances of this tendency, and the one with which this report is most concerned, is the discovery system of mineral location, under which prospectors and miners are granted free access payment of or royalty, to minerals on publicly ownedlands. The prevailing system of mineral development arose in a place and time where the average market value of development rights on the public lands was very low--probably less than the cost of administering a more sophisticated system of development--and in which the main problem for government was the adjudication of disputes among miners [S'wensen, l96B; Haman, l956; Martz, Z955]. This system is defended today on the ground that the purpose of the public land laws is and should be 11development, not revenue. 11 Economically, this dichotomy is a fallacious one, refuted on its face by continued mineral development and production on private lands subject to royal­ ties, and by the vast revenues generated for government in oil and gas leasing. The existence or nonexistence of charges for mineral rights and the nature and level of those charges do indeed influence the loca­ tion and the character of mineral development, but no set of charges less than or equal to the expected 11economic rent 11--the difference between the value of the product and the full cost of producing it, including exploration costs and the necessary allowances for risk and uncertainty--will deter exploration or production which otherwise would have been commercially feasible. There will always be mines or mineral provinces on the economic margin, where the value of the product barely meets its costs of discovery, development, and produc­ tion. In these cases, mining cannot support royalties or other land­ lord remittances. It is not in the public interest that exploration lOThe most important exception to the rule of giving away or under­ pricing of government-ownedresources is in the competitive leasing of Leasing Act minerals, and of oil and gas on the outer continental shelf. Even here the revenue potential has been reduced by the requirement of the Mineral Leasing Act for noncompetitive leasing in the absence of a 11knowngeological structure, 11 combinedwith the Department of the Interior's extremely narrow definition of such a structure, and by the same Department's voluntary subordination of outer continental shelf production to state prorationing. These two departures from market pricing have alone undoubtedly cost the Treasury (and the Reclamation Act states) revenues in the order of hundreds of millions of dollars during the life of current leases. 12 of tracts with low expected yields, or the opening or operation of marginal mines, be deterred by such charges. The problem is, rather, to devise a system of charges which will efficiently collect for the people the economic rents without deterring any socially useful explora­ tion or production. A system of competitive leasing in which the minimumcharge is no higher than the cost of administration, approximates this objective and is discussed in greater detail in another chapter. i l policy odds with one another. Policy making, therefore, involves the estima­ tion of implicit rates of tradeoff between competing objectives, and policy decisions require a balancing amongthem. Efficient alloca­ tion of resources, however, and the fiscal objectives of government with respect to the managementof resources on government-ownedlands almost exactly coincide. Revenuemaximization and market pricing of natural resource commodities should not be regarded as inviolable absolutes, but they should be an important policy norm. Legislators and public administrators ought to be as jealous of the potential revenues from the natural resource assets under their custody as they are of moneysactually collected from the taxpayers. The free grant, or noncompetitive disposal, or underpricing of minerals or any other product of the public wealth is every bit as mucha cost to the general taxpayer and against the government budget as is an appropria­ tion fronthe general fund. The same is, of course, true of special tax exemptions, discounts, or credits. Intelligent policy making requires that the magnitude of hidden subsidies in the form of departures from market pricing or from tax uniformity be estimated, their beneficiaries determined, and that these subsidies be somehow included in government budgets so that their costs and benefits can be evaluated by the same standards as those of direct outlays. One additional issue concerning government revenues which must be noted is the distribution of potential revenues between the state and federal _governments. By providing to the state at the time of statehood the right to select approximately one-third of the federal lands in Alaska, and by granting to the state a claim to nine-tenths of the revenues from mineral leasing on federal lands, the Congress clearly intended that the state should have the opportunity to appropriate for its own support virtually the entire revenue-earning capacity of the federal estate in Alaska. The unexpected richness of Alaska's oil and gas resource raises, and will continue to raise, questions about the wisdomand the equity of these provisions of the Statehood Act. There is an associated issue of national economic efficiency in the possibility that high per capita mineral revenues will lead to exceptionally high levels of public services and low levels of taxes, or even to a "social dividend," and thereby attract to Alaska a large nonproductive or underproductive population. These are issues of equity and policy about which this report will not make recommendations. 13

Varieties of Conservation

The term 11conservation, 11 with respect to natural resources, embraces a number of meanings, some of which are at odds with one another, so that the bitterest debates over resource management policies often have as their antagonists two or more sides, each of which claims to be the "true conservationists II The term is popularly used in at least five different senses: 1. The prevention or reduction of physical waste of those natural resource products harvested or extracted; 2. The optimum rate of extraction or pattern of extrac­ tion of an exhaustible resource over time; 3. Preservation of the capital stocks essential to a renewable resource--in reference either to a biological stock, as in the fisheries, or to an environmental complex, such as a watershed; 4. Preservation of open space or unspoiled wilderness for aesthetic, scientific, and recreational purposes; and 5. Attention to the quality of environment--reducing the degradation of waters, the atmosphere, soils, and scenery by industry and population. There are frequent conflicts even within each of these categories; for instance, between timber conservation practiceand conservation of fisheries stocks, or between retreationists who want to preserve roadless wilderness and recreationists who want ski tows or better access to hunting or car-camping. Classified differently, conservation problems can be divided according to whether or not they can be resolved, at least in principle, on straightforward commercial standards. Problems of true economic waste may arise, for instance,when resources are treated as free goods or as commonproperty. This is the case in the fisheries [Christy and Scott, l965] and is also the case with gas and oil reservoir pressure under the 11rule of capture 11 in the oil-producing states of the Southwest [Lovejoy and Homan, l966]. The necessity for conservation regulation in these instances arises 14 from the fragmentation of ownership or of access rights. In the absence of regulation, each producer will attempt to capture as much as he can "while the getting is good.11 There is no way that an individual enter­ prise by its own restraint can assure the preservation of common property like a fish stock or oil-field pressures. Conservation regulation in the form of seasqns, gear limitations, or prorationing are attempts to cope with this problem without interfering with the principle of open access; but they succeed in limiting physical waste 1 by imposing -by ing creati greater productive capacity than is necessary for the permitted rate of production ("maximumefficient rate" or "maximumsustained yield"). The rational owner, either private or governmental, of an entire oil pool or an entire fish stock would, in his own self-interest, remove the resource at the commercially and socially optimumrate, and do so at the lowest cost in terms of all resource inputs, material and human, without the additional baggage of conservation regulation. The State of Alaska has accomplished this objective for oil and gas by requiring fields to be produced as a ~nit, and similar arrangements can be imagined for the fisheries. 1 Conflicts of use between different commercial resources can also be resolved without conservation measures as such, provided again that the managementof both resource stocks is in the same hands, and that the same objectives (such as maximization of revenues, or of local employment) are pursued for both. If the Forest Service behaved generally as a rational revenue-maximizer with respect to its timber resource, and at the same time had managementjurisdiction over, and a mandate to maximize the revenues from, mineral resources on the national forests, it would have a straightforward measure of whether a particular mining operation should be forbidden because of its damage to the surface of the land: are the revenues expected fr()lll the mine sufficient to compensate the government as owner of the surface resources for the damage to the earning power of those resources? llrhe economically optimumrate of extraction can be treated as a capital budgeting problem for both exhaustible and renewable resources. Curiously, "maximumsustainable yield" as it is defined by the Forest Service or the Bureau of Commercial Fisheries will seldom be the same as the economic optimum (maximization of the capitalized value of the expected resource rents). The exis­ tence of a single "optimum"rate depends upon unitary management. In the Pacific salmon fishery, for instance, Crutchfield [1964] shows that,quite apart from the problems caused by open access and from international rivalry over the fish stock, the optimum rate of harvest of salmon would probably be different between American and Japanese fishermen. 15

As they relate to the exploitation of mineral resources, the toughest conservation problems in both theory and policy arise from the noncommercialbenefits of land, water, and space. Great progress has been made in the last few years in developing a conceptual framework in which to measure the economic value of recreation, scenery, open space, clean air, and the like; and there have been heroic attempts to assign actual dollar values to certain of these goods within limited assump­ tions. It is unlikely, however, that such methodologies, let alone the "shadow prices" they develop, will achieve general consensus in the irrnnediate future. Except for the most narrowly commercial aspects of these goods ("tourism,'' the cost of water treatment, etc.), formal cost-benefit analysis is unlikely to play a central part in the decision-making process for resolving these conflicts. Accordingly, only a few qualitative observations are made here. In contrast to the relative, and in many cases absolute, decline in commercial demandfor basic mineral stocks mentioned earlier, economic growth, operating through increases in population, per capita incomes, leisure, health, and mobility, clearly increases the utilization of open space, scenery, and opportunities for outdoor recreation. These goods are in many cases unpriced, so that a dollar measure of demandcannot be reliably determined. It can be noted that, despite a rising unit price (both in constant-dollar total travel expenditures, and constant-dollar income foregone), people are increasing their average number of experiences in these fields. [See Clawson and Knetsch, l966.] This fact demonstrates that the demandfor these activities, and for the spatial, scenic, and biotic resources on which they are based, are highly income elastic.12 A further and exceedingly significant implication is that, if we regard corronercial and noncorronercial resources use as mutually competitive, the socially optimum boundary between the two must continually shift in the direction of greater noncommercial--aesthetic and recreational--uses. Decisions concerning the allocation of Alaska's natural resources cannot help but, and properly should, reflect this shift in national priorities. Similar logic leads to a similar conclusion regarding environmental quality--the condition of

12It is only fair to treat the demandfor and supply of outdoor amenities syrrnnetrically with those for minerals and other natural resource commodities. Despite the declining absolute amount of wilderness, improved mobility and increased leisure and income have made all these amenities more accessible to most Americans than ever before. In human, or economic, terms, open space and wilder­ ness have becomemore abundant, not scarcer. It is harder, however, to project this trend indefinitely into the future than it is the increasing abundance of minerals. 16 water, soils, and the atmosphere. The historically declining social importance of the extractive industries, and the increasing social importance of open space, outdoor recreation, clean water and air, all suggest that Alaska should remain far less intensely developed than areas of similar natural endowmentin the older states (or in Europe or Asia). Such would be an appropriate outcome of changing human demands. There are several important considerations which modify the negative implications of these tendencies for Alaska mineral development. The first is that the spatial, land, water, and ecological requirements for enjoyment of the outdoors are extremely varied. Pure wilderness is only one of these requirements; and, although it needs individual chunks of land of substantial size and of substantial geomorphic and ecological variety, it by no means needs the vast bulk of the land. In addition, much of Alaska's prestige wilderness is economically so barren that it requires little institutional protection, at least for the present. Furthermore, since mining normally requires only small parcels of land, it is only pure wilderness which is totally incompatible with mining or industrial development. In fact, for much of Alaska's terri­ tory, the requirements for realization of its potential scenic or recreational values will be the same as for commercial development: knowledge and accessibility. It is the lack of both which has in the past delayed realization of any of the potential benefits residing in the land. Finally, as the demandfor protection of air, water, and ecological communities increases, our knowledge of their interrelation­ ships with humanactivity expands. Our technical and economic ability to avoid environmental degradation inthe process of industrial development grows simultaneously. The greater income and wealth of society and the wider range of possible sources of industrial raw materials also mean we can afford to be more cautious with our environment, and to err in a conservative direction. Despite alarmist arguments from both sides, a balance will be struck between the commercial and noncommercial interest in natural resources, and this balance need not be determined instantly and for all time hence. There will be no great loss to the nation if existing national parks and monuments, together with substantial other acreage reserved for wilderness and recreation areas and wildlife ranges, are closed to mineral location. On the other hand, Alaska's size, remote­ ness, and unimportance may be expected to leave vast tracts of wilder­ ness available perhaps for decades, for formal classification as such 17 as it is necessary. There are, however, costs to approaching the problem less intelligently rather than more intelligently. The absence of agreed~upon commonmeasures for comparing commercial and noncommer­ cial resource benefits does not mean that the frame of debate cannot be narrowed. Ignorance and misinformation regarding such basic matters as the ecological and geological environment may lie at the root of i ng demands on a given piece land. Even where individuals are aware of their ignorance, the problem persists. The mining industry, for instance, being uncertain of which particular areas represent the most desirable exploration targets, must assume that one area is in effect just as good as any other. Such a situation calls forth a shotgun reaction in response to any attempt to limit its access to land, even though miners would admit that the greater part of the area is worthless for their purposes. The proponents of nonindustrial uses of the public lands, those who would place a high priority on the recreational and other subjective values of open space and clean air and water, may not be hindered as seriously by the lack of geological information, but are likewise forced into exireme positions by the lack of knowledge regarding ecological relationships in Alaska and the extent to which these relationships would be disrupted by the intrusion of men and machines. Knowinglittle, they must assume the worst. Every such intrusion must be fought on the assumption that it might result in desecration of Alaska's single most valuable piece of wilderness real estate; for without information, this might indeed be the case. Rarely, however, do conservation groups such as the Sierra Club champion the cause of the U.S. Geological Survey in its annual requests for appropriations. Efforts at obtaining more information on the geological environment very often elicit a negative response from conservation organizations, perhaps on the premise that such efforts will be directed primarily at revealing valuable mineral deposits. To the extent that these attitudes are representative, they reveal a shortsighted and self-defeating approach to the task of preserving wilderness and environmental quality. Not only does the acquisition of geologic information help remove land classification decisions from the realm of wishful thinking, it also tends to reduce the uncertainty which has reinforced the mining industry's inflexible stand against legislation designed to insure wilderness preservation. If geologic investigation of an area shows that it is unlikely to contain valuable deposits, the pressure to keep it open for mineral entry will be correspondingly diminished. 18

A later chapter takes up the significance of information density to the rate of mineral development and suggests that a causal relationship exists between them. Commercialactivity will doubtless remain a most important justification for any expansion of geological efforts, but it is important that noncommercialbenefits of the sort outlined above not be overlooked. Though the exact extent of these benefits is difficult to estimate, the acquisition of geological informa­ tion clearly can help reduce those actions of the mining industry which n 1 on , nonmi resources. Free access to minerals and the location system probably play as large a role as does geological ignorance in assuring mining indus­ try opposition to almost any measure designed to protect other resource or environmental values. Prospectors and miners receive valuable rights--of exploring and removing minerals from public lands--completely without charge. Therefore, any restriction of their access to land, or any regulation imposing additional costs for protecting the surface of the land, or for keeping mining wastes out of streams, etc., is viewed (correctly) as a pure loss to the industry. A system of mineral development which, by competitive leasing, requires mining companies to pay the market value for exploration and production rights, would rapidly produce an industry with a different outlook on these matters. To the extent stringent regulations for the protection of the environ­ ment imposed higher expected costs, these higher costs would be reflected in lower bids. The financial burden of the government's regulations in the interest of nonmineral values of the land would be shifted where it belongs--to the g:>vernment. This proposition is supported by the general acceptance, even approval, by major oil companies of whatever regulations for protection of the surface are prescribed before, or in the terms of, a competitive lease. A model example is that of oil development on the Kenai Moose Range. The expected costs of strict regulations were capitalized in oil companypayments to the holders of noncompetitive leases. Under a competitive system such cost would be reflected in lower bonus bids, a,d cost the oi 1 companies nothing. 13

l3There is no assurance damagewill not be severe, and conflict bitter, even under a leasing system, as occurred in 1969 in the Santa Barbara Channel and may well occur on Alaska's North Slope--if geological and ecological kno~ledge is insufficient or is ignored, or if adequate regulations are not prescribed and ~triotly enforced. 19

Federal-State Interaction: WhoseMineral Polic_y?

The future of mining in Alaska and its regional economic impact depend upon the actions of both the state and federal governments. This truism is applicable to any industry in any state of the United States, but it has special force in this instance for five exceptional reasons:

I. Under the Alaska Statehood Act, the state is entitled to select from the vacant and unappropriatedlands in the public domain up to 103.5 million acres, to which the state is then to receive patent. Any lands so transferred to the state are then, in addition to present state lands, subject to state mining law. The major implication of this is that, with important limitations, the respective areas of juris­ diction of state and federal laws are theoretically alterable at the discretion of the state. 2. Although it was probably not the intention of Congress, the federal executive has held a de facto veto power over the consummati.onof state selections. In addition to the possibility of executive order and administrative with­ drawals, the Department of the Interior can segregate lands for classification, and has also generally engaged the state in a protracted bargaining process over the location and configuration of lands to be selected. At the present time (Spring, 1969) all the unreserved lands of Alaska have been withdrawn from entry and state selec­ tion because of the protest of Alaska Native groups. The point here is not to pass judgment on the wisdomor legality of the federal response to date--if blame is to be placed, it belongs with the Congress for failure to define aboriginal rights and to provide clearer implemen­ tation provisions for state selections in the Statehood Act. [See Alaska Land Study, l969; and Federal Field Committee, l968b.] 3. At the time of this writing, approximately 97 percent of the land area in Alaska remains in federal hands, and is, upon vacation of the 11land freeze" (the Native claims withdrawal) subject to the United States public land laws. A homestead entry, mining claim, or noncompetitive mineral lease offer thereby closes the land in question to state selection. The state is impelled to select land on which it is not ready to assume management responsibility, in order to protect its option ever to select the land, or in order to prevent costly sparse and haphazard settlement under the federal land laws. 20

4. Two large withdrawals of public land in northern Alaska-­ Naval Petroleum Reserve No. 4 (23 million acres) and the Arctic National Wildlife Refuge (8.9 million acres)-- are areas of exceptional mineral interest. Both were with­ drawn by executive order, but neither Congress nor the Executive has defined the status or the future of either reserve with respect to mineral location or leasing. Other smaller withdrawals are of a similarly ambiguous status. 5. The Statehood Act provides that 90 percent of the revenues-­ bonuses, rentals, and royalties--from the leasing of minerals on federal lands in Alaska be transferred to the state. This situation is riddled with invitations to the state-federal conflict, particularly so long as the state's selection program has not been completed. It introduces an element of uncertainty into the calcula­ tions of private investors, the Department of the Interior, and the state alike. The general situation in which the state receives nine-tenths of the revenues from resources owned and managed by the federal government conveys benefits without the responsibility of decision, and authority without responsibility for the consequences. The situation described above imparts an unfortunate ambiguity totile contents of this report about mining policy in Alaska because it is rarely clear just whose mineral policy should be discussed. There are points at which federal and state interests sharply diverge. In addition, the consequences of state action along certain lines will differ immensely, depending upon whether or not the federal government takes similar action; the converse is also true. The recommendations elsewhere in this report are intended to be of a level of generality appropriate either to state or to federal action, but the possibility of conflict engendered by institutional inconsistencies cannot be ignored. The way out of many of these conflicts, at least on the unreserved lands the Congress intended to be open to state selection, may not be difficult in principle. The mineral resources of the federal lands in Alaska are not being managedfor the purpose of earning revenues for the federal government.14 So long as this is the case, there is no valid

14As this report has pointed out earlier, no important natural resource on the federal lands of Alaska is being managed for the purpose of earning revenues for the federal government. It is probably unrealistic to expect this situation to change in the foreseeable future. The primary processing requirement for national forest timber is effectively enshrined in fifty-year contracts; despite prospective reforms in 21 public reason for the existence, with reference to the unreserved lands, of any federal mining or mineral leasing law. Indeed, for the vast majority of land and resource uses, state managementought to be socially more rational and more effective, even from a national standpoint, than federal management. This principle applies to almost every commercial resource use and to those unpriced recreational uses whose clientele are mostly residents. for exactly the consideration most often advanced to support resource administration by the federal government--the existence of i sp llover costs and benefits in the use of land and natural resources. Almost all these "externalities," be they the alleviation of local unemployment, multiplier benefits to the local service economy, environmental pollution, or the added costs of providing public services to remote settlements, are visited upon the regional economyand upon the state's residents. State managementcan be expected to provide both the greatest opportunity and the greatest incentive to internalize such externalities and thereby to improve the social efficiency of management.15 Stated in political terms, it is only fair that the people most closely affected should have the biggest voice in managementdecisions. The implication of the above is that Zand and mineral policy should be in the hands of the state except where paramount national interests can be demonstrated. The authors see three kinds of federal holdings whose objectives can be served only by federal management:

federal mining laws stemming from the work of the Public Land Law Review Commission, it is unlikely that the location system and free access to "locatable" minerals will be abrogated; the grant of 90 percent of federal mineral leasing revenues to the state is a feature of the Statehood Act which may not be alterable without the state's consent. Of the laws and policies providing for free or token disposition of federal resource assets in Alaska, only the relatively unimportant settlement laws are likely soon to be substantially altered. 15Despite its high priority for the regional development aspects of resource management, the State of Alaska has shown considerably more "rationality" in the sense of rent- and revenue-maximization than has the federal government with respect to its natural resources. The state's standards for wood-products exports are more liberal than those of the Forest Service; state law permits leasing for any kind of mineral, and provides for competitive leasing of oil and gas in a broader range of circumstances than does the federal government; although frustrated by the courts, the state has also attempted to take steps in the direction of limiting entry into the salmon fisheries. The state's homestead and settlement laws are generally more responsive to the realities of regional development. In summary, the notion that state resource managementshould be on the whole more businesslike, more rational, or more competent than federal managementis supportable not only by principle, but by Alaska experience. 22

(1) "Preservation" reserves--the protection of substantial and self-sufficient blocks of land containing represen­ tative geomorphic and ecological features; low-density outdoor recreation areas which depend upon the exis­ tence of wilderness or near-wilderness; endangered or rare animal and plant species and their habitat; the breeding grounds of internationally or interregionally migratory species; and important historic and a rcheo 1 i ca 1 (2) National defense facilities. (3) Resources of particularly high revenue earning importance to the federal government. The first use constitutes the justification fur a system of national parks, monuments,wilderness areas, and wildlife reserves. This system should probably be enlarged considerably in Alaska (but not necessarily by unilateral federal withdrawal); and, within this system, the control of commercial resource utilization, if any, ought to be under federal control, and subordinate to the preservation objectives of the reserves. While all three kinds of holdings clearly call for federal jurisdiction, state law and procedures might apply, or be "assimilated 11 {executed by federal authority) even on these lands to the extent that development is permitted. Nothing in thisapproach would prevent additional federal controls to assure protection of unique national interests. In summary,there are obvious regional benefits, and no obvious national costs, to placing most federal lands under state, rather than federal, mining law (and land law generally). Doing so would place manage­ ment responsibility where the major costs and benefits are, and reduce the incentive for the state preemptively to select land, or for the federal government preemptively to withdraw it from entry and state selection. Even with such a reform, however, there is some importance to an early determination of the boundary between state and federal juris­ diction. Whether it is the state under the Statehood Act or the federal government by classification or withdrawal which has the responsibility and right of selection, an open-ended selection process or even one which continues for 15 years is objectionable. Economicand management considerations both argue for the early establishment of certainty in jurisdiction and in disposal policy. The selector is bound to select opportunistically, dragging out the process as long as possible waiting for resource values to appear. The agency selected against will have a minimal incentive to invest either in information or in capital facilities, lest these investments be lost by the "highgrading" strategy of the 23 selector. Neither party will be inclined to develop a working long­ term land managementand development plan until the selection process is complete--one agency will have no incentive to do so and the other will have no ability. Consistent with the conclusions set out earlier, a major responsibility for completion of the division should be on the federal government, because the national interest is more clearcut and can be more easily and rapidly defined than leasable minerals from the surface in the selection process or providing a different rationale for the division of revenue between the state and federal governments would remove the disincentives to rapid disposition of the other land resources arising from the expectation that new oil and gas discoveries will provide a better revenue position.16 This study recommendsas an alternative to the present selection arrangement an authoritative joint land planning commission created by Congress and the State Legislature which would systematically and simultaneously classify the public lands of Alaska, both state and federal; complete the federal 11preservation 11 system; and select those lands to be transferred to the state. The same commission would be an appropriate body to review and make recommendations concerning the status of, and policy toward, existing land withdrawals. Federal land classification, state selection, and state land classification are all immensely handicapped by the lack of knowledge about the resource endowmentsof the lands in question. The benefits from an early and intelligent completion of both selection and classi­ fication are difficult to estimate, but these benefits alone will certainly exceed any anticipated costs of accelerating the U. S. Geological Survey's Alaska program.

