FINAL REPORT

THE PHILIPPINE MINERAL SECTOR TO 2010:

POLICY AND RECOMMENDATIONS

Asian Development Bank

Mineral Sector Study
T. A. NO.1894 - PHI

October 10,1994

Prepared by

MINERAL POLICY PROGIUM

PROGRAM ON RESOURCES: ENERGY AND MINERALS
EAST-WEST CENTER, HONOLULU, HAWAII

Project Director - Dr. Allen L. Clark

 TABLE OF CONTENTS

PREFACE uiv

EXECUTIVE SUMMARY/RECO~NDATIONS nvii

PART I: THE MINERAL SECTOR

Chapter Page

I. 1 Geology and Mineral Resources

Introduction
Mineralization
Precious Metals
Gold
Silver
Platinum
Iron and Ferro-Alloys
Iron
Chromite
Nickel
Manganese
Non-Ferrous Metals
Copper
Lead and Zinc
Molybdenum
Mercury
Aluminum
General Geology
summary

History of Philippine Mining

Introduction
Spanish Era (1 52 1- 1898)
American Era (1 898- 1935)
Philippine Commonwealth Era (1 935-1941)
Japanese Era (1 941-1 945)
Post-War Era (1 946-1955)
Renaissance Era (1 95 5- 1972)
Martial Law Era (1 972-1985)
Decline of the Philippine Mining Industry
Government Intervention
World Economic Factors
Increased Taxes
Industry Debt Structure
Interest Rates
Foreign Investor Flight
Environmental Factors
Post-Edsa Revolution (1 985-present)
Industry Overview
Equity Investment
Mines Closures
summary
I. 3 Present Day Philippine Mining Industry

Introduction
Atlas Construction and Mining Development Corporation
Benguet Corporation
Lepanto Consolidated and Mining Development Corporation
Manila Mining Corporation
Marcopper Mining Corporation
Maricalurn Mining Corporation
Philex Mining Corporation
Other Metal Producers
Nickel
Chromite

I. 4 Philippine Mineral Investment Climate

Introduction
Mineral Exploration Criteria
Mine Development Criteria
Mineral Sector Specific Issues
Lack of Modern Mining Code
60 : 40 Filipino-Foreign Ownership
Peace and Security Issues
Land Access Security of Title
Negotiated vs. Declared Development Environment
Lack of Transparency
Environmental Uncertainty
Local Government Issues
 Litigation in the Mineral Sector
Small-Scale Mining
Administrative Structure
National Investment Climate
Summary
Recommendations

PART 11: MINERAL SECTOR MACROECONOMICS AND

DEVELOPMENT SCENARIOS (1995-2010)

11. 1 Historical Contribution of the Minerals Sector

Impact on Gross National Product (GNP)

Impact on Export Levels
Interpreting Export Trends
Factors Affecting Gold Exports
Impact on Imports
Lack of Sector-Specific Import Statistics
Inferences From Input-Output Analysis
Multiplier Impact of Mineral Sector on Economy
Government Revenues and Fiscal Policy
Excise Tax
VAT Tax
Income Tax
Withholding Tax
Property Taxes
 Import Duties
Local Taxes
Planning for Improved Macroeconomics Performance
summary
Recommendations

II. 2 Philippine Mineral Resource Assessment

Introduction
Resource Assessment
Objectives of Resource Assessment
Estimation of Mineral Resource Potential
Delphi Estimation Procedures and Results
Estimation of Philippine Resource Endowment
summary
Recommendations

11.3 Mineral Sector Development Scenarios II-47

Factors Controlling Mineral Development

Development Scenario Assumptions
Other Development Scenarios
summary

II. 4 Forecast of Future Mineral Sector Development in the Philippines II-55

Overview of the Forecast

Projections of Future Mineral Sector Activities
 Export Revenue
Capital Investment
Imports
Fiscal Flows
summary
Recommendations

PART 111: PHILIPPINE MINERAL LEGISLATION

111. 1 Legislation and Policy

Philippine Constitution of 1987

Article XII- National Economy and Patrimony
Article XIII- Social Justice and Human Rights
Existing Mineral Legislation and Orders
Pending Mineral Legislation
60:40 Filipino-Foreign Ownership Rule

