1. Legislative Initiatives Poised to Make Life More Difficult for Mineral
Explorationists
For the past few weeks, the mining industry was again in the limelight as
the much eagerly anticipated Executive Order (EO) No. 79 was released and
the International Monetary Fund (IMF) study on Philippine mining fiscal
regime was published. Little did we know that various measures affecting
the industry were silently being deliberated and passed by the 15th
Congress.
There were numerous moves in both chambers to repeal the Philippine
Mining Act of 1995. In the House of Representatives, Congressmen Lorenzo
Tañada III and Kaka Bag-ao, both from the progressive bloc, filed two bills,
House Bill (HB) Nos. 206 and 3763 respectively, entitled “An Act to Regulate
the Rational Exploration, Development and Utilization of Mineral Resources,
and to ensure the Equitable Sharing of Benefits for the State, Indigenous
Peoples and Local Communities, and for other Purposes”. Both bills are still
pending with the Committee on Natural Resources since 2010.
On the other hand, Senator Sergio Osmeña III filed a similar bill in the
Senate. Under Senate Bill (SB) No. 3126, mineral resources development,
utilization and processing shall be reserved for Filipino citizens and Filipino
corporations. On the other hand, exploration shall be exclusively and
directly undertaken by the State through the Mines and Geosciences Bureau
and cannot be delegated or contracted out to private corporations or
persons. Also, Financial or Technical Assistance Agreements, or any other
similar agreements, contracts, and/or executive issuances granting license
or permission to explore, develop and/or utilize mineral resources shall not
be awarded to foreign entities or persons. Exploration activities shall be
non-invasive such as seismic, gravity, magnetic, electromagnetic, radar,
induced polarization, radio wave and electro-geochemical. Open-pit mining
method for the extraction of mineral ores and the submarine tailings
disposal method are likewise prohibited. Under Osmeña’s bill, the
contractor shall pay at least ten per cent (10%) of the gross revenues as
royalty to indigenous cultural communities (ICCs) in case of mineral
operations within ancestral domains, the payment of which shall directly be
given to the ICCs in a process that build on their traditional and customary
laws. Community development programs shall not be considered as royalty
payment. In no case shall mining rights under the proposed bill be
transferrable and violation of this provision shall cause the cancellation of
the agreement and forfeiture of assets and equipment of the contractor in
favor of the State.
Similarly HB No. 1635 authored by Rep. Maximo Rodriguez, Jr. entitled “An
Act Protecting the Rights of Indigenous Peoples Affected by Mining
Operations in Ancestral Domains proposes a five percent (5%) royalty based
on gross output. The bill is currently pending with the House Committee on
National Cultural Communities since 2 August 2010.
The House of Representatives passed HB No. 5485 sponsored by Rep. Rufus
Rodriguez, which disallows all extractive activities such as, but not limited
to, logging and mining in protection forestlands. Under the bill, protection
forestlands consist of all mossy and old-growth forests; freshwater, swamps
and marshes; all areas along the bank of rivers and streams, and the shores

2. of the seas and lakes throughout their entire length and within a zone of
three (3) meters in urban areas, twenty (20) meters in agricultural areas,
and forty (40) meters in forest areas. The bill was approved by the House on
13 December 2011 and transmitted to and received by the Senate on 15
December 2011. Concurrent with this bill is HB 5860 also authored by Rep
Rufus Rodriguez entitled “An Act Providing for the Delineation of the Specific
Forest Limits of the Public Domain and for Other Purposes” which was
approved by the House on 21 March 2012 and transmitted to and received
by the Senate on 26 March 2012.
In the Senate, Senator Loren Legarda introduced SB No. 1365 calling for an
amendment of the Philippine Mining Act of 1995 by giving local government
units the right to declare areas in their jurisdiction as no-mining zones.