16Amajor consideration in the state's present selection strategy is its fear of amendments, either to the Mineral Leasing Act or to the Statehood Act, which would reduce or remove the state's 90 percent share of mineral revenues from federal lands. If the status quo were to be retained, the state would have little incentive to take on the managementcosts of oil and gas lands (or at least those subject to competitive leasing under federal law). Despite the state's official position that unilateral federal changes in the terms of the Statehood Act would be unconstitutional, there is senti­ ment within the Interior and Treasury departments, the Bureau of the Budget, and Congress for changes in favor of the federal government. The state understandably wants to move into a property position before any such change occurs. 24

The ambiguities, uncertainties, and potential areas of conflict ar1s1ng from the interaction of the state's selection rights and its revenue-sharing rights to federal lands also complicate immensely the problem of arriving at a fair, generally acceptable, and reasonably cer­ tain resolution of Alaska Native claims. A claims settlement package which provides to Native groups land selection rights and/or a share of resource revenues will further complicate the situation, unless the legislation which deals with the Native claims contributes to a resolu- tion of the exi i 1 state relationships.

SomeObservations on Subsidies and Incentives

In discussing mineral policy in Alaska, attention is often directed to the tax incentives that the Canadian government makes available to mining and mineral exploration enterprises [Elliott, l964, p. l2]. These incentives include the following: 1. In general, qualifying corporations can claim immediately the costs of exploration and development as deductions from (taxable) income from any source. Any portion of these costs not absorbed against current income may be carried forward indefinitely. Depreciation on plant and equipment is not allowed as an exploration or development cost as such assets are subject to regular capital cost allowance. 2. The income of new mines is exempt from tax for a period of three years. Because a taxpayer may defer deduction of any capital cost allowance or development cost until after this period of exemption, income tax is unlikely to be paid for some additional years after this initial three years. 3. Taxpayers who operate oil or gas wells or mines (with the exception of gold and coal mines, which are given special allowances) are permitted to claim a depletion allowance equal to one third of their taxable income from petroleum production or mining operations .... In general, this provision can be said to reduce the effective rate of corporation tax by one third. Nonoperators are entitled to a depletion allowance of 25 per cent of their gross income from the mining or petroleum operation. In addi­ tion, shareholders are permitted to deduct 10 per cent, 15 per cent, or 20 per cent of the amount of dividends 25

paid by certain corporations resident in Canada if the income of the corporation which was derived directly or indirectly from the operation of a mine, oil or gas well meets the prescribed tests. [Carter Report, Z967, pp. 295-296.] No one doubts that these provisions have significantly stimulated mining in Canada. In 1964 alone, the three-year exemption and depl ion a lowance provi Canada's industry with an indirect subsidy of over $150,000,000 Canadian dollars [Ibid., p. 297]. Numerouswriters have understandably suggested that Alaska's mineral industry would be given a boost by the adoption of similar generous tax concessions on this side of the border. There has, however,· been a general failure to distinguish clearly between the normative evaluation of policy objectives and the objective description of policy results. While it is likely that Canadian tax policies have stimulated mineral development far more than their U. S. or Alaskan counterparts, the unqualified contention that Canadian policy is therefore better cannot be accepted on this basis. Such reasoning implicitly assumes that what is good for mining must be good for the country. This assumption is unwarranted. The Canadians themselves are aware of the very serious flaws in the case for these subsidies. A passage from the recent report of the Royal Commissionon Taxation [Carter Report, Z967, p. 298] summarizes the relevant considerations: The issue is not the direction of the effects of the concessions, but rather: l. Have the effects been significant? 2. To the extent they have been significant, did the diversion of labor and capital from other uses to the mining and petroleum industries increase or decrease the total output of the goods and services that Canadians want (or that could be traded for such things)? 3. To the extent that the diversion increased the economic welfare of the Canadians, could it have been achieved at lower cost? In our opinion, the concessions probably brought about an increase in the allocation of capital and labor to mineral and petroleum extraction; but, there is no 26

presumption that this had a beneficial effect on the overall economic well-being of Canadians. Even if the reallocation did improve general economic well­ being, the concessions were an unnecessarily costly method of achieving these results. It might be argued that the undesirable allocative effects of uncertainty would be mitigated by either direct subsidy or tax incentive. It will be shown in Chapter IV that numerous profitable exploration opportunities are being foregone because of the large "risk of ruin" with which they are associated. One way of reducing this risk would be by increasing the average expected profits to be gained from any particular exploration venture. Subsidies, direct or indirect, would have this effect, but they are an unnecessarily costly means of eliminating the problems of uncertainty. First of all, it is extremely difficult to apply tax concessions or other incentives in a manner that limits their impact to those firms that would otherwise be unable to prospect and develop mineral properties in Alaska. Such subsidies are effective but indiscriminate. They would, for instance, increase the profits derived from ventures that are already profitable under the existing state of affairs. In doing so, they merely create a classic case of 11windf a 1111 benefits to a se 1ected group of firms at the expense of the public purse. Even where concessions have the hoped-for effect of reducing uncertainty, it is probably achieved at an unnecessarily high cost when compared with increased public investment in the acquisition of geologic information. There are, however, ways in which the taxation system can be justifiably utilized to reduce the uncertainty involved in mineral exploration. Expenditures by firms are classified as either capital investments or operating expenses. Capital expenditures generally come about in the course of acquiring the tangible assets such as buildings and machines necessary to carry on the business. In most cases, the costs of acquiring these assets are deducted from expenses over a period of time, in some manner related to the rate at which the asset loses its value to the firm, either through wear and tear or for other reasons. Operating costs, on the other hand, are usually charged against income very soon after they are incurred. A literal application of these principles to the mining industry results in certain obvious inequities. The largest proportion of the cost of acquiring mining properties generally does not appear 27 on the books of the firm as payment to some previous owner, but rather as an exploration expenditure. The cost of acquiring mining property may be very low, but the cost of finding it and proving it may run into the millions. Exploration costs are thus seen to be a necessary and important part of a mining firm's capital investment. Difficulties arise in attempting to determine the appropriate rate at which exploration expenses should be depreciated· i e the rate at which they should be deducted from income. If it could be said for certain that a particular group of exploration expenses were solely responsible for the discovery of a certain property, it would only be necessary to sum up those exploration costs and depreciate them over the productive life of the particular property; but this is generally not possible. Due to the uncertainty of exploration, many ventures produce no discoveries and consequently no assets upon which to apply a depreciation schedule. Any taxation scheme which does not recognize this fact will burden the mineral industries with an unrealistically high tax load. Because of this fact, rapid depreciation should be allowed for exploration expenses, and liberal provisions should be incorporated for the carrying forward into future years of unused portions of the tax write-off. If these and similar factors unique to the mining industries are taken into account, there would be no public purpose to the present arbitrary depletion allowances. Such allowances are generally based on the argument that the mining enterprise 11consumes11 its capital assets in a manner dissimilar to other industries. By itself, this argument makes very little sense for, indeed, almost all productive assets are 11used up11 in one way or another by the process of production. A more realistic justification for depletion is its use as a device by which frequent failures are financed by the few successes. Capitalization of exploration expenses, and their rapid write-off, constitutes a far more precise and equitable way of taking account of these unusual factors in the mineral industries.17

17No attempt has been made to state the case against the percentage depletion formula in all its ramifications. However, the opinions expressed herein on the value of the depletion device find wide con­ firmation in the large body of literature on this subject. For a more complete treatment, the reader is referred to McDonald[1961], and Scott [1955]. An interesting implication of tax incidence analysis is that, under an effective competitive leasing system, most of the gains from percentage depletion with respect to oil and gas production in Alaska are capitalized in the bonuses, and accrue to the state as landlord. Percentage depletion allowances are thereby another means by which money is transferred from the federal treasury to that of the State of Alaska. 28

Of more relevance to Alaska policy-makers is the possible usefulness of subsidies and incentives as devices for bringing private costs and benefits more precisely in line with public costs and bene­ fits. For instance, mineral development in an area of chronic unemploy­ ment might confer social benefits which, without subsidy or incentive, do not usually enter the private developer's calculation of costs and revenues. The means by which such incentives should be applied, however, deserves careful study. Most important, the objectives of the idies ld precisely 11economic development, 11 should not be substituted for careful and complete specification of the purposes to be accomplished. Almost as important, the size of the subsidy or incentive should be closely tied to some index that is an accurate measure of the success achieved in meeting the objective. If, as will very often be the case, the objective is employment opportunities for a disadvantaged sector of the population, then the extent to which subsidy assistance is granted should be dependent upon the number of new jobs created and actually filled by members of the disadvantaged group. Finally, the subsidy or incentive should be administered in such a way that prospective developers can readily calculate its ultimate impact on their profits. It should be kept well in mind that the basic goal of such devices is to attract or sustain industry. Public policy designed to increase private income at the expense of public revenues is only justified to the extent that it assists in attaining this objective. Governmental efforts to influence the loca­ tion of private industry must have their focus on those private planning and decision-making activities which take place prior to the decision to invest if they are to have their hoped-for impact. A policy of promising rewards or incentives is only worthwhile if such promises are credible.18 Care should be taken to see that incentives do not 11rob Peter to pay Paul. 11 If the social or human problems that originally justified tampering with competitive market forces would be exacerbated by a reduction in the level of educational and local government services, as apparently has happenedin at least two Alaska instances, then any 11 incentive 11 which sacrifices local tax revenue supporting such services will have its desired effects both mitigated and reduced. A degradation of governmental services reduces a community's attractiveness to industry and emphasizes the original social problem as well. l8The Alaska Industrial Incentive Act, although objectionable on several grounds, scored particularly low on this point. For a detailed criti­ cism, see Tussing, et al. [1968, pp. 79-81]. The tax credit system which replaced it in 1968 has not been studied by the authors, but it appears to be subject to the same objections. 29

CHAPTERII: CHARACTERISTICSOF THE MINERAL INDUSTRIES

DevelopmentExpectations -'- -- .

If Alaska's natural endowmentof minerals were on the average at least as good as that of the contiguous forty-eight states, and if mining activity were distributed roughly according to the minerals physically present, Alaska's gross annual production of minerals other than fuels and construction materials would be over $1 billion, an increase of more than one hundred times the recent level. Table l suggests a recent record of mineral output in Alaska which is in almost unbelievable contrast to that of other regions, both developed and underdeveloped. A look at the cumulative value of mineral production presents an equally stark picture. Herbert [1967] has calculated that by 1963 Alaska had produced, on the average, $2,600 worth of minerals per square mile. This compares with a value of $83,000 per square mile cumulative output in the coterminous eleven western states. [See Appendix V for current Alaska output.]

TABLE1 1958 MINERALPRODUCTION PER SQUARE KILOMETER, SELECTED COUNTRIES Countrt $/KM2 Countrt $7KM2 Great Britain 10,702 USSR 369 West Germany 6,705 China (Mainland) 308 Poland 3,133 Mexico 247 France 2,197 Canada 167 Japan l ,738 Belgian Congo 121 USA(48 states) 1,468 Australia 45 South Africa 830 Brazil 25 Sweden 467 Alaska 14

11 11 Source: Bailly [1964], Plate 3 { After Blondel, 1961 ) •

Knowingnothing else about Alaska's mineral potential or the amount of exploration effort, this poor record of production might be taken as evidence of an exceptionally poor endowmentof mineral resources. While prospectors and explorers have advanced a multitude 30

of reasons to explain the paucity of past production, however, there is a remarkable unanimity in their belief that Alaska is as well ~ndowedwith mineral resources as many of the more prolific areas listed in Table 1 [Elliot, l964]. Geologists point out that insofar as it is possible to specify relationships between geology and the occurrence of mineral deposits, one may expect Alaska's endowmentto be fairly generous. It is known, for instance, that important varieties of metallic deposits are genetically related to igneous intrusions. Such intrusions dominate the geology of a large portion of Alaska. Alaska's Coast Range and the western part of the southeastern archipelago particularly contain terrane dominated by such rocks. Evidence of the volcanic activity that favors the deposition and concentration of metallic elements is also abundant [uses, l964, pp. lO-ll]. Broadly speaking, it is likely that Alaska's mineral resources are comparable to what might be found in an equal area in the contermi­ nous 48 states [Crye, et al., p. 2l; Battelle Report l96l; V. l, p. D3; V. 2, p. III-8; V. 3, p. V-68] or in western Canada.1 Howis it, then, that mining and exploration activity in the state does not expand in response to the general opinion that Alaska is geologically promising? What accounts for the relatively low level of exploration in the face of geological information that indicates reasonably high probabilities of discovery? The present low level of development in the Alaska mineral industries cannot be adequately explained by reference to any one particular deterrent or related set of deterrents. Although acknowledged problems exist in the areas of exploration inducements, acquisition of mineral title, financing, and inducements to production of knowndeposits, other mineral provinces have successfully been developed in the face of the same or similar difficulties. In Alaska, on the other hand, with its general economic backwardness, an obstacle at any one level is usually sufficient to preclude development. Past discussion of policies

lrn addition to the materials cited, the conclusions here are substantially based on information developed in the course of personal interviews with numerous geologists and engineers familiar with Alaska. Of particular usefulness in this regard were the authors' discussions with George Gryc, Chief of the Alaska Geology Branch of the U.S.G.S.; Robert Forbes, Head of the Geology Department, University of Alaska; James Williams, Director, and Gordon Herreid, Mining Geologist, both with the Alaska State Division of Mines and Minerals; and Lawrence E. Heiner, Assistant Mineral Engineer of the Mineral Industry Research Laboratory of the University of Alaska. 31 to encourage m1n1ngin the state has focused mainly on issues such as taxation, high wages, commodityprices, and transportation needs; but it is not clear that even the most favorable developments in all of these areas would have pronounced effect on mineral production in Alaska. It is necessary that at least as much attention be devoted to the organization of the mining industry, to the status and adminis­ tration of public lands, and to the state of knowledge of Alaska geological endowment,as to these more conventional issues of mineral policy. This is not to say that giving these complexities proper attention will guarantee a future of rapid expansion for the mineral industries in Alaska. These industries are, by almost any standard, in a nationwide decline. The actual number of workers employed in the mineral industries in the United States fell by almost two-thirds between 1909 and 1963. The value of shipments in constant dollars has, over the same period, fallen sharply in coal mining and has barely increased in metal mining. Only in oil and gas and in nonmetallic mining other than fuels have there been tendencies for the real value of product to increase. Even these sectors are declining absolutely in terms of employmentand relatively in terms of their contribution to national income.2 Therefore, expansion of mining in Alaska, at least for the domestic market, will come in large part at the expense of already established industry. Despite the fact that the state contains about one-fifth of the nation's total land area, and despite the general agreement that it is, on the average, as well endowed with minerals as the rest of the nation, the overall circumstances of mining do not indicate the probability of an Alaska development boom based on mining. Predictions based on observations such as these are subject to obvious cautions. In the perspective of Alaska's small population and low level of development, any substantial investment is noteworthy. Past trends may not persist, nor is it certain that the dynamics of Alaska's mineral industry will continue to reflect nationwide trends. For instance, overseas crude materials markets may be more readily accessible to Alaska's mineral production than to that of the nation as a whole. Such a market may be developing in Japan, where excep­ tional industrial growth has required crude-materials imports to increase at an average annual rate of 14.3 percent in dollar terms between 1958 and 1966. In 1966, Japan's imports of minerals amounted to $2,875 million, divided almost equally between mineral fuels and

2These statements are based on data in the 1963 Census of Mineral Industries. See also footnotes l and 2, Chapter I. 32

nonfuels. Japanese demand has been the mainstay of British Columbia's recent mining boom; in 1966 the province's exports of minerals other . than mineral fuels to Japan were .valued at about $71 million, more than half of which was for copper ores and concentrates.3 Another reason for excepting Alaska from the mineral industries' generally pessimistic expectations is the relative ease with which superior mineral development institutions might be developed within the state in part because of the absence of signifi- ete o zation. Should important institutional breakthroughs and foreign markets actually bring about a renaissance of mining in Alaska, there remain, however, reasons for caution in estimating its total benefits. Despite the disproportionate role the hope of speculative gains may play in the minds of many Alaska residents, the bulk of mineral development to occur in the state will occur, as it already has in oil and gas, through the agency of outside capital and outside entrepreneurship; and except in the case of natural gas, little direct benefit to Alaska residents will exist in the form of lower prices for the industry's products. Neither will the side benefits of mining enterprise through opening up remote areas to other uses be great, especially if offset by additional costs of public services required in these areas.4 Experience indicates that the mineral industries make most of their contributions to a region's economythrough direct employment and the purchase of locally produced goods and services. It is in order to estimate roughly the character and relative magnitude of each of these two contributions. In the most recent Census of Mineral Industries [1963], the proportion of production, development, and exploration wages and salaries in value added by all U. S. mining was 16.8 percent, compared to wages and salaries of production workers of 32.3 percent of value added in manufactoring in the same year. For wages of exploration, development, end production workers in metal mining, the figure was 27.l percent; in coal mining, 40.6 percent; and

3u. S. law presently prohibits the export of copper ore and concen­ trates. Obviously, no similar shipments can originate in Alaska while this policy remains in force. For a full discussion of the potentials for Alaska mineral exports to Japan, see Tussing, et aZ. [1968]. 4rhis point is explored further in Chapter !V's discussion of under­ development and transportation. Arnold, et aZ. [1966], similarly 11 concludes that, ••• the contribution of mineral resources to regional economic development will be limited primarily to mining and initial processing operations." [p. 68.] 33 in nonmetallic mining other than fuels, 28.8 percent.5 Historically, these proportions have been falling very rapidly. The national averages are undoubtedly much lower now, and the averages for new mines in Alaska would likely be lower yet. Comparable figures cannot be obtained for purchases of locally produced goods and services, but one measure of the "backward linkages 116 from the mineral industries may be obtained by a rough estimate of the proportion of total value of product likely to be spent directly for goods and services produced in Alaska. Using categories and coefficients from the 1958 Inter-Industry Input-Output Table of the United States, the estimated proportion of gross output to be spent locally directly or indirectly on intermediate goods was 9.0 percent in the case of iron and ferroalloy ores mining, 8.4 percent in thecase of nonferrous metal ores mining, and 6.0 percent in the case of crude petroleum and natural gas.7

5All wages and salaries as a proportion of value added were 23.4 percent in mining compared to 52.0 percent in manufacturing. Wages of production, development, and exploration workers are probably the appropriate measure for our purposes because head offices, marketing, and research activities of mining enterprise in Alaska are likely to be located outside the state. Figures are calculated from Department of Commerce,Z963 Census of Mineral Industries, and Z963 Census of Manufactures.