111.2 Mineral Production Sharing Agreements and Financial and

Technical Assistance Agreements

Evolution of Mineral Production Sharing Agreements

Executive Order Number 279
Administrative Orders Numbers 57 and 32
Senate Bill 1639 (S.B. 1639)
 New Provisions or Changes of S.B. 1ti39 from A 0 57 and 32 111-1 7
Evolution of Financial and Techcal Assistance Agreements 111-1 8
Executive Order 279 111-18
Administrative Order Number 63 111-19
Senate Bill 1639 111-19
New Provisions or Changes in S.B. 1639 from A 0 63 111-20

111.3 FTAA and MPSA Negotiations In-22

Negotiations Structure
Problems in Negotiating Procedure
Why are FTAAs and MPSAs Negotiated
What is Being Negotiated in FTAAs and MPSAs
When is the FTAAs or MPSAs Negotiated
Where are FTAAs or MPSAs Negotiated
Who Negotiates the FTAAs and MPSAs
An Economic Comparison of the FTAA and MPSA Agreements
summary
Recommendations

PART IV: KEY ISSUES OF THE PHILIPPINE MINERAL SECTOR

IV. 1 The Potential Impact of Political Decentralization on the

Mineral Sector of the Philippines
Introduction IV- 1
Decentralization and the Transfer of Existing Functions iv-3
The Local Government Code of 1991 iv-3
Impact on Administration of the Prospecting/Exploration
Permit System iv-4
Revenue Sources of Local Authorities 1v-5
Internal Revenue-Sharing and LGU Taxation 1v-5
Effect of LGU Taxes on the Mining Sector 1v-6
Allocation and Flow of "National Wealth" Funds 1v-6
Effect of "National Wealth" Revenue Sharing 1v-7
Early Implementation Experience of Decentralization Strategy 1v-9
Inequality in the Current IRA Formulas IV- 10
Decentralization and the Costs of Establishing New Projects 1v-12
Decentralization and Induced Inequities IV- 13
Inequalities Between Adjacent Areas 1v-13
Costs and Benefits of Mine Development to Local Residents 1v-15
Compensatory Programs and Barriers to Participation 1v-16
"Resident" versus "Political" Priorities 1v-17
Mistrust of Government Intentions 1v-18
Decentralization and Regional Infrastructure Planning IV- 18
"Local" versus "Optimal" Infrastructure Priorities IV- 19
Infrastructure Choices and Project Timetables 1v-20
Power and the Region 1v-20

- Exploration Access: A Secondary Consideration 1v-21

Recommendations 1v-22
Suggestions for the Existing Situation 1v-22
The "National Wealth" Formula 1v-23
The Allocation Problem IV-23
 The Timing and Volatility Problem
Amalgamation of LGU Development Planning Interests
Suggestions for Addressing Future Mining Development
Responsibilities and Comparative Advantage
Costs of Mining Company Involvement
Framework for National Government Involvement
Planning Physical Inhtmcture!
Mining Enclaves and Regional Infrastructure Links
Summary of Recommendations

IV. 2 Environmental Regulations of the Mining Industry

in the Philippines

Introduction
Legal Structure of Environmental Regulation
Industry Promotion versus Environmental Regulation: An
Old Problem Revisited
Resource Utilization and Environmental Management
Setting Appropriate Standards
Environmental Monitoring
The Problem of Changing Mine Releases Over Time
Problems of Implementing an EIA Scheme for the Mining Sector
The EIA-Planning or Regulatory Vehicle
The FeasibilityEIA Dilemma
Articulating Objectives and Timetables of Environmental Policy
for the Mineral Sector
Environmental Objectives
Timing of Activities
 Environmental Compensation: A Tale of Two Schemes
The Tailings\Waste Rock Fee Scheme
The Environmental Guarantee Fund
Operation and Funding
Potential Problems With EGF Scheme
Proposed Environmental Regulation
Reconciliation of Environmental Compensation Schemes
into a Unified Environmental Policy
Reclamation of Mining Areas
Planning Reclamation
Vehicles for Funding Reclamation Schemes
Recommendations

