BWorld 122, Six more myths in the mining debate

* This is my article in BusinessWorld last March 29, 2017.

A piece that I wrote for this space, “Seven myths in the mining debate” (March 15), has attracted attention from many readers, expressing either support or disagreement. One even sent an angry comment via e-mail. So I will add additional myths in the continuing debate on the issue.

To review, here are the seven myths discussed in the earlier article:

1. Mining contributes small, only P70 billion a year in gross value added (GVA).

2. Mining tax payment is small at only P3 billion a year.

3. Employment share of mining is very small at only around 100,000 workers.

4. Very small benefits, better stop all mining activities.

5. Open pit mining must be banned anywhere.

6. Closure of many mining firms means better investment environment.

7. Mining is entirely useless, we should have none of it.

HERE ARE ADDITIONAL MYTHS.

1 Large-scale mining covers a huge area of the Philippines.

Wrong. Only 2.3% of the Philippines’ total land area is covered by mining permits composed of 319 Mineral Production Sharing Agreement (MPSA) and five Financial or Technical Assistance Agreement (FTAA). Of this figure, only 0.27% of land area is actively mined, the rest are for roads, offices, houses, hospitals, schools, other community projects; mined out and rehabilitated areas, or for future mining. (See table.) 

What made the impression of “huge mining areas” include those under small scale mines (SSM) like in Mt. Diwalwal.

2 Large-scale mining is the biggest cause of soil erosion.

Wrong. Very often, it is deforestation or conversion of forest land into pasture land, agriculture land, or simply the endless cutting of trees in public forests.

The DENR is not exactly known to efficiently address these problems because it prefers to take more political noise in mining.

3 More mining areas result in more poverty.

Generally wrong. The top 20 poorest provinces in the Philippines and their poverty incidence are: (1) Tawi-Tawi 78.9%, (2) Zamboanga Del Norte 63.0%, (3) Maguindanao 62.0%, (4) Apayao 57.5%, (5) Surigao Del Norte 53.2%, (6) Lanao Del Sur 52.5%, (7) Northern Samar 52.2%, (8) Masbate 51.0%, (9) Abra 50.1%, and (10) Misamis Occidental 48.8%.

(11) Agusan Del Sur 48.7%, (12) Oriental Mindoro 47.1%, (13) Sulu 46.5%, (13) Occidental Mindoro 46.5%, (15) Kalinga 45.8%, (16) Surigao Del Sur 45.4%, (17) Mountain Province 45.0%, (18) Sarangani 44.8%, (19) Lanao Del Norte 44.1%, and (20) Negros Oriental 43.7%. (Source: NEDA, Philippine Development Plan 2017-2022).

Of these, only five host big mining companies (with an area of at least 4,000 hectares): Zamboanga del Norte (2 firms), Surigao del Norte (5 firms), Surigao del Sur (3 firms), and Mindoro Occidental and Oriental (2 firms).

These 21 provinces hosting big mining companies (at least 4,000 hectares) are not in the Top 20 poorest:, Zamboanga del Sur (Siennalyn Gold, TVI, 168 Ferum, Vilor), Sultan Kudarat (GRCO Isulan), Agusan del Norte (Agata), Davao Oriental (Hallmark, Austral-Asia Link, Dabawenyo Minerals, Sinophil, Oro East), Dinagat Islands (East Coast), Compostela Valley (Napnapan), Sarangani (Hard Rock).

Capiz and Iloilo (Teresa Marble, Parvis Gold,), Samar (Alumina, Bauxite), Leyte (Explosive Consult., Fastem Construction, Strong Built), Palawan (C. Palawan, Palawan Star, Pyramid Hill, Narra Nickel), Quezon and Camarines Sur (VIL Mines), Benguet (Philex), Zambales (Mina Tierra, Eramen), Cagayan (Peniel, JVDC, T&T, J&M), Nueva Vizcaya and Quirino (Oceana Gold), Ilocos Sur and Pangasinan (Altamina Exploration).

4 Mining can stop in the Philippines but continues in other countries.

Wrong. Mining is either good or bad; if bad then mining should stop worldwide, the same way that anti-coal campaigners want all coal power plants to close worldwide, not just in the Philippines. If mining is good abroad then the good practices should be adopted here. The law in post-Marcopper mining disaster in Marinduque, the Philippine Mining Act of 1995 has been hailed by many countries as the one of the world’s first stringent mining laws.

