The Threat of Resource Nationalism to the Philippine Mining Industry


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The Philippine government must realize that policy uncertainty can be extremely damaging to both investors and the host country and can hamper the successful exploitation of mineral endowments.

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The Threat of Resource Nationalism to the Philippine Mining Industry

  1. 1. The  Threat  of  Resource  Nationalism  to  the  Philippine  Mining  Industry       Resource   nationalism   has   been   hounding   the   mining   industry   worldwide   as   governments   initiate   regulations   to   intervene   in   the   contractual   provisions   of   resource  development  agreements.  Resource  nationalism  ranges  from  outright   nationalization  of  resources  to  regulatory  and  fiscal  measures,  which  deprive  an   investor  of  the  value  of  the  resources  it  is  exploiting  thereby  increasing  the  host   government’s  “take”  (“regulatory  expropriation”).  While  resource  nationalism  is   largely  perceived  to  be  widely  practiced  in  developing  resource-­‐rich  countries  in   Africa  and  South  America,  developed  economies  like  the  United  States,  Australia   and  Canada  have  also  joined  the  fray  in  adopting  resource  nationalist  policies.         According   to   Ernst   &   Young’s   report,   “Business  Risks  Facing  Mining  and  Metals   2011-­‐2012,”  resource  nationalism  is  the  highest  ranking  risk  faced  by  resources   companies  with  many  governments  going  beyond  taxation  in  seeking  a  greater   take   from   the   sector   with   a   range   of   requirements   introduced   like   mandated   beneficiation,   export   levies   and   limits   on   foreign   ownership.   Resource   nationalism  can  also  manifests  itself  in  subtle  forms  like  special  treatment  for   domestic   companies   or   forcing   foreign   companies   to   use   favored   entities   for   transporting  or  processing  commodities.       Dr.  Oladiran  Bello,   Head  of  the  South  African  Institute  of  International  Affairs’   Governance  of  Africa’s  Resources  Programme  said  that  resource  nationalism  has   been   applied   to   all   kinds   of   efforts   by   governments   of   resource-­‐producing   countries   to   gain   a   greater   degree   of   control   over   the   way   in   which   mining   activities  are  carried  out  within  their  jurisdictions.  On  the  other  hand,  Sir  Mark   Moody-­‐Stuart,   former   Chair   of   Anglo   American   and   Shell,   said   that   resource   nationalism   concerns   become   even   more   serious   when   prices   are   high,   as   resource-­‐producing  countries  seek  to  take  a  larger  share  of  the  windfall.  David   Humphreys,  who  has  served  as  an  analyst  for  Rio  Tinto  and  Russia's  top  mining   company,  Norilsk  Nickel,  said  that  there  is  a  growing  perception  from  producer   countries’   governments   that   they   were   losing   out   to   resource   companies   although  he  argued  that  this  perception  was  not  borne  out  by  any  research.       Fitch   Ratings'   Report:   Resource   Nationalism   indicated   that   while   greater   state   participation   in   large   commodity   windfalls   can   provide   additional   revenues   to   improve  government  finances  and  accelerate  economic  development,  the  long-­‐ term  effect,  however,  is  that  it  may  curb  the  revenue-­‐generating  capacity  of  the   mining  sector.    Excessive  taxation  and/or  regulatory  uncertainty  can  undermine   the  potential  of  the  sector  to  attract  new  investments  and  place  marginal  assets   into  early  retirement.     The  Philippines  joins  the  bandwagon     Resource   nationalism   has   become   highly   contagious,   as   there   is   now   a   faster   transmission  and  exchange  of  ideas  and  experience  across  some  resource-­‐rich   countries.  The  Philippines  has  been  no  exception.    Executive  Order  No.  79,  which   seeks   to   set   the   policy   framework   to   guide   the   government   and   other   stakeholders  in  the  implementation  and  operationalization  of  mining  legislations  
  2. 2. aims   among   others,   to   increase   revenues   to   promote   sustainable   economic   development  and  social  growth.    To  this  end,  EO  79  mandates  the  establishment   of  mineral  reservations  for  strategic  mineral  reserves  to  be  able  to  collect  5%   additional   royalties   and   the   creation   of   a   national   plan   and   road   map   for   the   development  of  value-­‐adding  activities  and  downstream  industries  for  strategic   metallic   ores.     The   Mining   Industry   Coordinating   Council   (“MICC”),   a   body   created   under   EO   79,   is   further   directed   to   conduct   a   study   on   existing   mechanisms  for  benefit  sharing  and  review  of  existing  taxes,  fees  and  incentives   receive  by  mining  companies.    The  MICC  is  also  tasked  to  consider  the  imposition   of   higher   export   fees   for   metallic   and   non-­‐metallic   minerals   in   the   country,   rationalize   revenue-­‐sharing   schemes,   mechanisms   and   incentives   given   to   mining   companies,   and   implement   resource   accounting   or   full-­‐cost   benefit   analysis.    In  addition,  the  Department  of  Environment  and  Natural  Resources  is   also   directed   to   increase   mine   wastes   and   tailings   and   occupation   fees   and   impose  processing  fees  for  all  mining  applications.     The  Department  of  Finance  has  also  been  pushing  for  the  passing  of  a  mining   revenue  bill  that  will  rationalize  the  mining  fiscal  regime  to  raise  more  revenues   for  the  government.  