IV. 3 Attracting Foreign Investment to the Philippine Mineral Sector

Introduction
The Current Economy and the President's Recovery Agenda
The Potential Benefits of Foreign Investment for National
Socioeconomic Development
Offsetting Risks of Foreign Investment and How They
Be Controlled
What Do Prospective Foreign Investors Require and How Can
Their Investments be Effectively Promoted
Investor Prerequisites
Investment Security
A Transparent Host-Government Legal Framework
A Competitive Return on Investment
Essential Characteristics of an Effective Host Government
 Promotion Effort
How Well Does The Current Philippine Foreign Investment
Climate Satisfy Investors' Requirements and What Concrete
Host-Government Initiatives Can Be Recommended To
Improve That Climate
Long Term Investment Security
A Transparent Legal Framework
For Foreign Investments in General
For Mineral Sector Investments in Particular
An Internationally Competitive Return on Investment
How Well Does the Board of Investment Manage and Promote
Foreign Investment and What Recommendations Can be Offered To
Strengthen Its Capabilities
The Structure, Authority and Placement of the Board
The Structure and Functions of the Board's Secretariat
summary
Recommendations

PART V: A QUANTITATIVE APPROACH TO PHILIPPINE MINERAL

POLICY

V. 1 Analysis of the Current Fiscal Regime

Introduction
Methodology
Specifications of the Mine Models
Scenario 1-Overall Comparison of the FTAA and MPSA
What was Analyzed
Objective of the Analysis
Where is the Analysis Presented
Results of the Analysis
Conclusion
Recommendation
Discussion
Scenario 2-MPSA Incentives: Analysis of the Investment Allowance
What was Analyzed
Objective of the Analysis
Where is the Analysis Presented
Results of the Analysis
Conclusion
Recommendation
Discussion
Investment Allowance with Tax Holiday
Investment Allowance without Tax Holiday
Scenario 3-MPSA Incentives: Analysis of Income Tax Holiday
What was Analyzed
Objective of the Analysis
Where is the Analysis Presented
Results of the Analysis
Conclusion
Recommendation
Discussion
Effects on NPV and Effective Tax Rates
 Effects on Project Economics (IRR)
Scenario 4-Analysis of Borrowed Funds (Leveraged Analysis)
What was Analyzed
Objective of the Analysis
Where is the analysis Presented
Results of the Analysis
Conclusion
Recommendation
Discussion
Scenario 5-Leverage Combined With Incentives
What was Analyzed
Objectives of the Analysis
Where is the Analysis Presented
Results of the Analysis
Conclusion
Recommendations
Discussion
Case 1
Case 2
Case 3
Case 4
Scenario 6-Analysis of the FTAA: Income Tax Holiday
What was Analyzed
Objective of the Analysis
Where is the Analysis Presented
Results of the Analysis
Conclusions
Recommendation

xiii
Discussion
Scenario 7-Analysis of the FTAA: Effects of Borrowing (Leverage)
What was Analyzed
Objective of the Analysis
Where is the Analysis Presented
Results of the Analysis
Conclusion
Recommendations
Recommendations for the Fiscal Regime of the Philippines
Overall Recommendations
Summary of Specific Recommendations for the Mining Act
or Implementing Guidelines Regarding the MPSA Fiscal Regime
Government Share
Government Share
Interest Payments
Investment Allowance (IA)
Investment Allowance (IA)
Summary of Specific Recommendations for the Mining Act
or Implementing Guideline Regarding the FTAA Fiscal Regime
The Case Against the Tax Holiday in the Philippine Mining Industry
Fails to Achieve Goal
Promotes High-Grading
Promotes and Subsidizes Inefficient Firms
Tax Holidays are Expensive
Tax Holidays Do Not Make (or Break) a Project
Tax Holidays Do Not Make FTAA Agreements
More Attractive
Tax Holidays Create a Biased Tax Regime
V. 2 Financial Primer for the Philippines

Economic Evaluation
Discounted Cash Flow Analysis
Discount
Current Versus Constant Dollars
Cash Flow
Net Present Value (NPV)
Advantages of Using NPV
Disadvantages of NPV
Internal Rate of Return (IRR)
Advantages of IRR
Disadvantages of IRR
Effective Tax Rates
Debt to Equity Ratios: Increasing Profitability By Borrowing
Capital

