Mining 37: Adverse Selection of Anti-Corporate Mining View

* This is my article today in Mining Week.
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In a Reuters special report, Philippines' black market is China's golden connection published on August 22, 2012, the story mentioned the following:

* Hundreds of small-scale mines in Mt. Diwata (or “Mt. Diwalwal”), Monkayo, Compostela Valley, Mindanao. One person  sold 5.49 grams of gold in his hand - his share of the day's output - for 8,260 pesos ($200). That's more than 16 times what a manual laborer earns daily in Manila.

* Up to 90 percent of small-scale Philippine gold production is being smuggled out, much of it to China.

Potential revenue loss is big.

* The Philippines, the world's 18th largest gold miner, produced just over 1 million troy ounces of gold in 2011, worth $1.6 billion at current prices. About 56 percent of that came from small-scale miners.

* A top central bank official told Reuters new taxes on gold sales imposed last year appear to be a key factor in the alarming rise in gold smuggling.

* “All the production of small-scale mines, almost all, now goes to the black market, because there is no tax in the black market," said Rex Banggawan, an accountant for a small-scale mining cooperative that buys and sells gold in the mountain city of Baguio in northern Philippines. "After that, smuggling is automatic."

* Arthur Uy, Governor of Compostela Valley, the top small-scale gold mining province in the Philippines, said the black market in gold is mainly based in the capital, Manila. "Most of the gold is being smuggled out to Hong Kong, that's the biggest market," said Uy, a two-term governor.

* The amount of gold sold by small-scale miners and traders to the Philippine central bank in the second quarter plunged 98 percent from a year earlier. By law, all gold produced by miners in the Philippines should be sold to the central bank at around world market prices. Small-scale gold mining output, is the main source of the central bank's gold reserves, which hit a record high of $10.4 billion early this year.

* Traders and officials say the biggest factor behind the spike in the gold smuggling trend the past year is a 2 percent excise tax and a 5 percent withholding tax approved in 2008 but which the Bureau of Internal Revenue (BIR) only started enforcing last year. The tax is imposed on gold sales to the central bank, so is usually borne by the traders.

* Tagum city, the provincial capital of Davao del Norte, is the biggest gold-buying centre nearest to Mount Diwata. Gold traders in Tagum say if not for the tax, they would rather sell to the central bank than in the black market where prices fluctuate fast.

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This development is what the public, the militant anti-mining environmentalists included, ironically get. A case of “adverse selection” problem in Economics. The things that they do not want to hear and see are what they get. When  large-scale and corporate mining is demonized, these firms that cannot avoid paying various taxes, fees and royalties because they are large enough to hide behind the mob, the firms that must comply with Mines and Geosciences Bureau (MGB-DENR) requirements and LGU regulations on giving various CSR projects to communities, then less corporate mining will happen.

Many local politicians and businessmen who own the mines can afford to be less caring of the mountain and the personnel.

One way to bridge the huge gap between large-scale corporate mining and small-scale guerilla type mining, is to encourage the latter to pool resources and become more transparent, more accountable, for their activities. It can be in the form of mining cooperatives, or a hybrid of corporate mining with lots of small holder investors.

When a business enterprise becomes big, like the multinationals or local firms which have joint venture and corporate partnership with multinationals, they are forced to become more transparent. They have websites, their corporate officers are there, they report to the SEC, BIR, MGB, LGUs. Often they are also listed in the stock market and hence, they report publicly to their shareholders and potential share buyers. Then there is the Extractive Industries Transparency Initiative (EITI) that both public and private agencies must divulge and submit information.

With such multiple system of reporting to government agencies, private investors and third party information reporting system, a large scale mining firm cannot afford to be too secretive of its mineral output, its tax payment and CSR projects.

Where there is more transparency, more accountability follows. And less environmental destruction, less disregard for health and labor regulations can be expected.

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See also: 

Mining 33: Job Creation, Taxes and the Politics of Envy, September 13, 2014 

Mining 34: EITI, Taxes and Other Costs of Regulations, September 24, 2013 

Mining 35: Opposition to Mining, Where Do They Come From?, October 15, 2013 

Mining 36: Tax that can Wipe Out All PH Public Debt, October 22, 2013

Mining 36: Tax that can Wipe Out All PH Public Debt

* This is my article yesterday in Mining Week.