More  alarming  is  the  proposed  People’s  Mineral  Resources   Act,   which   seeks,   among   others,   the   removal   or   prohibition   of   full   foreign   participation   in   mining   and   an   increase   of   the   government’s   share   in   mining   agreements  from  2%  to  10%.       On   the   judicial   front,   the   Supreme   Court   is   once   again   reviewing   petitions   assailing   the   constitutionality   of   the   Philippine  Mining  Act  of  1995   particularly   the  validity  of  sections  80  and  81.    According  to  the  petitioners,  the  questioned   provisions   foster   inequitable   sharing   of   wealth   by   limiting   the   share   of   the   government   in   Mineral   Production   Sharing   Agreements   to   excise   taxes   and   confining   government's   share   to   taxes,   fees   and   royalties   instead   of   letting   it   have   full   control   over   the   exploration,   development   and   utilization   of   mineral   resources.     These  developments  have  clearly  manifested  that  the  Philippine  mining  industry   is  under  threat  from  resource  nationalism  with  the  recent  regulatory,  legislative   and  judicial  initiatives  to  revise  and  amend  fiscal  and  contractual  regimes.         Non-­‐impairment  Clause     The  question  remains  whether  the  Philippine  government  can  justify  changing   the   rules   in   the   middle   of   the   ballgame.     Art.   III,   Sec.   10   of   the   Constitution   provides  that:  “No  law  impairing  the  obligation  of  contracts  shall  be  passed.”  Law   includes   statutes   enacted   by   the   national   legislature,   executive   orders   and   administrative  regulations  promulgated  under  a  valid  delegation  of  power,  and   municipal  ordinances  passed  by  the  local  legislative  bodies.    The  purpose  of  the   non-­‐impairment   clause   is   to   safeguard   the   integrity   of   valid   contractual   agreements  against  unwarranted  interference  by  the  State.    To  impair,  the  law   must  apply  retroactively  so  as  to  affect  existing  contracts  concluded  before  its   enactment.        
  3. 3. While  non-­‐impairment  of  contracts  is  constitutionally  guaranteed,  the  rule  is  not   absolute,  since  it  has  to  be  reconciled  with  the  legitimate  exercise  by  the  State  of   police   power.     A   contract   cannot   be   raised   as   a   deterrent   to   police   power,   designed   precisely   to   promote   health,   safety,   peace,   and   enhance   the   common   good,  at  the  expense  of  contractual  rights.  Resource  companies  operating  in  the   country   face   the   risk   that   the   government   to   assert   control   over   natural   resources   for   strategic   and   economic   reasons   will   invoke   its   police   powers   to   modify,  amend  or  repeal  resource  development  contracts.     Minimizing  Risks     In   response   to   the   risks   of   resource   nationalism,   mining   companies   have   employed   both   contractual   safeguards   and   socio-­‐economic   considerations   to   minimize   the   impact   on   their   investments.     Contractual   safeguards   include   meticulous  provisions  on  the  choice  of  law,  the  forum  and  method  for  resolving   disputes,  and  instituting  stabilisation  and  adaptation  clauses.    Foreign  investors   have   also   utilized   an   increasingly   robust   international   legal   framework   that  included  bilateral  investment  treaties  and  options  for  direct  investor-­‐state   arbitration  under   the   auspices   of   arbitral   authorities   such   as   the   International   Centre  for  Settlement  of  Investment  Disputes  and  the  International  Chamber  of   Commerce.     Political   risk   insurance   taken   by   developers   also   provides   cover   against  expropriation  and  breach  of  contract  by  host  governments.     Nevertheless,  the  industry  is  now  beginning  to  realize  that  the  traditional  legal   boilerplate   provisions   to   address   resource   nationalism   are   outdated  and   inadequate.  The  disturbing  trend  is  that  governments  in  emerging  markets  are   forming   state-­‐controlled   companies   or   mandating   local   equity   through   the   support  of  judicial  and  regulatory  environments,  which  directly  competes  with   foreign   investors   sometimes   using   aggressive   but   often   controversial   legal   measures.  Economic  liberalism  once  employed  by  government  to  attract  private   risk   capital   to   resource   development   projects   is   now   giving   way   to   mandated   local  participation  in  favor  of  larger  state-­‐  or  domestically-­‐owned  companies.     While  contractual  provisions  contribute  to  minimizing  the  risks  associated  with   the   various   expressions   of   resource   nationalism,   the   mining   industry   have   resorted  to  engagements  with  governments  to  foster  a  greater  understanding  of   the  value  a  project  brings  to  the  host  country.  By  communicating  the  benefits  of   the  project,  the  industry  hopes  to  encourage  governments  to  take  a  broader  view   of   the   return   from   natural   resource   development.   Using   this   approach,   the   industry  hopes  to  be  better  able  to  negotiate  appropriate  trade-­‐offs  that  preserve   the  value  to  both  mining  companies  and  governments  through  tax  incentives  and   offsets.     At   the   same   time,   mining   companies   are   developing   corporate   social   responsibility  initiatives  by  supporting  local  entrepreneurship  and  investing  in   public   services   and   infrastructure.   Foreign   companies   are   collaborating   with   local   companies,   as   the   rise   of   resource   nationalism   has   brought   with   it   a   requirement   imposed   by   host   governments   for   greater   local   content   and   participation  in  resource  development.      
