is there hope for mining after the aquino administration?
TRANSCRIPT
Is There Hope for Mining after the Aquino Administration? Formerly branded as the sick man of Asia, the Philippines grew faster than its Association of Southeast Asian Nations (“ASEAN”) peers during the administration of President Benigno Simeon C. Aquino III. This can be attributed to the country’s strong macroeconomic fundamentals, restructurings in government standards and competitiveness indicators, and more stable politics. Aquino’s government has implemented administrative, institutional and governance reforms that have unlocked the country’s growth potential resulting in all three major credit ratings agencies upgrading the Philippines to investment grade in 2013 and the economy growing by an impressive 6.4 percent in 2014. The Philippines received another upgrade from Fitch Ratings, which upgraded the country’s outlook to positive from stable as it affirmed the credit rating at “BBB-‐“ or minimum investment grade. In the report published by A.T. Kearney, “Global Economic Outlook 2015-‐2020” (June 2015), the country is one of seven emerging markets called the 2020-‐Seven: China, Malaysia, Chile, Poland, Peru, Mexico, and the Philippines, where the next wave of global growth is expected from. Amid higher volatility and more regional risks brought about by weak trade and financial turbulence in China, Socioeconomic Planning Secretary Arsenio Balisacan admitted that the country would grow at around 6% in 2015. This is a downward revision from the 7-‐ to 8-‐percent goal the government set for this year. Confounding the external factors are slowing export growth, fiscal under spending in the first half of 2015 and the threat of the El Niño-‐related dry spell that can hurt agricultural production. Nevertheless, the economy is expected to expand between 5.6 and 6 percent this year. The International Monetary Fund (“IMF”) lowered its growth forecast for the Philippines to 6 percent, before accelerating to 6.3 percent next year. The World Bank revised its projection for the Philippines to 5.8 percent, lower than the previous forecast of 6.5 percent. The Asian Development Bank revised its economic growth projection to 6 percent. Standard & Poor's slashed its 2015 economic growth forecast to 5.6 percent while Moody's lowered GDP growth projection to 5.7%. Despite weak global demand, the Hong Kong and Shanghai Banking Corp. (“HSBC”) said the Philippine economy remains resilient, as it is less sensitive to the deterioration in external demand and is not as dependent as other members of ASEAN. “The Philippine economy is still a bright star in a dim sky,” HSBC noted. In its October 2015 World Economic Outlook, the IMF said the Philippines would outperform Indonesia, Malaysia and Thailand, but grow slower than Vietnam, where cheap fuel is having a bigger positive impact than anywhere else in the region. Unfortunately, the economic boom did not bring about a similar boom in the mining industry. Optimism in a revived industry started to dampen in January 2011, when Aquino imposed a moratorium on the processing of exploration and mining permits in anticipation of a new revenue sharing scheme. Executive
Order No. 79 (“EO 79”) was subsequently issued by Aquino on 06 July 2012, laying down the administration’s fiscal, regulatory, environmental and administrative policies in the hope of stimulating investments in mining. The issuance of new exploration and mining permits continues to be held in abeyance while Congress deliberates on a law addressing the revenue sharing scheme between the mineral developer and the government as formulated and recommended by the multi-‐agency Mining Industry Consultative Council. The proposed mining fiscal regime filed by Marikina Rep. Romero Federico “Miro” S. Quimbo now contained in House Bill No. 5367 is currently being deliberated at the Ways and Means Committee. With Congress on its third and last regular session that is expected to end earlier in light of the 2016 presidential elections, the possibility of the bill to be passed as a law is remote. During the committee hearings, Department of Finance officials testified that the proposed mining revenue-‐sharing scheme could raise the government’s take to as much as 71% — the steepest in ASEAN, making the Philippine mining industry uncompetitive. Missed Opportunity The mining industry is currently in the midst of an apparent reversal of the resource super-‐cycle that dominated commodity markets in the 2000s. While the fall in fossil fuel and other commodity prices should provide a boost to global growth as consumers will have more spending powers resulting in an aggregate increase in demand, the mining industry is reeling from the effects. Former Budget Secretary, Prof. Benjamin Diokno, said that the Philippine mining industry missed the opportunity when prices of precious metal soared to new heights following the 2008-‐09 global financial crisis and Great Recession, driven largely by demand from resource-‐hungry China. The euphoria began to fade in the second half of 2011 as economic growth slowed in China. Unstable recoveries in Europe and the US have also weighed on global economic growth. The global economic uncertainty, combined with an oversupply of many metals and minerals has led to a dramatic drop in commodity prices over the past three years. Diokno noted that the mining industry received 32 out of 462 policy recommendations by the Joint Foreign Chambers of the Philippines. However of the 32 recommendations, only two were implemented: adoption by the Mines and Geosciences Bureau (“MGB”) and the Securities and Exchange Commission of the Philippine Mineral Ore Resources Reserve Reporting Code; and the completion of the MGB review of regulations to increase the allocation of direct mining and milling costs for community development from 1% to 1.5% to be utilized for information, education and communication campaigns, and the development and mining and processing technology and geosciences. Some 13 “more substantive” recommendations have been rated “Not Ongoing”, meaning no progress has been made as far back as 2011. According to the 2014 paper of Dr. Roberto B. Raymundo of the De La Salle University School of Economics, during the past 15 years the highest share of
