Mining 12: Political Risks vs. Natural Risks

Mining, the science and engineering of discovering and extracting valuable minerals for various human needs, is among the high risk investments in the country and elsewhere around the world. Since almost all governments worldwide follow the Regalian doctrine saying that "all lands of the public domain belong to the State, that the State is the source of any asserted right to ownership of land and charged with the conservation of such patrimony", then all economic and business activities that deal with natural resource extraction must deal with governments.

Political risks therefore, can be high as there are various government agencies and institutions that a mining firm must deal with, from local to national government units, from the Executive to Legislative to the Judiciary. And even civil society organizations (CSOs) that can create certain negative publicity and political pressure can be part of the political risks.

Natural risks or those coming from nature are relatively easier to deal with. Heavy flooding and erosion of an open mining pit, collapse of a containment wall of mine tailings and the wastes spill into a river or the sea, collapse of structures in underground mining. These are engineering problems which have engineering solutions. Or financial problems with financial solutions, like getting an insurance to deal with natural calamities.

In a presentation, The Mining Industry in Emerging Markets: The Philippines made during the Mining Philippines 2012 Conference last September 18-20, 2012, these three risks were mentioned: 

Title Risk
A major part of legal risk is the nature of the right of the mining company in question to develop the deposit that forms the basis of the mining project... ownership right in minerals is vested in the central government, and all that can be obtained is a license to mine the minerals in question. 

Tax Risk Potential taxes assessable on a mining project are numerous. The local project company may be subject to a profits tax, value added tax ("VAT") on services, royalties or other forms of local taxation. In addition, there may be withholding taxes on interest and dividend payments made offshore. 

Political RiskThis is viewed by the majority of institutional investors as the number one risk in emerging markets. It might be difficult to quantify but its systemic impact is quite evident. Stability is the single biggest threat. How strong are the pertinent governing institutions? How rampant is corruption and bribery? The reason this is the greatest risk is that it can very well lead to cancellation of a project or confiscation and/or abandonment of an investment.

One example of political risk, well risk that has materialized and has created policy damage already, is portion of Executive Order (EO) 79 issued by the President on July 06, 2012. Among the new areas "closed to mining" under Sec. 1, c to e are:

• Prime agricultural lands, in addition to lands under CARP, strategic agriculture and fisheries development zones and fish refuge and sanctuaries as declared by the Secretary of the Department of Agriculture.
• Tourism development areas, as identified in the National Tourism Development Plan.
• Other critical areas, island ecosystems, and impact areas of mining that the DENR may identify.

These new restrictions are not found in the Mining Act of 1995 (RA 7942) or other laws created by Congress. Yet private players have to obey this new ruling and any existing project, or proposed and planned mining project on any of those four areas, will have to be shelved, even temporarily.

In a short article last April 05 in The Daily Tribune, EVP of the Chamber of Mines of the Philippines, Nelia Halcon, said among the recent risks that mining firms have to face here are:

... the moratorium imposed by the local government units (LGUs) on mining projects also needs to be addressed. She said the Mines and Geosciences Bureau (MGB) moratorium on the grant of mining tenements obscure investment promotion activities. 

“If the moratorium in the grant of new mining permits will remain, which is now on its third year, the chances for the mining industry to grow will not happen and will cancel out the progress made in the past,” she said.The country also has to come out with a clear-cut policy on small-scale mining, she said.

Halcon also cited the recently issued Circular by the Bureau of Internal Revenue (BIR) indicating that companies have to pay taxes during the recovery period. “Companies are still recouping their investments during this period. This will have great implications on projects that have recently been on stream as well as on new projects, further eroding investor confidence in the country,” she said. 

There you go. Uncertainties and political risks from (a) local government units, (b) Mines and Geosciences Bureau, (c) Bureau of Internal Revenue, (d) Office of the President itself. And uncertainties when the current Mining Act is revised.

On a related subject, a presentation by a friend JB Baylon, VP of Nickel Asia Corporation, entitled  Mining and Me! My personal discoveries about the Mining Industry as it addresses the challenges ahead made at DLSU Manila last January, showed these points.

I like the three photos on point #5. From a denuded, zero vegetation and mined-out area, to thick forest cover in just three years. Many people do not know that.

The main purpose of government is to promulgate the rule of law that will protect private property, like private investments. So when government creates new orders or regulations that significantly revise or contradict existing laws as created by Congress, this promotes not the rule of law, but the rule of men and the bureaucracy. These things need to change and government should stick to respecting laws as made by those entrusted by the Constitution to make laws, Congress.

