BWorld 168, Uncertainty in mining policy and the Manicani debate

* This is my column in BusinessWorld last November 23, 2017.

The Duterte administration’s mining policy shows continuing uncertainty.

First, ex-DENR secretary Gina Lopez issued a Department Administrative Order (DAO 2017-10) banning open-pit mining for metallic products.

After her rejection by the Commission on Appointments (CA) last May, it was expected that her successor, Sec. Roy Cimatu, would recall or reverse the order. He did not. So the Mining Industry Coordinating Council (MICC) formally recommended the lifting of the ban last October. Then President Duterte himself declared that the ban remains.

This roller-coaster style in policy is captured in recent stories in BusinessWorld, their publication date this year is indicated:

1. “End open-pit mining ban — MICC” (Oct.25)

2. “Miners face longer wait for end to open-pit ban” (Nov. 21)

3. “Better prices push up value of metal production even as volumes drop” (Nov.22)

The last report mitigates the gloom in the industry, that while metallic mineral output in the country from January-September 2017 has declined, world prices of copper, nickel and silver have increased, according to the Mines and Geosciences Bureau (MGB).

MINERAL RENTS
This leads us to the big mining potential of the Philippines compared to its neighbors in North and Southeast Asia. One indicator of such potential is mineral rents, defined by the World Bank as “the difference between the value of production for a stock of minerals at world prices and their total costs of production. Minerals included in the calculation are tin, gold, lead, zinc, iron, copper, nickel, silver, bauxite, and phosphate.”

In 2015 in the ASEAN, only Laos has a higher mineral rents/GDP ratio than the Philippines. Even Indonesia and China, which are abundant in mineral resources, have lower ratio than the Philippines. Many African countries have very high ratio, partly because they have high output and partly because they have a low denominator, GDP size (see table).

Russia’s ratio that year was 0.9, Canada 0.5%, US 0.1%. World average was 0.4%, all lower than the Philippines. Australia indeed is a good model in developing the industry with high ratio despite its huge denominator.

MANICANI ISLAND MINING DEBATE
Among the recent high profile debates in the industry is the renewal of the Mining Production Sharing Agreement (MPSA) of Hinatuan Mining Corp. (HMC) in Manicani Island, municipality of Guiuan, province of Eastern Samar. The current MPSA (1992-2017) will expire this year and hence, a renewal is applied by the company.

Some facts and numbers here which I got from a friend, BS Geology student in UP Diliman, Ralph Abainza, who went to Manicani last Nov. 14-15.

• MPSA covers 420 hectares or 36% of Manicani Island’s total land area of 1,165 hectares but actual mine area is less than 3% of total land area, the other 33% are roads, community projects like school buildings, housing, offices and equipment area, etc.

• Of the 25 years MPSA, active but discontinuous mine operations occurred only for an accumulated 5 years.

• Island’s soil is mainly LATERITIC, highly mineralized that agriculture may survive but will never be sustainable nor profitable.

• Barangay surveys of residents in Manicani showed a 85% — 15% approval vs disapproval of mining in the island.

AUSTRALIA MINING MODEL
Australia is a good model for the Philippines and other countries. Mining occupies only 0.02% of total land area but the sector contributes 9% of GDP — compare that with the Philippines’ exports of millions of OFWs who contribute 10% of GDP annually. There are also no “small scale” mining in Australia, only big corporate operations that are easier to monitor for compliance with mining laws by the government.

The sector is heavily mechanized, monster machines, and engines at work at open-pit mines, giving high-paying jobs to tens or hundreds of thousands of people, and can give lots of community projects to cover even nonworkers of the industry.

The Philippine government should learn more from rich and developed Australia. There are more mining entrepreneurs, investors, workers, community beneficiaries and tax revenues there than anti-mining activists.

With this in mind, we should just strictly implement existing laws and not change them arbitrarily depending on the whims of the Environment secretary or the President. We should have a rule of law, not arbitrary rule of men.