mining output to GDP was at 1 percent while the contribution of mining employment to total employment has at most been 0.7 percent. In 2011, net foreign direct investment inflows to the Philippine mining sector were drastically lower compared to those of Indonesia, Malaysia, Thailand, Brunei Darussalam, Laos and Myanmar. Net foreign direct investment inflows was at negative $240.4 million indicating a greater amount of mining investments moving out of the Philippines relative to investments coming in. Citing the 2012 ASEAN Investment Report, Raymundo noted that net foreign direct investments severely lagged behind those of Indonesia at $3,882.0 million, Malaysia at $2,410.9 million, Brunei Darussalam at $1,058.0 million, Thailand at $296.2 million and Laos at $78.9 million. By 2012, net foreign direct investment inflows for Philippine mining indicated larger negative capital flows while exports of minerals and mineral products were at most 6 percent of total country exports. Philip Romualdez, President of the Chamber of Mines of the Philippines (“COMP”), noted that during the five years of the Aquino government, the MGB recorded only US$ 693 million in mining investments, less 76% from its original projection of US$3 billion. The COMP identified four major issues hounding the mining industry: the moratorium on new permits; the Alternative Mining Bill currently being deliberated in Congress; the tedious permitting process most notably the National Commission on Indigenous Peoples Guidelines on free and prior informed consent; and local government units continuing to ban mining in their jurisdictions. On the other hand, civil society advocates for transparency and accountability found an ally in Aquino, who they believed was elected on a reform platform that focuses on transparency, accountability and the pursuit of the rule of law as preconditions for national development. While legislative bills on the Freedom of Information, Alternative Mining, and National Land Use Management are currently pending in Congress, transparency and accountability advocates believe that these are steps in the right direction (Revenue Watch Institute, 2012). They also lauded efforts by local governments and communities to assert their local autonomy and environmental rights in the provinces of Quezon, Romblon, Zamboanga Del Norte, South Cotabato, Romblon, Albay and Marinduque. In addition, there are pending mining-‐free zone bills pending in Congress covering Cagayan de Oro, Catanduanes, Eastern Samar, Nueva Vizcaya, Sorsogon, Biliran, Davao City and Nueva Ecija. Mining Agenda of Presidential Candidates In May 2016, the Philippines will hold its presidential election the results of that will determine the country’s economic and foreign policies, which will have an impact on mining. The ruling Liberal Party of Aquino has decided to cast its lot on Manuel “Mar” Roxas II, the current secretary of Interior and Local Government and former secretary of Transport and Communication. Roxas is expected to continue Aquino’s policies on mining. Focus is now on two other leading contenders, Vice President Jejomar Binay and Senator Grace Poe. Binay and Poe declare that both will push for responsible
mining and transparency and the need for mining to make economic growth more inclusive to benefit the greatest number. This means growing the industry responsibly and distributing mining taxes efficiently. Both candidates believe that transparency should be institutionalized not only to ensure good governance but also to render a fair sharing of revenues. Of all the presidential candidates, it appears that Binay has the more comprehensive platform for the mining industry. Binay bats for the harmonization of national and local laws, and consistency in policies that should transcend political timelines. To attract investors with the capacity to deploy advanced technologies to minimize risks to personal safety and the environment, the government must have clear policy guidelines and rules that foster strong cooperative relationships between the national and local governments. Binay believes that mining taxes must not be higher than they already are and instead be fair and consistent with international best practices. Global competitiveness is crucial to the industry and is an objective that must guide fiscal policy reform. He called for a careful study on the economic effects of proposals to increase mining revenues. Binay will also work to upgrade the capacity of regulatory agencies as a well-‐equipped, highly competent governance institution enforcing mining and environmental laws at both national and local levels. The mining sector should spur the creation of high value-‐added businesses with commensurate employment potentials. Binay will give importance to processing intermediate products that will eventually encourage manufacturing of finished products. What is interesting is that Binay has indicated that he would have a different China policy than the one pursued by Aquino. On the maritime sovereignty dispute with China, Binay pronounced “we have to accept the fact that China has all the capital and we have the property over there, so why don’t we try to develop that property as a joint venture?” This could bode well for Chinese investments in the mining industry, which was viewed with suspicion and unease by the Aquino government. Senator Grace Poe, on the other hand, is working for greater transparency and openness in the mining industry to address people’s negative perceptions to mining. As one of the proponents of the Freedom of Information (“FOI”) bill in the Senate, she has been fully supportive of the Philippine Extractive Industries Transparency Initiative (“EITI”) because it promotes greater transparency in the mining sector. Aside from the full disclosure by the government of mining contracts, the FOI bill if enacted into law will encourage the mining industry to “publish what you pay” to inform the people how much exactly the industry is returning to the people in terms of taxes, jobs generated, livelihood, and corporate social responsibility projects. She added that the Transparency Report would help the government compute the right formula for what constitutes as “fair and equitable share” for stakeholders involved. Senator Poe calls for an inventory of natural resources and plotting a schedule for harnessing these resources. She has sponsored Senate resolutions on the