5 Open pit mines are destructive and not done in developed countries.

Wrong. Six of the 10 biggest and deepest open mines in the world are found in the US (Bingham Canyon, Hull-Rust-Mahoning), Canada (Diavik Diamond), Australia (Super Pit) and Russia (Mir Diamond Mine, Udachny Diamond). The other four are found in S. Africa (Kimberly Diamond), Indonesia (Grasberg Mine), and Chile (Chuquicamata Copper, Escondida Copper).

6 DENR Secretary’s closure of mining firms follows the rule of law.

Wrong. Secretary Gina Lopez has disregarded procedures and even the recommendations of her technical staff. As pointed out by Rep. Josephine Sato, “We are the legislature; if you’re not happy with the law tell us we will review and revise if necessary but you can’t legislate on your own...”

Mining practices that follow international and national regulations should continue and contribute to economic modernization and job creation. Those that violate these laws deserve suspension or closure.

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See also: 

BWorld 19, Taxation and regulations in PH mining industry, September 24, 2015

BWorld 119, Seven myths in the mining debate, April 07, 2017

BWorld 120, Five myths of solar-wind energy, April 08, 2017 

BWorld 121, The PH tax reform bill and tax policies in East Asia, April 10, 2017

Mining 39: Taxes, SDMP and Small Scale Mines

After I posted my previous article, Canada's $7.8 B a year tax revenues vs PH's $0.3 B  last month in my fb wall, several friends commented on it. Some lively exchanges here.

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December 17-18, 2013.

Andrew. Yep, pretty sad. I note that Indophil/Xstrata's project is being delayed until 2019 thanks to an OC mining prohibition. Mind you, with that large-scale project, in this economy, it was always probably going to be delayed until then anyway. In fairness though, mining doesn't proceed so easily in populated areas like East Coast Aust. i.e. Coal mining conflicts with wineries and farming. Most mines in Australia are so far from cities...even 200km from a significant urban centre of say 20,000 people.

Jayant. Nonoy: I don't think why the national government should be ashamed. Filipinos are very muddleheaded about this matter. They don't understand mining but want to tax it to death. They get what they deserve--a muddleheaded, bad government.

What the Philippines has ended up with? The companies that are there are run by crooks, for the legal problems make it extremely difficult to make money there. So you have TVI Pacific in Mindanao, who have their own armed forces. And recently a bunch of crooked people--B2Gold--have bought a gold mine. This is what you get for making life difficult for good businessmen. 

Andrew. Mining is highly taxed in Australia. In fact, taxes are 50% (oil, gas, iron ore & coal) compared to 3-5% for Google. Its really the landowner conflicts and legal uncertainty...more than taxes. Lower taxes for other minerals. And of course wage rates are very high.

Stephen. Well it’s what the CBCP and China want. China would prefer to keep small scale miners.

Andrew. Not sure that is true Stephen, I often hear about China forcing the closure of small scale mines. I think its a regulatory nightmare, but they get away with it by paying kickbacks. Maybe you are talking of Philippines?

Nonoy Oplas Thanks Andrew, Jayant, Steve. Yes, it is anti-big business, anti-capitalism, anti-globalization, even anti-geological science sentiments, that dominate public opposition to mining. Some guys are not that anti-big business but they are socialist-leaning that they want the government and the communities to get 60%, or 80%, of the total revenues of mining firms to "fight poverty" or "fight climate change" and so on. One result is adverse selection problem in the sector. The players that people do not want to see doing mining -- those who just mine and mine with zero environmental rehabilitation afterwards, those who pay little or zero mining taxes -- are the ones who escape the various government regulations and prohibitions.

Stephen. Andrew...China is forcing the closure of small scale mines in the Philippines? How can they do that? Yes, I thought Nonoy's posting was focused on the Philippines. Sorry. In the Philippine context however, the small scale mines are reputed to sell all sorts of ore to buyers who represent China. Most sales are "off the books. "Since the LGU's are responsible for, but have not much capacity for, regulation of the small scale mines, they are essentially unregulated. Unlike the big mines.

Andrew. Stephen, I was just trying to make sense of what you said, based on the crackdowns on small, under-capitalised miners in China, who cause a lot of damage. The Philippines has them too, often with kickbacks to local mayors. I can conceive of Chinese titleholders in the Philippines, whether local Chinese or mainland/Singaporean entrepreneurs paying similar kickbacks to get mining done. But it was your assertion, and I must say your counterpoint clarifies. Thanks.

