Fiscal Regime – Large Scale Mineral Mining Philippine Economic Society November 14, 2014 Christian S. Monsod

1. Fiscal Regime – Large Scale
Mineral Mining
Philippine Economic Society
November 14, 2014
Christian S. Monsod

2. 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.

3. 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.”

4. 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”.

5. 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.

6. 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.

7. 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

8. 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.)

9. 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.

10. MICC reforms: revenue sharing
major change in current regime (9)
a) Govt affirmed as owner of
minerals entitled to the
economic rent
b) Gets 10% of gross revenues or
55% of ANMR plus 60% of excess
over 50% ANMR margin
c) In lieu of all national and local
taxes, CIT, royalty to ICCs, duties
on imports and LGU charges and
fees

11. 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.

12. 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.

13. 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)

14. 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

15. 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

16. 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.

17. 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.

18. 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.

19. 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

20. 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.

21. 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.

22. 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)

23. 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…”

24. 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%
:

25. 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

26. 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.

27. 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%

28. 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.

29. 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.

30. 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.

31. 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% ?

32. 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.

33. 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.

34. Thank you.

35. Extra slides
 No need for these

36. 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.

37. 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.

38. 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

39.  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

40. 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

41. 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 Bugal
decision 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)

42. 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”.

43. 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)

44. 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)

45. 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%.

46. 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.

47. 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.”

48. Question… (29)
Is there a real cost to
foregoing mining investment
if it is not on our own terms?

49. 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.”

50. 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.

52. 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.”