When mining reforms fail

Balancing the interest of the country vis-à-vis its needs has never been trickier, especially when dealing with natural resources such as water, steam, minerals and metals, and oil and natural gas.

These days, when environmental pressures are thrown into the equation, government regulations that deal with water use for power generation, for example, have to contend with the need of farmers to irrigate land as well as that of urban cities for drinking and other water uses.

If water use, which did not have the above considerations in the last decades, has become a tougher cookie to regulate nowadays, much more has happened to more finite extraction resources like metals, minerals and fossil fuels, which are quickly in danger of being over-mined.

Toss in recent concerns about global warming, ozone layer destruction, environment degradation, and indigenous people’s territorial claims, and faint-hearted governments would rather opt to call a halt to any exploitation of natural resources for fear of contending with powerful natural resource and human rights activists.

It is not surprising thus that the Philippines is one among a handful of nations that has been in the prospective mining investors’ “don’t-even-think-of-putting-one-centavo” list. Consequently, while the Philippine government has remained sensitive to concerns of stakeholders in mining issues, it has not been able to raise much-needed revenues from mining contracts.

It did not help that in 2012, the current administration issued an executive order declaring a moratorium on any new mining agreements, and handing any decision on any amendment to the current revenue sharing to the legislative.

Short and longer term outlook

In the meantime, in the business cycle of metal and mineral mining, there is again pessimism in commodity prices for the short-term, with prices for silver, copper, diamonds, coal, zinc, nickel, potash, and platinum this year expected to be lower.

In the longer term, though, prices are expected to stabilize or even moderately increase, except for gold though, which is still expected to increase in value.

Against this outlook, the earlier pressure on government to entice investors to exploit our mineral reserves has eased somewhat, and the timetable to revise the current revenue sharing has slipped a bit, although it is still in the executive’s list of urgent matters for Congress to decide on.

The recently-created Mining Industry Coordinating Council whose mandate is to implement industry reforms, as well as dialogue with stakeholders and review all existing mining-related laws and rules, has come up with a draft bill that is scheduled to be filed in Congress this year.

Higher revenue expectations

The draft is expected to increase government revenues from mining by over 10 times, if we are to believe what Department of Environment and Natural Resources Secretary Ramon Paje has been telling media.

The executive side of government’s proposal wants to simplify the current revenue sharing scheme by imposing a single excise tax rate of 10 percent on gross sales of mineral products instead of the existing two-percent excise tax.

A five-percent royalty tax on minerals in the newly declared state reservations will also be imposed, plus a share of the royalty for indigenous peoples affected by the mining contract, and higher business taxes for the local governments concerned, although there will a cap on property taxes.

The DENR is also proposing to apply the tax on the gross value of each mining company’s output based on the monthly trading averages for gold, copper and other precious metals at the London Metals Exchange. There will also be a provision for windfall taxation so that the government is able to share in revenues when commodity prices are high.

A policy of instability and uncertainty

The draft sounds like manna from heaven except that these changes are coming at a time when foreign mining companies are finding business conditions in investing in the Philippines less bearable.

The reputation of the Philippines in the global mining stage is that of a state that cannot enforce its laws and regulations despite the long period of deliberation and consultations. In other words, our mining policy framework is a picture of instability and uncertainty, definitely an investor’s nightmare.

To top it all, doing business in the Philippines entails having to deal with a lot of red tape, corruption, and even major threats to security especially in areas where there is the presence of dissident leftist or extremist religious groups.

With such an adverse business climate, the MICC should best review its spreadsheets, and bring projections of economic benefits to a more realistic level. The government may be happy thinking of potential earnings, except that there would be no one who would want to invest and generate the revenues.

Striking a balance

The all-important concern, therefore, is just how a happy balance can be achieved. The good news is that it can happen. For one, many developed economies like Finland and Sweden are seen as top mining investment destinations despite their tough environmental protection laws.

Clearly, investment opportunities in the industry and environmental protection can go hand in hand. The trick is to clearly spell out what the rules are, and to stick to them come hell or high water.

Conditions critical to mining investors

The three important conditions that international mining investors spelled out are a competitive taxation regime, a sound legal system that will uphold the law, and a relatively low uncertainty involving land claims.

The world’s appetite for metals and minerals is still substantial, and potential investors are still aplenty. But given the huge capital investment needed on the ground to put a mining venture on stream, mining firms demand a higher level of security.

Therefore, the bigger challenge for our government is to ensure that it can protect new investments. With the Philippines’ track record, don’t be surprised if there are not even a few who will sign up.

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