Balancing act: Recent challenges are spurring a wholesale regulatory reform

Caught in the crossfire between a maelstrom of competing interests and agendas, policy makers attempting to hammer out a new regulatory regimen for the mining sector have had a tough go of it in recent years. In an attempt to find a middle ground, the central government has tried time and again to introduce reform and revise the legislative framework so that it can both encourage further investment in the sector and serve the best interests of the Filipino people. The results of these efforts so far have been something of a mixed bag, and the regulatory landscape continues to evolve, leaving behind a patchwork legacy that inspires little confidence of the sustained long-term stability necessary to attract the international heavyweights of the mining industry.

CHANGING THE PICTURE: According to the Mines and Geosciences Bureau (MGB), the largest single threat to the mining industry today is the anti-mining sentiment which fuels this confusion. These negative perceptions are in turn being fuelled by a lack of information, propaganda by advocacy groups, politics, a lack of benefits from mining, current malpractices by some mining groups and the legacy mines, according to a presentation given in March 2013 by the MGB at the Asia Mining Congress 2013 in Singapore.

As a result of these anti-mining efforts, along with the relatively strong autonomy granted to regional and local government units (LGUs), local opposition to mining operations has proven an effective deterrent to development over the years. As of March 2013, 15 of the country’s 80 provinces had issued anti-mining ordinances or resolutions, with six further provinces and two municipalities seeking to permanently ban mining activities from their territory.

MIDDLE GROUND: These activities have not only resulted in the delay in approvals and permits necessary to carry out a mining venture, but also in increased bureaucratic procedures as the national government seeks to find a middle ground and increases regulatory requirements. An example of this convoluted legal environment is the case of Glencore Xstrata-controlled Sagittarius Mines Incorporated’s (SMI) Tampakan copper mine (which would be the biggest operating mine in the Philippines if undertaken). After applying for an environmental compliance certificate (ECC) – a permit required to undertake any mining operation – in 2010, the Environmental Management Bureau denied the application of SMI for the ECC citing existing provincial ban on open pit mining in January 2012. However, the Department of Environment and Natural Resources (DENR) later signed the ECC in November 2012 at the behest of the executive branch under recommendation from the Minister of Industrial Coordinating Council, which was formed in July. As a result of these delays, SMI has pushed back its projected start date from 2016 to at least 2019.

PATH TO PROGRESS: While the eventual approval of the SMI ECC has been an encouraging sign for the sector, it does not make the Tampakan mine a done deal. There are still a host of regulatory hoops to jump through, as well as the issue of the LGU open pit ban which has yet to be lifted or overridden by the national government. And the mine still needs the local government’s endorsement, consent of indigenous groups, government mining feasibility study approval, clearance from various other government agencies and other permits. In addition to these changes, progress on all aspiring mining projects was arrested due to a moratorium on all exploration permits and financial or technical assistance agreements was enforced from January 2011 to March 2013. A moratorium on mineral production sharing agreements, which was also initiated in January 2011, remains in place pending the finalisation of the government’s new fiscal mining framework (which will ostensibly increase government royalties), which is not expected until after the next election cycle.

NEW ORDER: The most recent incarnation of the current government’s attempts at a more simplified regulatory regime is through the issuance of Executive Order (EO) 79. The legislation is the end result of a mining study group formed by the government by order of the President in October 2011, with the aim of rectifying many of these issues (including environmental and social issues at the heart of many of the anti-mining arguments) plaguing the industry.

The study group was made up of the DENR Secretary, the Presidential Assistants on Climate Change and on Environmental Protection, and the Vice-Chair of the Climate Change Commission.

Signed in July 2012, with implementing rules and regulations issued in October 2012, EO79 is an attempt to reconcile a wide range of contradictions and shortcomings perceived to exist in the current framework. Some of the highlights include clarification of areas closed to mining and the development on a “No Go” zone map, full enforcement of environmental standards, development of the downstream industries sector, rationalising small-scale mining activities and creating a one-stop shop for all mining applications along with a centralised database.

RESOLVING DISCORD: One of the more positive signs of the ordinance from the view of the private sector is the inclusion of an article that requires provincial governments to buy “in harmony” with the national government. Depending on how this is interpreted and enacted, this law could finally by the key to resolving the discord between local and federal policy which has been a focal point of regulatory uncertainty in the past. Another aspect of EO79 is the clarity it brings in applying laws in the future and not retroactively, meaning that current contracts will be honoured. While some licences have indeed been cancelled since the application of EO79, this is due to compliance failure by mines, which can occur for a variety of reasons including social, ethical, and safety violations rather than retroactive action.

FINDING A CURE: Although these efforts could go a long way towards soothing investor concerns about the mining sector, the legislation is by no means a panacea for all the mining industry’s ills. Included in the draft legislation are controversial provisions which would increase the taxation burden on mining operations, most notably with a rise in the 2% excise tax which is levied as a resource rent for companies which extract minerals which belong to the state, and sell them on the state’s behalf. The new scheme could be significantly different from the current structure. One option is to levy separate tax rates on different commodities. Metallic minerals would have a relatively higher rate while non-metallic materials like clay and gravel, which have lower margins and are only profitable at high volumes, would have lower rates.

Yet another option is to introduce a graduated tax rate tied to the price of commodities. As the price of a commodity rises and mining operations thus make higher profits, taxes would similarly rise in tandem. A separate windfall tax – which would kick in when commodity prices exceed a certain ceiling – is also under consideration, although in practice windfall tax schemes can be tricky to implement.

The government gave some clues as to how it would pursue the issue when Ramon J P Paje, the Department of Environment and Natural Resources secretary, announced in June 2013 that the new mining legislation to be introduced at the 15th Congressional session would push for a single excise tax rate of 10% on gross sales of minerals. The new tariff would replace the existing 2% excise tax and 5% royalty tax on minerals in state reservations, as well as all indigenous people and local business taxes. The financial impact of such a move could be substantial, with Paje stating that, “If we are getting 1bn pesos now, we will be getting about 10bn pesos later on,” while also noting that the current system of local governments collecting property taxes from mining firms will stay in place.

END GAME: Unfortunately, recent infighting and the uncertainty bred into the sector has meant that foreign mining investments into the country in 2012 topped out at $509.24m, 75% less than the estimated $2bn originally forecast by the MGB.

In fact, the situation has deteriorated to the point that an annual survey of mining companies carried out for 2011/12 by the Frasier Institute showed that the Philippines ranked near the bottom of the field when it comes to mining policy. In spite of ranking sixth out of 93 jurisdictions in policy/mineral potential, assuming no land use restrictions in place and assuming industry “best practices,” the Philippines scored 13 out of 100 in the comprehensive Policy Potential Index (PPI) above only Kyrgyzstan, Ecuador, Indonesia and Vietnam out of a total field of 93.

The PPI measures the effects on exploration of government policies including uncertainty concerning the administration, interpretation and enforcement of existing regulations; environmental regulations; regulatory duplication and inconsistencies; tax action; uncertainty concerning native land claims and protected areas; infrastructure; socioeconomic agreements; political stability; labour issues; geological database; as well as issues of security and corruption.