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See also: 
BWorld 162, Open pit mines and open economy, November 05, 2017 

BWorld 165, Airport transfers and tourism, November 25, 2017
BWorld 166, US energy trading and implications for Asia and Philippines, November 26, 2017 

BWorld 167, Multilateral, bilateral, or unilateral liberalization, November 27, 2017

BWorld 140, Mineral rent and taxation

* This is my paper in BusinessWorld last Wednesday.

The Philippines’ mining potential is inversely proportional to government mining policies.

Until about two years ago, the debate was on how much tax hike would be imposed on mining. Then early this year, the debate shifted to outright suspension and cancellation of operations by many mining companies. After the Commission on Appointments rejection of Ms. Gina Lopez as DENR secretary last May 3, the uncertainties have greatly subsided and certain sectors are reviving the old debate -- how much tax increases to impose on big mining companies.

Many of the anti-mining sentiments and groups will be jumping on this issue. Very high taxes on metallic mining companies will produce three results that are all favorable to them: (a) some operating companies will be forced to close down especially when global metallic prices are low; (b) planned projects or expansion of existing mines will be discontinued; and (c) companies that continue to operate will be forced to somehow underdeclare output and these groups will further demonize them and lobby for their closure.

In some developed countries like the US, Canada, and Australia, it seems that even big environmentalist groups do not lobby for mining closure but their counterparts in the Philippines are so adamant in this philosophical nirvana.

Consider some data for member-countries of the Asia-Pacific Economic Cooperation (APEC) below. Two technical terms are used:

1. Mineral rent: the difference between the value of production for a stock of minerals at world prices and their total costs of production. This rent is not the same as value added to GDP. Rent is pure profit (price minus marginal cost multiplied by quantity) while value-added is the sum of earnings from production that are due to residents. Thus, salaries of mine workers are included in GDP value-added but not in rent.

2. Mining Contribution Index (MCI) is calculated based on aspects of mining contribution to national economies, composite for three variables: (a) Mineral export contribution in 2010 as percent of total merchandise exports, (b) Increase/decrease in mineral export contribution 2005 to 2010, and; (c) Mineral production value as a percentage of GDP in 2010.

The numbers show the following:

1. China being a powerhouse producer of copper, silver, zinc, lead, and gold is the world’s biggest mining country despite having a low MCI. Australia comes second and its output is almost twelve times than that of the Philippines.

2. Countries on the “ring side” of the Pacific Rim generally have higher MCI -- Australia, Chile, Papua New Guinea, Peru -- than those a bit far from the Rim.

3. The Philippines is estimated to have $1 trillion-mining potential yet its actual output in a year is low, only $7 billion in 2013, much of it from nickel production as the country is the world’s second biggest producer of nickel, next only to Indonesia.

So a rich and developed Australia allows and optimizes mining while a poor Philippines with big potential for mining discourages it, at least in the minds of many environmentalists and some accidental DENR officials.

Responsible mining is happening here and abroad. So long as local mining companies follow the law in environmental protection and rehabilitation, and doing plenty of community projects as specified by law, they should not be demonized and over-taxed and/or over-bureaucratized.

The Philippine government can improve the mining attractiveness of the country via two important taxation policies:

One, do not further increase taxes as existing taxes, fees, royalties, bonds, fines, mandatory contributions, mandatory community projects, and environmental rehabilitation are already high and plentiful.

Two, the government should also ensure stable tax rates, or reduce demand for ad hoc taxes on excess or windfall profits as there are also no ad hoc tax breaks or subsidies for excess losses when world metal prices are low. Tax stability is more useful for private players than giving them certain fiscal privileges because these policies may later be challenged and reversed.

Having rule of law in mining audit, environmental rehabilitation, and tax stability is the single most important function of any government in economies with proven high mining potential. The Philippine government should take this path.

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See also:
BWorld 137, ASEAN trade expansion and RCEP, June 20, 2017 
BWorld 138, PPP vs ODA, Part 2, June 21, 2017 
BWorld 139, State central planning vs household decentralized planning, June 22, 2017