V. 3 Taxation Primer for the Philippines

Tax Policy Objectives

Philippine Tax Objectives
Criteria for Evaluating Taxation Devices
Neutrality
Stability
Imposition
Administration
Mineral Rent
Types of Mineral Taxation
 Royaltiedad valorern/excise tax
Income Tax
Dividend Withholding
Rent Resource Tax
Other Taxes
Tax Holidays

V. 4 A Comparison of International Mining Taxes

Comparison of Effective Tax Rates

International Tax Reference Charts
summary
Recommendations

V. 5 The Philippine Fiscal Regime: Aa Invitation to High Grade?

High Grading: Definition

Relationship of Revenue, High Grading,and Excise Taxes
Excise Tax: Encourages High Grading
FTAA Arrangements
MPSA Arrangements

xvi
PART VI: POLICY AND ADMINISTRATION OF THE MINERALS
SECTOR

VI. 1 The Department of Environment and Natural Resources and the

Mines and Geosciences Bureau vi-1
Introduction VI- 1
Department of Environment and Natural Resources VI- 1
Organizational Structure of the Department of
Environment and Natural Resources v1-2
Mines and Geosciences Bureau v1-6
Historical Evolution v1-6
The Present Day Mines and Geosciences Bureau v1-7
Structural Changes of the Mines and Geosciences Bureau VI- 12
Staffing Changes of the Mines and Geosciences Bureau v1-12
S-ary v1-14

VI. 2 Organizational Placement and Functional Activities of the

Mines and Geosciences Bureau
Introduction
Key Issues of Organization and Function

Can the Transfer be Mandated in the Mining Act

Is the Transfer Desired by Government
What is the Function of the MGB
Mineral Sector Perspective
Basic Geologic Data Needs
Mining Titles

xvii
 Technical Support and Oversight
Options for Organization and Function
Functional Conflict Within MGB's Mandate
Critical Mass and Efficiency
Summary
Recommendations

VI. 3 Mineral Resource Data

Responsible Agencies
Department of Environment and Natural Resources
Department of Energy
Department of Science and Technology
Data Generation Activities
Mandated Reporting
Department of Environment and Natural Resources
Department of Energy
Department of Science and Technology
National Research Activities
Department of Environmental and Natural Resources
Department of Energy
Philippine Council for Industry and Energy Research
and Development
Cooperative Programs
summary
Recommendations

xviii
VI. 4 Mineral Information Systems

Overview
Mines and Geosciences Bureau Information System
The Mines Title System (MTS)
The Mineral Reserves Inventory System (MRIS)
Mineral Industry Database (MID)
summary
Recommendations

M. 5 Data and Information System Needs

Overall Status
Mines and Geosciences Bureau Computerization
The Plan
Hardware Acquisition
Intra-Office Data Sharing
Sustaining the Data Processing Activ~ty
Inter-Office Data Sharing
Data Acquisition Needs
summary
Recommendations

PART VII: SELECTED REFERENCES

Books, Periodicals and Papers

Legislation and Orders
 LIST OF FIGURES

Figure Page

Mineral Sector as Percent of GDP

Mineral Exports and Peso Earnings
FOB Prices Received fiom Mineral Exports
Volume of Mineral Production
Generalized Schematic of Delphi Estimation Procedure Proposed
for the Philippines
TerraneIDeposit Resource Assessment Methodology
Terrane Map of the Philippines
Organizational Chart of Committees Created under A 0 57,
Series of 1989 Implementing EO 279 Showing
Narnes/Agencies/Sectors
Functional Chart of Committees Created Under A 0 57
Series of 1989 Implementing EO 279
VI. 1 Department of Environment and Natural Resources
VI. 2 Department of Environment and Natural Resources-Regional Offices
VI. 3 Mines and Geosciences Bureau- Organizational Chart
VI. 4 Mines and Geosciences Bureau- Functional Chart
VI. 5 Department of Energy Organizational Chart-
VI. 6 Department of Sciences and Technology
VI. 7 PCIERD Organizational Structure
VI. 8 Planned MGB Information Management System
 LIST OF TABLES

