Philippine Mineral Industry: Philippine Mineral Industry: A ReA Re examinationexaminationA ReA Re--examinationexaminationFilomenoFilomeno S. Sta. Ana IIIS. Sta. Ana IIIAction for Economic ReformsAction for Economic Reforms

Basic PremisesBasic PremisesBasic PremisesBasic Premises

The Philippines must generate investments, jobs, The Philippines must generate investments, jobs, and revenues.and revenues.

Investments in the Philippines remain weak, despite Investments in the Philippines remain weak, despite the ascendancy of a popular and clean Pthe ascendancy of a popular and clean P--NoyNoyd i i id i i iadministration.administration.

Unemployment and underemployment are high.Unemployment and underemployment are high.

Tax effort is low (12.9 percent in 2010) despite the Tax effort is low (12.9 percent in 2010) despite the tax administration reforms being undertaken by BIR tax administration reforms being undertaken by BIR

d C d h l d hd C d h l d hand Customs under the new leadership.and Customs under the new leadership.

PremisesPremisesPremisesPremises

Exploitation of mineral resources is a source of Exploitation of mineral resources is a source of economic growth and development.economic growth and development.

Mining Law promotes responsible mining.Mining Law promotes responsible mining.

But are the premises correct?But are the premises correct?But are the premises correct?But are the premises correct?

Basic ConsiderationsBasic ConsiderationsBasic ConsiderationsBasic Considerations

Absolutely necessary Absolutely necessary conditions to enable conditions to enable responsible or responsible or developmentdevelopment--oriented mining: oriented mining:

1.1. Quality of institutions.Quality of institutions.

22 CoaseCoase theorem must hold theorem must hold 2.2. CoaseCoase theorem must hold. theorem must hold.

3.3. Internalize the costs of negative externalities.Internalize the costs of negative externalities.

Institutions MatterInstitutions MatterInstitutions MatterInstitutions Matter

Institutions (rules of the game): “Deep determinant” of Institutions (rules of the game): “Deep determinant” of longlong--term growth. Good institutions prevent the term growth. Good institutions prevent the occurrence of the resource curse.occurrence of the resource curse.occurrence of the resource curse.occurrence of the resource curse.

Indeed, we can find countries rich in natural resources Indeed, we can find countries rich in natural resources that were spared from the natural resource that were spared from the natural resource curse curse (N C d Wh (N C d Wh h f h h f h (Norway, Canada, etc. What (Norway, Canada, etc. What sets them apart from the sets them apart from the cursed countries is the quality of institutionscursed countries is the quality of institutions..

HalvorHalvor MehlumMehlum KalleKalle MoeneMoene and and RagnarRagnar TorvikTorvik (2002(2002):):HalvorHalvor MehlumMehlum, , KalleKalle MoeneMoene and and RagnarRagnar TorvikTorvik (2002(2002):):TThe he natural resource curse is explained by “a dangerous natural resource curse is explained by “a dangerous mix of grabber activities, bad institutions, and resource mix of grabber activities, bad institutions, and resource abundance.abundance.””

Building InstitutionsBuilding InstitutionsBuilding InstitutionsBuilding Institutions

But building and strengthening institutions is a But building and strengthening institutions is a longlong--term task. term task.

To illustrate, the To illustrate, the 1986 People1986 People--Power revolution and Power revolution and the Cory administration embarked on the the Cory administration embarked on the rebuilding of institutionsrebuilding of institutions. . It has been more It has been more than a than a rebuilding of institutionsrebuilding of institutions. . It has been more It has been more than a than a generation generation since reformers undertook the rebuilding since reformers undertook the rebuilding of institutions; yet, till now, the State and of institutions; yet, till now, the State and institutions remain weak.institutions remain weak.institutions remain weak.institutions remain weak.

Sequencing is critical: Put in place responsive and Sequencing is critical: Put in place responsive and capable institutions first before extraction.capable institutions first before extraction.pp

Transaction CostsTransaction CostsTransaction CostsTransaction Costs

CoaseCoase Theorem: In the absence of transaction costs, Theorem: In the absence of transaction costs, the efficient outcome is for rights (e.g., mineral the efficient outcome is for rights (e.g., mineral

i ) b ll d h ( ) h i ) b ll d h ( ) h extraction) to be allocated to the agent(s) who are extraction) to be allocated to the agent(s) who are willing to pay the highest price and in the process willing to pay the highest price and in the process compensate others who will be affected. compensate others who will be affected. pp

But note the qualification: “in the absence of But note the qualification: “in the absence of transaction costs.” Experience now tells us that the transaction costs.” Experience now tells us that the pptransaction costs in mineral extraction are high (e.g. transaction costs in mineral extraction are high (e.g. political conflict, social tensions, multiple vetoes ).political conflict, social tensions, multiple vetoes ).