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The mining industry is a very useful sector because many of the things that humanity needs in modern life come from mining, like cellphones, tv, cars, buses, electricity, appliances and so on. Yet mining is also highly criticized if not demonized for the various environmental damages attributed to it, real or imaginary.

The Extractive Industries Transparency Initiative (EITI) is an international voluntary system among governments and big mining worlds in many countries that help clear this issue of whether mining indeed deserves to be demonized or be protected, at least on the taxation and output transparency aspect. Its focus is on making revenue payment and collections from the extractive sectors like oil, gas and mining, become more transparent to the public. In the process, this enhances government revenues.

The EITI International Secretariat and the World Bank Washington office jointly sponsored the “Conference on the Adoption of the 2013 EITI Standards” last September 27, 2013 at Crowne Plaza in Ortigas. Among the speakers was Dr. Elmer Billedo, Assistant Director at the Mines and Geosciences Bureau (MGB) of the Department of Environment. This is one of the slides he showed.

Table 1. Mining Industry Performance, 2008-2012

There is no breakdown how much of those gross value production came from (a) large scale metallic mining (LSMM), (b) small scale metallic/gold mining (SSM), and (c) large non-metallic mining (LNMM) like cement and coal firms. Table 2 below will show breakdown.

Many sectors look down or understate the contribution of mining in the economy, as shown by its low share of only 0.7 to 1.0 percent of the gross domestic product (GDP) and only 0.5 to 0.7 percent of total employment in the country. With such a low share, then the country can possibly afford to shut down all mining companies and give the displaced workers alternative work elsewhere, particular in the agriculture, industry and service sectors.

This analysis is wrong. No mining raw materials and products means little or no industrial output as the iron, nickel, copper, chromite and other metallic products are the raw materials to produce various machines, steel and construction materials, cell phones and various electronic products and appliances. If these manufactured products are not available or present at very small amount and very high prices, then construction, transportation, telecommunications, trading and other service sub-sectors will have little or no output.

The analogy may also look like this. Raw and live chicken production is counted in the agriculture sector. Once it becomes litson manok or chicken adobo or chicken curry in food shops, it is counted under the service sector. If it is transformed into chicken cubes or chicken fillet or noodles, it is counted in the manufacturing and industry sector. Valuation in the industry and service sectors is a lot higher than those in the agriculture sector. A P115 per kilo live chicken raised for a month in the chicken farm can become P230 or higher as litson manok or a doubling of gross value after just a few hours.

Thus, raw, lower value mineral products actually have huge multiplier effects in the economy, from the agriculture to industry to service sectors. Even a 1 percent mining share of GDP can enable all the other  sectors to have high share of GDP.

Below is a breakdown of output by the three producing sectors, namely LSMM, SSM and LNMM. Data from the MGB

Table 2. Mining Industry Output and Taxes, 2008-2012

Note that those taxes and fees generally come from LSMM as the firms here are highly regulated and monitored by the BIR-DOF, MGB-DENR and local government units (LGUs). Such taxes, fees and royalties comprise between 43 to 60 percent of the LSMM’s net revenues.

The Philippines has been ranked by the US Geological Survey as being the biggest nickel producer worldwide. The estimated nickel reserves though is not very big compared to those in Australia, Brazil and Russia.

Table 3. Philippines as the world’s biggest nickel producer

During the open forum, I suggested that the BIR-DOF, MGB-DENR and LGUs-DILG should make data on  mining taxes, fees and royalties become more easily available online. Lack of updated and official data makes the anti-mining sentiment and biases become more convoluted. For instance, even known economist Ma’am Winnie Monsod is misinformed to insist that the government collects only two percent excise tax from LSMM which she says is peanuts, and proposed the Malampaya natural gas revenue sharing arrangement where the government gets 60 percent of the net revenues. The IMF says that if the Average Effective Tax Rate (AETR) formula is applied, LSMM in the country is paying up to 60 percent of their net revenues to the government, both local and national.

There is huge industrial potential for the country given our high mineral deposit and wealth. If those companies and investors are following existing environmental regulations, paying various taxes, fees and royalties, spending extra for the community via social development management program (SDMP), and creating lots of direct, indirect and auxiliary jobs to the people especially in rural municipalities and provinces, then they should not be demonized by the public.

With a $0.9 to 1.0 trillion value of mineral potentials, with potential net revenues of $400 billion (about 60 percent of gross production goes to operating costs like personnel salaries, depreciation of expensive capital equipment, fuel and electricity, etc.), and if government will collect about half of that in the form of taxes, fees and royalties, that is a whooping $200 billion revenues or P8.6 trillion at P43/$ exchange rate.