Meanwhile, there is an interesting, well written article today about Rio Tuba written by a new friend, Carla Ravanes,  The Mine of the Matter.
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See also:
Mining 8: Rio Tuba Mining in South Palawan, March 17, 2013
Mining 9: Supreme Court Hearing on RA 7942, March 27, 2013
Mining 10: Urban Tailings vs. Mining Tailings, March 31, 2013
Mining 11: Big Projects in the US, UK, Canada and Australia, April 04, 2013

Mining 4: EO 79 and the MICC

* This is my article today in the online magazine,  http://www.thelobbyist.biz/perspectives/less-gorvernment/1329-minings-eo-79-the-promise-and-challenge
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The Office of the President released last Monday Executive Order (EO) 79 series 2012, entitled Institutionalizing and Implementing Reforms in the Philippine Mining Sector Providing Policies and Guidelines to Ensure Environmental Protection and Responsible Mining in the Utilization of Mineral Resources. Overall, the new law is positive because of its promotion of twin goals – environmental protection and responsible mining. In short, mining will continue to be allowed, not banned. The anti-mining groups are losers here.

Going through the new EO, the good points from the perspective of limited government, rule of law, and property rights protection, are the following:

One, the promise of “full enforcement of environmental standards in mining.” Rule of law, the law applies to all, rich and poor, big and small, no one is exempted from the law and no one can grant exemption from the provisions and penalties of the law. Among the most common observations is that while the large mining companies are heavily monitored and regulated by the DENR and local government units, the small-scale mines and miners are not. Thus, it is one thing to promise “full enforcement” and another to really implement this. But nonetheless, it is important that the philosophy of the rule of law is made as explicitly as possible.

The EO has expanded the list of “no go” zones where mining will be prohibited. Before the EO, these zones were only the protected areas; now, they include prime agricultural lands, lands under agrarian reform, tourism development areas, island ecosystems and other critical areas. This expansion of “no mining” areas will tie the hands of many local government units that issue small scale mining permits. This plus the “full enforcement of environmental standards” policy will be a big challenge in promulgating the rule of law culture in the country.

Two, creation of a one-stop-shop for all mining applications and procedures. This means reduced government bureaucracies and red tapes. To move from one agency to another, arranging meetings and securing compliances with various requirements, takes time and money. This plus other related expenses are something that the mining operators and applicants will pass on to their buyers (indirectly, more expensive cell phones, tv, cars, steel and other construction materials, other products of mining) or the local community and environment in the form of lesser spending for environmental regeneration.

The one-stop-shop will be created within six months after the effectivity of this EO, that should be enough time when a new legislation and hence, a stop on the moratorium on new mining permits will be lifted.

Three, joining the Extractive Industry Transparency Initiative (EITI) to promote more transparency and accountability. The Philippine government and the mining companies registered with it will soon be part of the annual reports of this initiative showing how accountable those governments and companies are in paying for natural resources and preserving or restoring them. Mining, petroleum and other companies in the extractive sector will report how much they have paid to the government while governments will report how much they have received from the companies. So reports of corruption or even extortion can be more easily detected.

On the other hand, what I find lacking in the new EO, are the following.

One, not enough transparency nationwide. Information like the names of companies and individuals engaged in mining, small to large-scale, their location and area coverage, how much they have paid to the government in various taxes and fees, accessible in the web, is not mentioned or assured in the EO. This information will help guide the public and the concerned government agencies in their “full enforcement of environmental standards in mining” function.

Two, among the functions of the Mining Industry Coordinatiing Council that was not listed in the EO, would have been to make the above information accessible to the public. If companies and the government will report their payment and receipt at the EITI, they should do the same with more details at the MICC.

The call by some sectors like the Alyansa Tigil Mina (ATM) and Palawan NGO Nework (PNNI) to have a “stronger” EO like declaring a permanent ban of mining in certain areas and provinces like Palawan is misguided. The EO has retained the moratorium on the granting of new mining agreements until a new Mining Act is enacted, they should recognize and support that provision.

Mining is a good industry. Without mining, we shall have no cell phones and computers, no tv and radio, no cars and buses, no tricycles and bicycles, no steel and buildings. To call for the banning of mining, or even restricting and banning large-scale mining, is wrong. Compared to small-scale or micro mining, it is large- and corporate mining that is more transparent and more accountable, that pays more revenues to both national and local governments.

The amount of corporate investments in mining is also huge. It was nearly $620 million last year despite the delay in new projects due to the moratorium on the granting of new mining agreements; the projection was $1.44 billion. This year, the projected investments will be $2.27 billion. People who would rather be unemployed or underemployed and ask for more CCT and other subsidies from the government, would become productive people receiving their regular pay and other allowances.

The government armed forces, the police and the army, should do their job in protecting private property like the huge mining equipment and other investments. The burning and looting by the NPA rebels in four mining companies in Mindanao two years ago should not have happened and should never happen again.

One good activity that the advocates of zero mining, or ban of corporate mining can do, is to campaign for very basic if not primitive lifestyle. Ride horses and carabaos instead of cars, have no cell phone or computer or TV as these are all products of mining. To limit the supply of something, one should just limit the demand.

This is not possible of course as even the most rabid anti-mining groups and leaders cannot live without the modern gadgets, appliances, cars and structures derived from mining. It is important therefore, that people should accept certain compromises in economic and environmental regulations.
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See also:
Mining 1: Mineral Rights, September 09, 2010
Mining 2: Insurgents and Mining Companies, October 25, 2011
Fat-Free Econ 3: Mining and Environmentalism, March 15, 2012
Mining 3: Debates on Mining, March 17, 2012