Benham Rise, which is believed to have potential natural gas deposits and manganese nodules. Poe believes that knowing the amount of resources and identifying areas where mining is permitted will serve as a solid foundation for economic policy makers to develop a sustainable and long-‐term strategy for the growth of the mining industry. Though he has not filed his certificate of candidacy for presidency, Davao Mayor Rodrigo Duterte is clearly anti-‐mining having lauded the approval of an anti-‐mining ordinance by the Davao City Council. He has been consistently against mining saying that mining results in nothing that benefits host communities and the country. Duterte is fully supportive of the mining ban in Davao City because of environmental concerns and social problems related to mining. He said the economic benefits of mining are not enough to outweigh the destruction it leaves many years after and “the government gets very little royalty.” Outlook for the Industry The global demand for metals will depend a lot on sustained economic growth but economic, political and environmental risks are expected to disrupt growth. European growth appears to have hit a snag, which could impact the mining industry’s recovery. The US economy is rebounding but still faces some strong headwinds. Investor sentiment will depend on the strength of the US dollar and China’s economy. The current strength of the US dollar and the declining oil price will help some miners manage costs. However, extreme weather and geopolitical issues also pose a risk to recovery. (Price Waterhouse Coopers, Gold Silver Copper Price Report 2015) Depressed metal prices have been devastating for the mining industry resulting in widespread cuts and restructuring from exploration and production as well as operating and capital expenses. Investments in the industry have slowed from key consumers like China as a result of recent reforms in that country. In order to improve its national extractive industry competitiveness, the Philippines needs to address political risk and unstable fiscal policy particularly in the revenue transfer in the form of taxes and royalties. In a presentation during the Mining Philippines 2015 Conference, Price Waterhouse Coopers (“PwC”) identified the following regulations as affecting the mining industry: control versus grandfather rule on ownership; adoption of FTAA framework in all contracts; removing constitutional limitations on foreign equity; possible ban of unprocessed ore similar to Indonesia; mining ban through provincial and municipal ordinances; and the mandatory implementation of EITI/perpetual confidentiality waiver. Despite the fact that the Philippine mining industry is one of the poorest performers in terms of mineral product exports and foreign direct investments, the Aquino administration remains resolute to enforce resource nationalism through EO 79. Had the big-‐ticket mining projects in the pipeline pushed through, the Philippines according to the COMP would have obtained almost US$20 billion in investments. The COMP calls for a repeal of EO 79 and urges the
government to maintain the current fiscal regime. PwC also called for a reassessment of the fiscal regime following the drafting and submission of a revised tax-‐sharing scheme under HB 5367, which according to PwC’s computation pushes the Effective Tax Rate to 79.3%. Exploration companies operating in the Philippines have been in a wait and see mode given the moratorium on new permits while operating mines are trying to make ends meet to adjust to the current low commodity prices. Whether the mining “super cycle” has ended or the current slump in commodity prices is just a manifestation of the cyclical nature of the industry, PwC believes that demand for metals will continue, but it won’t be the steady upward climb that was seen between the end of 2009 and early 2011, or in the years leading up to the 2008 commodities crash. If the next administration will follow the EO 79 blueprint laid down by the Aquino mineral policy makers and mineral prices have yet to recover, no foreign direct investments inflow are expected as risk capital are turned off by the unattractive tax and sharing arrangement, the unstable regulatory regime, and the convoluted permitting system. Needless to say, an anti-‐mining president-‐elect will be a death knell for the industry. On the other hand, a president who is willing to stick his neck despite the general negative perception of mining will be a shot in the arm for the industry that has been lingering in the hospital’s intensive care unit for the past six years. Conclusion Modest economic growth for the Philippines will continue in 2015 with low oil prices supported by increased government and election spending. Capital outflows in mining indicate the presence of a poor investment environment in the Philippine mining sector relative to the other ASEAN countries. Given the current volatility in metal prices and the onset of a new government following the presidential elections in 2016, it is difficult to predict if the worst is over for the industry. While the long-‐term fundamentals for metals remain strong, the industry is still in a limbo as it waits for the outcome of the 2016 elections. No amount of company restructuring or cautious optimism can reverse the tide of the industry’s demise if an anti-‐mining or a status quo president is elected.
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.