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PORTAL: Column - 2015 Volume 4 No. 4 4TH QUARTER ISSUE
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MINING AND CHRISTMAS
by BRO. CLIFFORD T. SORITA

 
As you read this article I am very sure that our Christmas Countdown has finally reached its peak. In fact Christmas in our country is one of the biggest holidays of the year. We have even earned the distinction of celebrating the world’s longest Christmas Season, with Christmas Carols and Decors heard and seen as early as September and would last till the celebration of Epiphany (or popularly known as Three Kings).

Mostly Catholics, Filipinos begin a novena (a series of nine masses) on December 16th. The masses are part of the cherished religious tradition of SIMBANG GABI, which literally means “Dawn Mass.” Filipinos go to church at four o’clock in the morning and afterward have breakfast together. A traditional drink during this season is a warm ginger tea called salabat and a traditional treat is a flat but thick yellow rice cake called bibingka.

What every Filipino looks forward to is the Noche Buena, the grand family dinner after the midnight mass. Christmas morning is the time for visiting relatives. Filipinos wear new if not their best clothes. Children do “mano”, which is kissing or bringing to their forehead the hand of an elderly person as a sign of respect. This is when they receive their pamasko (gifts), from godfathers and godmothers.
But come to think of it, each time we excitedly open our Christmas gifts we fail to appreciate the “journey of each item from the mine to beneath our Christmas Trees”. Actually at Christmas Time the mining industry has moved from the street and into peoples’ houses. Mining is now a domestic industry, where a circuit board of our Christmas Lights bubbles away to refine the copper next to a pot of Christmas meal in someone’s kitchen.

THE CHRISTMAS LIGHT

Lights play a big part in our celebration of Christmas. Christmas will never have its glitter without Christmas Lights, and thanks to Mining it will continue to brighten our festive season. The first known electrically illuminated Christmas tree was the creation of Edward H. Johnson, an associate of inventor Thomas Edison. While he was vice president of the Edison Electric Light Company, a predecessor of today’s Con Edison Electric Utility, he had Christmas tree light bulbs especially made for him. He proudly displayed his Christmas tree, which was hand-wired with 80 red, white and blue electric incandescent light bulbs the size of walnuts, on December 22, 1882 at his home on Fifth Avenue in New York City.

Incandescent lights are the ones that started it all. Even though they’re well over a hundred years old now, the technology largely remains the same. The shapes and sizes of the bulbs, on the other hand, have been in constant flux. Now we’re left with three major types of incandescent Christmas light bulbs. Nowadays LED lights have been growing in popularity for the past few years. Regardless of what you think of their light output, there’s no denying that they’re much more energy efficient than incandescent bulbs, and give off less heat.

THE CHRISTMAS ORNAMENTS AND GIFTS
These are decorations (usually made of glass, metal, or ceramics) that are used to festoon a Christmas tree. Ornaments take many different forms, from a simple round ball to highly artistic designs. Ornaments are almost always reused year after year rather than purchased annually, and family collections often contain a combination of commercially produced ornaments and decorations created by family members. Such collections are often passed on and augmented from generation to generation. Guess where do they come from … The Mining Industry.



By the way, the first decorated trees were adorned with apples, white candy canes and pastries in the shapes of stars, hearts and flowers. Glass baubles were first made in Lauscha, Germany, by Hans Greiner (1550-1609) who produced garlands of glass beads and tin figures that could be hung on trees. The popularity of these decorations grew into the production of glass figures made by highly skilled artisans with clay molds. One more thing, all those high-tech gifts we all aspire for (as gifts this Christmas Season) in this modern world, which we hope will land beneath our Christmas Tress … the dust that emerged from our mines eventually makes its way into these gifts of smartphones, electric cars, laptops, TVs, power tools and nearly anything electronic.

Another significant correlation between mining and the gift-giving predispositions of Christmas is the seasonal tendencies for gold and for silver, which usually follows it. Unlike agricultural commodities where seasonality is primarily driven by supply, as when a drought results in shortfalls in crop harvests, the seasonal tendencies of gold are driven by demand. The demand for gold fluctuates during the year based on seasonal aspects, such as the wedding season in India, which occurs around the end of the year and the U.S. wedding season that occurs in late spring. Christmas Holiday shopping is also a demand driver.

The first known electrically illuminated Christmas tree was the creation of Edward H. Johnson, an associate of inventor Thomas Edison.

THE CHRISTMAS MEALS
Celebrating Christmas in the Philippines always calls for a feast. Our Christmas dinner here in the Philippines as per Hispanic tradition, is called Noche Buena. With our streets festooned with flashing parols and twinkling holiday lights, families gather around dinner tables as soon as clocks hit midnight. Families that are not as affluent would opt for a more economical Noche Buena; the organizing of even a simple gathering despite financial difficulties reflects the importance in Filipino culture of familial (and by extension communal) unity over most other concerns.