Economic costsEconomic costsEconomic costsEconomic costs

Any economic valuation analysis/methodology always Any economic valuation analysis/methodology always starts starts with the with the concept of opportunity cost.concept of opportunity cost.

Wh t i th f l f th lt ti ?Wh t i th f l f th lt ti ?What is the foregone value of the alternative?What is the foregone value of the alternative?

On benefitOn benefit--cost analysis: Fullcost analysis: Full--accounting of all costs and accounting of all costs and benefits. Transaction costs and (negative) externality benefits. Transaction costs and (negative) externality ( g ) y( g ) ycosts must be factored in.costs must be factored in.

What yields the highest social net benefits prevails over What yields the highest social net benefits prevails over maximization of benefitmaximization of benefit--cost ratio cost ratio maximization of benefitmaximization of benefit--cost ratio. cost ratio.

Sensitivity to interSensitivity to inter--generational equity and trading off generational equity and trading off the present for future benefits. Identification and the present for future benefits. Identification and

ti ti ti ti f f t l f f t l estimation estimation oof future values. f future values.

Total Economic ValueTotal Economic ValueTotal Economic ValueTotal Economic Value

Total economic value= directTotal economic value= direct--use value + indirectuse value + indirect--use value + nonuse value + non--use value + intrinsic value.use value + intrinsic value.

Industry does not make proper allowance for IUV, Industry does not make proper allowance for IUV, NUV and IV.NUV and IV.

Environmental ValuesEnvironmental ValuesEnvironmental ValuesEnvironmental Values

DirectDirect--use values: goods and services directly consumed by use values: goods and services directly consumed by usersusers

IndirectIndirect--use values: indirect benefits arising from ecological use values: indirect benefits arising from ecological systemssystemssystemssystems1.1. Biological support Biological support –– links to other species and links to other species and habitatshabitats2.2. Physical Physical protectionprotection3.3. Climate Climate regulationregulationgg4.4. Global life support Global life support –– functions that aid in supporting life on Earthfunctions that aid in supporting life on Earth

NonNon--use value: option value (future use) and existence valueuse value: option value (future use) and existence value

Intrinsic value: ecology has value in itself regardless of human Intrinsic value: ecology has value in itself regardless of human use.use.

http://www.csc.noaa.gov/coastal/economics/envvaluation.http://www.csc.noaa.gov/coastal/economics/envvaluation.htmhtm, , adaptedadapted fromfrom SpurgeonSpurgeon(1988) (1988) (1988) (1988)

Contribution to EconomyContribution to EconomyContribution to EconomyContribution to Economy

Contribution of the mineral industry to the Contribution of the mineral industry to the economy is expressed mainly in terms of revenues economy is expressed mainly in terms of revenues

d ld land employment.and employment.

On both counts, performance is low.On both counts, performance is low.

Contribution to GDP and exports is insignificant, Contribution to GDP and exports is insignificant, and will remain so even even if production peaks.and will remain so even even if production peaks.

But the bigger question is: Should we make the But the bigger question is: Should we make the mineral industry an engine of growth? Answer is mineral industry an engine of growth? Answer is nono——resource curse.resource curse.

Revenue PerformanceRevenue PerformanceRevenue PerformanceRevenue Performance

Average ‘01 to Average ‘01 to ’’09:09:

Revenue effort (revenue as a percentage of GDP) of Revenue effort (revenue as a percentage of GDP) of Revenue effort (revenue as a percentage of GDP) of Revenue effort (revenue as a percentage of GDP) of the Philippines was 15.4%. This is already the Philippines was 15.4%. This is already considered low.considered low.

For the mining industry, revenue effort was a mere For the mining industry, revenue effort was a mere 9.2% (if withholding taxes remitted but not paid for 9.2% (if withholding taxes remitted but not paid for b i i i i l d d)b i i i i l d d)by mining companies are included).by mining companies are included).

