News and Events

A middle ground on mining

Posted: 2011-06-06
Category: Opinion
June 6, 2011- According to Philippine government statistics, total annual mining output stands at well over P100 billion and this will increase further with expanded mining operations. With already about US$4 billion investments in the last six years, the Philippine mining industry is expected to be boosted by up to $18 billion in additional investments by 2016.

The country is sitting on vast amounts of mineral resources — Philippine nickel output alone is expected to reach seventh in the world by 2012 in terms of international production.

Despite our mineral and other wealth, roughly one-fourth of our population lives in poverty. Instead of being a boon to development, mining operations in the Philippines have often been associated with governance problems and environmental harm. Tax receipts from mining operations are also not very clearly linked to development related investments — instead, the bulk of it disappears into the general pooled budget, and we have little to show for the amount of wealth already mobilized through mining.

How are mining resources used?

Government revenues from mining come mainly from the taxes, fees, and royalties. The national government takes in about 60%, while local governments with mining operations take up the remainder. The Mining Act of 1995 and its implementing regulations led to the creation of trust funds for the rehabilitation of mining areas as well as financing social development and management programs for the local population.

These mainly focus on promoting local development and livelihoods, as well as protecting areas affected by the mining project. While useful, these appropriations appear more as compensation, rather than as additional funds to boost nation-wide development prospects. Further, taxes, fees and royalties from mining are not directly tied to human capital investments.

Ultimately, mineral deposits are exhaustible, so development strategies should consider the inevitable need to shift the economy to a non-mineral extraction based model. Wealth from the mining industry could also be used and distributed to promote sustainable development and more inclusive growth.

Other countries offer potential lessons on professionally managed financing mechanisms designed to promote more inclusive growth through mining. For instance, all oil-related revenues in Norway are first paid into the Norwegian Government Pension Fund (formerly the Norwegian Petroleum Fund), which has the principal objective to ensure that future generations also benefit from the exploitation of the country’s non-renewable resources.

In Chile, revenue from its copper industry funds the Economic and Social Stabilization Fund, which is partly used as a “”rainy day fund”" to help stabilize social spending when the economy is in bad shape. During the recent global economic slowdown, this fund was used to put together an adequate and timely stimulus package that would spur lending to households and small and medium-sized businesses, as well as boost public works projects and provide financial and other support for poor and vulnerable Chileans.

Further, in Chad, a portion of the annual revenue from the Chad-Cameroon oil pipeline project is spent on education, infrastructure, and health projects.

Governance and professional management of these funds is surely important, and our analysis of the evidence suggests that, unsurprisingly, natural resource wealth is linked to stronger economic and human development only under better governed environments.

An ‘inclusive growth trust fund’

Part of the tax revenues from the mining industry could help boost human capital investments in the Philippines — to help illustrate, a 5% mining levy on three of the country’s top mineral resources alone (e.g., gold, nickel, and copper) can generate up to P4 billion per year which can be used to finance a trust fund for human capital investments. If the projected quadrupling of investments will also (at least) quadruple output, then total revenues from such a mining levy could easily reach about P16 to 20 billion per year. This is probably very conservative — output is likely to be larger (if indeed the investments materialize) and this does not yet consider the next commodity boom cycle (which seems to be well underway).

Strong accountability mechanisms could be built into the fund itself. Resources could be allocated transparently and specifically toward programs on education and health investments for children with clear targets and timelines. For instance, it could accelerate government efforts to bridge the classrooms deficit faced by almost 19 million of our school children who have no or dilapidated classrooms, by quintupling the annual budget for classroom building. It could also help sustain the country’s flagship social protection program, Pantawid Pamilyang Pilipino Program (4Ps). In addition, it could boost our country’s human capital investments and significantly advance our research and development capabilities to compete in global markets and the knowledge economy.

Tying part of the wealth from mining to human capital investments and related competitiveness measures could make sense on several levels. First, it could help increase the accountability in the use of these resources. The creation of an inclusive growth trust fund could be underpinned by institutionalized participatory mechanisms for academia, civil society, the media, and other stakeholders to monitor allocations as well as participate in deliberations of investment decisions. This is the case in many countries that have managed to use mining resources to boost development prospects.

Even mining companies — at least the truly legitimate and professionally managed ones — could find this arrangement much more appealing than the status quo, since the lack of transparency in the industry is essentially eroding public support for extractive industries altogether, harming the reputation of all mining firms, well-run or not.

Second, such an innovative financing mechanism for development could help ensure that national-level (and not just region-specific) development objectives are promoted by the mining sector. Minerals in the country are part of the national patrimony, and not just the wealth of any specific region or province in which these are extracted from.

Third, given the instability introduced by extractive industries and the commodity boom and bust cycle, it would be useful to consider ways through which natural resource wealth could also help to protect the population from the pernicious effects of this economic instability. This is the case, for example, when part of the resources is used to boost social protection programs, such as what other countries (like Chile) did during the recent food, fuel, and financial (3Fs) crises.

Finally, human capital investments could help boost prospects for long-run growth, while at the same time promoting a much more inclusive growth process. Through this inclusive growth trust fund, we could arm the next generation with the requisite education and good health, among other human capital investments, that are needed to compete in both the domestic and global economies.

The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines. The author is associate professor of Economics at the Asian Institute of Management, and Executive Director of the AIM Policy Center. Prior to joining AIM, he was a senior economist with the United Nations in New York. Feedback at map@globelines.com.ph. For previous articles, please visit map.org.ph

This was published in BusinessWorld.

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