This amount can practically wipe out the total public debt of P5.45 trillion as of June 2013. It is a substantial or giant revenue that the government and the rest of society should recognize.

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See also: 

Mining 32: Output Contraction in 1st Half 2013, September 02, 2013 

Mining 33: Job Creation, Taxes and the Politics of Envy, September 13, 2014 

Mining 34: EITI, Taxes and Other Costs of Regulations, September 24, 2013 

Mining 35: Opposition to Mining, Where Do They Come From?, October 15, 2013

Mining 35: Opposition to Mining, Where Do They Come From?

In my previous article in this subject, I said that the EITI Secretariat has declined my belated application to join their conference last month. Upon the request of a friend who is a DOF official, the secretariat invited me to attend the conference of Day 2.

Below is my article today in Mining Week.
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Other than the usual left-leaning and anti-capitalism, anti-globalization groups, there are many other camps and individuals who oppose large-scale mining (metallic and non-metallic) for other reasons. What are these reasons and where do they come from?

During the “Conference on the Adoption of the 2013 EITI Standards” last September 27, 2013 at Crowne Plaza in Ortigas, sponsored by the Extractive Industries Transparency Initiative (EITI) International Secretariat and the World Bank, Dr. Elmer Billedo, Assistant Director of the Mines and Geosciences Bureau (MGB, DENR) was one of the speakers. Among the slides he showed was this one.

It is a useful illustration and it shows that the major groups of people who oppose the industry come from the following:

1. Politics and politicians, either for personal or professional reasons, the painted or assumed destructiveness of mining is exaggerated, begging for more regulations and taxation on top of existing ones, if not outright banning of LSM.

2. Propaganda groups, especially the anti-capitalism groups who dislike big corporations and multinational firms extracting rocks and soil from the Philippines and exported to other countries.

3. Lack of information by the public, media and other civil society organizations. Many are not aware that “responsible mining” is possible and is in fact happening in many large mining projects in the country.

4. Legacy mines, like the mining disaster in Marinduque about two decades ago. Then the occasional fatal landslides in Mt. Diwalwal and other areas where small scale mining (SSM) is the dominant practice, but is attributed to large scale mining (LSM).

5. Current violations of environmental standards, by some LSM companies, and is more rampant among SSM but is attributed by the public to LSM.

6. Lack of benefits, coming from some mine workers themselves and residents of the mining village. Sometimes this is an objective assessment but oftentimes, it is a subjective and biased opinion. For instance, some residents who are not connected with the mining company may feel that they should be “entitled” too to some benefits like free or highly subsidized healthcare, education, given by the mining  firm.

As a result of such opposition, (a) local government units (LGUs) are issuing more ordinances and resolutions against mining; (b) Congress is considering Bills declaring “mining-free” provinces, cities and municipalities; (c) MGB-DENR and BIR-DOF are increasing regulatory requirements and taxes; and (d)

Advocacy groups  are filing complaints and cases against mining projects, both in Congress and the Supreme Court.

During the open forum, I spoke and shared my observation that many anti-mining groups are easy to address if they are shown with lots of data, that responsible mining can and does exist, that LSM are already over-taxed, that the total area under LSM is very small compared to the total land area of the country. That I was surprised that my former teacher at the UP School of Economics (UPSE), Prof. Winnie Monsod, is misinformed and thinks that mining tax is only the 2 percent excise tax, that is why she is advocating that the Malampaya natural gas sharing scheme of 60-40 of net revenues going to the government and the private developer respectively, should also apply in mining.

Then I suggested that the MGB, DOF and DILG should produce more detailed data available online, like breakdown of mining taxes and fees collected by both national and local governments from LSM, SSM and large non-metallic mining. If the public can see these data for themselves, negative sentiments against LSM and mining in general can decline.

The participation of the Philippines at the EITI is a good move. The regulated and taxed companies can declare how much they have paid to the barangay, city/municipal and provincial governments, the royalties and social development management projects (SDMP) given to communities and people’s cooperatives, and to the MGB, BIR, BOC, SEC and other national agencies. These agencies will also be forced to report how much they collected from each mining enterprise, small and big alike.

Of course there are other costs that are not reported by the mining firms. Like special and monetary requests by the LGUs and national agencies, otherwise these government officials will harass the mining firm, if not disallow its continued operation. This data is hard to produce.