Stephen. Thanks, Andrew. One doesn't see much in the way of crackdowns and enforcement on small scale miners in the Philippines. Well...mother nature "spanks" them from time to time with landslides, but not so much from the local government people who are their "regulators." I've heard of the payments made "off the books" to those regulators. Most of the gold and other ore that is mined in the "small scale" system doesn't make it into the regulated market, so I'm told, but rather goes to a variety of buyers who represent China. Or so I'm told. But the large scale and centrally regulated mines are the focus of the "anti-mining" groups.

Andrew. Yeah, I think about 8mths I heard reported of a gun shoot-out as gold was reputedly run from Camarines Sur to Manila...the gold disappeared...if my memory serves me. It probably doesn't'. lol

Nonoy Oplas Now see this news report -- a 10% on gross revenues of mining firms, wow. 

Disadantage: this is big, whether the company makes a profit or not, govt share is already assured of its own share. 

Advantage: Govt will hopefully become less prohibitionist, less bureaucratic, in allowing more players or in allowing expansion by existing firms as govt will get sure money from them.

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 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 33: Job Creation, Taxes and the Politics of Envy

* This is my article today in Mining Week.

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A capital intensive industry would have less direct job creation compared to a labor-intensive one, say on a per hectare of land area. But workers in the former would have higher per capita income compared to the latter. This higher income per worker means higher consumption power, which means indirect job creation nearby. For instance, a person earning P30,000 a month in a province would have the extra resources to hire a nanny for the kids, compared to someone earning P20,000 a month or less.

In addition, higher productivity per hectare of land means higher revenues for a government as the company pays corporate income tax and other business taxes and fees, and the company personnel pay personal income tax, VAT and other consumption-based taxes.

In one study by an office in the Philippine Senate last year, this table was shown.

Source: Alonzo, Emmanuel, Issues Affecting the Mining Industry, Senate STSR Taxbits, July-August 2012.

Mining, large metallic mining especially, is a good example of a capital-intensive industry. Agriculture on the other hand, is largely a labor-intensive sector or industry. Small-scale gold mining is also another example of a labor-intensive industry.

In many barangays,  municipalities and cities where there are large scale metallic mining, while direct employment is created by the mining company, indirect employment is created by these mining company workers – carinderia and food shops, retail shops for clothing and apparel, appliances and electronic gadgets, furnitures and construction materials, school supplies, and so on.

On taxes, one report in Manila Standard last August 17, 2013,  PH mining taxes not competitive,

said that

A study by the International Monetary Fund undertaken last year shows that the existing tax structure applied in the Philippine mining industry for financial and technical assistance agreements “is not competitive internationally.”  

Using the internationally accepted average effective tax rate formula, the Philippine government’s share under the current mining fiscal regime is about 60 percent with the remaining 40 percent going to the mining contractor.  

The AETR is the percentage of the value of a mining project that the government receives in the form of taxes and royalties over the life of the mine.  

The IMF study, which compared AETRs across the globe, shows that the Philippine government’s share in the value of a mining project under the current fiscal regime of 60 percent is higher than those of Chile, Peru, Australia, Canada, and the United States, acknowledged as global mining industry leaders, which receive government shares of 40 percent to 45 percent.  

The IMF considers the current FTAA regime to be a “tough regime for investors compared to fiscal regimes of other countries.”

This is bad news for both existing and potential players. And there are moves to further raise mining taxes, for the large-scale metallic mining only. Small scale metallic mining, despite producing an estimated value of P43 billion in 2010 and P34 billion in 2011, pay little or zero to the national government. They pay only certain local taxes and imposed by the LGU concerned.

If large scale metallic mining companies already pay a lot of taxes and fees to both national and local government units (LGUs) while small scale metallic mining pay very little (see for instance, Mining Taxes and Prof. Winnie Monsod), why is the politics of envy remain strong until today?

In a new article in BusinessWorld last September 11, 2013, Old Tricks, famous economist and my former teacher at the UP School of Economics, Prof. Winnie Monsod wrote,

“… the incidence of poverty in the mining sector is much higher than the Philippine average (roughly twice, if memory serves).

… A 2004 paper by Scott Pegg of the University of Indianapolis, entitled “Mining and Poverty Reduction: Transforming rhetoric into reality”…. found that not only was per capita GDP growth negative for all three categories during that period, but that the growth rates were inversely associated with the level of dependence on mineral exports -- i.e., countries with substantial incomes from mining performance performed less well than countries with less income from mining. 

The list of the negative effects of mining (and other extractive industries) continues: countries that become heavily dependent on oil and mineral exports are become more vulnerable to economic shocks (e.g. price volatility), not to mention risk of “intrastate armed conflict,” social risks (price inflation, alcohol abuse, prostitution and child labor). Then there is corruption: Pegg cites the work of Leite and Weidmann (at the IMF) finding that “capital intensive natural resources are a major determinant of corruption.” Further, there is the matter of anti-democratic effects: Ross finds that oil and other minerals impede democracy, but other primary commodities -- which generate few or no rents, produce less export income for the state, and employ a larger fraction of the labor force -- do not….”

The first paragraph is easy to debunk. Capital intensive and higher income large metallic mining attracts lots of job seekers, both skilled and unskilled. Some would get a job either as direct employees of the mining company or indirect employment in various micro to medium size enterprises around the mining area. Some would not and become marginal and subsistence earning workers around the mining communities. The latter group is what is referred as “higher incidence of poverty” group of people.

The second paragraph would most likely refer to informal or small scale mining in those countries studied. There are many factors to explain a country’s fast or anemic economic growth. Like the quality and maturity of their institutions that observe the rule of law and penalizes corruption, frequent stealing or plunder. Compare for instance mining rich Indonesia and its neighbor, mining poor Singapore. The level of economic growth and wealth in the latter on a per capita basis is a lot higher than that in Indonesia. The same can be said of mining rich Philippines and its neighbors, mining poor Hong Kong and Taiwan.

The third paragraph is highly suspect as it does not recognize mining rich yet developed economies like Australia and Canada. And the statement has gathered many types of social ills associated with poverty and dragged them as contributed by mining or extractive-dependence. Non-mining rich countries like India, Pakistan and Bangladesh also have”price inflation, alcohol abuse, prostitution and child labor, corruption.”

Metallic mining is a big opportunity for the Philippines to create lots of jobs, direct and indirect; to expand exports and industrial production, and to raise tax revenues for the government without creating new tax measures or hiking existing tax rates. And in providing various social development projects (free private education, hospitals, roads, drainage, street lighting, livelihood training, etc.) for the communities near the mining area.

The politics of envy against large metallic mining should be exposed and corrected.

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See also:

Mining 29: On Open Pit Extraction, Tampakan and SDMP, August 06, 2013 

Mining 30: Some Conceptual Considerations in Mining Tax, August 15, 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 32: Output Contraction in 1st Half 2013

* This is my article in Mining Week yesterday.

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The continuing policy instability in the mining industry has one clear result, the continued decline in mining output, both metallic and non-metallic.

The National Statistical Coordination Board (NSCB) released this week the 2^nd Quarter 2013 macroeconomic data. The economy’s gross domestic product (GDP) was able to grow 7.7 percent in 2^nd Qtr 2013 compared to its year ago level. The main contributors to such high growth in the expenditures and demand side were investments or capital formation, public and private, followed by government consumption, then private household consumption.

By industrial origin, the main contributors to high GDP growth were construction and manufacturing, followed by financial intermediation and real estate. And the sectors that suffered output contraction were agriculture and mining, with growth rates of -1.1 percent and -2.7 percent respectively, in 2^nd Qtr 2013.

The NSCB data also shows sectoral breakdown of output. For mining, current prices of metallic mining output showed another two-digit percentage decline. From -16.8 percent in the 1^st half of 2011-2012, to -13.4 percent in the 1^st half of 2012-2013. Contraction was prominent in gold, nickel, other metallic and non-metallic mining.

The main contributors to an increase or decrease of output are (a) quantity output measured in metric tons, and (b) value of output measured in pesos, which is partly a result of currency appreciation or depreciation of the importing country of our raw mining products. Thus. it is possible that quantity output has remained the same or even slightly increased, but their peso value once exported has declined due to the peso appreciation compared to the US$, Japanese Yen, Chinese Yuan, the Euro, and other major global currencies.

Mining output in constant prices, ie, the effect of inflation has been removed, still showed output contraction, -2.4 percent in the 1^st half 2013 compared to their year ago output. The high output growth of chromium and copper mining was negated by high output contraction by other metallic and non-metallic mining.

Mining is a huge job creator in the provinces and rural barangays. And aside from direct job creation, taxes and fees paid to the national and local governments, large-scale mining also provides various direct social and economic services to the employees and residents of the mining permit areas.