11 6Hirschman defines backward linkage effects as ••• input provision, derived demand ... i.e., every non-primary economic activity [which] will induce attempts to supply through domestic production the inputs needed in that activity." [1968, p. 100.] 7The proportions are the sum of input coefficients for categories of goods and services assumed to be obtained mainly in Alaska: forestry and fishery products; agricultural, forestry, and fisheries services; coal mining, crude petroleum and natural gas; stone and clay mining and quarrying; new construction; maintenance and repair construction; printing and publishing; radio and T. V. broadcasting; electric, gas, water, and sanitary services; wholesale and retail trade; hotels and eating and drinking places; personal repair and services excluding automobile; automobile repair and services; amusements; medical and educational services and nonprofit organizations; and state and local government enterprises. Also included were one-half of expenditures on the following: transportation and warehousing; communications except radio and T. V. broadcasting; finance and insurance; business services; and business travel, entertainment, and gifts. Input­ output coefficients were obtained from Survey of Current Business, September, 1966, p. 40. 34

The mineral industries• potential contribution to the state's treasury, i.e., from taxes and landowner remittances, is the most difficult to project of their possible contributions. In the case of oil and gas, the developmental impact on Alaska of this portion will probably far outshadow all other effects combined. Contributions of similar dollar magnitudes--tens or even hundreds of millions of dollars annually--are not likely in the foreseeable future from other minerals. The most that can be said is that a prerequisite for realization of any substantial revenue from other minerals is the establishment of an i ism i i i compe leasing of oil and gas rights that would, in fact, capture for the state some share of the economic rents8 generated by mineral production.

Uncertainty and the Character of Mining Enterprise

A distinctive feature of the mining industry is the environment of high economic uncertainty in which much of it operates. Whenthe uncertainties of individual events can be reduced through a pooling arrangement, they are sometimes referred to as 11risks. 119 However, not all uncertainties are capable of being treated as risks. If an event is in some aspect unusual or unique, it may not be possible to locate another similarly situated decision-maker with whom its uncertainty could be shared. In another case, it may be impossible to identify similarly situated decision-makers until the decision has been made and the event has occurred. Sometimesuncertainties cannot

8The concept of economic rent used here refers to the residual income from the value of the product after the payment of all necessary costs, including labor, materials, and a normal return to capital and entrepreneurship appropriate to the degree of risk and uncertainty involved. The rent, then, is the contribution of the resource itself to the value of product. As a 11residual , 11 rent as a share of product value can vary from zero to a major proportion of the whole. It is the economic rent that the private resource owner normally attempts to maximize. Generally, the most effective mechanismfor pricing rights in natural resources and for approximating the capture of the economic rent generated by them is competitive sale or leasing. 9The classical formulation of the difference between risk and uncertainty is that of Knight [1921]. A rigorous modern examination of the issue is found in Georgescu-Roegen[1954]. 35 be transformed into risks (and the gains of insurance thus realized) simply because no one has bothered to develop the necessary pooling arrangements.10 Clearly, crucial issues for this analysis and for Alaska are to what extent the high levels of uncertainty associated with mineral exploration and mining in the state are intrinsic to the activity itself and to what extent they are functions of enterprise size, or are otherwise institutionally generated and reinforced. No industry is free from uncertainty. Uncertainty arises ictability the uncer- tain avail ility and price of raw materials, abor, and intermediate goods. It arises from changing technology, from political institutions, and from the uncertain quality of managementdecisions themselves. The unique feature of most sections of the mineral industries which contri­ butes to their seemingly extreme uncertainty is that the productive possibilities of any particular mine--its output capacity and its costs of operation--are seldom knownwith confidence until a large fixed investment has been sunk in exploration and development. Each mine, and each prospective mine, is unique; the upshot is, in economic language, that the production function of each contemplated new 11plant 11 will not be knownwith any degree of confidence until after production commences. In addition, further uncertainty is introduced by high market instability relative to other industries. The demandfor crude materials such as ores and primary metals is sensitive both to cyclical business fluctuations and to technical shifts in the structure of demand. World supply conditions can be changed almost overnight by political upheavals or by large new discoveries.11 The effect of market instability on the character of enterprise and on business decisions in mining is further deepened by the lack of adaptability of mining properties and the industry's low

lOThe ultimate burden of the higher costs resulting from uncertainty depends on a number of factors; normally, however, investors will require a higher average rate of return than they would in the absence of uncertainty. As fewer projects will be able to meet the resulting higher profit requirements, the flow of development funds will be reduced. The effects will include some combination of lower employment, lower output, and higher product prices. Risk, on the other hand, as defined here, imposes only the additional transfer costs of maintaining some kind of averaging mechanism. llThe average annual changes, plus or minus, in the prices of some primary metals in the United States between 1910 and 1957 were: iron--12.2 percent, copper--14.9 percent, lead--16.3 percent, and zinc--18.0 percent. Calculated from Potter and Christy [1962, p. 332]. 36 rate of capital turnover. That is, a copper mine produces copper ore and is hardly convertible to the profitable production of anything else if copper prices should fall; the heavy proportion of fixed costs in total outlays makes it difficult for capital to move in and out of mining as dictated by short- or medium-runmarket expectations. Political uncertainties bear with particular force on mining. The high ratio of fixed plant to value added in mines makes them particularly attractive candidates for expropriation, while their weak con bution to general economic development makes them politically vulnerable. Mines and oil fields are everywhere in the underdeveloped countries popular candidates for nationalization. Even in wholly stable and incorrigibly capitalist countries, mining enterprise is uniquely sensitive to uncertainties flowing from the political realm. Because of the high ratio of fixed capital to output, small changes in taxes, subsidies, or trade policy are capitalized into huge changes of asset value. The "mining industry" is a far from homogeneousentity. Nevertheless, some useful generalizations can be made about the struc­ ture and psychology which result from its special environment of uncertainty.12 The capital structure of mining firms, large and small, tends to be extremely conservative, involving relatively high levels of liquidity and low levels of debt. This circumstance reflects both the difficulty of borrowing against mineral properties with such uncertain asset values and the wide precautionary margins needed for enterprise survival and protection of managementcontrol. Managementtends to be centralized, entrepreneurial, and intuitive rather than bureaucratic and "rational . 11 This characteristic is not strange in an industry

12These generalizations clearly do not apply with equal force to all sections of 11the mineral industries," but only in proportion as the circumstances above prevail. To the extent that a mineral is ubiquitous and of low unit value, to the extent it is produced for a local or regional market whose dimensions are relatively predictable, to the extent its plant and equipment are composed primarily of adaptable or short-lived investments such as earth-moving machinery rather than exploration and deep shafts, or to the extent that integrated firms in the industry are involved primarily in processing or fabrication, enterprise will tend not to have the structure and psychology described. The sand and gravel industry is an outstanding example; while coal, iron, steel, and the petroleum 11majors 11 share only some of the characteristics which are most apparent in the oil 11independents 11 and in nonferrous metal mining. 37 where the most important parameters of decision can be approximated only vaguely by engineering and market research and, hence, appear to be almost wholly derived from guesswork. Where the success or survival of the firm so often hinges on a single managementdecision, the successful entrepreneur must be a technician in geology, engineering, and financing. The reluctance of the top man to delegate authority is understandable. The entrepreneurial character of management, the large gambles involved in exploration and opmen i , 1 i h gh on of fixed capital gives to minor changes in government behav or, all contribute to stubborn traditionalism about 11the rules of the game,11 and a stubborn devotion to free enterprise fundamentalism that is found in few other industries.13 Another characteristic is a propensity for secrecy and suspiciousness, which, inter alia, makes information collec­ tion and public planning extremely difficult where they involve mineral properties.14 The influence of mining's special characteristics upon industry structure and behavior probably results, in part, from the nature of the personalities and capital it attracts. Because of the high levels of uncertainty, it can attract funds only from a narrow segment of the capital market and its entrepreneurship from certain distinct personality types. Simply put, much of the industry is the

13The ideology and attitudes of the existing mining industry may be a serious obstacle to reforms in mining law, taxation, and natural resource administration which would actually improve the industry I s development potential and profit expectations. But, the industry's ideology should not always be taken at face value. The same companies which can be expected to vehemently oppose changing from the discovery system of mineral appropriation to competitive leases or to a concession system, or to oppose the establishment of a state exploration and development corporation, seem to work quite comfortably with all of these institutions in other parts of the world. 14rt is, for instance, impossible to assess with any degree of confidence the value of knownmineral properties in Alaska or the current level of exploration activity for the purposes of this study. The tendencies toward suspicion and secrecy are exacerbated by the prevailing system of mineral appropriation on public lands in which any indication either of serious exploration activity or of discovery leads to a rush of speculative staking by others. 38 province of long-shot gamblers. It has little access to the bond market, to banks, or to institutional lenders; nor does it attract to its managementrisk-fearing 11gray flannel" corporatebureaucrats. Inves­ tors in mining stocks seem to be largely individuals with high incomes from personal services (e.g., doctors, and entertainers) who are sub­ ject to the top marginal rates of the income tax schedule and for whom the net cost of speculative losses is low. For such individuals, the prospect that any long-shot 11killing 11 is taxable only at capital-gains rates or not at all is extremely attractive.15

i and Canada revolves around how to keep this capital flowing into prospecting and mine development, or about how a region competes for this kind of capital and enterprise. This is the frame of reference behind the almost unanimous opposition of mining spokesmen and industry economists to the proposals by Canada's Carter Commission to tax mining uniformly with other industries, and capital gains uniformly with service income.16 The same considerations are also behind industry opposition to the Securities and Exchange Commission's rigorous supervision of mineral securities markets in the United States, and to proposals for introducing similar regulation in Canada. Governmentexploration and competitive leasing are also opposed on the ground that they will deter the extremely speculative investor. To the extent these objections are not simply ideological or self-serving, they reflect the conscious or unconscious a5sumption that highly speculative and highly specialized forms of capital and enter­ prise are the only source, an indispensable source, the most abundant source, or the best source of capital and enterprise for the develop­ ment of mineral resources. This assumption is not clearly justified in Alaska; federal and state governments should be prepared to examine substantial changes in mining law, tax policies, etc.~ even if they seem completely unpalatable to mining industry spokesmen. lt

151n the authors' experience, the attitudes and values described above are not confined to owners and managers of mining and prospecting companies. They are 11cultural traits" which also characterize many mining engineers, mineral economists, mineral lawyers, trade associa­ tion representatives, and even helicopter pilots and heavy equipment operators connected with mining firms. 16someexpression of these sentiments with reference to the Commission recommendations can be found in almost any 1967 issue of the Northern Miner. 17rn considering objections to proposed reforms in Alaska, sight should not be lost of the fact that mineral production under the present regime is approximately zero. 39

The peauliarities of mining are more characteristic of the past and present than of the future. There are strong reasons to believe that the mineral industries must increasingly come to resemble other kinds of business in structure and outlook, for powerful factors are working to reduce the climate of uncertainty with which mining has been surrounded. Most pervasive is the process of technical change which allows the use of ever lower gradesof ores. Since the abundance of particular minerals seems to increase more than proportionally to the decrease in their richness [Kaufman$ pp. l09-ll2] most segments of the industry are dealing with an increasing"ly abundant primary resource. For this reason, the proportion of costs devoted to exploration, and the asset value of any particular discovery, will tend to fall. As open-pit mining replaces underground methods, the value of the mine itself falls in relation to the value of the earth-moving equipment, rolling stock, and skilled production labor. Capital so committed is more adaptable and can be recovered faster; cost parameters can be estimated with greater reliability before large outlays are made. Domestic price instability in major minerals in the United States has also declined substantially since World War II. Recent technical changes have increased the price elasticity of mineral supply, and increased substitutability amongcrude materials has increased price elastiticy of demand. Above all, there has been general economic stability and public acceptance of government stabili­ zation policies which have led to less volatile price behavior for primary products. Newtechniques of exploration, particularly geophysical and geochemical techniques and the use of aircraft, together with the acceptability of lower grades of ore, are sharply reducing the average unit cost of discovery. At the same time, minimumexpenditure necessary to use the new techniques is relatively high. Earlier surface techniques of prospecting did not have conspicuous efficiencies of scale: a company spending $10,000 a month for exploration would not be more successful, on the average, than twenty individual prospectors spending $500 apiece. On public lands subject to mineral location, the one-man exploration team probably had a significant advantage because of the danger that, in a larger enterprise, employees or associates would stake discoveries for themselves or sell information, and because large-scale exploration activity would be conspicuous to outsiders. These last problems still exist under our mining laws, but the balance of advantage in mineral exploration has now shifted to larger firms which can afford the equip­ ment, the division of labor, and the 9pecialized skills which modern prospecting require. These technical advantages of large size are added to the large firms' ability to reduce uncertainty--particularly to reduce the probability of total failure--by averaging the failures with the successes. 40

The final, and probably the most powerful, influence broadening the potential supply of capital and enterprise to the mining industry has been the rapid progress of corporate diversifi.ca­ tion. The interest of oil companies in nonfuel minerals is explained, in part, by the increasing similarity of their exploration techniques and by the fact that during oil and gas exploration these companies occasionally discover minerals or information valuable in the search for them. The interest of primary metal and chemical manufacturers in mining can be explained in part by their desire for control over . t the cruci advantage compani together with conglomerates of wholly unrelated industrial activities, have over the 11pure 11 mining firm or mining-smelting-refining firm is the ability to reduce uncertainty and its attendant costs to the enterprise as a whole by scale and by diversification.

Discovery Versus Production

The public interest in minerals is associated with their production and use, not with the accumulation of reserves as such. This truism may appear pointless because minerals are discovered and assessed only with a view to their eventual extraction. Yet, some of our laws and institutions which are intended to encourage exploration make it worthwhile for individual firms to hold high-grade reserves idle for decades. However rational this behavior may be for individual companies, idle stocks do not contribute to the regional or national economy unless they are extracted and processed.18 Both ore reserves and production of each major metal in the United States (e.g., iron and steel, aluminum, copper, and nickel) are concentrated in a small number of large integrated companies. For each company, control of reserves is a major means of market control. In the case of any particular metal, there seems to be a powerful direct correlation between a firm's reserve-to-output ratio and its share of total sales [Martin, l96?]. To a businessman in any other industry, it must seem peculiar that United States Steel, with more than sixty years of ore reserves, or Kennecott Copper Company,with more than thirty years, should spend money attempting to add to these inventories.

18For a fuller treatment of this point, see Gaffney [1967, pp. 355- 358]. 41

There are a numberof factors which lead mining companies to behave this way. Amongthem are: the desire to preempt reserves and keep them out of the hands of rival firms; the need to protect heavy investments in refining and fabricating capacity which would become idle if a flow of ore were not assured; the desire not just to add to present reserves, but to replace portions of present reserves with higher grade reserves; and the ability to retaliate in case a rival initiated vigorous price competition. While these factors motivate a leading firm to keep trying to acquire more mines, the same firm will hesitate to use i vast inventories to increase production at the expense of rivals because of its own ability to 11soften the market11 by adding to supply. An attempt by one firm to increase its share of the market by increased output can lead to retaliation, to 11excessive 11 price competi­ tion, and perhaps to a general collapse of the price structure.19 Finally, if the attempt of one firm to increase its market share were conspicuously successful, it could expect to attract anti-trust prosecution. It follows from these circumstances that the interest of one of the mining giants in an Alaska mineral property, or even a steady stream of exploration investment by one of them, does not establish any presumption that production will take place in the foreseeable future. Furthermore, those same properties are probably less likely to be produced if held by the dominant domestic firms in its industry than if held by a smaller firm. Unfortunately, the firms with the financial capacity to develop a large mining project and to average out the unsuccessful ventures within a generally profitable operation are the very firms which can best afford to hold their discoveries out of production. The tax and mining laws of the United States and these of Alaska, perpetuate this situation and encourage accumulation of excessive reserves. Minerals in the ground are generally not taxed at all, and the appreciation of their value over time is taxed, if at all, as capital gains rather than income. The expense of acquiring a mine can be written off not against the production of that mine, but against the firm's overall income. The law allows mining companies to retain control of, or to obtain ownership of, deposits on public land by attesting to an irrelevantly low level of assessment work rather than by purchase, rental payments, or by actual production or progress toward

19The world copper industry provides excellent historical illustrations of this principle. See Herfindahl [1959]. 42 production.20 These and other prov1s1ons which lead to overinvestment in exploration and to idle reserves might be justified on other grounds, but the situation remains, particularly in Alaska, one in which explora­ tion is not tantamount to preparation for production, and one where the acquisition of mineral properties by the major companies does not clearly contribute to the state's economic development.

SomePolicy Implications

Mineral enterprise, and particularly the business of mineral exploration, operates in an atmosphere of exceptional uncertainty. This uncertainty has a substantial influence on costs and on the level of investment. Together with high ratios of fixed capital to output, these circumstances have narrowly restricted the kind of enterprise and the capital sources to which mining appeals. The uncertainty itself can be traced to both technical and institutional factors, but.the former are losing much of their force. Muchof the remaining impact of uncertainty on costs and investment incentives could be reduced by increasing the scale or diversity of enterprise. Implications for Alaska's mineral development strategy include the following:

1. The existing exploration, mining, and mining-smetting­ refining firms are by no means the only source of capital and enterprise for the development of Alaska's mineral resources. Development strategies should not be directed only or mainly to this sector. There is active interest in these resources from domestic manufacturing corporations requiring specific material inputs, foreign (mainly Japanese) trading companies and manufacturers, major oil and gas companies, and industrial conglomerates. In addition, there is the possibility of utilizing capital or leadership from the state government, the federal govern­ ment, or both; these options should not be excluded on rigid ideological grounds, particularly where they help develop new sources of private capital.

20Gaffney lists nine major institutional inducements to mineral overexploration on and in the United States: "Open access to undis­ covered minerals; preclusive acquisition to enhance market power; duplication by vertically integrated firms; artificially high prices; the need to replace the flexibility destroyed by prorationing; the leverage of private over public investment; the publicity-promotional value of discovery; managementself-agrandizement; and tax favors.'' [1967, pp. 391-400.] 43

2. Public policy should pay special attention to institutional and political factors which exacerbate the climate of uncertainty with respect to the mineral industries. The chaotic state of existing mineral ZawJ the uncertainties it introduces into mineral title) and their gratuitous inducements to litigation are certainly worth mentioning.21 Beyond these) however) the system of mineral location itself is probably the most important institutional source of uncertainty.

3. Institutional changes) such as major changes in the m~n~ng laws) or changes in tax policy) or the expectation of such changes or of other alternatives of the "rules of the game)" are also significant sources of uncertainty which can operate with great leverage on mining investment. For this reason) major reforms of public Zand policy) mining law, and mineral tax policy in Alaska should be instituted nowwhile mining in the state is at a low ebb and vested interests in the existing arrangements are at a minimum. The likelihood that commercially workable discoveries may not be produced for manyyears, or at all, provides support for three recommendationswhich are also supported elsewhere in this report on other grounds. 1. Permits or leases on public lands should be of limited duration) and minerals should be transferred under some system whereby the holder of a claim or lease will incur appropriate costs for holding idle prospects or idle reserves. 2. A public or quasi-public institution should be established to help smaller companies in financing mine development and operation) and to provide the scale of risk-sharing and risk-averaging which now is available only to the largest companies.

3, Exports of concentrates) particularly to Japan) should be encouraged as a means of circumventing rigidities in the domestic market. This last measure implies) of course, lifting certain export restrictions.

2lrhere is copious literature on this subject. See, for instance, Senzel [1967]; Herbert [1967]; Haman[1956]; Martz [1955]. 45

CHAPTERIII: SYSTEMSOF MINERALDEVELOPMENT

There are a number of systems of ownership and administration under which minerals can be developed in a private enterprise economy. purposes analysis, , general types, ba on discovery, leasing, and concession arrangements, stand out. Each of these systems has a different rationale and different effects, and the choice among them is the most fundamental and far reaching decision a political entity can make with respect to mineral development on the public lands under its jurisdiction. In what follows, these systems are examined--the way in which development rights are transferred to private firms; the kind of payment, if any, for these rights (and thereby the distribution of the economic rents generated in mining activity); their demands on the capabilities and sophistication of government; and the circumstances to which they are most appropriate. In conformity to the situation in Alaska, it is assumed that original title to minerals and to the land under which they are found rests with the government and that exploration, development, and production are conducted by private enterprise.