Table Page

Summary of the Number of Producing,Abandoned, Non-opcrating,

Explored Prospects Under Development/Exploration
Planned and Actual Equity Investments in the Mining Industry,
1985-1992
Major Philippine Mines Which Have Ceased Operation
Major Precious and Base Metal Mines Operating in the
Philippines (1 993)
Mineral Exploration Incentives
Ranking of Investment Decision Factors at the Exploration and
Mining Investment Stage 1-37
Ranking of Selected Countries for Mineral Investment 1-39
A Comparative Evaluation 1-43
Contribution to Gross Domestic Product 11-2
Value of Exports 11-3
Mineral Production 11-4
Planning Targets- Real GDP by Industrial Origin 11-7
Philippine Gold Production by Sector II- 10
Production Cost Stnrcture of Selected Metals 11-15
Sectoral Backward-Forward Linkages of Major Mineral
Commodities and Selected Economic Sectors
Taxes Paid
Needs and Benefits of Resource Assessment in the Philippines
Philippine Mineral Deposit Types
Porphyry Copper-Gold Model
 Number of New Mineral Deposits Estimated to be Developed
in the Philippines During the Period 1995-2015
Deposit Type and Number of New Deposits to be Developed
(0.50 Confidence Level)
Known Mineral Deposits With High Grade Development Potential,
1995-2000
Scenario A Rapid Development
Scenario B Baseline Development
Scenario C Slow Development
Value in Mineral Output
Investment in New Mining Capacity
Imports for Operating Supplies for Major Projects
Projected Fiscal Receipts From Mining
Summary Table of Resource Development Scenarios
Mineral Sector Executive and Administrative Orders
Comparison of Past and Proposed Mineral Legislations
Far Southeast Project: Comparison of MPSA and FTAA
Fiscal Regime
Arimco Project (Didipio); Comparison of MPSA and FTAA
Fiscal Regime
IV. 1 Revenue Distribution at Local Government Level
v. 1 Parameters for the Financial Models
v. 2 Far Southeast Project: Comparison of FTAA and MPSA
Fiscal Regimes
Arimco (Didipio): Comparison of MPSA and FTAA
Fiscal Regimes
Investment Allowance (IA) as a Deduction From Taxable
Income, With 5-Year Tax Holiday
 Investment Allowance (IA) as a Deduction From Taxable
Income, Without 5-Year Tax Holiday
Far Southeast Project: Effects of the Income Tax Holiday (MPSA)
Arimco Project (Didipio): Effects of the Income Tax Holiday (MPSA)
Far Southeast Project: Effects of Borrowing (leveraging)
Far Southeast Project: Effects of borrowing (leveraging)
combined with incentives proposed in Mining Act for MPSA
Far Southeast Project: Effects of the Income Tax Holiday (FTAA)
Arimco Project (Didipio): Effects of the Income Tax Holiday (FTAA)
Arimco Project (Didipio): Effects of Borrowing (leveraging)
Without Tax Holiday (FTAA)
Example of a Cash Flow Calculation
International Comparison of Effective Tax Rates
International Income Tax Provisions (1993)
Summary of Profit and Nonprofit Tax Rates in Australia and
Selected Foreign Jurisdictions (1993)
FTAA With 5-Year Tax Holiday
Effect of High Grading on Ore Grades and Revenues
Revenue Per Ton of Ore
Taxes, Incentives, and Their Potential to Cause High Grading
in the Philippines
VI. 1 Reorganization Options for Mines and Geosciences Bureau
VI. 2 Mandated Mineral Reporting
VI. 3 Mandated Reports to the Department of Energy
VI. 4 Current Research of the Mines and Geosciences Bureau
VI. 5 Current Research of the Department of Energy
VI. 6 PCIERD Sponsored Research
VI. 7 Cooperative Projects of DENR/DOE/DOST