Senator Legarda also introduced SB No. 1359 proposing for the
institutionalization of a Philippine Economic Environmental and Natural
Resources Accounting (PEENRA) System. The PEENRA framework includes
accounting for environmental quality and waste disposal services,
depreciation of natural capital, and environmental damages. PEENRA aims
to generate physical and monetary estimates of the depletion of selected
natural resources and the degradation of environmental media arising from
selected economic activities. As the economy continues to capitalize on its
water, forest, mineral and other natural resources in its quest for higher
growth, Sen. Legarda believes that the framework will address concerns as
to the physical and monetary impact of this economic growth on
the environment.
Representative Neptali Gonzales II sponsored HB No. 4410 “An Act Providing
for the Direct Remittance to the Host Local Government of its Forty Percent
Share (40%) of the Proceeds Derived from the Utilization and Development of
National Wealth, amending for the Purpose Section 293 of Republic Act No.
7160 as Amended Otherwise Known as the Local Government Code of 1991”.
The bill was approved by the House on 16 May 2011 and transmitted to and
received by the Senate on 24 May 2011.
Relatedly, in the International Monetary Fund (IMF) Report “Philippines:
Reform of the Fiscal Regimes for Mining and Petroleum” published on June
12, the IMF recommended that Congress enact a continuous appropriation
for the distribution of the share of local government units (LGU), and
payments should be made based on estimated amounts with adjustments
when final amounts are known to improve the procedures for transferring
funds and to foster local support for large-scale mining. The IMF also
recommended that a joint monitoring commission, with national and local
representation be introduced to oversee the distribution of revenues to
LGUs.
The IMF mission was requested by the Philippine government to identify and
provide advice on measures that would increase government revenue from
the mining sector, but which would not require legislative action. Initially,
the proposed measure was to extend the 5 percent mineral royalty, which
currently applies only to mines located in mineral reservations, to all mines
by way of an administrative order. But the IMF realized that this could be
problematic as the precedent used to justify the imposition of royalties
explicitly provided only for royalties on minerals produced in mineral
reservations.

3. Sen. Ralph G. Recto introduced SB No. 2754 proposing to increase the tax
on minerals and quarry resources from two percent (2%) to seven percent
(7%). Under the bill the potential revenue from the proposed increased excise
tax on mineral products shall be equally divided between the national
government and the LGUs where the mineral and quarry resources are
extracted. In particular, revenues from the three and a half percent (3.5%)
tax on minerals shall accrue to the National Treasury, while revenues from
the other three and a half percent (3.5%) tax on minerals shall be remitted
directly to the LGUs as support for their Special Education Fund.
Nevertheless, the IMF admitted that simply extending the royalty to mines
outside a mineral reservation or increasing the rate of the mineral excise
would increase production-based levies and would make the fiscal regime
unattractive for mining projects of low profitability.
It has been reported that for the Mining Industry Coordinating Council,
(MICC), created and deputized under EO 79 to prepare its implementing
rules and regulations, the question of whether or not mining would continue
to enjoy incentives depends on the proposed legislation being crafted by the
Department of Finance (DOF) to rationalize the revenue and benefit sharing-
schemes and incentives given to mining companies. The DOF is also
considering inputs from the IMF Report, which recommended among others,
the repeal of the Board of Investments and Mining Act tax incentives. As
reported, the MICC is inclined to strip prospective mining projects of
incentives, a move that has to go through legislation, which the Aquino
administration is expected to prioritize the passage of. However until the
issue on government share is resolved by the MICC, the question on
incentives cannot be tackled. The government cannot take away existing tax
incentives given to mining projects but there will be no new incentives for
mines opened in the future if Congress strips existing incentives.
It appears that the confluence of these legislative and policy measures
currently being undertaken by the Philippine government will cause
investors in the industry to reevaluate their business strategies and cash
flow analyses. As it is, mineral explorationists will face the inevitable task of
telling their shareholders if it is worth spending further risk capital on the
Philippines or it is time to pack their bags and leave for safer and stable
havens.
Fernando “Ronnie” Penarroyo is the Managing Partner of Puno and Penarroyo
Law Offices (www.punopenalaw.com). He specializes in Energy and Resources
Law, Project Finance and Business Development.