The Discovery System

Except for fossil fuels and the "commonvarieties" of minerals such as sand and gravel, mining rights on the public lands of the United States are acquired through discovery and exploitation. Alaska's law is similar, but requires or permits leasing as an alternative to 11location 11 in a wider range of circumstances. The details of both the discovery (or "location") and leasing systems in Alaska are described by Herbert [1967]. Under the first system, the claimant may actually obtain title to the land itself (as under the U. S. mining laws) or title remains with the state (as in British Columbia and on state-selected public domain lands in Alaska). In either case. however, the miner receives exclusive right to continue exploration or to engage in mining without any payment to the state either for the right itself or for the mineral extracted. There is no logical reason why rights obtained by discovery should not be coupled with a rental or royalty requirement, but for historical 46 reasons the discovery system has been associated with free extraction.l The only requirement for continuation of tenure is some minimal level of activity on the claim; if the claim is patented, however, there is no condition whatever. Virtually the only role or requirement for government under this system· is tn the aajadicati~n of:dtsput~s among·claim~n~sand the ability to determine whether the conditions of the law have been met. In practice, the first requirement has generally been very poorly performed; and the second function has largely been ignored, except as it was necessary to deal with the first. The system originated in, and may be appropriate to, poorly developed and poorly knownregions where the probability of discovering commercial minerals on any particular tract of land investigated is extremely low. Under these circumstances, the market value of mineral rights on unexplored land or of the right to explore itself is nearly zero. Here, even a moderate rental or registration fee may be a serious deterrent to exploration, particularly if there are other areas of similarly uncertain endowmentnot subject to the charge. In this case, the value of any discovery is fairly attributed neither to the services of government (for instance, in furnishing geological informa­ tion) nor to the intrinsic qualities of the land itself, but rather to the skill, daring, and investment of the prospector. Notwithstanding the high probability of exploration failure on any single small parcel, by making the land area large and diverse, it is possible to insure that some marketable resource exists on it. Value of this resource, no matter how small on a per acre basis, imparts a market value to the mineral estate and to exploration rights on any tract of sufficiently great size. This value is properly attributed not to the act of prospecting, but to the intrinsic endow­ ment of the land and to the existing knowledge about it. A charge in the form of a lump-sumpayment or rental for mineral rights will not deter exploration on the part of enterprises large enough to explore the whole. Obviously, one of the issues in comparing staking and leasing systems is that of large versus small enterprise. It is conceivable that individual prospectors or small exploration companies

lThe system of noncompetitive leasing provided under the Mineral Leasing Act is an important exception to the general association of free extraction with free access. 47 actually have a greater probability of success, dollar for dollar, than larger firms; if this is true, the barrier to entry of small enterprise posed by preproduction charges, such as bonuses or rentals, may impose costs on the communitywhich are not totaily compensated for by these remittances. The choice of system then depends in part upon whether there are economies of scale in exploration and develop­ ment; whether the technical, financial, and uncertainty-reducing advantages of large enterprise are sufficient to give it superior efficiency. Experience does not provide easy answers to these questions. Any discoveries which are made and developed in a region tend to be made by the kind of enterprise favored by the region's institutions, and the record cannot tell us what would have happened under other arrangements. There is no question, however, but that the "little guy" has continued to play a major role in the growth of mining in western Canada. According to Charles F. Herbert, 11All of the major mines developed, or in the preproduction stage, within the last fifteen years in British Columbia and YukonTerritory have a direct line of descent from an individual, syndicate, or small companyto a public company, most of which are controlled and managedby a well­ financed, integrated mining company.11 [Personal communication, February, Z969.] One difficulty in interpreting Herbert's generalization is that we have no way of knowing how many of these mines would have been discovered and put into production even if the "little guy11 had not got there first. It is clear that the location system now imposes severe handicaps on extensive and systematic exploration strategies by failing to provide security of tenure, particularly in the prediscovery phase. It is also beyond question that many prospects, including some of the most promising, are staked speculatively by amateur prospectors who have neither the knowledge nor financial ability, nor any intention of exploring or mining them, hoping that nearby discoveries will make their claims salable. Such speculative stakings must delay as often as they accelerate true commercial discoveries. The opinions of geologists, mining engineers, and explora­ tionists on the relative efficacy of large and small enterprise in mineral exploration are, in the authors' experience, divided along predictable lines. Persons associated with oil companies and mining divisions of industrial firms emphasize advantages of scale, advanced technology, and systematic exploration strategy; those associated with small enterprise stress the importance of individual initiative 48 and intuition; while government geologists and mining engineers are generally, but not unanimously, on the large scale, systematic side. The substance of the argument for the 11little guy, 11 stripped of fundamentalist and ideological overtones, is one which is at least plausible. Corporate or government explorationists tend to be better financed and able to take better advantage of sci fi edge i i vi l pros pee 1 exploration companies, but they tend to be more conserva­ tive and less imaginative. Small operators will often work over areas whose expectations of success larger firms would estimate at close to zero or even negative. However economically irrational the behavior of most prospectors may seem, they actually do make a substantial number of important discoveries; if there are indeed people who behave this way, the mining industry and society ought to continue taking advantage of them.2 If the above summaryis indeed the ultimate justification for the discovery system, or for noncompetitive systems generally, the existence of the 11independent wildcatter 11 or 11crazy prospector 11 who makes an important find that big companies overlook, is not a valid general argument against competitive leasing. The issue is not whether the government as landlord should collect rents from properties on which the expected economic rents are zero or negative. The real issue is whether there is any social justi­ fication for disposing of exploration or production rights which do have a market value to one party at no charge or at a token charge when there are other parties who are willing to pay, or to pay more, for these rights. Nowhere have the authors encountered a respectable argument for giving away mineral rights under these conditions. Considerations of the efficient allocation of resources (the highest bidder's expectations coincide with the expectations of greatest efficiency), equity (the highest bidder 11deserves 11 to win; the people 11ought to" get the fair market value for their wealth, etc.), and probability of actual production (willingness to pay is an excellent indicator of relative intentions and abilities to explore, develop, and produce on a property, and the payment once made is an incentive to do so), all demandcompetitive disposition of rights in resources where there is a competitive interest in them.

2This paragraph is a synthesis of the implicit reasoning of several mining authorities interviewed by the authors who emphasize the continuing importance of the prospector, and does not precisely reflect any one person's analysis. Preston [1960, especially 49

There is nothing in the above position to preclude some system of "over-the-counter" leasing, or of appropriation by discovery, on lands for which no one is willing to pay and in which only the "independent wildcatter" or the "crazy prospector" is interested. It may require some ingenuity to develop workable criteria for deciding where to apply competitive and noncompetitive procedures, but surely it is not difficult to design standards which are more relevant than are the present distinctions between "locatable" and "leasable" minerals, or than the requirement of a "knowngeological s which forms the basis of the dis nction under the Mineral Leasing Act. The above considerations suggest some circumstances to which the location system (or any other noncompetitive system) is not appropriate: It is either unnecessary or unjustified: (1) If there is a high enough probability of discovery and mine development to give mineral rights a substantial market value. Where government maps and surveys point to favorable geological indica­ tions, and make a particular tract sufficiently interesting to mining companies so that some or any of them would be willing to pay for the right to explore or produce on it, there is no justification for conveying these rights without charge., ..

(2) If discoveries occur, or are likely to occur accidentally or occur incidental to activities other than prospecting. Minerals discovered in the course of drilling for oil, highway construc­ tion, etc., ought to be sold or leased rather than subject to free appropriation. (3) If the minerals occur on Zand of substantial value for purposes other than mining--timber, recreational uses, watersheds, etc. The prospective incomes from mineral leasing can then be measured against, and used to compensate for, damage to surface values; and the lease contract can be used to control environmental effects. (4) If mineral development depends upon substantial government investment in transportation facilities or other capital improvements. Again, the prospective revenues from the sale or lease of minerals can be compared against the cost of the public investment. There is no net benefit to the communityif a remote mine produces minerals of only sufficient value to cover its direct private costs, and in addition requires an indirect subsidy through public investment in auxiliary facilities.

pp. 59-76] examines in detail the arguments and evidence on both sides of the issue, and concludes that they do not sustain the position characterized here. The authors were unfortunately unaware of Preston's important study at the time this report was written. 50

The circumstances listed above can be restated as a single criterion for application of a location or other noncompetitive system: Minerals should be made available for free appropriation if, and only if, there are no obvious costs in doing so, either in terms of revenue foregone, damage to other resource values, or requirements for addi­ tional public expenditures. Even where the discovery system remains appropriate, none of these considerations precludes the collection of royalties, which, u i ren or , come only nners--those discover and produce. Neither does it necessarily preclude a system of prediscovery leases or competition for exploration rights in which the auction variable is the royalty rate instead of bonus or rental. If the criterion at the top of this page is not fulfilled, the decision not to collect any payment for exploration or extraction rights must be justified on the ground that one or both of these activities should be indirectly subsidized. Arguments along these lines often proceed from considerations of local development, strategic self­ sufficiency, the balance of payments, or from the need to offset asserted handicaps of mining compared to other industries. If some kind of sub­ sidy is justified on any of these grounds, however, free access subsi­ dizes the richest mines by the whole amount of their net product, and marginal mines not at all. It is surely not the most direct and cost­ effective method of stimulating production.

The Competitive Leasing System

Certain substances, including oil and gas and a number of low value minerals, are subject, on both state and federal lands in Alaska, to leasing rather than to mineral location. The system exists at its purest for oil and gas on the outer continental shelf and on some federal onshore properties. A competitive leasing system normally provides for 11 11 the purchase of exclusive explorationrights by competitive ( bonus ) bids, the remittance of an annual rental, and the payment of a royalty on minerals extracted. Nominations for tracts to be leased are taken from interested parties; and if sufficient interest is evidenced, a sealed bid lease auction is advertised. The 11bonus11 is well established as the auction variable,3 with the lease going to the highest bidder.4

3Twoor more variables could, of course, be left open for bidding, but doing so introduces insuperable problems in determining just which bid is the highest. Doing so requires the assignment of implicit rates of interest and of uncertainty discount, assumptions as to the amount and time-shape of future production and future product prices. Any auction 51

The revenues to the state-landlord from this system are the greatest among the different systems, and--in a competitive market for exploration rights--closely approximate the economic rent attributable to the resource itself and the general knowledge about it.5 It places few demands on the capabilities of government since the geologic, engineering, market, and financial research is done by the private bidders. The competitive process, in effect, enables the managing agency to exercise the expertise of each of the bidders against the others; the bidder who wins the lease is the bidder who is most optimistic or most thoroughly convinced of its value. Unless the owner holds and intends to exercise monopolistic market power, there is no reason to believe that its revenues over the long run will be greater with a wide latitute of discretion as to the volume and timing of lease offerings than if any tract nominated had to be offered for lease. Implicit in such a belief would be the assumption that the owner's judgment about the future market conditions is consistently more accurate than that of the market itself.6 The leasing system is the most appropriate institutional arrangement for mineral development and production in an advanced capitalist economy. Where cooperating factors of production--labor, capital, and material supplies--are available in organized markets, competitive leasing tends to put the right to exploit a natural resource in the hands of the enterprise which can carry it out most efficiently. That is, the high bidder can afford to be the high bidder because he expects to be able to use the natural resource to create a valuable product at the lowest price to himself (and to the community) in terms of capital, labor, and materials. The offers of successful bidders will individually often be very wide of the mark because of the uncer­ tainties involved in discovery, production, and marketing. Over the

whose terms include two or more variables for which there are not explicit coefficients of exchange cannot really be considered a competi­ tive sale, but is, in effect, a negotiated one. 4Bids are sometimes rejected, usually because of apparent lack of competition. 5If the land were in private hands, this rent is what would become the income of private land owners. 61t will, of course, be in order to withhold acreage from leasing if the imminent publication of new maps or survey reports is expected to enhance its value, and to set a minimum bid corresponding to the sum of expected administrative and service costs imposed on government, plus the value of the anticipated damage to other resource values. 52

the long run, they should on the average approximate the difference between the value of the product and the cost of producing it, including the return to capital and such rewards for facing uncertainty as investors collectively regard as appropriate. This difference-- the economic rent--is the value contributed to society by the natural resource itse~f and is the appropriate measure of its 11fair 11 value [Mead., l96?].

In addition competitive leasing is by far the most effective arrangement by which the public~qua landlord can maximize its revenues from the disposal of its natura1 resources. No amount of ingenuity in negotiating contracts, in taxation schemes, or in requirements for local processing or for local hire can match the effectiveness and predictability of a competitive market for production rights in obtaining for the communitya just payment for the export of its natural wealth. Every increase in severance taxes or business taxes, every additional cost imposed through primary processing requirements or the like, will normally be capitalized in reduced amounts bidders are willing to offer for rights to the resource. 8 Conversely, public out­ lays which reduce uncertainty or input costs to mining, or which increase the value of the product, will normally be capitalized into increased bids. No matter how effective the competitive market for exploration and production rights is in maximizing public revenues over the long run, the prices offered by private developers will inevitably contain a substantial discount for uncertainty. Muchof the uncertainty and the resulting discount--loss of revenue to the state--is inevitable because of the technical and market uncertainties inherent in mining, but others can be overcome or reduced with substantial benefits to the public purse. Most directly subject to policy decision is the area of political uncertainty; that is, fear of expropriation, tax increases, or costly changes of rules 11in the middle of the game.11 Expropriation is

7The experience of the United States Department of the Interior with competitive oil leases has been very good in this respect as competi­ tion for these leases has been intense. Most of the oil-producing underdeveloped countries, however, prefer bilaterally negotiated concession-type agreements because of their conviction that the major international oil companies, assisted by Western governments, collude to exploit them monopsonistically. [Kaufmanand Cushner, 1968.] 8A very clear example of this principle can be seen in Southeast Alaska's timber resources. Timber sales on private or Indian lands which are not encumbered by a primary-processing requirement typically elicit bids several times as large as those commandedfor timber on Forest Service or state lands [see Tussing., et al., l968]. 53 not a serious issue in Alaska, but tax and policy changes may be. The attempt to maximize state revenues requires that royalties, taxes, and operating regulations remain constant through the life of each lease. If mineral exploration and development is regarded as a continuing process, the state should not increase its revenues (because in the long run it cannot), for instance, by increasing the severance tax. This point is probably best illustrated by the example of Alaska 1 s oil and gas leases. Whenthe oil companies bid on exploration Cook I in ~ bonus ngs ected the net income expected from each tract discounted for the probability of failure and for the cost of the capital employed. The amount bid also depended on assumptions about future state taxes. At that time, Alaska 1 s severance tax was 2 percent, but the level of the severance tax was a matter of political controversy, and the legislature was in a position to raise it at any time. It is generally understood that a future tax level of 5 to 8 percent was built into the financial calculations preceding the bids. Exactly how much this affected the amount bid depended on each company1 s crude position, its future price expectations, its rates of discount for uncertainty, and the passage of time. The exact impact of tax expecta­ tions is impossible to calculate, but the allowance for future tax increases was undoubtedly very costly to the state. Yet, had the state attempted to recoup the loss by fulfilling the companies• expectations of a higher tax rate, doing so would have established expectations of further increases which would in turn be reflected very substantially in future bonus bids. The very possibility of future tax changes puts the state in a position of being 11damned if it does11 and 11damned if it doesn 1 t. 11 If the state wishes to maximize its return from the export of its natural wealth, it must avoid introducing unnecessary sources of uncertainty. There may be good reason to retain flexibility in the mix of payments from which the state obtains its revenues. It may change its judgment about how much a dollar of present bonus income is worth in uncertain future royalties and severance taxes. But, whatever its implicit rate of exchange between the two, the state as landlord can only lose by asking mining companies to bid on an exploration and development contract, the terms of which can be modified by legislation or by administrative whim. The government should make future severance tax levels part of the lease contract, and make explicit in advance of bidding on each lease offering its regulations and policies with respect to environmental protection, local hire, etc. It should either continue these regulations and policies in force for the duration of that lease contract or guarantee to take upon itself the costs imposed by any changes. Tax certainty can be obtained by providing that any increases in severance or production taxes or any other taxes not imposed uniformly throughout the economywill be credited against the royalty payment. It is quite proper that this tax credit provision work in reverse as 54 well; that is, any savings as a result of tax reduction ought to be added to the royalty. Such a procedure would retain for the legisla­ ture long-term policy flexibility and, at the same time, minimize the cost-increasing and revenue-reducing impact of political uncertainty on mineral development. This arrangement requires the greatest popular understanding and forebearance in the face of a possible bonanza in which some enter­ prise appears to 11walk off with the bank. 11 Using a combination of bonuses royal es an the bonuses alone es s to share in such a bonanza; but, if the discovery is large and rich enough, this royalty share may superficially appear to be totally inadequate. Nevertheless, the possibility of a bonanza is just one aspect of extreme uncertainty and is taken into account when a lease contract is originally made. Wisdomas well as fairness requires that the state show its steadfastness in adhering to the original rules of the game. Next to the political factor, the other aspect of the uncertainty over which the government has direct control is the state of knowledge regarding the region's mineral endowment. There are strong reasons to expect the returns to geological mapping and surveying in terms of mineral revenues and in terms of the volume of exploration to be extremely high. The serious constraint imposed on mineral development by the lack of geological information is discussed at length in Chapter IV.9

The Concession System

For purposes of this discussion, a mining concession is defined as a contract for mineral exploration, development, and/or production arrived at in bilateral negotiations and involving a number of contract variables, including but not limited to provisions for bonuses, rentals,

9In the early stages of this investigation, an attempt was made to arrive at order-of-magnitude estimates of the social benefits (present value of net social returns) to the incremental dollar of USGSmapping and survey activity in Alaska. This exercise, though it would have been extremely valuable, was dropped not primarily because of the lack of technical data, but because the prevailing system of mineral loca­ tion provides no organized market in which we can compare the average value of comparable tracts with different levels of published information. A uniform system of competitive leasing would make the value of increased information very apparent. See Appendix II. 55

royalties, taxes, the construction of transport and other social overhead facilities, local hire, local processing, and local pricing policies. The economic rent normally neither goes entirely to the entrepreneur, as under a discovery system, nor entirely to the landlord, as under a leasing system, but is shared between them according to the terms of negotiation, or may be actually collected by neither but spent or dissipated for some other purpose such as the subsidy of an otherwise uneconomic processing industry. The concession system makes the fewest on the urrou i ng c sys , but makes t demands on the sophistication and technical capabilities of the government. In order to arrive at an optimumpackage of concessions and benefits, the government must negotiate as an equal with the concessionaire and have an equal understanding of geologic, engineering, financial, and marketing aspects of the proposed development. Perfor­ mance of such a contract usually requires the most intense surveillance, and often involves continuous negotiation of its details. The concession system is usually the consequence of a generally underdeveloped economy. If there are organized and effective markets for all the cooperating factors of production and for materials used in development and production, there is little advantage for either side in a bilaterial agreement covering a great number of mutual obligations. In a sophisticated economy, the state normally would want to sell the right to develop each of its resources to the highest bidder for each, to buy capital goods (as for its transportatiori system) in the cheapest markets, to borrow moneyfor its capital-improvement program at the lowest rate, etc. Each enterprise engaging in mineral development would likewise wish to sell its output in the most lucrative market, buy the lowest cost services, hire the most skilled and effective workers it can find at any particular level of wages, etc. Neither side has any particular advantage in being bound to a multi-faceted bilateral trade agreement. If, however, there is not an effective competitive market for the kind of mineral rights the communitywishes to lease, a negotiated contract may appear appropriate. Also, if the mining firm cannot get its concentrates to market by purchasing transportation services from an existing system, and neither private enterprise nor the government of the underdeveloped region can easily raise the capital to provide these transportation services on a commercial basis; if the mining firm cannot hire its skilled labor locally on the open market and musy import it at great expense from outside; if at the same time, the communityhas difficulty in training its citizens for remunerative modern occupations; or if for any of a myriad of 11indivisibili_ties 11 and other handicaps both to enterpri~e ~nd to ~ociety which exist in the underdeveloped economy, then the concession system may be a necessary pattern of economic development. 56

Someaspects of the concession system are likely to be appealing in Alaska's present state of underdevelopment. However, the general application of this system has serious dangers, as it requires an intimate and continuing association between the public agency responsible for resource development and large private corporations. This kind of relationship is often an invitation to bureaucratic self­ aggrandizement or corruption, and is continually subject to political suspicion and harassment. It is hard to imagine any large-scale concession arrangement in Alaska which would not be attacked on the iali on a g The fundamental fault of the concession strategy for resource development, however, is that it provides no clear-cut measure of success. 11Getting the best price 11 for the community's natural resources under a leasing system is an operational standard of performance, but the 11maximumcontribution to economic development11 is a very vague notion, meaning different things to different people. Requiring the concessionaire to build a railroad or processing plant, or to train local residents for employmentmay be clear contributions to economic develop­ ment, but it is difficult to determine whether these means are the cheapest way to achieve their ends or what sacrifice these requirements entail in terms of resource revenues or taxes. In many cases, these same development objectives could be achieved at a much lower cost; but once the concession system is estab­ lished, it is in the economic interest of the private concessionaire and in the organizat1snal interest of the managementagency to perpetuate the arrangement. lOAnalmost prototypical example of the concession system with all the characteristics mentioned is found in the U. S. Forest Service's major timber sale contracts in Southeast Alaska. By requiring, in the name of regional employmentstability and regional economic development, local mill construction and precisely defined kinds of primary pro­ cessing as a condition of timber-sale contracts, the Forest Service has been forced to classify a large proportion of the commercial timber as inaccessible, to accept timber prices at a small fraction of the competitive free market value, to countenance the establishment of a lumber export monopsony, and to become involved in continuous detailed surveillance over, and negotiation with, the operators. These sales, committing hundreds of millions of dollars of the public's wealth in fifty-year contracts, were made and continue to be made without any explicit comparison of the intended economic benefits of this system with its costs, in terms of resource revenues, or even in terms of other regional development goals. See Hilliker and Campbell [1969]; Tussing [1968]; Massie and Haring [1969]. 57

Policy Variables in the Choice of a Leasing System

The outstanding characteristics of the three systems are summarized in Table 2. If the merits of each are judged simply by the "conditions to which they are appropriate" in the table, the choice for Alaska is not unambiguously apparent. The present level of geologic information is low, as is the probable market value of exploration rights. Alaska is a generally underdeveloped corner of the world's most highly developed capitalistic economy. Nevertheless, the authors believe that the merits of competitive leasing, as a general principle for the development of minerals on Alaska public lands, are over­ whelming, and that the objectives whose pursuit might favor the choice of another system can be met effectively within the framework of a leasing system. The reasons can be summarized as follows: l. The direct impact of mining in fostering the development of other local industries is uncertain and is, in any case, weak. For this and other reasons, public revenues derived from mining should be an important objective of development, and the maximization of revenues should be the norm by which the cost of achieving other develop­ ment objectives is measured. This objective can be achieved only under a system of competitive leases. 2. The leasing system also most closely implements the principle that the communityshall be compensated at fair market value for the extraction and export of its natural wealth. 3. Competitive leasing also means the closestapproach to implementing the goal of maximumeconomic efficiency. 4. By allowing a system of prediscovery rights, leasing increases the prospective returns to exploration effort by reducing both "moral risk" and the problem of speculative "free riders." It can provide prediscovery leases or prospecting permits on tracts of different sizes to utilize either the initiative of individual prospectors or the economies of scale inherent in the most advanced exploration techniques. 5. Leasing further provides the possibility of contractual guarantees against changes in taxes or regulatory policy. Such guarantees would be politically impossible under a system of staking and free extraction; the people would see them as a 11sellout 11 for which the communityreceived nothing in return. TABLE2 COMPARISONOF SYSTEMS OF NATURALRESOURCE DEVELOPMENT

11 11 11 11 DISCOVERYSYSTEM" LEASINGSYSTEM II CONCESSIONSYSTEM

DEVELOPMENTRIGHTS Discovery and Competitive bid. Negotiation. OBTAINEDBY appropriation PAYMENT None Bonus. Bonus. tax provisions. FORRIGHTS: Rental. Rental. construction of ADDITIONAL Royalty. Royalty. transport, other TERMSOF Share of public works. CONTRACT product. local processing. training, hire of local workers. others. ~ ------POLICY Maximization of value Maximization of Mixed: 11genera 1 economic OBJECTIVE added in mining. economic rents (and development." government revenues). Allocative efficiency. ------DISPOSITIONOF All to entrepreneur All to government as Negotiated share between TRUE11 ECONOMIC resource owner. resource owner and entrepreneur. RENT"(economic Maybe wholly or in part spent return from or dissipated for other resource itself 11development11 goals. after discounts for risk and uncertainty) ------TABLE2 (cont.)