  4. 4.   While  some  mining  companies  appear  confident  that  they  stand  a  better  chance   of   fair   treatment   from   governments   through   their   tangible   investments   in   the   environment   and   host   communities,   the   assumption   that   social   development   spending   assure   them   against   resource   nationalist   policies   is   unrealistic   according  to  Nader  Mousavizadeh  of  Oxford  Analytica.    Resource  projects  with   the  concomitant  infrastructure  improvements  they  bring  to  the  host  country  are   most   of   the   time   held   hostage   to   political   rhetoric   and   strategy   employed   by   populist   governments   vulnerable   to   unrest   over   pollution,   corruption,   and   inequitable  sharing  of  wealth.  Companies  are  now  more  particularly  vulnerable   to  both  the  emotional  and  economic  aspects  of  resource  nationalism  especially   during   times   of   peak   commodity   prices   as   higher   revenue   will   translate   into   greater  public  demands  for  rents  and  governments  will  be  increasingly  wary  of   foreign  control  of  these  commodities.     Mousavizadeh  believes  that  when  government  and  foreign  companies  negotiate,   there   is   no   set   ratio   or   formula   for   arriving   at   the   best   practice   to   channel   resource  nationalist  tendencies  away  from  zero-­‐sum  thinking.    Deals  will  vary   according  to  contract  lifetime,  type  of  mineral,  bargaining  positions,  and  many   other   factors.   So   rather   than   thinking   about   an   optimum   distribution   of   production  or  profits,  the  parties  should  think  about  optimum  deal  structures.  By   recognizing   joint   interests,   the   contracting   parties   can   create   shared   value   instead  of  a  playing  a  zero-­‐sum  game  where  one  has  to  win  at  the  expense  of  the   other.     The   contracting   parties   must   apply   strategies   for   constructive   engagement   instead   of   counter-­‐productive   opposing   positions.   For   foreign   resource   developers,   they   must   realize   that   local   content   development   can   play   a   huge   part   in   mitigating   resource   nationalism   by   addressing   the   issue   of   equitable   distribution  of  economic  benefits  and  the  build  up  local  industries  so  that  they   can  directly  benefit  from  the  exploitation  of  the  resources.     Conclusion     Resource  nationalism  has  become  much  more  sophisticated  and  complex  in  the   forms   it   takes,   being   not   purely   driven   by   nationalistic   policies   but   by   wider   political,  economic,  social  and  environmental  drivers.    Effective  risk-­‐mitigation   strategies  will  involve  not  only  careful  thought  as  to  contractual  protection,  but   also  to  effective  early  engagement  by  the  resource  developer  with  the  host  state   and  its  communities  to  deliver  the  socio-­‐economic  benefits.       The  Philippine  government  must  realize  that  policy  uncertainty  can  be  extremely   damaging  to  both  investors  and  the  host  country  and  can  hamper  the  successful   exploitation  of  mineral  endowments.    It  is  imperative  then  that  any  legislative   and  regulatory  measure  imposed  by  the  government  should  be  properly  vetted   and   go   to   a   proper   consultation   process   with   the   affected   stakeholders   less   regulators  may  be  unwittingly  putting  the  finishing  touches  to  the  demise  of  the   mining  industry.  The  key  challenge  is  the  creation  of  an  investment  climate  that  
  5. 5. can  assure  appropriate  profit  to  investors,  protect  host  states’  natural  resources   and  provide  other  long-­‐term  benefits  to  the  state  and  its  people.     Fernando  “Ronnie”  Penarroyo  is  the  Managing  Partner  of  Puno  and  Penarroyo  Law   (   He   specializes   in   Energy,   Resources   and   Environmental  Law,  Business  Development  and  Project  Finance.