Why did I mention this? I hope you did not think that I would start mentioning recipes and menus derived from mineral resources. But don’t you know that mining produces Halite, which is used in human and animal diet for food seasoning and food preservation?

Halite, the natural form of salt, is a very common and well-known mineral. It is found in solid masses, and as a dissolved solution in the oceans and in salt lakes. The inland lakes that are rich in salt exist in arid regions, and may also be below sea level without an outlet. These lakes evaporate during dry seasons, causing a recession in the water level and an increase of salinity content. When this happens, salt forms on the evaporated shores of the lake. This also happens as the tributaries of salt lakes are diverted for human and agricultural use, causing the lake to dry up with additional salt forming at the evaporating shoreline. Many of these inland lakes have already dried up, leaving over enormous salt deposits, which may be commercially mined.

Mining is truly an intrinsic part of our Holiday Season but never should we forget that the Giver is still important than the Gift. So as we celebrate Christmas let us always remember each and every miner (inclusive of their families and communities) that took significant strides to produce the raw mineral resources that made this Yuletide Season what it is today. So let us take the time to acknowledge all their efforts by making sure that what they do be truly sustainable within the framework of responsible mining. Merry Christmas and a Happy New Year to all.

For any personal comments or suggestions you may call 0917-4805585 or email me at csorita@yahoo.com.

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WHOLLY HOLISTIC MINING TAXES
by DEAN DELA PAZ

  Recently, before a select and limited group of media men specially gathered for a roundtable discussion with one of the most influential cabinet officials under the current dispensation, the subject of foreign investments, taxes, capital creation and global competitiveness was placed on the agenda.

Of particular interest was the official’s unusual perspective on the mining industry.

The cabinet secretary in charge of raising funds so that government might function the way it wanted declared that among the industries contributing to economic growth and development one would be singled out and the taxes imposed on players within that industry increased way beyond what other sectors pay. Rather than base the increase in tax burdens on the capacity to pay or the level of income players in the industry earned and later pay taxes on, the criteria he introduced seemed novel, out of the ordinary, unique if not rather unusual.


His rationalization for aggressive taxation relative to other industries was that mining was extractive and exploitive of a finite resource. The ground can only yield so much and the earth under our feet needed to nourish more than just the insatiable desires of the downstream mining industry but it also had to nourish crops, flora and fauna that feed Filipinos living above it.

In economics we are taught that the fact that supply is finite for anything since the Big Bang necessitates economy or the allocation of limited supplies among diverse and divergent, insatiable and infinitely unlimited demand. Of the industries nothing can be more eloquently extractive than mining.

Never mind that the secretary was a self-styled technocrat and once a professional accountant. Those who knew him intimately expected the unusual nonetheless. He was thinking out of the box. While he was obviously not a practicing economist, those intimately familiar with his style of governance, its failures and successes, also understood why the mining sector would be singled out for the relatively unusual attention, and, the even more unusual initiative for an aggressive increase in taxes.

In a sense his perspective was understandable. At least from the perspective of an accountable bureaucrat whose performance is naturally measured against revenues earned. The tax bureau under his portfolio from the very start has had few successes in meeting its targets in the half a decade of its charge. As the administration approaches it’s eleventh hour, the revenue inflows might either stay at current levels, perhaps inch up a bit, but on the opposite end where demand lurked, those were not only tremendous at this stage but were expected to heighten even more where government spending rockets during the election period.

The mining industry is a wholly holistic contributor to national development.

The demands of an administration seeking to perpetuate were increasingly massive and now within its twilight, a lot remained undone, unfinished, for many, half-baked if not nearly raw. One of those was the question of a tax overhaul for the mining industry started way back when the administration had first moved in and from there, virtually tax policies for mining petrified.

It was about time some movement took place. In its waning weeks one of the most important was the tax overhaul for mining. Unfortunately, congress remains typically preoccupied with politics. For the bureaucrat, aggressiveness was called for. But let’s be circumspect.

There are several characteristics about the mining industry that set it apart and thus make it standout as a tax and regulation issue among industries within an economy that might be similarly taxed but in much less aggressive manner.

Allow us an aside and let us simply go through a short list of the others in order to stress the relative differences between mining and other industrial economic drivers.

In relation to other extractive enterprises that exploit resources such as the logging and the oil and coal industry, for these there are domestic markets that not only provide downstream industries that immediately show the economic multiplier effect but also immediately show the expansive impact on such critical benchmarks of development such as employment generation and consumerism.

