Yellow Pad
Business World, 22 September 2014


NATURAL RESOURCES are important to national development. The mining industry, however, misleads the public when it argues that the competitiveness of the mining industry will lead to economic development and poverty eradication. According to Daniel Kauffman of the Natural Resource Governance Institute (NRGI) and the Brookings Institution, about 700 million people today live in poverty in resource-rich countries. Evidently, many governments fail to translate their mineral resources into assets for development. Malaysia, for example, is often cited as a country that successfully uses mineral resources for its development. But what they do not tell us is that Sarawak and Sabah, the oil-rich states of Malaysia, are still the poorest despite decades of oil production.

What then are the policy strategies that will help translate natural resource wealth into assets for development?

Governments should ensure that we get a fair share in the extraction of our natural resources. Fair share means guaranteeing that mining’s social benefits outweigh its social costs. This is not achievable if the only focus of government policy is ensuring the competitiveness and profitability of the mining industry.

The industry’s argument for competitiveness suggests that the government should offer lower tax rates to make the Philippines attractive to investors. It may work in other sectors but it cannot be applied to the mining sector. This argument incorrectly assumes that mining investors can easily transfer their investment to the country that offers the cheapest tax package. However, natural resources are unique endowments of a country. Investors will invest in a country because of the natural resources it has. This allows host countries to determine the amount of tax that they should impose on mining to ensure that the social benefits outweigh the social cost.

Often, industry advocates predict that increasing tax would reduce mining investments. This is true because increasing tax rates would render some mining activities unprofitable. What does that mean? Low tax rates would allow mining operations with high social costs to continue despite their low social benefits. With fair taxation, operations with low social benefits and high social costs cannot operate. This is how it ought to be. Minerals should be kept under the ground if social costs are high.

The argument for competitiveness triggers a race to the bottom among countries. Governments will continuously adjust their fiscal packages regardless of the actual cost of mining. Governments end up absorbing the negative environmental and social impacts of mining activities without any guarantee that enough income will be available to implement anti-poverty programs and stimulate economic development. As a result, mineral prices do not reflect the actual cost of mining. Making countries compete by offering the lowest taxation regime attracts mining companies but ignores the costs of extraction. The mispricing of minerals promotes consumerism and non-optimal use of mineral resources.

Aside from ensuring a fair share in natural resources, translating natural resource wealth into assets requires strong regulatory capacity, established transparency and accountability mechanisms, and sound macroeconomic policies when windfall revenues from extractive industries start coming in. The Philippines is nowhere near accomplishing any of these. The weak regulatory capacity of the government over mining companies has been discussed repeatedly. Some measures have been taken. The Aquino government adopted the Extractive Industry Transparency Initiatives (EITI) as a mechanism to increase transparency and accountability of the industries.

It is an opportunity for companies to show how much they are contributing to economic and social development. The effort of the Chamber of Mines of the Philippines to encourage compliance from its members should be acknowledged.

Unfortunately, there are companies that refuse to participate in EITI. Among these are Pacific Nickel Phils., Inc., Mt. Sinai Mining Exploration and Development Corporation, Citinickel Mines &Development Corporation and AAM-PHIL Natural Resources Exploration and Development Corporation. Among the oil and gas companies, these are Oriental Petroleum & Minerals Corp., Alcorn Gold Resources Corp., Trans Asia Oil & Energy Devt. Corp., Forum Energy Philippines Corp.. The coal mining company Semirara Mining Corporation, controlled by DMCI Holdings, also refused to participate in EITI. The company accounts for 94% of our coal production and has been enjoying incentives and tax breaks from the government.

These companies’ non-participation in EITI says a lot about their disrespect for government policies and their lack of sincerity in being accountable for their operations. They want to continue to profit from our natural resources but refuse to disclose how much they are really contributing to national development.

Yes, mining is important. But our policies are too weak for the State to promote national interest over the interest of few mining firms.

This article was published in BusinessWorld Online on September 21, 2014.