11DISCOVERYSYSTEM 11 "LEASINGSYSTEM" "CONCESSIONSYSTEM"

ECONOMIC Unexplored country. Highly developed Underdeveloped economy. CONDITIONS Diseconomies of scale capitalist economy. Monopsony n market for TO WHICH in exploration. Competition in market extraction rights. APPROPRIATE for extraction rights. ------·------DEMANDSON Adjudication of Lease administration. Sophistication in: GOVERNMENT disputes among Geology claimants. Engineering Finance

Conservation Market ng CJ1 regulation. Economicplanning. <..O (Minor role for (Minimumrole for (Maximumeconomic role for government.) government.) government,) ------EXAMPLES Metal mining on Alaska and 0. C. S. U. S.S. R. - Japan Natural U. S. public domain. petroleum leases. Gas Agreement. Ocean fisheries. BLMtimber sales. U. S. F. S, timber sales in Alaska. Typical Mi -East Oil Agreement. 60

6. Leasing can provide for a rental charge adequate to discourage the holding of mineral properties for preclusive purposes or for idle speculation. 7. The leasing system provides to 9overnment a way of measuring the benefits, and recovering the costs, of topographic and geological mapping, and of investments in transportation and in other capital improvements serving mining. 8. Competitive leasing provides a mechanismfor measuring the value of competitive resource uses, choosing the most valuable among them, and using the revenues therefrom to offset sacrifices for damagewith respect to other resources or values. Just what constitutes the optimummixture of lease payments-­ rentals, bonuses, and royalties--admits of no clear-cut answer. There are a great number of possible leasing strategies and considerable literature exists concerning them. If, as is customary in oil and gas leasing, the royalty rate is set and the quantum bid upon is a lump sum bonus, there isciearly a tradeoff between the expected yield of the one and that of the other. The rate of tradeoff, however, is an extremely complex function in which several parameters are very difficult for either party to esti­ mate prior to the bidding. In submitting a bonus bid, the prospective miner is gambling a very certain present asset on a very uncertain future one. He will be willing then to offer substantially more in expected future royalties than in bonuses. If the government's interest and risk discount rates are, as is likely, lower than that of the mining firm, elimination of the bonus altogether and acceptance of the bids on the royalty rate only would increase the present value of the expected govern­ ment revenue. The major objections to this strategy are: 1. It imposes no costs on preclusive or wholly speculative bidders; and 2. A high royalty rate (or royalty plus severance tax rate) will block the opening of margina1ll mines which would be feasible at lower royalty rates, and will cause premature mine abandonment.

11In this instance, the term marginal is not used in its formal economic meaning, but to indicate a mine to which the royalty plus severance tax make the difference between an operating loss and an operating profit. 61

These considerations together are responsible for the prevailing leasing system for oil and gas which combines bonuses, rentals, and royalties; and--despite its shortcomings--it is not certain that this system can be substantially improved upon for those commodities. In metal mining, however, the market value of an undeveloped prospect will usually be only a tiny fraction of the value of the product from an operating mine. Here the argument for elimina­ tion of the bonus in favor of royalty bidding is much stronger. If bonus payments are retained as the auction variable, it would still 1 managi agency di ng the level of rental and royalty charges prior to each lease offering. Such charges would be determined within the framework of the agency's general mandate to maximize the present value of expected revenues from the lease. The tendency of a fixed royalty rate to prevent the opening of a marginal mine or to cause premature mine abandonment can be offset by setting the royalty on net income rather than on the value of ship­ ments, or by a provision allowing renegotiation of the royalty rate, or tax forgiveness, upon demonstration that unit operating costs plus royalties and severance taxes exceed the unit value of product. One inevitable objection to any charge for exploration or development rights is that it establishes a barrier to entry for the individual prospector or small exploration firm. Notwithstanding the authors• conviction that this kind of enterprise is not clearly the most promising future source of discovery for Alaska, experience in British Columbia and YukonTerritory proves that discoveries are still made by small operators. In view of the sparseness of geological information in Alaska, it seems certain that for many years there will be millions of acres of public lands in Alaska on which exploration rights over small tracts would commandno bonuses. There is no good reason to deny the small scale exploration firm access to this land.

A Hybrid System for Alaska

This report is concerned mainly with the general principles of mineral policy, and is not intended to spell out in detail an alternative to the present regime. The following simply outlines one combination which combines the many advantages of a competitive leasing system with continued encouragement of small enterprise. In spirit it does not depart radically from present Alaska mining law: 1. The system would provide two kinds of leases-­ competitive predisoovery leases, and nonoompetitve leases based upon proof of discovery. Land classified 62

for certain other uses--high value timberlands, water­ shed protection, recreation, transportation corridors, etc.--and land under other leases or use permits would be available for competitive leasing only, but the public lands in general would be eligible for either kind of lease. 2. The unit leased in either case would be a quarter section defined by protraction, but discoveries might be staked on the ground and described prior to survey by meets and bounds. Noncompetitive lease applications would not be publicized, while competitive lease nomina­ tions would be. The filing of two or more applications of either or both types in the same quarter-section tract within two adjacent calendar months would be treated as a simultaneous filing and would require a competitive sale.

3. In any competitive sale the administrator would establish minimwn bids (bonus and/or royalty against gross production) equal to the expected damage to, or sacrifice in, the commercial value of other resources. An applicant who files proof of discovery in order to apply for noncompetitive lease, but who is subsequently required to bid competitively for the tract, may credit any exploration expenditures on this tract or immediately adjacent tracts during the previous five years to the part of his bid above the minimumbid. 4. Leases would be for five years with automatic renewal for another ten upon the commencement of production. Subsequent five-year production leases would be negotiated. To insure turnover of acreage, a rental of $1 per acre would be assessed the first year, with the rental per acre doubling each successive year. Lease­ holders would be required to relinquish annually at least half their acreage not committed to a production plan. Acreage opened up either by expiration of a lease or by its relinquishment would be subject to new filing under either mode and would again be eligible for the exploration expense credit against competitive bid offers.

5. The royalty rate would be 50 percent of net income; an enterprise might pool all of its Alaska operations for accounting under this system and would be allowed to expense over the expected life of the mine exploration costs, bonuses, and royalties paid, as well as operating 63

costs and depreciation of capital. Any severance tax paid would be credited against the royalty. Taxes which are imposed uniformly on all enterprises or persons, e.g., state or federal corporate taxes, could not be credited nor expensed. The regulations for protection of other resource values and of the environ­ ment at the time of issuance of the lease would become part of the least contract; legitimate costs imposed by more stringent requirements would be credited against royalty payments. The managing agency should be empoweredto reject all bids if it has reason to believe there has been collusion in bidding.

Separation of Estates and Grants of Patent

A number of the outstanding faults of the discovery system under present laws are not essential to that system. The most unnecessary of these is the grant to claim holders of a patent (owner­ ship) to the surface estate associated with a mining claim. Naturally, such a system provides the greatest possible incentive and reward to the capital and labor resources required to make such a discovery. Damageto tre surface estate as a result of extractive operations results in no additional costs to the operator-­ costs which would necessarily reduce profits. In addition, whatever residual value may be left in the surface estate is conferred upon the original discoverer. Once patent is granted, it is fee simple title to the land. If land is abundant and the benefits to be derived from its occupation and use are easily obtained elsewhere in the environment, then the collective sacrifice involved in giving up the surface estate is of little consequence. On the other hand, if the benefits derived from use and occupation of this surface estate are relatively hard to come by elsewhere, then their loss should not be incurred without appropriate compensation. Under the existing system of granting tenure on the public lands for purposes of mineral resources exploitation, there is ~o institutional or legal means through which such compensation can be arranged. Having proven the existence of a 11valuable 11 discovery, the explorationist is entitled to a patent. The abuses to which this system lends itself are obvious--a great number of claims are filed not primarily (or at all) for their mineral potential, but rather to gain control of a recreation site, timber resources, a strategic business location, or simply to obtain "free land. 11 64

The government's social and managementresponse to this situation varies from agency to agency, but is perhaps best typified by that of the U. S. Forest Service. Public lands encompassed by national forest boundaries are, like most other public lands, available for patent under provisions of the mineral laws developed during the 18601 s and 70 1 s. However, patent on a mineral claim within a Forest Service boundary removes the tract from collective jurisdiction and places it under the sole control of the private owner. This is an anathema to the Forest Service, a direct challenge to its philosophy of !!multiple use land management. While the Forest Service has encouraged private development of natural resources on the public lands (as evidenced by its management of the timber resources), the agency obviously feels that the social costs incurred in losing the surface estate are far larger than the benefits of mineral production against which they must be offset. Notwithstanding the vagueness of the "multiple use 11 doctrine as a decision criterion, almost any attempt at rational regional land manage­ ment encompassing all the values of the land is better than none at all. The Service has understandably undertaken a policy of contesting almost all applications for patent on tracts within national forest boundaries. Because of the somewhatuncertain meaning in law of a "valuable discovery, 11 such contests have generally been successful; and the Forest Service has effectively prohibited the development of all but the most valuable of the mineral deposits located within its jurisdiction. The failure of present laws to distinguish between the mineral and surface estate has deprived the agencies which administer the public lands, such as the Bureau of Land Managementand the Forest Service, of any tool which is both sensitive and legitimate for weighing the benefits and costs of different land uses. Present tenure institutions in the United States leave little room for maneuver. The authors advocate a leasing system in part in order to 11internalize 11 such external costs and benefits as much as possible. Short of this reform,however, British Columbia has ended the grant of surface patent to mining claim holders without much opposition from bona fide mining interests, and without apparent damage to the working of a system generally based on the principle of discovery. The State of Alaska is forbidden to grant patent even to the mineral rights on land se1ected from the federal public domain. It is urged, even if the general complexion of the United States mining law is not changed, that surface and mineral estate be separated, and that the patenting of the former to the holders of mining rights be ended, and that the same land managementagency have jurisdiction over development of both the surface and subsurface resources on each tract. 65

CHAPTERIV: THEECONOMICS OF UNDERDEVELOPMENT AND GOVERNMENTINVESTMENT

Transportation and Other 11Social Overhead11 Investments

One of the important differences between an economically advanced area and a backward one is the depth and diversity of its organized markets. In the former, almost every good or service required in business is readily available for a price, and supplies of these goods are generally highly responsive to changes in price. This is true of raw materials, construction services, specialized machinery, water, electric power, transportation services, labor, knowledge itself, and managerial skills. Developed regions have effective capital markets, and even technical innovation and entrepreneurial imagination can be purchased. That virtually all productive goods and services can be obtained at a price has its obverse. Every kind of asset or service has a market in which a buyer can be found if it is at least identical to, or an economical substitute for, other goods already being sold. The owner of capital, for instance, can lend it out, purchase equities in established enterprises, or hire workers, managers, and all the other services and capital goods necessary to establish his own enter­ prise. Likewise, the engineer-innovator may choose to peddle his patents, to offer his services for a salary, to establish a consulting firm, or to borrow capital and start productive enterprise under his own management. Even in the most advanced regions, however, markets are not perfect. The creation of markets for new products or processes and the circumvention of imperfections in existing markets may be regarded as the central task of entrepreneurial creation and as the most power­ ful prime mover in economic growth.l Yet, the ability of the enterpriser to overcome specific obstacles is severely limited if a skilled labor force must be recruited at high costs from great distances; housing and all the amenities of life for that labor force must be provided; low­ cost commoncarriers, highways for companytrucks, or port facilities for chartered vessels are not available; and electric power cannot be lsee Leibenstein [1968], Baumol [1968]. 66 purchased but requires additional heavy capital outlays. In addition, the costs of managementand of legal, engineering, insurance, archi­ tectural, and other services are inflated by travel costs, the time lost in travel, and communications difficulties. In such circumstances, the challenge to enterprise is vast and its expected profits must be huge indeed to justify investment. Conventional economic theory, particularly the "theory of the firm, 11 is a theory of small changes. Small changes in amounts supplied , in p or ices, or in or government expenditures, all have predictable results. Yet, this body of theory assumes a complex economic system in which markets function tolerably well, and in which production functions (i.e., the combinations of inputs required for any given product) are knownwith a tolerable degreee of confidence. Local industrial tax incentives, for instance, while often mutually self-defeating, may have a predictable impact on economic activity in a particular highly developed area. Similarly, the construction of a new freeway in an already developed region will have predictable effects on industrial location, on incomes, and on property values adjacent to it. In a backward area, however, where the absolute 11need11 for industrial incentives or for transportation services seems most acute, their crovision may be completely ineffective as a stimulus to development.2

211The probability of success of a transportation investment is obviously dependent on the existence of prior dynamismin the region or nation as a whole. If a particular region is growing rapidly in terms of population, output, and so forth, the probability is very great that existing transport facilities will soon constitute a true bottleneck even if there is some excess capacity at the moment. The discovery of such dynamic areas not only suggests where additional capacity should be located, but also is a good indicator that heavy utilization may be expected. "If the nation as a whole is growing rapidly, the probability of making a successful transport investment is high even in a region which is not growing so long as it possesses some reasonably good economic potential. The existence of overall dynamismimplies amongother things an environ­ ment in which economic opportunity tends to be sought and quickly exploited when found. Thus in any circumstance of local or general dynamism, both the need for new transport capacity and the probability of success are very great "But where there is no initial growth or development, a single transpor­ tation project cannot be expected to accomplish much. It is in this type of situation that a coordinated set of investments, inducements, and policies is most essential and where the prospects of success from 67

The backward region seeking to stimulate economic development through public works has further handicaps flowing from the very lack of development. Even if funds can be raised for a giant public works project, this project will have few of what Hirschman [1958] calls forward and backward linkages to the local economy. The skilled labor, the equipment, material inputs, and managementtalent must be almost totally imported along with capital. And the overall viability of the project will depend not so much on its ability to lower costs for local enterprise, but on its ability to service large-scale exports of crude ma ials processing elsewhere. Finally, if some special feature of the region, such as a unique natural resource, together with public works subsidies, tax concessions, and other development incentives, is actually effective in attracting private investment, the income and employmentmultipliers of these investments are bound to be low, so that the actual contribution of the enterprise to the regional economy is much less than it would be in more developed surroundings.3 Alaska, and particularly the portions of Alaska remote from its Southcentral economic core, obviously has most of the characteristics of backward areas described above. These characteristics apply with special force to prospective mining enterprise in the state because

a single project of any kind are very low. The initiation of growth is a fundamentally different and more difficult task than its facilita­ tion and normally requires a more careful appraisal of noneconomic factors as we11. 11 [WiZ.son, et aZ.., Z.966, pp. 2Z.Z.-2Z.2; emphasis ours. J The AZ.aska Highway Study [1965] viewed similarly the question of building additional highways to open up remote areas: 110n the basis of currently available economic and resources data, it is not possible to make a definitive evaluation of benefit-cost ratios for additional roads. Capital investment in such roads would be largely speculative and should be determined, to some extent, on the return on investment principal. There is no historical framework of proof that construction of an access road into an undeveloped area will in itself enhance the economyof the area. Experience gained throughout the world in the construction of highways into undeveloped areas tends to emphasize that highway development and economic development must go hand-in-hand-­ one cannot get appreciably ahead of the other. In addition, care must be exercised to keep capital investments in highways economically productive. 11

3The 11enclave 11 character of most extractive industries in underdeveloped countries is often observed and deplored, but it is almost inescapable. 68 mineral deposits are distributed without particular reference to the thin existing network of economic support facilities.4 The implications for mineral policy of Alaska's general underdevelopment may be summarizedas follows: 1. Alaska's mineral resources generally do not remain undeveloped because of specific transportation "bottlenecks." This judgment is sharply at odds with prevailing sentiment in the state. The former Governor of Alaska repeatedly stated his con­ viction that new transportation facilities were the necessary and sufficient preconditions for opening up and developing the mineral resources of northern Alaska. The state legislature in 1967 accepted this thesis in the funding of the "NORTHCommission." Probably the most authoritative single statement of this point of view is found in a policy analysis of the Joint Federal-State Transportation Task Force which expresses the consensus of senior state and federal officials concerned with transportation and with economic development in Alaska. The report states: Spotted with the majority of isolated Eskimo settlements and containing indicated mineral resources of great quality and magnitude, rail access to and from this immenseland [northern and western Alaska] as yet relatively untouched would serve to markedly accelerate desired develop­ ment and economic "actuals." What seems required is another quantum public investment in the Alaska Railroad similar in concept (and more likely of success) to that of fifty years ago when the present railraod was built. [Joint Federal-State Transportation Task Force, Z968, pp. Z84-l85•] In discussing the KobukRiver drainage, the report becomes more specific:

4charles Herbert has pointed out to the authors, however, that the converse is not true. Manyof the existing transportation facilities were located to serve placer mining areas which correspond to, or are associated with, generally mineralized belts. 69

The massive exploration activities and rich finds (some, e.g., copper, awaiting only the availability of transportation for extraction) along the south slope of the mineralized Endicott Mountains make this prime routing. [Ibid.] It is entirely conceivable that there are mineral deposits in Alaska for which transportation availability and costs are the critical factor. But in all the discu sion and i key role of railroads, roads, or river transportation in mineral development, one persuasive Alaska instance has yet to be encountered in which a transportation bottleneck is clearly the key.5 A negative case of a circumstantial sort can be made simply from the fact that the Fairbanks area, the Alaska Range and the Talkeetna Mountains in the vicinity of the Alaska Railroad, and Southeast Alaska close to the tidewater, are all at least as promising geologically as the remote areas of the Brooks Range and are much better known. Nevertheless, these areas which do not suffer from extreme transportation handicaps account for almost no mineral activity at present. 2. Transportation faailities designed to service remote mineral locations in Alaska generally should not be regarded as "social overhead capital," but as an essential part of the mining faaility they serve. Such facilities are highly specific spatially; they do not serve an area of economic activity, but connect a specific mine with a specific harbor, concentrating plant, or smelter. When, as in most of Alaska, there is very little other economic activity--agriculture, manufacturing, or trade--to which lowering of transportation costs could be a substantial stimulus, general development effects of the facility are almost nonexistent. These judgments apply with greatest force to the most specialized forms of transportation, such as pipe­ lines and conveyor belts; with slightly less force to heavy fixed investment in railroads and harbors; and with least force to roads, which have the most flexible access and the greatest variety of uses. In many cases, tourism, hunting, and fishing may be the only side beneficiaries of the transport system. The preference of tourists and of outdoor recreationi~ts for road travel should

5Muchof the advocacy obviously has in mind Kennecott's Kobuk properties. Officials of that company, however, have gone to great pains not to endorse the notion that production from these properties depends wholly or primarily upon an extension of the Alaska Railroad to serve them. 70 not be discounted in any evaluation of the secondary benefits of mineral access facilities. Soberrnan[1968] has pointed out that uncertainty about the materialization of necessary tonnages may dictate reliance on higher cost, but less "lumpy" and inflexible modes of trans­ port, such as motor vehicles and aircraft, rather than rail and harbor facilities. The point here is that outlays for railroads, roads, and river dredging to serve remote mining areas should generally be regarded as a service to the mines in the area--nothing more and nothing less. And, provision of this service at less than its full cost--including capital costs assessed at the rate of interest prevailing in the private sector--is a subsidy to those mines. The public may choose to undertake that subsidy for a variety of reasons. If the investment, however, is to be justified as a contribution to the general economic development of the area, the burden should be on its advocates to specify exactly its spillover developmental benefits and exactly to whomthey will accrue.6

