Legislative Initiatives Poised to Make Life More Difficult for Mineral Explorationists

Monday, 1 October 2012

For the past few weeks, the mining industry was again in the limelight as the much eagerly anticipated Executive Order (EO) No. 79 was released and the International Monetary Fund (IMF) study on Philippine mining fiscal regime was published. Little did we know that various measures affecting the industry were silently being deliberated and passed by the 15th Congress.

There were numerous moves in both chambers to repeal the Philippine Mining Act of 1995. In the House of Representatives, Congressmen Lorenzo Tañada III and Kaka Bag-ao, both from the progressive bloc, filed two bills, House Bill (HB) Nos. 206 and 3763 respectively, entitled “An Act to Regulate the Rational Exploration, Development and Utilization of Mineral Resources, and to ensure the Equitable Sharing of Benefits for the State, Indigenous Peoples and Local Communities, and for other Purposes”. Both bills are still pending with the Committee on Natural Resources since 2010.

On the other hand, Senator Sergio Osmeña III filed a similar bill in the Senate. Under Senate Bill (SB) No. 3126, mineral resources development, utilization and processing shall be reserved for Filipino citizens and Filipino corporations. On the other hand, exploration shall be exclusively and directly undertaken by the State through the Mines and Geosciences Bureau and cannot be delegated or contracted out to private corporations or persons. Also, Financial or Technical Assistance Agreements, or any other similar agreements, contracts, and/or executive issuances granting license or permission to explore, develop and/or utilize mineral resources shall not be awarded to foreign entities or persons. Exploration activities shall be non-invasive such as seismic, gravity, magnetic, electromagnetic, radar, induced polarization, radio wave and electro-geochemical. Open-pit mining method for the extraction of mineral ores and the submarine tailings disposal method are likewise prohibited. Under Osmeña’s bill, the contractor shall pay at least ten per cent (10%) of the gross revenues as royalty to indigenous cultural communities (ICCs) in case of mineral operations within ancestral domains, the payment of which shall directly be given to the ICCs in a process that build on their traditional and customary laws. Community development programs shall not be considered as royalty payment. In no case shall mining rights under the proposed bill be transferrable and violation of this provision shall cause the cancellation of the agreement and forfeiture of assets and equipment of the contractor in favor of the State.

Similarly HB No. 1635 authored by Rep. Maximo Rodriguez, Jr. entitled “An Act Protecting the Rights of Indigenous Peoples Affected by Mining Operations in Ancestral Domains proposes a five percent (5%) royalty based on gross output. The bill is currently pending with the House Committee on National Cultural Communities since 2 August 2010.

The House of Representatives passed HB No. 5485 sponsored by Rep. Rufus Rodriguez, which disallows all extractive activities such as, but not limited to, logging and mining in protection forestlands. Under the bill, protection forestlands consist of all mossy and old-growth forests; freshwater, swamps and marshes; all areas along the bank of rivers and streams, and the shores of the seas and lakes throughout their entire length and within a zone of three (3) meters in urban areas, twenty (20) meters in agricultural areas, and forty (40) meters in forest areas. The bill was approved by the House on 13 December 2011 and transmitted to and received by the Senate on 15 December 2011. Concurrent with this bill is HB 5860 also authored by Rep Rufus Rodriguez entitled “An Act Providing for the Delineation of the Specific Forest Limits of the Public Domain and for Other Purposes” which was approved by the House on 21 March 2012 and transmitted to and received by the Senate on 26 March 2012.

In the Senate, Senator Loren Legarda introduced SB No. 1365 calling for an amendment of the Philippine Mining Act of 1995 by giving local government units the right to declare areas in their jurisdiction as no-mining zones. Senator Legarda also introduced SB No. 1359 proposing for the institutionalization of a Philippine Economic Environmental and Natural Resources Accounting (PEENRA) System. The PEENRA framework includes accounting for environmental quality and waste disposal services, depreciation of natural capital, and environmental damages. PEENRA aims to generate physical and monetary estimates of the depletion of selected natural resources and the degradation of environmental media arising from selected economic activities. As the economy continues to capitalize on its water, forest, mineral and other natural resources in its quest for higher growth, Sen. Legarda believes that the framework will address concerns as to the physical and monetary impact of this economic growth on the environment.

Representative Neptali Gonzales II sponsored HB No. 4410 “An Act Providing for the Direct Remittance to the Host Local Government of its Forty Percent Share (40%) of the Proceeds Derived from the Utilization and Development of National Wealth, amending for the Purpose Section 293 of Republic Act No. 7160 as Amended Otherwise Known as the Local Government Code of 1991”. The bill was approved by the House on 16 May 2011 and transmitted to and received by the Senate on 24 May 2011.

Relatedly, in the International Monetary Fund (IMF) Report “Philippines: Reform of the Fiscal Regimes for Mining and Petroleum” published on June 12, the IMF recommended that Congress enact a continuous appropriation for the distribution of the share of local government units (LGU), and payments should be made based on estimated amounts with adjustments when final amounts are known to improve the procedures for transferring funds and to foster local support for large-scale mining. The IMF also recommended that a joint monitoring commission, with national and local representation be introduced to oversee the distribution of revenues to LGUs.

The IMF mission was requested by the Philippine government to identify and provide advice on measures that would increase government revenue from the mining sector, but which would not require legislative action. Initially, the proposed measure was to extend the 5 percent mineral royalty, which currently applies only to mines located in mineral reservations, to all mines by way of an administrative order. But the IMF realized that this could be problematic as the precedent used to justify the imposition of royalties explicitly provided only for royalties on minerals produced in mineral reservations.

Sen. Ralph G. Recto introduced SB No. 2754 proposing to increase the tax on minerals and quarry resources from two percent (2%) to seven percent (7%). Under the bill the potential revenue from the proposed increased excise tax on mineral products shall be equally divided between the national government and the LGUs where the mineral and quarry resources are extracted. In particular, revenues from the three and a half percent (3.5%) tax on minerals shall accrue to the National Treasury, while revenues from the other three and a half percent (3.5%) tax on minerals shall be remitted directly to the LGUs as support for their Special Education Fund.

Nevertheless, the IMF admitted that simply extending the royalty to mines outside a mineral reservation or increasing the rate of the mineral excise would increase production-based levies and would make the fiscal regime unattractive for mining projects of low profitability.

It has been reported that for the Mining Industry Coordinating Council, (MICC), created and deputized under EO 79 to prepare its implementing rules and regulations, the question of whether or not mining would continue to enjoy incentives depends on the proposed legislation being crafted by the Department of Finance (DOF) to rationalize the revenue and benefit sharing-schemes and incentives given to mining companies. The DOF is also considering inputs from the IMF Report, which recommended among others, the repeal of the Board of Investments and Mining Act tax incentives. As reported, the MICC is inclined to strip prospective mining projects of incentives, a move that has to go through legislation, which the Aquino administration is expected to prioritize the passage of. However until the issue on government share is resolved by the MICC, the question on incentives cannot be tackled. The government cannot take away existing tax incentives given to mining projects but there will be no new incentives for mines opened in the future if Congress strips existing incentives.

It appears that the confluence of these legislative and policy measures currently being undertaken by the Philippine government will cause investors in the industry to reevaluate their business strategies and cash flow analyses. As it is, mineral explorationists will face the inevitable task of telling their shareholders if it is worth spending further risk capital on the Philippines or it is time to pack their bags and leave for safer and stable havens.

Fernando “Ronnie” Peñarroyo is the Managing Partner of Puno and Peñarroyo Law Offices (www.punopenalaw.com). He specializes in Energy and Resources Law, Project Finance and Business Development.

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