xxiii
 PREFACE

The Philippines once led Southeast Asia in terms of economic growth, with the
mining sector providing up to 20 percent of foreign exchange earnings (1980). The
Philippines now finds itself lagging behind most Asian nations in economic growth, with
the mining sector providing less than 5 percent of foreign exchange earnings. For the
mineral sector, the overall downward trend continues with four gold mines and one
copper mine ceasing operation between 1991 and 1994. The questions which this study
addresses in the context of these problems are :
1. What are the factors which resulted in the decline of the Philippine Mining industry?
2. What actions need to be taken by industry and government to revitalize the industry?
3. What are the emerging problems and concerns that must be addressed if the mining
sector, and the Philippines, is to grow and prosper?
To answer these questions and related issues the Asian Development Bank, with
the endorsement of the Government of the Philippines, undertook to support T.A. No.
1894-PHI the Philippine Mineral Sector Study.. This study was undertaken by the East-
West Center's Program on Resources: Energy and Minerals of Honolulu, Hawaii. The
principal terms of reference for T.A. No. 1894-PHI- arc summarized as follows:
"(i) make a quantified assessment of the non-fuel mineral resources potential of
the Philippines; (ii) review and examine the effectiveness and adequacy of the
various Government policies and existing legal and regulatory frameworks for the
development of the mineral sector, and identify areas where policy reforms and
Government assistance would be deskible to accelerate the development of the
non-fuel mineral sector; and (iii) formulate a Mineral Sector Development Plan
that identifies and recommends actions and reforms to be implemented by the
Government during the next five years to accelerate the development of the
mineral sector and a long-term strategic plan for the mineral sector up to the year
2010."
 The revitalization of the Philippine mineral sector will be neither easy nor quick
because of the scope and magnitude of activities to be undertaken. There are. however, a
number of activities which can be taken in the short term that will quickly expedite the
revitalization of the industry. Chief among these actions are 1) the passage of enabling
mining legislation; 2) rationalization of Government procedures for the mining sector
from exploration through mine closure; 3) strengthening of the Mines and Geosciences
Bureau; 4) development and implementation of an effective mineral sector promotional
program: and, 5) resolution of local and regional issues which impede mineral
development. In all of these activities, however, there must be the recognition and
promotion of the Government's objectives of economic growth, decentralization and the
empowerment of the people; all within the concepts of environmental integrity and
sustainable development.
At the outset the achievement of the proceeding objectives might appear to rival
the "Tasks of Hercules". Fortunately, realizing the objectives is not quite so difficult nor
does it require anythmg except rational decision-making to achieve.
The revitalization of the Philippine Mineral Sector, however, will not be without
difficulty as it must be accomplished within both regional and international constraints;
particularly in terms of attracting foreign capital, accessing foreign markets and
developing value-added capacity to optimize the returns for mineral development. The
primary difficulty lies in the fact that the above objectives are virtually the same for the
mineral sector of all nations. As a result, the extent to which the Philippine mineral
sector competes favorably, as a partner in global mineral development, will largely be
dependent on how competitive the investment climate of the Philippines will be vis-a-vis
other nations. At present the Philippine investment climate for mining is among the
competitive in the world evidenced by the low levels of both domestic and foreign
exploration and development w i t h the nation.
The primary activities involved with this study have been to assess how the
existing policy and legislation could be modified to create a more competitive investment
climate while preserving the basic objectives of the Government. It is the purpose of this
study to address these issues by a) defining the problems; b) providing options for
solutions based on international norms; c) defining an overall framework for
implementing the options and; d) providing both a medium and a long-term master plan
for mineral development in the Philippines
In undertaking this study, we have been supported by the Mines and Geosciences
Bureau of the Department of Environment and Natural Resources and we wish to express
our sincere appreciation to Director Joel D. Muyco and our MGB Countexparts -Assistant
Director Salvador G. Martin, Mr. Edwin G. Domingo, Atty Anselmo C. Abungan, Mr.
Gabino V. Belleza, Mrs. Nelia C. Haicon, and Miss Fely Boston. Additionally, special
appreciation is extended to Atty. Deogracias Contreras, of the Philippine Chamber of
Mines and Dr. Guillermo R. Balce for their assistance, advice and insights to this study.
Special appreciation and a special debt of thanks are due Mrs.Ellamelides S. Antonio of
NEDA and Mrs. Nelia C. Halcon of the MGB, who throughout this study have provided
advice. data and immeasurable assistance.
To the over 100 individuals and their organizations who met with us during this
study, at both the national and local levels, we are deeply indebted for their frank,honest
and usefbl inputs.
We would also like to extend our deepest thanks to Mrs.Rosario "Chat" D.
Meneses and Miss Ma. Luisa "Riza" G. Francisco, who provided administrative and
secretarial support during the study and throughout the seemingly endless revisions of the
draft and final report.
A special debt of thanks is expressed to Dr. James P. Dorian, Dr. Charles Johnson
and Dr. Russell Sunshine of the Program on Resources: Energy and Minerals and to
project Consultants Mr. Guillermo Balce, Mr. Webb Callicutt, Mr. Wilfiedo Icay and Mr.
Sam Pintz whose tireless efforts and creativity made completion of this project possible.
 Executive Summary and Recommendations