Nonetheless, information is empowerment. The more information that will be available to the public, the lesser will be the misconception and unnecessary opposition  to mining.

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See also: 

Mining 31: Prof. Winnie Monsod's Faulty Tax Proposal, August 22, 2013 

Mining 32: Output Contraction in 1st Half 2013, September 02, 2013 

Mining 33: Job Creation, Taxes and the Politics of Envy, September 13, 2014 

Mining 34: EITI, Taxes and Other Costs of Regulations, September 24, 2013

Mining 34: EITI, Taxes and Other Costs of Regulations

* This is my article yesterday in Mining Week.
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The World Bank and the Extractive Industries Transparency Initiative (EITI) International Secretariat will hold a “Conference on the Adoption of the 2013 EITI Standards” this coming 26-27 September 2013, at Crowne Plaza Galleria in Ortigas.

EITI is a non-government, non-UN, non-foreign aid international system that requires both the government and the private enterprises in the extractive industry (petroleum, gas, mining) to report among others, information like how much government has collected and how much private enterprises have paid to the government, both local and national. Exploration and operating contracts will also be reported and published online. The goal is to make both the regulator (government) and regulated (private enterprises) to become transparent to each other and be more accountable to the rest of society.

The World Bank is interested in this initiative mainly on the taxation aspect. The WB, along with the ADB, UN and other foreign aid, have lots of “inclusive growth” programs and projects in many developing countries, to be funded by “inclusive pockets” of course. In a recent Philippine Development Report 2013 for instance, the WB has proposed three new taxation measures. One is creating a land surtax, two is raising petroleum tax, and three is further raising the sin tax. See Why the WB report on PH jobs is alarmist, if not simplistic.

One glaring characteristic of Philippine taxation of the mining industry is the double standard applied on large scale metallic mining (LSMM) vs. small scale gold mining (SSGM). Probably almost 100 percent of all mining tax collections by the Bureau of Internal Revenue (BIR) and fees by the Bureau of Mines and Geosciences (BMG) come from LSMM + large non-metallic mining. SSGM pay only local taxes and fees to LGUs.

Output by SSGM is not small. Gross value production by LSMM and SSGM for 2008 were P29.7 B and P33.9 B respectively. In 2010, P69.1 B and P42.9 B respectively; and in 2011, P88.0 B and P34.1 B, respectively.

In the literatures by EITI International and EITI Philippines that I saw, there is very little mention about making SSGM be as transparent and accountable as LSMM. There is the implicit and wrong equation that “mining = LSMM”.

Actual costs of regulation to the private enterprises are composed of (a) cost of compliance (getting external accounting, auditing and law firms), (b) cost of “compromises” with regulators, including dealing with extortion and  special favors/requests, and (c) actual taxes and fees paid.

What is often noted is (c) only, this will be reported under the EITI system. The public do not know the costs of (a) and (b). Hence, actual costs to private enterprises are larger than what is reported.

Consider also the cost to a firm that has spent substantial amount complying with (a) national regulations (SEC, BIR and BOC, MGB-DENR, DOLE, etc.) plus (b) local regulations plus (c) social development management program (SDMP) while doing exploration and research activities, then limited operations and extraction. Then rules are suddenly changed in the middle either by the national government (like EO 79) or by the local government (like the S. Cotabato ruling on Tampakan project), and some of those players will consider pulling out or reducing the project scope, reducing also employment, SDMP, and so on.

Such costs are not likely to be captured by the EITI system as it is focused on existing operating firms.

Another cost is when a big mining firm that pays various taxes and fees is further being extorted by rebels or other armed bandits. Or worse, its expensive machineries and facilities were destroyed and burned by those groups and the government armed forces have done little or nothing to prevent such large scale destruction of properties.

I wrote/tweeted EITI Philippines last week and expressed interest to attend their conference and hopefully bring the above and other issues. They replied that “unfortunately slots for the event have already been filled. Please check our website, fb &twitter accounts for upcoming events.”

Let the EITI system become a drive to institutionalize real and meaningful transparency and accountability in the extractive sector. The system should not be used as a new harassment scheme against LSMM by the vocal and militant environmental NGOs and media that will press for more public disclosure of their data, while the same vocal and militant NGOs and media will remain silent on the non-transparency and non-accountability of SSGM. Or at least in pressuring municipal and provincial governments to apply existing environmental  regulations and revenue charges to SSGM.