611Lumpingall transport capacity together under the heading of social overhead capital may be seriously misleading. Someportion of each form of transportation is specific in the sense that in reality it is geared to a particular industry; its developmental potential is then intimately associated with the industry in question. In such cases, it is no more meaningful to talk about the relationship of transportation to economic development than it is to refer to the relationship of any industry to growth. It is frequently suggested that transport facilities serve a wide variety of industries, and it is this aspect that leads people to regard them as social overhead. Indeed, this leads to the common carrier obligation. On an aggregative basis this is no doubt valid, but in the process of disaggregation, the validity of this aspect of transport is considerably reduced. In an underdeveloped economywith a small undiversified manufacturing sector and a large agricultural sec­ tor specializing in one or a few crops [or mineral sector], the trans­ portation facilities are bound to be far more specific and less social. At the same time, the carriers function less as commoncarriers regard­ less of their legal status. In general, the lower the level of economic development, thehigher the degree of transport specificity. This is true for modes that in other more developed and diversified economies are, in fact as well as by law, commoncarriers. "In short, it seem preferable to treat much of transport capacity as part of the main industry it serves, especially in underdeveloped economies. An oil pipeline is an obvious example, but a railway or road that passes through barren territory to connect an isolated natural resource to a local market or port is not very different. The social 71

3. The regional development impact of mining activities in remote locations is extremely limited unless extremely large or extremely profitable, with the profits somehow remaining within the region. For a number of reasons, the net development spillovers of a m1n1ngenterprise decrease with greater remoteness from existing population centers. One reason is the location-specificity of the transportation facilities serving it, All except the most specialized transportation facilities will have other uses and will lower costs to other classes of patrons if they are located in a settled area that already has a variety of economic activities. The more settled and developed the surrounding area, the more likely is the mining enterprise to rely on local businesses for its supplies and services, on the local labor market for its workers, and on the local housing market to house these workers. Likewise, the employees themselves will spend their incomes within the region in proportion to the consumer goods and services available there. All this is, of course, an elaboration of the point that the most valuable precondition for economic development is previous economic development--that the biggest obstacle to development is underdevelopment. There may be valid reasons that are not strictly economic for extending transportation systems to "open up the country 11--these reasons may be strategic or sociological,or may include a subjective philosophical conviction that every corner of the land just "ought to be11 accessible. From an economic point of view, however, it is difficult to find justification for this approach in Alaska.?

nature of any transport facility increases as the degree of resource isolation diminishes and the territory along the right-of-way improves; that is to say, as the level and extent of potential or actual economic development rises. 11 [Wilson., et al., l966, p. 202.] 7The development of the American West in the 19th Century by the building of a railway network "ahead of demand" is often cited as a precedent for such a strategy in Alaska. It is now seriously questioned by scholars· whether the railroads actually did have this role in the economic growth of the United States. [Fishlow, l965; Fogel, l964; Cootner, l963.] One may accept the more traditional argument (as advanced, for instance, by Schumpeter [1939] and Rostow [1960, p. 25]) to the effect that the railroad was historically the most powerful single initiator of the take-off to modern economic growth, but even so the parallel between 19th Century American experience and Alaska today is a very tenuous one. Somerailway segments were indeed built ahead of settlement. The transcontinental rails connected the eastern metropolitan core with western cities, agricultural and mining regions 72

The reference to profitability above can best be understood by an example of the oil and gas industry. The local development impact of petroleum production on Alaska's North Slope is expected to be almost nil, despite the fact that it may be North America's richest oil province. The indigenous economyhas virtually nothing to sell to the petroleum companies or to their employees--no capital goods, practically no labor, no transportation services, no foodstuffs, and none of the services of local government. Workers will probably not live in the existing villages or make purchases at village stores and may not even travel by commoncarrier. To the extent there is a resident labor force, it will most likely be stationed at remote camps supplied directly from Anchorage and Fairbanks and, hence, will be effectively isolated from the indigenous subregional economy. On the other hand, if the present discovery is as rich as preliminary information indicates, the state can expect to receive hundreds of millions of dollars in royalties and production taxes. Even in the absence of further discoveries, competi­ tive leasing of additional land might be expected to bring in additional hundreds of millions of bonuses and lease rentals. A hardrock mining bonanza of the magnitude apparent in the Prudhoe Bay oil discovery is rather unlikely. Yet, as was pointed out in Chapter III, neither state nor federal law provides the means whereby the public as landlord would gain any of the economic rents generated by the mining of metallic ores if such a deposit should be discovered.

4. The overall implication of the above considerations is that, other things being equal, the total develop­ mental spillovers in Alaska from mineral development will in any case be small, but will increase with proximity to developed areas, and decrease with distance.

5. If public works or transportation facilities are constructed which enhance the feasibility of private ventures in mineral development, costs of such facilities can, under a competitive leasing system, be at least partly recouped through increased bonuses.

which were already more populous and more intensely developed than the most advanced section of Alaska today. The rail network of the Midwest and the prairies was extended into areas the quality of whose main natural resource--agricultural and grazing land--was well knownand rather uniformly distributed. A cursory look at the maps provided in the decennial Population Census of the United States suggests that no railway trackage has ever been built into a region of the lower 48 as sparsely populated as Alaska north and west of Fairbanks is today. 73

In cases where proposed facilities are under public and governmental consideration, it would be appropriate to delay lease offerings in the affected areas until the final decision to construct has been made, and also to provide the means whereby a portion of the lease bonuses could be earmarked for its financing. Oil companyexecutives seem convinced that extension of the Alaska Railroad into the Arctic Slope will offer few benefits to their current exploration programs, if only because the prospective completion of such a facility seems so uncertain. A surface transportation system will have substantial impact on the costs of oil companies' North Slope operations but these reduced costs will not be reflected in bonus offerings from future North Slope leases unless a definite commitment has been made as to the nature, destination, and construction schedule for this system. 6. So long as mineral leasing revenues in Alaska accrue almost entirely to the state, public investments in transport facilities to serve remote mineral districts should be primarily a state decision and a state financial responsibility. If a northward extension of the Alaska Railroad makes sense economically, it would also make sense for the state to sell revenue bonds to finance it. Increased revenues (particularly bonuses) from oil and gas leases should be available at an early date to retire a major part of the debt.

GovernmentInvestment in Mining Enterprise

By national custom, basic research in regional geology and mapping are regarded as government responsibilities, while exploration, development, and production are generally reserved to the private sector. There is a reasonable justification for this division in that the social benefits generated in the first two activities are distributed very uncertainly and have "external II or "coll ective 11 aspects, while those of the last three can generally be captured by the entrepreneurs who initiate them. The customary borderline, however, is not a clear one, nor is its proper location beyond dispute even according to the single criterion mentioned above. Industry itself insistently sets forth national strategic self­ sufficiency as a collective and nonmarketable benefit from its activity. Also, in each mineralized but underdeveloped area, economic development as such is advanced as a spillover benefit justifying various kinds of govern­ ment outlays in behalf of mining growth. The existing industry under­ standably advocates indirect subsidies in the form of free or less-than­ competitively priced access to resources, special tax treatment, and 74 prov1s1on of free government services (including geological mapping) instead of government enterprise as a means of overcoming the discrepancies between public and private costs and benefits. There is no powerful countervailing sentiment in the country as there is with respect to water, hydropower, and some other natural resource products, advocating their production by government enterprise. Apart from the issues of national self-sufficiency, which is generally beyond the scope of this paper and of regional economic development, for which the spillover benefits from mining are limited, there are grounds for considering direct state investment in mining enterprise. The expectation of success from exploration in Alaska is high, but investment in exploration and development is retarded by institutionally generated uncertainty, uncaptured economies of scale, and market imperfections. If this is so, government or semi-government enterprise ought to be considered without ideological prejudice as one means of increasing the net social benefits deriving from the state's natural resource endowment. The state's objectives in establishing such enterprise ought to be to reduce uncertainties and to overcome market imperfections without introducing new sources of misallocation of resources between the public and private sectors or between mining and other industries. It should aim to attract and complement private capital rather than to supplant it. The proposal below, inspired in part by Quebec's mineral-exploration company, SOQUEM,approximates these objectives. A quasi-private corporation is suggested here. The corpora­ tion would have a special legislative charter, which--along with the corporation's financial performance--would be subject to review of the legislature at the end of ten years. The state would, however, be the sole stockholder and would furnish the corporation's capital by the purchase of stock either on a fixed schedule or appropriation from the general fund (the preferable alternative), or out of a specified share of the state's revenues from mineral leases. The corporation would be organized as a business corporation with a mandate to maximize profits (or, more specifically, the present value of its net worth). The corporation would be permitted to stake or purchase claims, file or bid on mineral leases, and sell or lease mineral properties like any other corporation in the industry. It could, and would seek to, engage in joint ventures with private enterprise. It would have no special restrictions or privileges other than the following: 1. Its business would be confined to exploration, develop­ ments, and investment in mineral properties within Alaska. It would not directly engage in mining. 75

2. To the extent its status as a government enterprise exempted it from state or federal taxation or allowed it to borrow in the tax-free securities markets, it would take advantage of these privileges; but the benefits therefrom would be paid to the State of Alaska in lieu of taxes and would not be calculated as profit either in the corporation 1 s business decisions or for the purposes of assessing its financial performance The purpose of these last restrictions is to prevent the tax­ exemption privileges available to government enterprise from functioning as a hidden subsidy to its activities and obtaining it an advantage over competin~_pr_i.vate enterprise. The real costs to s.ociet.y of a given investment are the same whether investment is undertaken by public or private enterprise. To avoid a misallocation of resources, the decision parameters should also be the same. Quebec1 s experience suggests that the mining industry will at first vehemently oppose an innovation of this sort--on largely ideological grounds--but that this opposition will quickly fade. In 1968, three years after SOQUEM'sestablishment, it was engaged in joint exploration ventures with twenty private firms [SOQVEM,Z968].B An earlier study [Tussing, et ai., Z968, p. ?2] indicated that the establishment of a state mineral exploration and development companywas favored by Japanese mineral and trading companies as a means for risk-sharing and reduction of political uncertainty in Alaska.

Investment in Topographic and Geologic Information9

Certain information must be developed before any investment in economic development can rationally be decided upon. In the develop­ ment of mineral resources, the demandfor information preceding the actual decision to invest is especially large, being so large, in fact, that acquiring it may require a substantial investment. This, in it­ self, would not make the mineral industries fundamentally different from other areas of economic activity were it not that much of the informa­ tion developed by a prospector or miner is at least potentially useful in many other applications. The word 11potentially 11 should, perhaps, be

8see Appendix III. 9Herfindahl [1969] probably has the most authoritative treatment to date on the economic significance of natural resource information and its place in economic development policy. This study, whose context is Latin America, was not available to the authors at the time the section here was written. 76 emphasized sincea priori estimates of the return on investment in acquisition of geologic or topographic information are likely to be surrounded with a high degree of uncertainty. A person or firm attempting to develop such information for his own use might be confident that in the long run his efforts will be adequately rewarded, but the success or failure of any particular effort at developing information can be estimated only with considerable uncertainty. Again, this would raise no particular difficulty were it not that very often information is needed by individuals and firms whose operations are conducted on too small a scale to allow an averaging effect to 11spread the risk. 11 The absence of a market in which certain types of information can be purchased raises costs considerably even to large firms; and it is not uncommonto observe three or four oil com­ panies repeating similar airborne or seismic examination routines on the same acreage. Under certain circumstances, it is very difficult to establish a market for such information. A person who makes a map may attempt to sell the map at a profit, but the use to which such a map is put passes beyond the control of that person after the first sale is consummated. An enterprise trying to make a profit in such a business is required to price its product at a very high level in order to be assured that an adequate return will be obtained after relatively few sales. The high asking price, however, is usually beyond the ability of most prospective purchasers to pay. This is particularly true when the benefits to be derivedfrom the information purchased are highly uncertain.

Topographic Information

In the United States, the usual response tothe situation described above has been to socialize part of the information acquisi­ tion activity in question. The topographic mapping services of the U. S. Geological Survey are a case in point. The precise location of points on the earth's surface in relation to the land forms around them, and in relation to other points on the earth's surface, is required with greater or lesser degrees of accuracy by almost all physical investments, be they factories, highways, or homes. Although it is almost impossible to conceive of these investments being made without such information, the very ease of its availability often makes it a rarely thought of cost to be considered in the planning process or in the evaluation of a project's cost. In undeveloped regions such as Alaska, however, where such information is lacking, the costs and difficulties in project development or planning for future use may be raised to insurmountable heights. 77

The argument is occasionally heard that lack of economic activity in a region argues against its inclusion in a mapping program because of the 1ack of quanti fi ab 1e benefits. In genera 1 , this argunient is probably valid if the competitive projects are similar programs of topographic mapping in other areas. Greater economic activity generally means greater usefulness may be derived from any particular type of map. The argument, however, breaks down into circularity when it is used to compare the benefits of widely differing types of public investment. In ice as ic as provi ng ic information, the lack of such information should be viewed as one possible contri­ butor to underdeveloped status. It may be very difficult to justify in terms of direct economic benefits the investment of public funds in mapping underdeveloped areas, but it is even more difficult to prove that no such benefits exist. To prove such a proposition would require the very information whose acquisition is argued against. The scale of public investment in such activities should be great enough that, although any particular map may not turn out to have great benefits, the returns to the program as a whole are certain to exceed its costs. Fortunately for Alaska, the essential program of mapping the physical features of the state and providing basic horizontal and vertical control points is well on its way to completion. As is shown in Figure 1, over 80 percent of the state is covered by standard quad­ rangle maps, either published or in process. The complete coverage of the state at this scale (one-inch-to-one-mile) would provide the greatest part of the topographic information required for mineral develop­ ment. Although the remaining 20 percent of the state is covered by modern one-inch-to-four-miles scale maps, there would seem to be justi­ fication for completing the larger scale coverage as well, particularly the areas known to be highly mineralized, such as the KobukRiver area near the Bornite copper prospect. The 13 maps requried to cover this limited area of mineralization could be completed in one year at an average cost of $25,000 per quadrangle, or $375,000. In view of the existing levels of exploration activity in the area and the considerable interest evidenced by the State of Alaska in developing transportation facilities in the Northwest, it is reasonable to expect a fairly high return on this relatively moderate investment. If this mapping cannot otherwise be carried out promptly by the U. S. Geological Survey, it would be appropriate for the State of Alaska to enter into a cooperative mapping agreement with the federal government in order to expedite publication. State participation in the project;s funding is justified because the main incidence of both the costs and benefits of development is on the state. FIGURE 1 EXTENT of LARGE SCALE TO POGRAPH IC ( 111= I mile) MAPPING in ALASKA JUNE 1968 source: U. S. G. S. Topographic Division

f::"::":1 II II 1.:..8.:..JCoverage Complete .,,, IIIlilIICoverage 11Urgent ly Needed" 11 11 t~~UCoverage Desired -....J CP

50 0 100 200

Statute Miles 79

Maintaining published maps at present standards of accuracy and completeness will require a small but continuing effort on the part of the U. S. Geological Survey, mainly to account for changes in cultural detail. In areas of little or no development, no expenditure will be necessary, but the agencies involved should be sensitive to the rapid physical and cultural changes which can be expected to occur in areas of population concentration or unusually rapid resource base developments.

Geologic Information

Geologic information can be developed from a wide range of sources; the electromagnetic spectrum provides numerous means of sensing the properties and nature of the earth's crust. The tools of information acquisition range from the extremely simple and time­ honored to the modern and complex, from the gold pan to the orbiting earth satellite. Almost equally broad ranging are the uses to which this geologic information may be put. Geologic understanding is naturally an important precondition to the successful search for minerals in the earth's crust, but much of the justification for acquiring geologic information derives from its nonmineral economic benefits. In Alaska, where manymillions of acres remain unclassified and uninvestigated, the desirability of geologic information is readily apparent. The land's ability to hold and discharge water, sustain vegetation and other living things, and support structures such a roads or highways depends importantly upon its geology. Despite the progress of recent years in developing sophisti­ cated and powerful tools of geologic investigation, much of our geologic information is still produced by individuals or small teams of scientists who study the physical characteristics of an area and systematically record their relations on a map. Field investigation remains the basic means of acquiring regional geologic information. The cost of regional geologic mappingis relatively modest, ranging in Alaska from $4 to $7 per square mile. 1U The final result of such investment is generally a geologic map of a scale of one-inch-to-four­ miles. The basic geologic information contained in such maps is essential to any rational plan for land use.

lOcalculated on the basis of man-year estimates contained in U. S. Geological Survey, Long Range Plan [1964], p. 26. 80

The early availability of geologic information can result in substantial savings in highway construction through advantageous route alignment as determined by factors such as the availability of construc­ tion material, the engineering characteristics of subsurface materials, and the cost of cutting or tunneling. The absence of geologic reconnaisance maps in northern Alaska is having a palpable impact even today. For instance, the economic feasibility, the optimum routing, and the construction costs of a proposed railroad to the Arctic depend on geologic conditions along the route. The costs imposed by the present scarcity of such information are impossible to calculate, but they are certainly considerable. Lack of information on the occurrence of such an unglamorous mineral as gravel is adding hundreds of thousands, or even millions, of dollars to construction costs in the Arctic petro­ leum province; meanwhile, the uncontrolled removal of gravel from river beds and beaches may lead to serious environmental damage and to unnecessary future costs. An area can be classified as a wilderness preserve without any knowledge of its geology, but geology has a great deal to do with the opportunity costs of removing such an area from the list of land available for mineral exploration. Because regional geologic maps can point out those areas likely to be most favorably endowedwith minerals, failure to conduct such a program prior to land classification may saddle future generations with higher costs and needless confusion. In addition to these obvious and practical grounds for comprehensive regional geologic mapping, there are less quantifiable scientific reasons for conducting such a program. A knowledge of regional geology is an important part of, and step toward, the basic understanding of the earth. Like a large part of scientific research, its practical payoff is great, but is difficult to identify precisely, and impossible to measure. For instance, it is unlikely that many Alaskans who lived through the 1964 earthquake will wish to retard accumulation of the knowledge that might someday contribute to an earthquake prediction and warning system, or to techniques for gradually bleeding off tensions in the earth before they produce disastrous quakes. In populated and highly developed regions, the requirements of land use planning and of engineering are the most compelling justifi­ cation for a program of geological mapping. In some parts of Alaska as well, these uses are sufficient economic grounds for the provision of large-scale geologic maps.ll The crucial argument for general coverage

111n conformity with the usage of map-makers, Za:t'ge-scaZe refers to maps covering a smaller area in greater detail. That is, a scale of 1:60,000 is greater than a scale of 1:250,000. 81 of the vast, unpopulated and undeveloped bulk of Alaska's land rests on the use of geological maps in the search for economically useful minerals. At successive stages of a rational exploration program, the land area under consideration is progressively reduced, and the intensity of search effort is increased [Bailly, l964, Plates l6-lB]. Accordingly, different types and grades of information are required as the explorer moves from one stage of investi on another, I the early phases of an exploration program, it snot economical to send individuals into the field simply to observe the lay of the land. At this stage, regional geologic information indicated on maps or in regional geologic evaluations is particularly important in delineating the localities deserving further investigation and in eliminating the less promising acreage. One example of a broad regional geologic evaluation which resulted in tangible returns is the U. S. Geological Survey's early investigation of the possible petroleum provinces in Alaska [Miller, et al., l959]. Published in 1955, this paper called attention to the sedimentary basins in Alaska which appeared to have characteristics favorable for the formation and entrapment of petroleum. Petroleum exploration had previously been conducted in Alaska, but by bringing together the most relevant information available and by showing the geologic similarities to petroleum-bearing provinces elsewhere, the SurveYrprovided a focal point for oil industry interest in Alaska, and laid the foundation for the state's present economic expansion. Acquisition and publication of regional geologic information is likely to have an effect on private exploration expenditures out of proportion to the public costs involved because of the crucial role it plays in shaping the expectations held by a mineral explorer about what he will find and how much it will be worth. The general usefulness of geological information--public geological information--is apparent enough. In addition, there are clear instances in Alaska where the absence of maps or other published data has a present cost which would have amply justified past invest­ ments in mapping the areas concerned. Yet it is much more difficult to determine howmuch, what kind, and in what places government geological investigation and mapping is justified in Alaska today. Three issues which are critical for such a decision, and for which this study has not yet provided satisfactory answers, are: 82

(1) What are the expected returns to the regional economyand to the national economy through increased mineral discovery from investment in (a) small-scale mapping of large areas of Alaska, and (b) large-scale mapping of areas of particular promise? (2) At what point in the collection of geological informa­ tion for the purpose of discovering minerals do the private returns to geological investigation become great enough to make government investment superfluous? (3) What is the optimumnational allocation of a limited pool of geological talent amongthose programs having the greatest direct payoff in mineral discovery; those having the greatest usefulness in engineering, land use planning, and environmental management;and to basic research ~od the training of future scientists and technicians?ll Even without rigorous answers to these questions, there is a strong presumption that the lack of broad geological information is a key bottleneck to Alaska's mining development, and that the social returns--and probably the returns to government finances--more than justify an accelerated program of broad regional geologic mapping. Only about 35 percent of Alaska's land area is covered by even small­ scale (one-inch-to-four-miles) geologic maps; regional planners in the United States generally consider inch-to-mile maps as the minimumsize useful in their efforts. The United States Geological Survey [Long Range Plan, l964] set 1980 as the target date for complete coverage of Alaska with four-miles-to-the-inch reconnaissance series geologic maps. The rate of progress toward this goal has been disappointing, in part because of budgetary constraints imposed as a consequence of the Vietnam war. At the present level of effort, it will be well into the 19901 s before complete coverage is attained.