Introduction
The resource potential of the Philippines is excellent for a large number of
commodities which in addition to gold and copper includes chromite, nickel, iron,
manganese, and zinc. As such the Philippines is faced with the dicotomy of an excellent
resource potential but a declining mind industry, the result of past and present policies.
This dicotomy can be resolved by positive Government action to change the mineral
investment climate of the Philippines: an effort which is now underway with the present
study and allied activities. With the proper investment climate, the mineral sector of the
Philippines can be expected to increase substantially. As with the growth of any sector
there will be associated problems requiring action at the National and Local Government
levels and from industry. Whether the mining industry of the Philippines fluorishes, and
becomes a major component of national development, will to a large extent depend on
how rapidly and effectively the following issues are addressed and the recommendations
of this study are implemented.

Part I: The Philippine Mining Sector

The Philippines is richly endowed with a broad range of mineral resources

including copper, gold, chromite, nickel, iron, silver, manganese and zinc. In 1991 the
nation was 13th in the world in copper production and 1lth in gold production. These
figures are even more impressive considering the Philippines relatively small size and
that those countries with larger production figures are generally of sub-continental extent
(China, Australia, USA).
Although gold mining dates back to the 3rd Century A.D., when Chinese traders
referred to Luzon as the Isle of Gold, major mining activity did not begin until the "gold
rush" of the 1930's and 1940's when, by 1941'41 mines were producing approximately
30 mt of gold per annurn: higher than present levels of production. In 1965 the first
porphyry copper deposit was opened by, Atlas Mining Company in Cebu, which marked
the beginning of modem day mining in the Philippines. In 1974 there were 18 major
copper mines in operation and in 1980 copper production peaked at 304,500 mt of copper
metal but declined rapidly.
The Philippine base and precious metals mining sector now consists of 25 major
to medium size operating mines. The sector is dominated by 7 companies which produce
more than 75 percent of total metal output. These mining companies are (1) Atlas, (2)
Benguet, (3) Lepanto, (4) Manila Mining, (5) Marcopper, (6) Maricalum and (7) Philex.
In 1993 the industry accounted for over $US 800 million in exports which represented
1.22 percent of total GDP and 3.64 percent of the industrial sector contribution to GDP.
Since 1985 the Philippine mining sector has seen 10 major mine closings (5 gold,
4 copper and 1 chromite) and has undergone major downsizing of existing operations. In
addition foreign investment in the mineral sector has all but ceased as a result of the
investment climate in the Philippines, which is perceived by the worldwide mining
industry as extremely negative. In terms of the mineral investment climate, the
Philippines ranks 98th overall (below China and Vietnam, two major regional
competitors for foreign investment in the mineral sector). Similarly when the Philippines
was compared with other ASEAN nations in terms of its overall investment climate (not
minerals specifically) it did not receive a superior rating in any of the 18 rating
categories.
The mining industry of the Philippines has a great potential based on the geologic
endowment of the nation. However, in order to realize this potential the Philippines must
(a) develop and implement enabling mineral legislation, in particular a Mining Act, and
(b) must address a number of related issues which are:
1. 60/40 Filipino - Foreign Ownership 6. Peace and Security
2. Land Access - Security of Title 7. T e r n of Negotiations
3. Process Transparency 8. Environmental Issues
4. Local Government Issues 9. Litigation in Mineral Sector
5. