Fiscal Regime – Large Scale

Mineral Mining

Philippine Economic Society

November 14, 2014

Christian S. Monsod

I’m not here to argue that mining must

be banned. Constitution allows it (1)

Moreover, value of mineral wealth is huge – about one

trillion dollars.

While mining has never been a driver of our

development, we cannot discount its potential and must

find ways to realize it. But present mining framework has

clearly not worked.

No industrialization based on mineral wealth and an

inequitable imbalance in the distribution of its costs and

benefits.

Mining is a social justice issue…(2)

Mining operates in rural and mountainous areas

affects farmlands, rivers and shorelines where the

poor live and engage in livelihood – farmers,

indigenous peoples and subsistence fishermen.

Mining is not only about extraction but also

exhaustion of non-renewable mineral resources.

It is an activity that “privatize benefits and socialize

costs.”

Mining is a social justice issue (3)

Principle encapsulized in Art. XIII, Sec. 1

“…equitably diffusing wealth and political power

for the common good.”

Also Art. XII, Sec. 1 in goals of the economy:

“..more equitable distribution of opportunities,

income and wealth” is given more priority over

“sustained increase in the amount of goods and

services” and “productivity”.

But social justice makes good

economic sense as well…. (3)

NEDA Sec. Arsenio Balisacan says: no longer

debatable that sustained high growth is required

for poverty reduction and

Addressing high inequalities is pre-condition for

sustained high economic growth. Worst

inequalities are in ownership, or access to, land

and natural resources.

An equitable fiscal regime in mining

should consist of the following: (5)

1) equitable revenue sharing – recognizes that govt

has two distinct and separate roles in mining:

govt as sovereign taxing power – taxes, fees,

charges imposed on ALL individuals and

businesses

govt as owner of the minerals which is the main

input in mining, for which it should be paid its

full value.

An equitable fiscal regime should

consist of the following (6)

2) Equitable sharing of social, environmental and

economic costs (“externalities”)

3) Other financial considerations – incentives,

royalties, compensation;

4) Capacity of govt to regulate and enforce

environmental safeguards

5) Distribution/use of mining revenues

None of the 5 are present or are

inadequate in the mining regime (7)

On revenue sharing:

Govt share is capped

Mining contractor’s share is open-ended

which invariably results in its

appropriation of economic rent* –

(*excess or windfall profit over and above

all costs of production and a reasonable

return to investor.)

What it should be…. (8)

Mining contractor is never a co-owner. Its

share should be the one capped to a

reasonable return. A mining concession is

also a monopoly not only on minerals but also

water and forestry;

Govt share should be open-ended because

excess profit arises from an increase in the

price of minerals which it owns, since mining

extraction technology is relatively rigid.

MICC reforms: revenue sharing

major change in current regime (9)

a) Govt affirmed as owner ofminerals entitled to theeconomic rent

b) Gets 10% of gross revenues or55% of ANMR plus 60% of excessover 50% ANMR margin

c) In lieu of all national and localtaxes, CIT, royalty to ICCs, dutieson imports and LGU charges andfees

MICC reforms: scope of new

revenue sharing……… (10)

New revenue sharing now applies to both MPSA and FTAA

Basis for major correction: owner of minerals is not Filipino majority owner of company but the Filipino people.

Present regimes: MPSA – no compensation as owner. FTAA – 5% royalty but AGS watered down. SMI regime, even worse.

MICC reforms: on scope of

new regime ………. (11)

But new regime applies only to future projects. Existing MPSAs and FTAAs deemed protected by “sanctity of contract”. Disputable. SC -contract for natural resources is privilege subj. to policy changes.

Mining industry zone – carved out of LGUs. Disputable – under General Welfare power of LGUs.

MICC reforms: expanded scope

of environmental funds*..

(12)

No longer limited to damages from normal operations but now includes damages from disasters;

Perpetual coverage of maintenance and of disaster damages from permanent structures in both mining areas and impact areas.

*(MRF, MTF, RCF, MWTF, ETF, FMR/DF)

MICC reforms: no more BOI

incentives (13)

Repeals Sec. 90 that says that mining activities

shall always be included in the investment

priorities plan. Mining ”not a footloose

industry”. (major change)

Other provisions repealed - secs. 80 (MPSA

sharing), 81 (govt share), 83 (income tax), 84

(excise tax), 86 (occupation tax), 87 (manner of

payment of fees), 88 (allocation of occupation

fees), 92 (income tax carry-over) and 93

(accelerated depreciation) of R.A. 7942

Not among the reforms: (14)

The front-loading of incentives. Country is

shortchanged. Ex. TVI, Rapu-Rapu, SMI;

EIS: does not consider biodiversity, ethno-

diversity, cumulative effects such as on

water and crops;

Flawed procedures -EIS not under oath;

public hearings discretionary, documents in

English, 120 days vs 18 mos to 8 yrs in U.S.,

presumed approved if no action taken

Not among the reforms: govt

enforcement capacity … (15)

PDP 2011-2016 admits (page 320):

- ”..there is no standard resource and environmental valuation”

- “capacity for resource mgt is wanting”

- “enforcement of environmental law and policies is inadequate..Relevant environment laws, esp. those regulating the utilization of natural resources, are poorly implemented.”

Mining approvals should be suspended until these are corrected. Or history will repeat itself.

Then, there is putting to use the

analytical tools, such as….. (16)

WAVES - wealth accounting and ecological systems services to take account of environmental, social and economic factors recently launched by the NEDA

In other words, there is still unfinished business ahead if we are serious about reforms.

Mining industry’s objections to

MICC reforms … (17)

It results in an uncompetitive AETR and will

deter investments that result in “inclusive

growth”, i.e. jobs, more infrastructure, better

health and education in hinterlands, forward

and backward linkages, etc.

Firstly, what deters investments? (18)

According to World Investment Report and others – the factors that attract or deter investments are:

Adequate infrastructure

Skill levels (human capital)

Quality of the general regulatory framework

Clear Rules of the Game

Fiscal determination

Graft and corruption

With regard to mining investment,

the other considerations are……. (19)

World demand and supply situation for minerals and products;

Comparative quality of minerals and extraction cost

Rate of return (IRR) on investments (& AETR)

Ref: World Bank (2006) “Mining Royalties. A Global Study of Their Impact on Investors, Government, and Civil Society” by James Otto and others.

Secondly, has mining really

delivered all those benefits?

(20)

Historically, all economic indicators of

mining are low (labor-output ratio,

backward and forward linkages,

contribution to GDP, job generation,

contribution to govt revenues etc). It is

the second highest sector on poverty

incidence.

Socio-economic projects….(21)

The national impact of its socio-

community projects is negligible

because they cover only 711 out of

more than 42,000 barangays (data from

DENR-MGB)

What has mining delivered? (22)

The country is shortchanged by the mining

fiscal regime (ADB Study 2010 by Habito )

“Undermining the inclusiveness of future

growth is the nature of fiscal regime

“the largest share of value of output accrues

to operating surplus, amounting to 43%,

indicating that the benefits from mining

accrue primarily to investors…”

What about AETR? (23) According to study by African Development Bank (2013) on

gold, the Fraser Report (bible of mining industry) says that

the percentage of mining companies that would NOT invest

because of the fiscal regime do not appear large:

Country/Region Percentage

USA 3.8%

Latin America 10.6%

Eurasia - 5.3%

Canada 0.8%

Australia - 2.6%

Africa 3.4%

:

What about AETR? (24)

Comparing AETRs is a useful economic

tool but should not be central to our decision-making.

Neither is it central to the decision to invest of mining companies. But it’s probably a useful tactic to pit countries against one another. And divert attention from issue of economic rent

What really matters?…. (31)

If a mining Contractor is getting a

reasonable rate of return on its

investment, why should AETR matter at

all?

What does the Contractor consider as a

reasonable return? That’s what mining

companies asks for in every mining

application.

The IRR (plus WIR factors) more

relevant to decision-making …

(32)

The World Bank study (2006). The top 12 (of

24 countries), IRR range = 12.6% to maximum

of 15.7%;

Philippines (rank 5) IRR of 13.5% AETR of 45.3

Zimbabwe (rank 5) IRR of 13.5%, AETR of 39.8%

South Africa (rank 5) IRR of 13.5%, AETR of 45%

PNG (ranked 4) IRR of 13.8%, AETR of 42.7%

Chamber of Mines (33)

COM submission of IRR range of selected

countries: 12.7%-18.2% (average 15.9%).

Phil-MICC has lowest IRR (with AETR

81.4%); PNG has highest IRR (with AETR of

32.7%). Copper at $3.05/lb, gold at

1,200/oz.

Some projections ….. (34)

Projections based on data in SMI project study :

- current tax, copper $3/lb, gold $1300/oz, IRR= 21%

- current tax, copper $3.50/lb, gold 1400/oz, IRR = 27%

- at 50% ANMR, copper $3.50, gold 1400/oz,

IRR = 19%

If capital is leveraged w/ debt equity ratio at 60-40, return on equity would be higher.

How much in real money are

we talking about? (35)

Estimate of shift in government share of gross revenues by reason of the MICC proposal is estimated at about 2% from the present FTAA fiscal regime.

SMI gross sales over 18-yr period, base case is about $43 billion. The $860 million (43 x 2%) difference represents the additional revenue to govt and the reduction of the Contractor profit from $16b to $15.14b.

Status of MICC proposal (36)

Not yet filed with Congress. President still

waiting for more analysis from MICC-TWG.

Question to Mining Industry: If the TWG MICC-

IRR for mining contractor is about 15%, is that

a reasonable rate to the mining industry? Or is

the issue, not the level of the IRR, but the

economic rent in the 21%-27% ?

Conclusion (37)

Volatility of data suggests caution in interpreting figures, tax regimes are moving targets. And our legislators are easily taken by expert academic studies.

According to WIR, African Development Bank, ADB, IDEA and others, most countries are re-negotiating (and increasing) government total “take” and taking account of economic rent.

Are we serious about

reform? (38)

History shows mining has had its way with us for over 50 years with unacceptable results.

If we are serious about reform, we should pursue our own vision, as others are already doing.

Thank you.

Extra slides

No need for these

Two FTAA holders unwittingly

disclose excessive profits in

pending SC case

Sagittarius Mining

“….respondent SMI’s projection based on gold

price of US $1,500/oz and Copper at $3.5/lb is

that the 2-year average ratio (.n.b. net profit

to gross revenue) would be beween 0.40 to

0.69 – with a recovery period of 2.5 years.”

Since “AGS” (additional govt share) does not

arise until mining contractor fully recovers all

its investments and pre-operating expenses,

this implies that the rate of return during the 2

½ years would be 40%/year.

OceanaGold Mining: same

situation

“ OceanaGold undertook financial modeling….

the conclusion…there would in fact be an

additional 14.4 Billion going to the

government….it will happen in October 2016,

even before the 5-year recovery period.”

This implies a 33%-40% return on investment

during the recovery period.

Context of reforms…

Ample Foreign Exchange Reserves, thanks to OFWs

New analytical tools to measure environmental, social and economic costs (WAVES. TEV, multi-hazard and climate change mapping. etc). Promulgation of the Precautionary Principle by the SC and already agreed to by the Philippines in the Rio Convention.

Lower interest rate and cost of capital worldwide

Instead, the mining industry shifts to the bogus

argument of static comparison of Average Effective Tax

Rate (AETR) of other countries.

When almost all mineral countries are reviewing fiscal

regimes to increase their take due inequitable

agreements.

World Investment Report of 2012 -- need for new

generation of investment agreements to promote

inclusive growth and correct unfavorable contracts to

developing countries

Proposed corrective

measures.. (1)

(1) Govt as owner gets economic rent. Cap is applied

to mining contractor. Rate of return of Contractor

can admit of penalties and bonuses.

(2) Remove all fiscal incentives (mining not footloose

industry)

(3) With higher take, remove royalties paid to IPs and

social community projects which govt should provide

anyway. People will no longer feel indebted to mining

companies but to their government, and can express

real feelings about it. (CIT also removable with right

GR tax/Ec.rent approach)

(4) Rationalize distribution and timely delivery of

LGUs’ share

Proposed corrective measures

….(2)

(4) Earmark revenues from mining to create replacement capital for lost minerals, i.e. with manufactured capital (infrastructure) and social capital (human resources).

(5) There are only 6 FTAA; only one in operation, another on slow implementation. MPSAs on notice with La Bugaldecision where both majority and minority agreed that government should get more than taxes. Manageable, in case of renegotiation or litigation;

(6) Revisit flawed La Bugal SC decision (Supreme Court)

Proposed corrective

measures……(4)

(7) No mining approvals until institutional capacity of govt

to handle evaluation and enforce laws is in place.

Otherwise, 50-year history of being shortchanged will

continue. EO 79 is not unconstitutional

(8) New rules on no-go areas and environmental protection

should apply to existing mining operations. Jurisprudence

supports exercise of police power and no violation of

“contract clause”.

The context of mining in the

international investment

environment.

There is a need for a “new generation of policies”

in the light of findings that investment

agreements, particularly on extractive

industries, found wanting in two major aspects –

(1) they do not take account of the requirements

of sustainable development and inclusive

growth, and (2) there has heretofore been an

imbalance in the benefits and costs assumed by

the government and by the investors, with the

governments at a disadvantage. (UNCTAD’s World

Investment Report of 2012)

Environmental protection funds

MRF - (a) MTF at least P150,000 (b) RCF (Rehab Cash

Fund) – Revolving w max of P5m.

MWTF (Mine waste and tailings fund) – P0.10/mt &

P0.05/mt mine wastes. ETF excludes disasters

FMR/DF –up to 10 yrs maintenance. Capital cost only for

decommissioning and final rehab. None for disasters on

permanent structures.

Institutional funds to safeguard the environment no

longer limited to damages from normal operations but

now includes damages from disasters (corrects gap)

Requirement of perpetual coverage of maintenance and

disaster costs of permanent structure for damages in

both mining areas and impact areas (corrects gap)

More on ADB study…. (25)

“In terms of employment generation, mining

and quarrying has relatively low labor-

output ratios. Labor accounts for only

13.35% of the sector’s output against an

economy-wide average of 20.7%.

More on the ADB study.. (27)

“… mining has contributed a relatively miniscule share

of national GDP over the years…. an average of only

1.444% of the country’s total GDP since 1975.

“Job generation in the mining sector is low. …. “…14

workers were employed for every P1 million of mining

Gross Value Added (GVA ) in 1980, by 2004 this was

down to 6 workers per P1 million of GVA.

More on ADB study…… (28)

…… The other and more prominent concern in

mining is the environmental and social

impact of mining activities, especially in

uplands and indigenous lands.”

Question… (29)

Is there a real cost to

foregoing mining investment

if it is not on our own terms?

More on ADB study…. (26)

“With a backward linkage index of only .460, the

industry uses relatively little input from other

domestic industries.

“..low forward linkage index of .82 forward

linkages are below the average for all sectors of

the economy. ..industry’s products are exported

in primary form, with little processing taking

place within the country.”

Does mining really produce all

those benefits? (23)

After 50 years of mining - no industrialization

footprint based on mining.

Biggest mining investment ($5.9 billion SMI)

exports ore. No downstreaming plants to

increase value added. Employment is 10,000

construction plus 2,000 permanent =

P10,000,000/job.

On Extractive Industry

Transparency Initiative… (30)

EITI is a promising development. Past mining

industry made similar promises. Present disowns

corrupt/abusive practices of the past.

On disasters: “… even the screw-ups have to be

placed in the proper perspective. We are but

human, and mistakes and accidents do occur

every now and then, in any industry.”