The continuing policy instability in the mining sector are in the form of (a) proposed higher taxation, (b)  occasional mining moratorium, and (c) reversal by some local governments of a mining permit given by the EMB-DENR.

Such policy instability if not outright  contradictions are not good. They contribute to more business uncertainty and hence, discourages both existing and potential players, especially from big and responsible mining companies from the west.

Government should focus on promulgating the rule of law. Of ensuring that mining, environmental and taxation laws and regulations are strictly implemented and followed by both large and small-scale mining, by both local and multinational companies. Enforcing the laws strictly only to large scale mining while allowing small scale mining to get away with certain violations of mining, environmental and taxation laws is both wrong and unfair.

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See also:

Mining 28: Markets, Government and Rule of Law, July 31, 2013 

Mining 29: On Open Pit Extraction, Tampakan and SDMP, August 06, 2013 

Mining 30: Some Conceptual Considerations in Mining Tax, August 15, 2013 

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

Mining 31: Prof. Winnie Monsod's Faulty Tax Proposal

* This is my article today in Mining Week.

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In an opinion last August 09, 2013 at the Inquirer, Worse than the pork barrel scam, Prof. Winnie Monsod wrote,

Alas, there is an even greater scam that is being perpetrated on the Filipino people, beside which, in terms of orders of magnitude, the pork barrel pales in comparison.  A scam that allows the rich to get richer, and the poor to get screwed coming and going. A scam that affects not just the present generation, but also generations to come…. 

What humongous scam is this?  That foisted by the Philippine Mining Act of 1995 or Republic Act 7942.

Why is it a scam?  Because the Filipino people, as owners of the minerals, receive, under RA 7942, only TWO Percent of the value of the mined ore, as their share of the proceeds from the mining development enterprise.  Period.  And for so-called FTAAs (financial and technical assistance agreements), our share would consist of 50 percent of the net income of the operation after taxes—from which would be deducted all taxes paid to the government. Which effectively  reduces that 50 percent to, as former Environment Secretary Angel Reyes commented, “zero or nil,” and which Supreme Court Justice Antonio Carpio termed a “sham.”

Let us see official data from the MGB-DENR to check the validity of some points by my former teacher in UPSE in the mid-80s.

Table 1. Gross Production, Taxes and Fees Paid, by Philippine Mining Enterprises, 2008-2012

These facts then may have overlooked by my former teacher:

One, there are many taxes and fees imposed by the national government other than the excise tax: corporate income tax, VAT, royalties, documentary stamp tax, capital gains tax, withholding tax on dividends, withholding tax on interest payment, customs tax on imported vehicles, vehicle registration tax, MGB fee, other national taxes and fees.

Plus taxes and fees by local government units (LGUs): business tax, real property tax, community tax, occupation fee, extraction fee, wharfage fee, other taxes and fees. In 2011, government, national and local, collected P22.23 billion.

Two, small scale mining (SSM) do not pay national taxes, only small local fees, despite producing some P43 billion in 2010 and P34 billion in 2011. Just how small is tax payment by SSM to LGUs? Take the case of two of the most mineral-rich provinces in the country.

Table 2. Provincial Tax Collection from SSM, South Cotabato and Benguet, in P ‘000

	2007	2008	2009	2010	2011
S. Cotabato *		4,935.5	5,067.4	6,559.8	9,754.6
Benguet	6.7	10.7	8.1	22.1

* For South Cotabato, includes tax collection from sand and gravel.

Source: Alternative Forum for Research in Mindanao (AFRIM), March 2012, A Background on Small Scale Mining in Benguet and South Cotabato and their Impact on the Economy, the Environment and the Community. Original and official data are from S. Cotabato and Benguet provincial governments.

S. Cotabato is a mineral rich province. Tampakan copper-gold mining project is supposed to be located there but the provincial government stopped it as it will not allow open-pit mining. Yet the provincial government collected only P6.6 M in 2010 and P9.7 M in 2011 from SSM.

Benguet’s provincial collection was even smaller, only P8,100 in 2009 and P22,100 in 2010. From the same AFRIM report, it says that of the 69 SSM operators in 2010, only 8 were registered and only 5 have payment records.

Three, with such minuscule tax payment to LGUs and zero tax payment to the national government, it is safe to assume that up to 99 percent of the P22.23 billion collection in 2011, or P22 billion, were paid by large-scale metallic mining (LSMM) and non-metallic mining (NMM) firms.

We can construct this computation from the above numbers.