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See also: 

Mining 22: Philippines as EITI Candidate, June 05, 2013

Mining 31: Prof. Winnie Monsod's Faulty Tax Proposal, August 22, 2013 

Mining 32: Output Contraction in 1st Half 2013, September 02, 2013 

Mining 33: Job Creation, Taxes and the Politics of Envy, September 13, 2014

Mining 22: Philippines as EITI Candidate

A friend, Stephen Cutler, called my attention to this press statement by US Ambassador to the Philippines, Harry Thomas, Jr. In a message , Congratulations, Philippines: Raising the Bar on ExtractiveResources Transparency and Accountability, the Ambassador said,

…  On May 22, I was pleased to see the Philippines became a candidate member at the latest Extractive Industries Transparency Initiative (EITI) Global Conference held in Sydney, Australia.   EITI is a voluntary international system through which governments reaffirm their commitment to accountability and transparency for their country’s oil, gas, and mining industries. By working together, the government, private sector, and civil society are achieving broader agreement on higher standards for the extractive industry. 

   The concept behind EITI is simple. Member governments partner with the private sector and civil society organizations to publish an annual report that compares two figures: revenues that the government reports it received, with what extractive companies report they have paid for their oil, gas, and mining activities. This system incentivizes honesty and provides data necessary for accountability. 

 … at the latest EITI Conference recently held in Sydney, members formally agreed on a set of strategic changes to EITI. 

   The aim is to make EITI reporting more comprehensive, reliable, and easier to analyze. The reforms will also require governments to provide citizens basic information about the extractives sector in their country, including what licenses have been awarded and to whom, how much is being produced, and the role of state-owned oil companies in the sector.  In addition, EITI will encourage governments to voluntarily go one step further by publishing their actual contracts with companies. Transparency benefits U.S. companies because it helps them to better understand a country’s operating environment as they consider investment decisions.

This is a good development. Not only payment and collections will be published and made transparent, but also existing and new contracts entered by governments. Meaning if there are mining or oil drilling operations and they are not found in the EITI website (http://eiti.org/), that means these are illegal or unauthorized or under-reported activities.

I checked the EITI website, one report there says:

… The decision of the Board on the status of the Philippines in full: 

 The EITI Board admits the Philippines as an EITI Candidate country on 22 May 2013. In accordance with the EITI Rules, the Philippines is required to publish their first EITI Report within one year and six months of becoming a Candidate (by 22 November  2014) and to submit a final (MSG endorsed) Validation Report to the Board within two years and six months of becoming a Candidate (by 22 November 2015). Failure to meet either of these deadlines will result in delisting. 

 As an EITI Candidate country, the Philippines has to start disclosing payments from its extractives sector, and meet all the requirements in the EITI standard within 2.5 years to become EITI Compliant.

The advantage of EITI is that it is not owned or controlled by the UN or other multilaterals or a particular government. Private companies in the extractive sector and governments are both members and they both pay for the funding and maintenance of this body. Hence, regulations and requirements are jointly set and not just imposed by any government, national or multilateral body. 

Two and a half years before the Philippines -- government and the mining and oil companies here -- can become EITI Compliant (or a member?), this is a good opportunity to unmask certain hypocrisies by the Philippine government. The government, national and local units, usually say they welcome big investors to create lots of jobs here, responsible mining and extraction of resources, then puts up lots of regulations, restrictions and prohibitions. As if wishing that only angels, not humans, should engage in mining and other extractive activities.

EITI membership will force the Philippines and other governments to declare publicly how much they (both national and local government units) have collected (taxes, fees, fines and mandatory contributions) from the extractive companies, and the latter will declare how much they have paid to the government. I wish these companies will also declare how much they paid to expensive law firms and accounting firms, just to make sure they have properly complied with various government agencies (city government, provincial government, BIR, SEC, MGB-DENR, DOLE, DOH, etc.) for various taxation, labor, health, environmental standards, and avoid punitive penalties. When regulations are too many, the cost of compliance can be as big if not bigger than the actual taxes paid.

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See also:
Mining 18: Nickel, Copper, Gold Production, May 09, 2013
Mining 19: Rule of Men, Not Weak State, May 13, 2013 
Mining 20: Miscellaneous Comments on Mining, May 18, 2013 
Mining 21: Chile Policies, May 21, 2013