If we exclide witholding taxes, the revenue effort for If we exclide witholding taxes, the revenue effort for ld b l 8%ld b l 8%mining would be equivalent to 7.8%.mining would be equivalent to 7.8%.

Why the low revenues in Why the low revenues in i i ?i i ?mining?mining?

Fiscal incentives: Fiscal incentives:

Income tax holiday or nonIncome tax holiday or non--payment of tax up to 5 years.payment of tax up to 5 years.yy p y p yp y p y

No No taxtax for for importationimportation ofof machinerymachinery, , equipmentequipment andandmaterialsmaterials..

No taxes for pollution control devices.No taxes for pollution control devices.

TaxTax deductionsdeductions for labor for labor expensesexpenses for for thethe firstfirst 5 5 yearsyears ofofpp yyoperationsoperations..

UnfairUnfair incentive incentive –– Mining Mining companiescompanies paypay occupationoccupationff th tth t ll thth thth l dl d t t idid bb fffeesfees thatthat are are lowerlower thanthan thethe landland taxes taxes paidpaid byby farmersfarmers

Fiscal incentivesFiscal incentivesFiscal incentivesFiscal incentives

Omnibus Investments ActOmnibus Investments Act

11 Income Income tax tax holidaysholidays1.1. Income Income tax tax holidaysholidays

2.2. Tax Tax exemptions on imported spare parts, exemptions on imported spare parts, wharfagewharfagedues export tax duty and impost dues export tax duty and impost feesfeesdues, export tax, duty and impost dues, export tax, duty and impost feesfees

3.3. Tax Tax credit on raw materials and credit on raw materials and suppliessupplies

4.4. Deductions Deductions from taxable income for labor expense from taxable income for labor expense and necessary and major infrastructure worksand necessary and major infrastructure works

Fiscal IncentivesFiscal IncentivesFiscal IncentivesFiscal Incentives

Mining Mining ActAct

1.1. Income tax carry forward losses; income tax Income tax carry forward losses; income tax y ;y ;accelerated depreciation on fixed assetsaccelerated depreciation on fixed assets

2.2. Incentives for pollution control devicesIncentives for pollution control devices

3.3. Tax holidays for national taxesTax holidays for national taxes

Fiscal incentives for resourceFiscal incentives for resource--seeking industries are seeking industries are gg

redundant.redundant.Main criteria for fiscal incentives:Main criteria for fiscal incentives:

11 Undersupplied goods with high social returnsUndersupplied goods with high social returns1.1. Undersupplied goods with high social returnsUndersupplied goods with high social returns

2.2. Industries included in industrial policy because Industries included in industrial policy because they create massive employment and bring forth they create massive employment and bring forth they create massive employment and bring forth they create massive employment and bring forth transformative growth.transformative growth.

Incentives for resourceIncentives for resource seeking industries are seeking industries are Incentives for resourceIncentives for resource--seeking industries are seeking industries are redundant because the presence of resources to be redundant because the presence of resources to be extracted is already the incentive.extracted is already the incentive.

Overgenerous Fiscal Overgenerous Fiscal Incentives:Incentives:

Bad Fiscal PolicyBad Fiscal PolicyTax and Duty Exemptions under Various Tax and Duty Exemptions under Various Fiscal Incentives Laws vs. Deficit (B Fiscal Incentives Laws vs. Deficit (B PhPPhP))(( ))

300

350

150

200

250

DeficitR L

50

100

150 Revenue Losses

0

50

2001 2002 2003 2004

UUndernder--declaration?declaration?UUndernder declaration?declaration?

115125

8595

105

657585

2005 2006 2007 2008 2009

354555 2005 2006 2007 2008 2009

25GVOPExports

UnderUnder--declaration, resulting declaration, resulting i l t f t ?i l t f t ?in lower payment of taxes?in lower payment of taxes?

MGB data show exports were 18% to 49% greater MGB data show exports were 18% to 49% greater than GVoP (between 2004 and 2009, except in 2009).than GVoP (between 2004 and 2009, except in 2009).

We can derive from MGB data (from 1997 to 2009) We can derive from MGB data (from 1997 to 2009) that underthat under--collection of excise tax was equivalent to collection of excise tax was equivalent to

l 54% d 83% f h l l l 54% d 83% f h l l at least 54% and up to 83% of what total annual at least 54% and up to 83% of what total annual excise taxes should be (excise taxes should be (GVoPGVoP x .02). x .02).