Table 3. Taxes and Fees Paid by LSMM and NMM, 2010 and 2011, in P Billion

	2010			2011
	LSMM	NMM	Total	LSMM	NMM	Total
Gross Revenue	69.1	33.3	102.4	88.0	41.1	129.1
Less Operating Cost (60% LSMM, 50% NMM)	41.5	16.6	58.1	52.8	20.5	73.3
Net Revenue	27.6	16.7	44.3	35.2	20.6	55.8
Taxes and Fees Paid *	11.9	1.5	13.4			22.0
Taxes/Net Revenue, Percent	43.1	9.0	30.2			39.4

* 2010 tax breakdown source: Dr. Artemio Disini, COMP. Presentation at the Philippine Economic Society Conference (PES), November 27, 2012, PICC, Manila.

No breakdown of tax payment among LSMM, NMM and SSM at the MGB data.

At 39.4 percent combined payment by LSMM and NMM in 2011, and seeing their proportional payment in 2010, it is safe to assume that LSMM paid about 50 percent of their net revenues to the government.

Four, on top of those taxes and fees paid, LSMM are also required by RA 7942, Chapter X, and DENR Administrative Order (DAO) 2010-21 (IRR of RA 7942) requires LSMM to have Social Development and Management Program (SDMP) for the communities where they are operating. In 2010 alone, this was more than half billion pesos from members of the Chamber of Mines of the Philippines (COMP) alone.

Since SDMP (school, hospital, livelihood trainings, tractors, etc.) is not counted as part of operating expenses, then it can be considered as additional tax and fee that goes direct to the people in the communities, not to the BIR and LGUs.

Prof. Monsod  was  silent on SSM in her article, she only lambasted LSMM. She further wrote,

About 10 or so years ago, the value placed on the metallic minerals in the country was something like $900 billion.  Assuming an exchange rate of P40=$1, we’re talking P36 trillion.  Subtracting development and production costs assumed to be 60 percent of that value, the gross profits before tax would be P14.4 trillion.

Using the Malampaya formula, the share of the government/Filipino people would come out to P8.64 trillion.  Using the 2-percent formula of the Philippine Mining Act, our share is P720 billion—or eight hundredths of one percent (0.08 percent) of what we would have gotten using Malampaya. In effect, if all those mineral resources had been extracted, under RA 7942, the loss to the Filipino people would be P7.92 trillion. And this does not even take into consideration the cost of the adverse environmental effects of mining.

The above computation by my former teacher is wrong, here is why.

One, based on taxes and fees paid by LSMM in 2010 (43 percent) and 2011 (about 50 percent), the tax multiplier to be used should be around 46 percent, not two percent.  A comparison of Prof. Monsod’s numbers vs more realistic numbers can be constructed.

Table 4. Projected Tax Revenues from the Philippines’ Metallic Potentials

	Monsod computation	Realistic numbers
Potential metallic mineral  value	P36.0 trillion	P36.0 trilion
Gross taxable profit	P14.4 trillion	P14.4 trillion
Government share	(a) Excise tax: 2% (b) Malampaya: 60%	(c) Average taxes + fees payment: 46 %
Projected tax collection	(a) P288 billion (she wrote P720 B) (b) P8.64 trillion	(c) P6.62 trillion
“Underpayment” to government	(b) – (a) = P8.35 trillion (she wrote P7.92 trillion)	(b) – (c) = P2.02 trillion

Two, even if an amendment to RA 7942 in mining taxation will be enacted and move from excise tax of two percent ++ existing taxes and fees to a Malampaya gas revenue sharing (government 60%, private/Shell 40%), the potential difference in revenue collection will only be around P2.02 trillion and not P8.35 or P7.92 trillion).

And if SDMP spending is included, the difference will narrow down to perhaps only P1.8 trillion.

Three, “adverse environmental effects of mining” applies mainly to practices by SSM (see Mt. Diwalwal for instance) and not by LSMM. But again, Prof. Monsod was silent about SSM in her article.

In short, Prof. Monsod’s paper is more about revenue exaggeration and alarmism and not based on realistic numbers based on existing revenue policies of the government, both national and local.

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See also:

Mining 27: Ensuring Responsible Mining from Small and Large Projects, July 19, 2013 

Mining 28: Markets, Government and Rule of Law, July 31, 2013 

Mining 29: On Open Pit Extraction, Tampakan and SDMP, August 06, 2013 

Mining 30: Some Conceptual Considerations in Mining Tax, August 15, 2013