The logging industry immediately feeds into the construction and housing industries and there provides proximate and immediate proof of its downstream criticality. The same is true for the oil and coal industries where the products of the extractive industry can immediately feed into a downstream sector. The raw material is easily transformed whether in its original state or as a semi-raw material to be immediately applied and used.

Note that there are environmental concerns that affect these other extractive and exploitive industries, some in greater degrees than those that are normally applied to mining. Note likewise that in these other industries, the social impact might just as well be as critical as those applied on mining but with a rather distinct difference where economic multipliers and expansive impacts are concerned.

In the logging industry the kind of community impact where whole communities are erected from nothing, schools, hospitals, roads and whole villages from nowhere are sprung – all these do not just by happenstance appear as they do in the mining sector. While admittedly logging towns are sprung, their degrees of industrial diversity is not on the sane level as those that spring from mining. For one, the capital requirements are less. For another, the criticality of foreign direct investments are likewise lower.

On the sophistication of the emergent community, its degree of industrialization and development, the same is true if not truer for the coal and oil exploration industries. In other words the microeconomic impact on the community level where there are positive contributions that are more immediate and relevant do not occur in these industries as they do in exponential levels in mining.

All these do not make a case for aggressive taxation. On the contrary.

They make a case for a more liberal tax regime applied on the sector as the economic benefits of the sector redound from a whole slew of mining factors not readily apparent but are real nonetheless in degrees much more than those sectors that are less regulated and less taxed.

Taken against this light, the emergent picture of a diversely contributing industry such as mining to the goal of wholly and holistic national development cannot simply be framed against a single unilateral gross receipts tax whose girth, or aggressiveness, is based solely on the argument that the industry id extractive and exploitive of a finite resource. On the contrary. The mining industry is a wholly holistic contributor to national development in arenas unseen and degrees not readily apparent unless we are able to profoundly discern the full range of its diverse impacts. As investors, with respect to regulators, understand the full cost paradigm of investments, so should regulators perceive a taxable industry in the same manner, arraying full costs against full benefits. Mining is not simply a source of revenues from its income taxes. It is also a critical contributor to economic development way beyond its audited, bean-counted EBITDA (earning before interest taxes, depreciation and amortizations).

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REVERSING THE CURSE: MAXIMIZING THE POTENTIAL OF RESOURCE-DRIVEN ECONOMIES (A REACTION)
by HORACIO C. RAMOS

  The report - Reversing the Curse: Maximizing the Potential of Resource-driven Economies - adds to the body of work/research on the relationship between extractive industries and economic development. It also adds to the debate on the subject of resource curse, a thesis put forward in the ‘80s and to this date, remains unsettled. The thesis, sometimes referred to as the “paradox of plenty”, theorizes, that resource-rich countries (minerals, fuels, oil, gas) tend to have less economic growth and worse development outcomes than resource-poor countries, hence, a country’s natural resource abundance becomes a curse rather than a blessing.

The Philippines has a long history of mining and its mineral endowment is well recognized.

Our mining policy has evolved from “Filipinization” (after the expiration of American parity rights) in the ‘70s to liberalization with the Philippine Mining Act of 1995 which allows the entry of foreign corporation. The previous administration, meanwhile, shifted “from tolerance to promotion” while the current administration is focused on environmental reforms and improvement in the mining revenue sharing scheme.



In each stage of the evolution, there is that overarching objective of improving the lives of people in the host communities, contributing to economic development, and in ensuring, what is now referred to as responsible and sustainable mineral resources development.

Based from official government statistics, the Philippine mining/minerals industry, in monetary terms, has been progressively growing (albeit, inconsistently) over the last decade. However, in terms of percentage growth, the change from year-to-year is relatively small, giving industry critics the ammunition to question the government’s wisdom of promoting the utilization of the country’s mineral resources. There is this perception that the industry is so big and huge tracts of land are being mined, generating widespread damage to the environment and the impact communities but yielding the minimum economic benefits for the country.

From an alternative point of view, the mining industry’s small contribution can partly be attributed to the overall expansion of the Philippine economy which has been largely stimulated by the service sector especially the continued rise in foreign investments on business process outsourcing, of which the country is now number one and the increasing household spending due to the remittances of over 10 million overseas workers. Tourism is also rapidly growing. And of course, the Philippines remains an agricultural country.

Notwithstanding this perception, there is this recognition that mining remains a development option and that minerals left on the ground cannot generate the capital/financial wealth needed for countryside and national economic growth and development. And that mining, done responsibly, can be a positive force for development and poverty alleviation.

Expectedly, the McKinsey report did not include the Philippines among the eighty- one (81) resource-driven countries subject of the report. With a small mining industry and only one producing oil and gas deposit - Camago-Malampaya - which was placed in operation in the early 2000s, the Philippines will not satisfy criteria set forth in the study.