12Earlier drafts of this report contained first approximations by Gregg K. Erickson to a statistical theory of mineral exploration which takes into account explicitly the level of published geological information as a determinant of the effect of uncertainty on explora­ tion investment. One implication of his analysis,omitted here because of space limitations, is that small increases in the average density of geological information will have a greater leverage on exploration investment where the existing density of information is low, than where it is high. This apparently means that, for the purpose of stimulating discovery, the same amount of government geological effort is more effective if devoted to covering larger areas with small-scale maps than to a more intensive mapping of smaller areas. Both authors are continuing work on this problem. 83

As illustrated in Figure 2, most of the highly mineralized regions of the state, i.e., the Seward Peninsula, the KobukRiver area, Copper River area, Kenai Peninsula, etc., are not covered by modern geologic maps. Potential developers of Alaska's mineral resources are thus confronted with an especially difficult task in allocating their limited exploration investment to the most favorable targetareas. If they are unable to delineate these favorable target areas, it is probable that mining firms will largely ignore these portions of Alaska until the regional geologic reconnaissance is completed and available. Delaying completion of reconnaissance coverage by ten years will probably cause a similar postponement in the large-scale explora­ tion programs that these areas would seem to merit. Consider the mineral production per square kilometer for the different countries listed in Table 1 [p. 29]. The authors have made no systematic analysis of the geologic information density in these countries, but knowledgeable geologists questioned ranked the quantity and quality of published information in almost the same order as mineral production. In Table 3, five industrial countries for which comparable data are available are ranked on the basis of mineral output in Table l, together with the relative extent to which each of them is covered l?Ygeologic mapping. Despite the fact that some of these countries extend over a rather small area forpurposes of statistical inference, a positive relationship is clearly evident, with a rank correlation coefficient of 1.0 for the composite index of information density. Covariation is also indicated in a comparison of two less developed countries. South Africa produces considerably more per square kilometer than the Congo (Katanga), even though the latter is reputed to be the world's most highly mineralized region; this may be explained by the low information density in the Congo compared with the well-mapped and highly explored geology of South Africa. Mention has already been made of the disparity between western Canada's boomingmineral industry and the virtual nonexistence of the industry in Alaska, despite a similar institutional climate and similar transport accessibility. Consequently, the relative levels of informa­ tion density in the two regions provide a crude test of the hypothesis that it is a critical variable. The contrast between the amount of information published (or on file) on British Columbia and YukonTerri­ tory, with that on Alaska is strikingly shown by a comparison of Figures 3 and 4 with Figure 2. This comparison still understates the difference in information density between the two regions. In many cases, mapping of the superfi­ cial geology provides only a marginal amount of information on the under­ lying geology due to the thick cover of forest or gravel. Since most TABLE3 PERCENTOF AREACOVERED BY GEOLOGIC MAPPING IN FIVE COUNTRIESAND COUNTRY RANK N TERMSOF COVERAGE AT VARIOUSSCALES CORRELATED WITH VALUE OF MINERALPRODUCTION

RANKTN SCALE-T:30,oon - SC-AIF·l-:75-,uou--SCA1-TT:Z50, 1 TERMSOF ORLARGER ORLARGER ORLARGER INFORMATIONDENSITYd VALUEOF Percentage Percentage Percentage Equivalent MINERAL of Rank of Rank of Rank of I Rank PRODUCTION Area Covered Area Covered Area Covered 1:30.000 l England 65 1 100 l 100 1-2 70 1 2 Germany 50 2 60a 2 75a 52 2 3 France 5a 3-4 5a 5 100b 1-2 11 3 4 Japan 5a 3-4 20 3-4 ]QC 8 4 5 United States 2a 5 20 3-4 37 5 5 ------~------Spearman Rank Correlation 00 Coefficient .95 .65 .80 I 1.00 ..i::,.

Notes: aApproximate. b1 :80,000. c100 percent 1:300,000. dJndex weights are based on the assumption the amountof geologic information (number of discrete 11places 11 for which geological characteristics can be distinguished) varies with the square of map scale: m s-1 130,000 = I (Ps - I Pn)(30;~00)2 s=l n=l where Ss is mapping scale, s distinguishes different scales in descendi order, and Ps is the proportion mapped at scale Ss or larger. Sources: U.S.G.S. Long Range Plan, 1964, p. 25; Bailly, 1964, Plate 3. 85

.c. w 0 ..J C <{ C... - CI) (.) E <{ >, Cl) ~ Cl v ~ Cl) 0 0 II 0 ..J Cl) <{ ·-w Q) ...... u:, ,._ (.) zu, -::, LL (!) :::::,0 0 0 (!) z-:) . U)- - U) - 0 Q. I- ...J :::, z Q. ~ w w0 <{ I- ~ Q) (!) 0.... X ::, 0 w (/)

-- - \ \IP ,, \ \ 1 la. •,,, 86 FIGURE3 YUKON TERRITORY BRITISH COLUMBIA BEDROCKGEOLOGY MAP COVERAGE

March 31, 1967

INCLUDES:

Areas for which reconnaissance maps (mainly 8 & 4 mile scales) have been published by G. S. C.

Areas for which detailed maps (1 ·mile scale) have been published by G. S. C.

Areas being mapped by G. S. C. Maps not yet published

Source: Geological Survey Miles 100 0 100 200 300 400 of Canada, Dept. of Energy, Mines a 200 0 200 400 600 Kilometres Resources. 87 FIGURE4 YUKON TERRITORY a BRITISH COLUMBIA SURFICIAL GEOLOGY MAP COVERAGE

March 31, 1967

INCLUDESI

Areas for which G. S. C. maps published since 1900

Areas being mapped by G. S. C. Maps not yet published

Source: Miles Geological Survey 100 0 100 200 300 400 of Canada, Dept. of 200 0 200 400 600 Energy, Mines a Kilometres Resources. 88 metallic minerals of economic concentration (with the exception of gold and a few others) are found in bedrock, this constitutes a limitation on the utility for prospecting purposes of some geologic coverage. In Canada, a separate series of maps have been compiled showing the bedrock geological structure that is knownor inferred to underlie the surficial cover. Figure 3 shows the very complete coverage of these maps in British Columbia and YukonTerritory. Although no attempt has been made here to evaluate qualitatively the usefulness of differing types of geologic information, such differences certaintly exist, as, for instance, between the types of geologic mapping just mentioned. In discussions with various mineral explorers, high regard is evidenced for the effectiveness of the aero­ magnetic survey and other airborne geophysical methods as tools for effectively reducing a very extensive area under regional evaluationiD a much smaller tract suitable for target investigation. By sensing the subtle variations in the earth's electromagnetic and gravitational fields, valuable information may be derived concerning the underlying geology. Although much of Alaska has been covered by private surveys of this sort, primarily directed at petroleum exploration, practically none of the state has been covered by published surveys in scales useful to the prospector or would-be miner [Heiner, personai communicationJ. Once again, the Canadian situation is far more conducive to the discovery of valuable mineral deposits, as is shown in Figure 5. Although there remains room for much more study of this sub­ ject, the striking differences between Alaskan and Canadian levels of information density constitute the most persuasive hypothesis the authors have encountered to explain the corresponding differences in mineral development.

Investment in Technology

In many ways similar to public investment in information acquisition is the promotion of technological development through research. The funding of 11pilot projects 11 has long been an important part of mineral policy in the United States and elsewhere. In a number of respects, the acquisition of technological knowledge parallels the acquisition of geologic information. Just as the prospector is no longer the dominant force in mineral development, so too has the indi­ vidual inventor largely been supplanted by the well-financed research organization. Research and development demand the coordinated activity of many highly trained individuals, generally working within the structure of a large organization. From the viewpoint of risk 89 FIGURE5 YUKON TERRITORY 8 BRITISH COLUMBIA AEROMAGNETIC S SEA MAGNETOMETER MAP COVERAGE March 31, 1967

INCLUDES:

Areas for which G. S. C. maps published;

Areas surveyed by G. S. C. but Maps not yet published;

Areas surveyed under Federal-Provincial program for which maps published;

Areas surveyed under Federal-Provincial program, 1966.

Source: Geological Survey Miles of Canada,Dept.of 200 300 400 Energy, Mines a 200 0 200 400 600 Resources. Kilometres 90 analysis, the parallels to mining also hold true. Muchresearch and development takes place under similar conditions of uncertainty where the commercial application and profit-making opportunities being sought are far in the future and not at all certain to materialize. Of course, not all such projects are necessarily large in scale or very risky in their undertaking. The attempts to develop a light-weight rock drill that could be transported over rough terrain by one man is a case in point. Both the benefits to be derived from this technological advance and the scientific principles necessary to make it a reality have been well knownfor some time. In such cases, it is difficult to justify public investment in the development process because, with the profit rewards of such development so clearly in view, the private sector is generally able to advance such a project without government assistance. The technological developments appropriate for government support are those which are surrounded by high uncertainty and require a very large scale effort. The best example of such a project yielding fruitful results is the development of the process whereby taconite, a hitherto discarded mineral containing iron, could be inexpensively sorted and smelted into pig iron. Muchcredit for this achievement goes to the University of Minnesota. In response to the exhaustion of higher-grade mineral resources in the northern part of the state, and the consequently depressed condition of that area, the state undertook early research risks in the hopes of stimulating further mining. This hope was fulfilled; and, as a result, northern Minnesota and Michigan are no longer the economic disaster areas that they were only 20 years before. Although the state and university received no royalties in compensation for their investment in this project, a true social dividend was realized in the economic revitalization of the affected areas. Alaska has few, if any, parallels to this situation. With the possible exception of the Kennicott copper deposits, Alaska 1 s mineral resources are far from exhausted. Alaska has its depressed areas, but these are not the result of mineral re~ources depletion. In some cases, an argument from the point of view of self-sufficiency bears scrutiny, and the possibility of utilizing presently knownbut unexploited mineral deposits must be considered. Public investment in developing the necessary technology to extract the commodityfrom the mineral may be in order. Nevertheless, public investment in the acquisition of geologic information is more responsive to Alaska 1 s conditions than would be development of technological processes which might benefit other areas to a greater extent than they promote economic development in Alaska. 91

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APPENDIXI

A NOTEON GOLD by Gregg K. Erickson

No analysis of mineral policy in Alaska can neglect the important matter of gold. The discoveries of the late nineteenth century ~rid the stampedes of the early tw~ntieth were the begihning of Alaska's modern economic development, and gold remained the territory's most important mineral product until the 1940's. Despite the almost total disappearance of gold mining in Alaska, this mineral still plays a disproportionate role in popular thinking about the state. Special consideration for gold mining takes a numberof forms. Some, like the Alaska Congressional delegation's ritual advocacy of increasing the price of the metal, may be seen as harmless sentimentality. Occasionally, special treatment has real consequences; for instance, Alaska has remained outside the federal water quality standards program because of the state legislature's insistence upon a total exemption of placer mining from pollution controls. Continuing preoccupation with gold would be unfortunate. Of all the extractive resources upon which a developing economyin Alaska could be based, gold mining is uniquely unpromising in today's economic and political environment. By concentrating on gold mining, Alaska would be tying its economic fortunes to a commoditythat will probably be in worldwide oversupply within the next twenty years. Almost all of the world's existing gold stock is utilized by governments and central banks to provide stability for paper currencies and to settle international trade balances. One-fourth of annual gold production, equal to about 0.5 percent of stocks, is added to monetary reserves, with the remainder being used for industrial and artistic purposes. In the face of the recent discussion and speculation about the future of gold in the world monetary system, it is easy to lose sight of the fact that gold is basically a commodity, and that its price is dependent upon the interaction of supply and demand. A lessening of demandmeans a fall in the price of the commodityand a fall in the fortunes of those holding it or supported by its production. 104

There is reason to believe that just such a softening of the demand for gold is very likely in the near future. Industrial consump­ tion of gold is expected to maintain its upward trend, but at the present price this component of demandaccounts for only about three-quarters of yearly production. Existing stocks of gold held by individuals and central banks would be sufficient to satisfy the present level of indus­ trial consumption for more than 175 years. In the past two decades a number of plans have been put forth which would eliminate or at least drastically reduce the world's monetary dependence on gold. Should gold suddenly be demonetized, existing stocks would become either partially or wholly available for industrial uses, and prices would naturally plummet. The more likely eventuality is that the price of gold will continue to be pegged at levels much higher than those supportable by industrial demandalone, but far below the levels required to satisfy international monetary requirements under existing arrangements. This outcome will require, and will be accomplished by, the gradual withdrawal of gold from monetary functions. In recent years world banking authorities have become increasingly frustrated over the critical place of gold in the monetary system. The reasons for this dissatisfaction are not difficult to see; what is surprising is that the world has stuck with gold for so many years in the face of so many difficulties. As long ago as World War I, for instance, it was necessary completely to overhaul the international monetary system as a result of the evident unworkability of the gold standard that had evolved during the nineteenth century. Its succes­ sor, the gold-exchange system, met ruin in the early years of the global depression, which it played a large part in propagating. Nevertheless, 11 ••• man's centuries-old love affair with a soft yellow metal was not yet over. 11 [A'lbrook, 7,967, p. 80.] The present gold exchange system was created in 1944. Recognizing the inherent rigidity of an international exchange struc­ ture based on gold, the new system incorporated a number of changes and innovations designed to provide a greater range of flexibility and responsiveness to the changing requirements of world trade. The performance of this system over the past 25 years has been adequate to world needs, but it now is clear that the growing international economy has stretched the system close to its breaking point. The basic problem with a gold-based monetary system, and the source of its inflexibility, is that gold is in relatively fixed supply. The steadily increasing level of international trade in the past ten years has brought about a parallel increase in the demandfor liquidity--the wherewithal to finance transactions. This rising demand has created a need for expanded world money supply that cannot be satisfied under the present system. 105

Of the many solutions proposed for this dilemma, the most likely of implementation involves the creation of some sort of inter­ national monetary unit that will effectively substitute for gold. Called variously a Collective Reserve Unit (CRU), Special Drawing Rights (SDRs), Goldersatz, or paper gold, the new reserve asset would effectively eliminate the need for increasing the monetary stock of gold. Once such an asset gains acceptance, it would bring about a relative decline in the value of gold as a monetary reserve, and a eas gold from monetary stockpiles into the industrial market. Such a release would relieve the upward pressures on the commodityprice of gold.l The above discussion is not intended to be a comprehensive survey of the world monetary situation. It is only included to give the reader a once-over-lightly view of the most likely future develop­ ments in the demandfor gold. It is possible, of course, that some solution might be found which would have more favorable consequences for Alaska's gold mining industry. Wedo not think this will come about;2 and, if it did, we would continue to have very serious reserva­ tions about its desirability in terms of the national interest or even the long-run best interests of Alaska. A gradual increase in the price of gold at a rate of 2 percent or so per year, as has been advocated by some economists, migbt slowly increase the attractiveness of gold mining; but it is doubtful that an increase at this rate would be sufficient to change the prospects of the industry in Alaska. A sudden devaluation of the dollar in terms of gold--for instance, reestablishing the price at $70 per ounce--would have important international complications and would stimu­ late hopes for revival of gold mining in Alaska. However, even an increase of this magnitude would have its main effect on the use of new techniques to exploit new kinds of gold sources, such as offshore dredging. It would probably be insufficient to reopen most of Alaska's abandoned placers.

lA cross section of contemporary economic views on this issue is found in Hinshaw [(ed.) 1968]. 2For a contrary view, see O'Neill [1967]. 107

APPENDIXII

ALASKAAS A POLICYLABORATORY

The 11Proof11 of Our Conclusions

The two most crucial analytical propositions in this report are (1) the general superiority of competitive leasing over the location system, and (2) the critical effect of published geological information on exploration investment and mineral discovery. In the course of this investigation, the authors became convinced of the validity of the above two propositions. This report, however, has not provided overwhelming proof of what are, and will remain, controversial issues. 11 Proof" cannot be furnished except by some method which wi11 compare well-defined measures of benefit, in which the only systematic difference amongthe cases compared is the variable being tested--the institutional system or the level of published information. Such a test is extremely difficult to furnish from existing information, because it is virtually impossible to select areas which differ only in the variables whose association is being tested; even if this task could be accomplished, it might not be possible clearly to distinguish cause from effect. The value of minerals produced in the United States either under government or private leases or on purchased land far exceeds the value produced on properties obtained by "discovery and appropria­ tion." The former value is, moreover, undoubtedly much greater on a per-acre basis than is the latter. These statements in themselves provide no basis for evaluating the merits of different institutions, because the mineral endowmentand commercial accessibility of the land involved in the two cases are not comparable. Land in the more settled portions of the country tended to be privately appropriated long before its mineral value became apparent; the fossil fuels on public lands were classified as 11leasable 11 rather than 11locatable 11 largely because of their exceptional value. Any valid historical test of the merits of different systems must be extremely sophisticated; the authors of this report have not been able even to conceive of the design for such a test. The table on page 84 of this report shows a powerful association between the density of published geological information 108 and the intensity of mineral activity. It is almost certain that extending the comparison from the five countries included in the table to a much greater number of countries would show a similarly high correlation between mapping and production. Here too, distin­ guishing cause from effect is a challenging problem. A superior mineral endowmentobviously increases the returns to geological mapping; in addi­ tion, population density and urbanization increase the engineering demand for geological information. Furthermore, the per capita cost of any given scale of mapping decreases as population density increases. Finally, mineral production and population density are themselves highly intercorrelated, and each is in part a determinant of the other in addi­ tion to being an influence on the level of mapping effort. Here again, a crude statistical association proves almost nothing.l An estimation of the social value of geological mapping by historical-statistical methods would be a major undertaking, but it is conceivable. The existing coverage of the United States by geologic maps appears to be only barely related either to population density or to a priori expectations of mineral value [U. S. Geological Survey, Long Range Plan, pp 26 and 28]. A research plan may be possible which would hold both the level of economic development and development expec­ tations constant and relate variables like the value of mineral produc­ tion, the number of building permits, the cost of highway construction and maintenance per mile, etc., to the density of published geological information. The results of such a study would be useful to the United States Geological Survey and to the state in determining both the optimumlevel and the optimumstrategy for geological mapping.