(S MGB Mi i I d S i i F b (S MGB Mi i I d S i i F b (Source: MGB, Mining Industry Statistics, February (Source: MGB, Mining Industry Statistics, February 2010 and March 2011.)2010 and March 2011.)

Contribution of Mining (and Contribution of Mining (and Q i ) t E l tQ i ) t E l tQuarrying) to EmploymentQuarrying) to Employment

0.376% M&QPeaks in mining employment were in ‘08 and ’09 at 0.5% of

total employment99.624% All other employment

total employment

p y

Source: MGB, Mining Industry Statistics, Feb 2010 and March 2011

Weak forward and backward Weak forward and backward li kli klinkageslinkages

Backward Backward Linkage Linkage –– buying production inputs from local buying production inputs from local gg y g p py g p psources (labor, food services, transportation services, sources (labor, food services, transportation services, utilities, etc.)utilities, etc.)

Forward Linkage – downstream industries h h d / i lthat process the products/minerals

Weak forward and backward Weak forward and backward li kli klinkageslinkages

FFor or every peso of output from the mining sector (and every peso of output from the mining sector (and this includes quarrying), only 36 centavos of input is this includes quarrying), only 36 centavos of input is sourced sourced locally (Source: NCSB Inputlocally (Source: NCSB Input--Output Technology Output Technology sourced sourced locally (Source: NCSB Inputlocally (Source: NCSB Input Output Technology Output Technology Coefficient and Inverse Matrices). Coefficient and Inverse Matrices). Meanwhile, multiplier effect of one peso increase in Meanwhile, multiplier effect of one peso increase in mining demand is mining demand is mining demand is mining demand is

•• 0.0869 for utilities sector0.0869 for utilities sector•• 0 084 for manufacturing0 084 for manufacturing•• 0.084 for manufacturing0.084 for manufacturing•• 0.05 for 0.05 for other sectorsother sectors

In sum mining’s multiplier effect is lowIn sum mining’s multiplier effect is lowIn sum, mining s multiplier effect is low.In sum, mining s multiplier effect is low.

Yes to Investments…Yes to Investments…Yes to Investments…Yes to Investments…

The question is what kind of investments should the The question is what kind of investments should the Philippines focus on.Philippines focus on.

Distinguish different kinds of investments.Distinguish different kinds of investments.

For example, portfolio investments (hot money) are For example, portfolio investments (hot money) are h f l t th l t th d i h f l t th l t th d i harmful to the real sector, as they erode price harmful to the real sector, as they erode price competitiveness, resulting in slowdown of tradable competitiveness, resulting in slowdown of tradable sectors.sectors.

For that matter, there are investments that do not For that matter, there are investments that do not contribute to contribute to highhigh--productivity employment productivity employment or that or that only reinforce the resource curse.only reinforce the resource curse.yy

SStructural change and tructural change and d ti it thd ti it thproductivity growthproductivity growth

DaniDani RodrikRodrik and Margaret McMillan (“Globalization, Structural and Margaret McMillan (“Globalization, Structural Change, and Productivity Growth, 2011)Change, and Productivity Growth, 2011)::

“ “ In our empirical work, we identify three factors that help determine In our empirical work, we identify three factors that help determine whether (and the extent to which) structural change goes in the right whether (and the extent to which) structural change goes in the right whether (and the extent to which) structural change goes in the right whether (and the extent to which) structural change goes in the right direction and contributes to overall productivity growthdirection and contributes to overall productivity growth.” .”

One factor: “ [E]One factor: “ [E]conomiesconomies with a revealed comparative advantage in with a revealed comparative advantage in O e acto : [ ]O e acto : [ ]co o esco o es t a e ea ed co pa at e ad a tage t a e ea ed co pa at e ad a tage primary primary products products are at a disadvantage. The larger the share of natural are at a disadvantage. The larger the share of natural resources in exports, the smaller the scope of productivityresources in exports, the smaller the scope of productivity--enhancing enhancing structural change. The key here is that minerals and natural resources structural change. The key here is that minerals and natural resources g yg ydo not generate much employment, unlike manufacturing industries do not generate much employment, unlike manufacturing industries and related services. Even though these “enclave” sectors typically and related services. Even though these “enclave” sectors typically operate at very high productivity, they cannot absorb the surplus labor operate at very high productivity, they cannot absorb the surplus labor f i lf i l ””from agriculturefrom agriculture.”.”