But for a very brief period in the 70s, the Philippines was considered a “mining country” when the industry contributed over 20% to the country’s total exports, a measure then of what a mining country is.

The concerns raised in the McKinsey report, however, also rings true for the Philippines:
• That the government is under pressure from citizens to reap greater share of the rewards of developing the natural resources;
• That extractive industries are uncertain about their licenses and permits;
• That the government have failed to put up appropriate fiscal regime and supportive business environment thus discouraging investors, among others;
• Not to mention the chronic issue of corruption in the government;
• The unequal sharing of benefits from mining operations;
• As well as environmental and social disruption/impacts as a result of mining activities.

The many studies on the relationship between extractive industries and economic development has failed to reach a definite conclusion that being resource abundant is good or bad for a country. Some considered mineral-rich countries alone, some considered oil/gas/mineral-rich countries and others considered oil/gas-rich countries only.

One study, the 2002 World Bank/International Finance Corporation study - Treasure or Trouble: Mining in Developing Countries – consciously looked only at mining countries (fifty one in all) and stayed away from the large oil-rich countries for three reasons:

• The sheer size of the oil and gas sector in a typical oil and gas country is much larger, relative to the respective economy, than the size of a mining sector in a typical mining country.

The challenge is to turn the national endowment of mineral resources into national wealth.

• The structure of the value chain in mining typically involves a longer exploration period, a longer lead time between con struction and production, and a different footprint in terms of the environmental, social, and economic changes in a region. These factors influence the flow of revenues normally paid to governments by mining companies. Thus, the share of minerals and metals in a mining country’s exports is a very different proxy for revenue flows to governments than that indi cated by the share of oil and gas in a country’s exports.

• Finally, the social and political dynamics involved in mining, in particular underground mining, differ from those in oil and gas. In many mining countries, as diverse as China, Poland, Romania, and Zambia, major political changes have occurred with the active participation of miners and mining communities. While mining can bring social disruption, it also appears in many cases to generate an extraordinary social cohesion. This can be an important factor in the dynamics of the political economy of a mining country, rarely seen in oil and gas countries.

The study concluded that:
• First, in more cases than not, mining countries appear to fare better than other countries in their respective regions.

• Second, where they do fare well, their good performance appears to be associated mostly with institutional stability and overall good economic management, particularly that relating to the management of revenues from the mining sector and the management of the sector itself.

• Third, the need to build institutional stability and improve economic management is most urgent in countries where the mining sector dominates an economy and where poor economic management and weak institutions are persistent features.

In addition, the study stated that:
• In contrast to some analyses, this paper can find no reason to assume a causal relationship between a dominant mining sector and overwhelming economic ills.

• The challenge is to turn the national endowment of mineral resources into national wealth.

The new growth model on how to transform the potential resource windfall into long-term prosperity espoused in the McKinsey report, meanwhile, is anchored on six core elements:
• Building the institutions and governance of the resources sector;
• Developing infrastructure;
• Ensuring robust fiscal policy and competitiveness;
• Supporting local content;
• Deciding how to spend a resources windfall wisely; and
• Transforming resource wealth into broader economic development.

Both study points to a common denominator – governance. And two inter-related governance initiatives by the current government are worth mentioning:

01. The proposed mining revenue sharing scheme pending in the Philippine congress as House Bill No. 5367, where the government, as owner of the minerals, seeks to get 10% of a company’s gross revenues or a 55% share in adjusted net mining revenue yearly, whichever is higher; and 60% of any windfall profit above the net revenue threshold. The government says that this is equitable, the industry feels that it is excessive. Given the nearness of the elections and with congress pre-occupied with the Bangsamoro Basic Law, its passage can happen in the next congress at the earliest. And with the bill’s link to the lifting of the moratorium on the issuance of new mining tenements, the longer it will take to approved the bill, the longer it will take to realize the industry’s growth potential; and

02. Participation in the Extractive
Industry Transparency Initiative or EITI. The President has expressed confidence that implementation of the EITI will “improve transparency in the collection and payment of government taxes and other revenue from extractive industries”. Considered as a test of transparency and accountability, progression from being a candidate-country to being a compliant country is still a year or two away at the earliest. Being a two-way initiative, we need to see a report tracing the full financial flow of company payments, government revenues and national and local government utilization of such revenues. Such report will give us the clear picture if mining companies are paying the right taxes or if the three levels of the government are using (or misusing) such revenues properly.

That these initiatives will result to meaningful changes in the way the government collects, shares and manages the benefits from the Philippine mining/minerals industry and in regulating the industry itself is something to look forward to.


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