Opportunities for Controlled Experiments

Alaska, because of its great size and present underdevelopment, offers a chance to conduct far more effective and persuasive tests of different policy alternatives--both in institutions and in information collecting strategy--than any conceivable study using existing data. Alaska offers the opportunity, so rare in social policy matters, to conduct controlled experiments on both these issues. There is undoubtedly some part of Alaska's land area--probably no more than 5 or 10 percent--in which present development expectations lAs was remarked on page 88, the most persuasive single case for potential value of published geological information in Alaska is found in the difference in the level of mineral activity between Alaska and Canada's Far West, which are similar to each other in their overall institutional arrangements, geological endowment,and commercial accessibility. 109

are so high that there is a compelling case for giving them priority in mapping, and on which it may not be wise nor politically feasible to determine mineral policy according to the dictates of a research design. For any small portion of the remainder (for instance, the area of one of the Geological Survey's four-miles-to-the-inch quadrangles), development expectations are now so low and so uncertain that the present value of the cost of doing the "wrong thing" or of doing nothi is extremely low.2 Exceptional scientific interest, or ready i geol i l i gati , may l the early mapping of certain economically indifferent quadrangles. For the remainder of Alaska's land area, however, an experiment might call for the timing and scale of mapping efforts to be determined randomly and/or for institutional policy variables to be assigned at random.3 The sturcture of two experiments might be as follows: (1) Test of Institutional Variables. Because of their present importance, certain areas wouZd have to be excZuded fromife experiment and shouZd be cZassified for disposaZ of mineraZs by teasing onZy according to the criteria on pages 49 and 50 of this report. The remainder of the public lands of Alaska would be classified (subject to valid existing rights) by the use of random numbers on a quadrangle-by-quadrangle or township-by-township basis: for competitive leasing only; for noncompetitive leasing; for appropriation by discovery; and for administration under a hybrid system (such asdescribed on pages 61 to 63). On those lands subject to a royalty, the royalty rate might be determined randomly. 2If we begin with a "null hypothesis" which is not unreasonable in respect to any single quadrangle, that neither the choice of develop­ ment institutions nor the timing of geological mappingmakes a signifi­ cant difference in the present value of the net social benefits to be generated from the natural resources of that quadrangle, the expected cost of the experiment is zero. The benefits of the experiment will becomeapparent precisely to the extent that its results allow the null hypothesis to be rejected. 3some pseudo-randommethods of selection such as 11checkerboarding11 would be simpler to apply and easier to explain to the general public than true randomization. However, the technical inferiority of such methods would seriously limit the range and validity of statistical inferences which could be drawn from any experiment. 110

(2) Test of Information Variable. Certain quadrangles would be segregated for early mapping because of exceptional economic or scientific interest, and would thereby be excluded from the experiment. The schedule of mapping the remainder of Alaska in units corresponding to four-miles-to-one-inch quad­ rangles would be determined with the use of a table of random numbers. In each quadrangle so chosen, the decision whether to map at a scale of four-miles-to­ one-inch or one-mile-to-one-inch would likewise be made randomly; within each ofthe quadrangles selected for mapping at the larger scale, the mapping sequence would also be determined by a random process. (3) Analysis. Subsequent figures on exploration effort, mineral production, lease revenues, employment, engineering costs, etc., would be collected and related statistically to other important variables, such as geological characteristics of the land, transport accessibility, as well as to the institutional and information variables deliberately determined in the experiments. Significant results from experiments of this type would begin to emerge only after the passage of several years and might become conclusive only after perhaps a decade. They would require some changes in the manner of work of the Geologic Division of the United States Geological Survey, which apparently has at present no explicit 11strategy 11 for mapping. They would also require overcoming the objections of fundamentalist advocates of free access to minerals on public lands and of others who (like ourselves) are convinced they already knowgenerally what the results of the experiment would be. Nevertheless, if the system of mineral development or the level of public geological information does indeed make any difference, controlled experiments along the lines of those suggested here would provide the most convincing evidence, and the most powerful imaginable tools for policy choice. 111

APPENDIXII I

ORGANIZATIONANDOBJECTIVES OF QUEBECMINING EXPLORATION COMPANY (SOQUEM) By C. Carbonneau, President (Address to the C. I. M. Meeting, Toronto Branch December15, 1966)

Seven years ago, the NoPthern MineP asked a panel of seven top exploration engineers and geologists the following question: "Given a million dollars to spend each year for five years, howwould you go about finding an orebody?11 There were seven different answers and expressions of opinions, but the seven experts fully agreed on one aspect of the problem: one million dollars a year represented too much moneyto be spent intelligently. One favored the spreading of the expenditure over a period of eight to ten years, while another favored a period of up to twenty years. The Quebec Governmenthaving endowedSOQUEM with an annual exploration budget of one million and a half dollars ($1,500,000) for the next ten years, I came before you tonight to explain howwe have kept afloat trying to sail in very choppy waters. And the worst part of it is that the experts reported to the NoPthern MineP that the difficulty of spending that moneyintelligently would arise mostly from setting up an organization from scratch. SOQUEM(the name stands for Societe Quebecoise d'Exploration Miniere translated into QuebecMining Exploration Company}started its operation the first of November1965 with three permanent directors and two geologists in a small office building containing no accommodation whatsoever except the bare outside walls. It was a real start from scratch. Weclosed our first year of operation six weeks ago. I am very happy to be here tonight and I wish to thank your Address Committee for giving me the opportunity of describing to you what has been achieved during this first year. Our terms of reference, as quoted from our charter, are: 112

1. Carry out mining exploration by all methods; 2. Participate in the development of discoveries including those made by others with power to purchase and to sell properties at various stages of develop­ ment and to associate ourselves with others for such purposes;

3, Participate in the bringing into production of mineral deposits either by selling them outright or transferring them in return for a participation. The way we set to work is not very original. Westarted first by defining mineral priorities because we could not, of course, tackle the whole problem all at once and simply because we felt more secure by selecting what appeared to us less difficult considering markets, explora­ tion methods, geological information, and--not the least--available professional resources. These priorities are the following for the time being: 1. Disseminated copper and molybdenumdeposits; 2. Massive sulphide orebodies of copper and zinc; 3. Sedimentary gold and uranium deposits; 4. Cooper, nickel, lead, zinc, chrome and other metallicals associated with basic intrusives. The industrial minerals were set aside for future consideration, although we would not turn away an all made up asbestos find. Wehave been rather rigid concerning these priorities all along this first year. Wehave started to build a nucleus of exploration specialists in order to fill these immediate objectives. Our main explora­ tion activities were divided in two units: 1. A program planning division. 2. A project execution division. Both divisions can work on joint exploration programs or projects, or on our own,projects. 113

As can be seen on this organization chart, the two main divisions can draw on the professional advice of a group of exploration specialists classified under 11exploration services 11 and "research department. 11 The people in the exploration services act more or less as consultants to both the project planning division and the project execution division. The exploration services are centered on three scientific specializations: geology, geochemistry, geophysics, supported by laboratories, diamonddrilling, and supply sections. In each of the three main services, i.e., geology, geochemistry, and geo- i , poi department head devotes most of his time to planning will soon be reached. A third group of activities is dealt with by a committee called the 11Prospect Valuation Committee,11 in which the technical, financial, and legal aspects of proposals--option taking, joint ventures, participations--are appraised. At present, the managementdevotes much of its time to this committee. Most of the project execution activities are entrusted to non-governmentproject engineers recruited amonggeologists, experienced prospectors, and local consultants. Wedraw also on the services of consultants and outside laboratories for our aerial geophysical work and our geochemical analysis work. As of October 1st, SOQUEM'spermanent employees numbered thirty-three of whomeight are employed part time during the winter months. The permanent staff includes twelve geologists or geological engineers, three prospectors, and two laboratory technicians. In order to reach an ideal operating level, possibly in two years from now, we feel that we might need one more geophysicist, one more geo­ logist, and one more geochemist. Somemight say that this will make a very big staff, to which I agree, but rememberthat within a few years SOQUEMwill have to managean exploration budget of at least a million and a half dollars ($1.500,000) per year to which will be added the moneysentrusted to SOQUEMby private concerns as a result of joint exploration ventures. In addition, one has to keep in mind that SOQUEMis not part of an integrated mining complex. It cannot rely on the services of a parent mining company. This calls for more personnel. For instance, it may very well be that SOQUEMwill have to hire an ore dressing specialist for certain problems of beneficiation of potentially valuable mineral deposits which at present time cannot be exploited. The general policy of the Companyis to have within its ranks a specialist for each large division of the mineral sciences. By doing so, SOQUEMwi11 be in a position to we11 supervise its own projects and those undertaken jointly with private concerns. 114

During the last field season, SOQUEMhas embarkedon sixteen exploration programs, some minor, but four of them far-ranging and long term. The targets uncovered by these programs are now being followed up by trenching and diamonddrilling in some cases. Others require more detail work and some of them will be jointly explored with partners. Approximately nine hundred and thirty-five thousand dollars ($935,000) were spent. These expenditures were distributed as follows: Grass root exploration programs $ 301,000 Probing of targets by detail work 168,000 Research 30,000 Joint exploration programs (SOQUEM'sportion} $ 24,000 TOTALEXPLORATION $ 523,000 Administration 246,000 TOTALDEFERRED EXPENDITURES $ 769,000 Investment in furniture, fixtures, equipment, rolling stock and inventory of supplies (net of depreciation} 166,000 $ 935,000 Reserve in short-term deposits and cash $ 565,000 Capital subscribed from inception to Oct. 31, 1966 $1,500 ,000 As during our first five months of operation, our activities were mainly organization and planning, out of a total expenditure of one hundred and fifty thousand dollars ($150,000), one hundred and eleven thousand dollars ($111,000} were charged to administration. This is why the amount of moneyassigned to administration is large in regard to the amount actually spent in direct exploration.

During this first year of operation SOQUEMhas accumulated a syrplus of five hundred and sixty-five thousand dollars ($565,000} which '<:{1Jl be. u~ed as. a res.erve for future years I exploration programs and ~pectally to cover the cost of diamond drilling campaigns. During the period, ~ental of equipment, services and contracts amountedto one hundred and eleven thousand dollars ($111,000) and close to fifty per cent of the exploration moneyswere devoted to geochemical (one hundred and twenty thousand dollars} and geophysical (one hundred and ten 115 thousand dollars) prospecting. Five hundred and twenty-four (524) claims covering an area of over sixteen thousand (16,000) acres have been optioned by SOQUEMat a cost of sixty thousand dollars ($60,000) and SOQUEM'semployees, assisted at times by contractors, ahve staked close to one thousand (1,000) claims representing sixty thousand (60,000) acres of land. Whenthe charter was discussed by the Quebec Legislative Assembl , it was expected that surplus would accumulate during the possibly three million dollars. The first year's surplus, if extrapolated to three years, will provide an accumulated reserve of over one million and a half dollars ($1,500,000) for later saturation programs. The moneyspent during the first year may not have been put to best possible use, but we hate to think it was much below the national average in regard to efficiency of exploration ... if this can be measured. I might add that the Company had to manage an additional fifty thousand dollars ($50,000) brought in by participants in a joint exploration program. At the present time, the Companyis negotiating eight joint exploration ventures for next season, the whole involving an expenditure from partners amounting to approximately four hundred thousand dollars ($400,000) or more than sixty thousand (60,000) acres of staked land. These various joint ventures have reached the final stage of negotia­ tion and involve a total of five mining organizations. In six of these joint ventures, SOQUEMwill act as a minority partner. However, it will take charge of the execution of the exploration programs for four of them. Five of these joint ventures stemmedfrom programs and properties brought in by our partners, whereas the other three have been prepared and proposed by SOQUEMas a result of its first year's activities. More information concerning these associations will be released upon completion of the agreements. It may be useful here to recall that SOQUEMhas essentially been conceived by the Quebec Governmentas a body devoted to collabora­ tion with either private Canadian firms actually engaged in exploraion in Quebecor with foreign concerns involved in field work or in ore treatment or simply interested in securing a safe source of ore supply. It was made at the start as an autonomousbody, a crown com­ pany like many of the crown companies we have in Canada, except that it is not an agent of the crown. In other words, it enjoys no preferential treatment in regard to the mining laws, the Companies Act, and is submitted to all the regulations governing the private enterprise. Needless to say that it has no access to the information filed by private companies with the Quebec Department of Natural Resources. It is managedby a board of seven directors which has to 116 meet once a month. Three of them are permanent officers and four non­ permanent directors. The officers were nominated by a term of five years for two of them, and ten years for the president. No director can have an interest in any mining exploration or operating undertaking or in any undertaking for the manufacture or sale of mining equipment and materials. The Board of Directors has the exclusive authority to bind the Companywith respect to ihe acquisition of mining properties, the sale of mineral deposits, mining properties or any interest therein, for any transaction above five thousand dollars ($5,000). It has also the authority to bind the Companyin regard to any additional remuneration to the employees of the Companyin respect to discoveries. The Company,each year, makes a report of its activities to the Minister of Natural Resources and such report contains the informa­ tion which the CompaniesAct requires the directors of any companyto give to its shareholders. The report shall be laid before the Legisla­ tive Assembly by the Minister. In case the Companybecomes more prosperous than it is now, it cannot be forced to declare dividends, the payment of which would reduce the Company1 s accumulated surplus to less than 1/3 of its paid-up capital. Without prior authorization by the Lieutenant-Governor in Council the Companycannot sell mineral deposits, mining properties otherwise than by auction sale or public tender. SOQUEMhas no exploration budget as such, the one million and a half dollars ($1,500,000) yearly made available to it come from the buying of the Quebec Governmentof one hundred and fifty thousand (150,000) shares of the companyat ten dollars ($10) per share. Somemay wonder why this form of government intervention in mining exploration. Well SOQUEMwas created to fill several needs, but the main one is to act as a supplement to private mining exploration. SOQUEMhas to stress the long-term approach through systematic research. No companycan be asked to spend year after year a large sum of money in the same province. This cannot be done under the present economic setup by the private enterprise which cannot be blamed for that. Private concerns may have interests scattered in various parts of the world. Exploration budgets might not always be stable; they may vary for a particular area with variations in metal prices, with a haphazard pattern of discoveries and with the prevailing economic conditions. SOQUEMwill not be affected by these variables. 117

It will provide one million and a half dollars ($1,500,000) of the thirty million dollars ($30,000,000) which has been estimated as the exploration moneywhich should be spent by 1970, in Quebec alone, to maintain a satisfactory rate of discoveries of new orebodies. It has been said that if governmentwants any bigger share of · potential profits, it can only do so by contributing a proportional share of the early risk money. Well, through SOQUEMthe Quebec Governmentis taking its share of this early risk money, investing fifteen million dollars ($15,000,000) over the next ten years in this early phase of exploration. It has elected to do so in a frameworkwhich will assure a continuity of efforts and permit a systematic approach. Of course, SOQUEMwill keep a share of the profits in case of discovery, but a share which it will well deserve from its effort and capital expenditures. This is interference, but very slight and a very positive move through which for once, some might say, the govern­ ment is acting as a partner and not as a tax grabber. In a sense, SOQUEMis a very attractive partner since it is willing to spend its moneyon the most speculative part of the undertaking and then in case of discovery share it with partners. I may add that if exploration is to becomemore and more scientific and financially more and more onerous, large corporations will have to turn more and more to grass root prospection. The sources of properties coming from prospectors and small syndicates is bound to becomescarcer. In Quebec, SOQUEM will labor to remove from this grass root exploration activity the first and generally the greater element of risks. From thereon, it will attempt to acquire equities through participation in return for its contribution. Of course, SOQUEMis quite Willing to share an expenditure at a later phase of exploration. On the whole, however, being speci­ fically an exploration company, it will be always reluctant to enter into the final phase of exploration. It cannot act as a financial backer for exploitation; it was not made for that. Wehave seen that through this charter for its own discoveries, it cannot act alone in order to put a property into production. SOQUEMwill labor at least for the next ten years mainly in one province, will not accomplish miracles, but should, within a few years, reach a high level of exploration efficiency. It has the time, the financial means, the organization framework and the environment to reach that goal. The impact of its activities can only be bene­ ficial to the professionals engaged in exploration, to the mining fraternity at large, and to the investment community, whether the investors are Quebecers through their government, or other Canadians or foreigners through participation. 119

APPENDIXIV

EDITORIALREPRINTED FROM THE SEPTEMBER, 1966, ISSUEOF MININGIN CANADA

WhenBill 10, authorizing the formation of 11SOQUEM,11 the QuebecMining Exploration Company,as a public exploration organiza­ tion, was passed by the QuebecLegislative Council last autumn, the fact was met by the membersof the mining industry with mixed reactions, ·" to say the least. The general feeling then, and this is still the case, was that private enterprise does not consider it necessary for govern­ mentsto become involved in exploration and that experience has proven the efficiency of private capital to undertake the high risk business of exploration and mine development. On this we agree and because of the record of efficiency, we have becomeone of the leading world producers and exporters of minerals. Canada owes much to private enterprise for its enviable record of accomplishment, as many parts of our North would not have any activity of economic importance were it not for mining developments. Wedo, however, have to admit that the search for mineral· wealth has often been carried out in a haphazard manner which is under­ standably characteristic of the mining industry, and there are many examples in the history of mining where a search for minerals could be described as little more than a rush to a 11hot 11 area. There is also another side to the picture governed in great part by scientific, technical, and political changes in the modernworld. Canada has no monopolyof mineral resources and other countries are making great strides in developing their own. In some minerals and metals we are not maintaining reserves to back up our production. Should private enterprise falter in the build-up of reserves, what is the guarantee that we can hold our own as a supplier of minerals on the international markets? Is not our Canadian standard of living and national development dependent on our success in exporting our products, possibly more than other highly indus­ trialized countries in the world? 120

What pertains nationally, applies regionally, and the provinces' position in their economic importance can be gauged by the degree of revenue from their natural resources. As the Province of Quebec has embarked on a program of economic expansion, further development of its mining industry has beco~e a factor of huge importance. Quebec also points out that less than one-twentieth of this province's area has undergone some sort of systematic explora­ tion. SOQUEMwas formed for the purpose of filling a void which will i as i 1 tic i the Provincial Government, there is room for both private enterprise and the public sector. In fact, it offers SOQUEMas a complementto private industry's efforts and invites participation by private enterprise. There have been numerous examples of the success of govern­ ment exploration companies in various parts of the world. A prime one was the United States' entry into exploration at the beginning of World War II which lasted through 1949 in the build-up of reserves of strategic minerals. An exploration expenditure of $29,000,000 resulted in the exploitation of 14 mines including the copper deposit at San Manuel, Arizona, which by itself was worth more than all expenses incurred. This direct intervention by the State is more remarkable, as all exploration work was concentrated on properties and showings rejected by private enterprise. Private capital has proven its ability to do a job, but we wonder if the existence of a publicly owned companysuch as SOQUEM could not be an inducement to do still better. It is something to ponder. 121

APPENDIXV

FIGURESON MINERAL PRODUCTION IN ALASKA*

*Source: State of Alaska, Departmentof Natural Resources, Division of Mines and Geology, Report for the Year l968. College, Alaska: December31, 1968. 122

TABLEV-1 MINERALPRODUCTION IN ALASKA, 1967 AND1968

1967 1968a Quantity Value Quantity Value (Thousands) (Thousands) Antimony, short tons antimony content 10 w Coal, thousand short tons 930 $ 7,178 812 $ 5,034 Gold, troy ounces 22,948 803 21,000 814 Natural Gas, million cubic feet 39,927b 7,269 49,326b 8,400 Petroleum, Crude, thousand barrels 28,917C 88,187 66, l 48C 179,500 Sand and Gravel, thousand short tons 22,370 26,248 17,585 20,729 Silver, thousand troy ounces 6 9 3 6 Undistributedd 4,924 4,117 Totals $134,628 $218,600 aFigures for 1968, except petroleum and natural gas, are preliminary and subject to revision. b1ncludes only gas sold. crncludes only oil sold. Additional small amounts were produced during testing of new wells. drncludes barite, gem stones, lead, mercury, peat, platinum group metals, stone, and tin. Wwithheld and included under 11Undistributed 11 to avoid disclosing individual companyconfidential data. Note: The above statistics were prepared under a cooperative agree­ ment for the collection of mineral data between the Bureau of Mines, United States Department of the Interior, and the Division of Mines and Geology, Department of Natural Resources, State of Alaska. Figures for coal, petroleum, natural gas, and undistributed commodi­ ties are presented on authority of the Division of Mines and Geology only. 123

TABLEV-2 PRODUCTIONOF MAJOR COMMODITIES SINCE 1949 Gross Value (Thousands of Dollars)

Oi1 Production Year Gold Mercury Coal and Gas (Millions)

1950 $ 10,125 $ 3,033 $ 17.9 1951 8,387 3,767 19.5 1952 8,420 $ 6 5,779 26.3 1953 8,882 8 8,452 24.3 1954 8,699 277 6,442 24.4 1955 8,725 12 5,759 25.4 1956 7,325 853 6,374 23.4 1957 7,541 l ,349 7,296 30.2 1958 6,525 774 6,931 20.9 1959 6,262 851 6,869 $ 311 20.5 1960 5,887 940 6,318 1,496 21.9 1961 3,998 816 5,868 17,776 34.7 1962 5,784 711 6,409 31,657 54.2 1963 3,485 76 5,910 33,760 67.8 1964 2,045 95 5,008 35,490 66. l 1965 1,479 104 6,095 35,614 83.2 1966 956 101 6,953 50,418 86.3 1967 803 79 7,178 95,455 134.6 1968 814 78a 5,034 187,900 218.6 Totals $106,142 $ 7,130 $115,475 $489,877 $1,000.2 aEstimate--no data available 1968. 124

TABLEV-3 PHYSICALVOLUME OF ALASKAMINERAL PRODUCTIONa

MINERAL QUANTITY YEARS

Total gold, troy ounces 29,944,000 1880-1968 Total silver, troy ounces 19,075,000 1906-1968 Copper,short tons 690,011 1880-1967 Coal, short tons 20,631,000 1951-1968 Sand and gravel, short tons 171,530,000 1958-1968 Crude petroleum, 42 gal bbls 159,714,917b 1958-1968 Natural gas, million ft3 266,935 1948-1968 Stone, short tons 10,893,000C 1921-1966 Mercury, 760 lb flasks 34,999d 1902-1968 Tin, short tons 2,400C 1902-1966 Chromite(approx. 45%CR203), long tons 29,000 1917-1957 Tungsten, short ton units W03 7,000d 1916-1958 Antimony(approx 53%Sb), short tons 3,443 1928-1968 Lead, short tons 25,014 1906-1968 aExcept platinum, uranium, barite, and other commodityfigures which are confidential. 1968 estimated and included in total. bonly other crude petroleum recorded production was from the Katalla area. From1901 to 1932, 154,000 barrels of oil were produced there. Cproduction data, if any, withheld in 1967 and 1968. dEstimate--no data available 1968. 125

V I T A

Arlan Rex Tussing, b. 1933. Education University of Chicago, Oregon State College, University of Washington (Ph.D. 1965), Hitotsubashi University. Formerly Instructor, University of Washing­ ton; Assistant Professor, San Francisco State College; Economic Consultant (private), San Francisco, California. At University of Alaska since 1965; presently Associate Professor of Economicsin Institute of Social, Economicand GovernmentResearch, University of Alaska, Fairbanks, and Economist, Federal Field Committeefor DevelopmentPlanning in Aliska.

Gregg Knute Erickson, b. 1941. Education Wesleyan University (Connecticut) and University of Alaska. Formerly Opera­ tions Assistant and Public Relations Coordinator, Alaska Pipeline Co. Presently Resource Economist, Institute of Social, Economicand GovernmentResearch, University of Alaska, Anchorage.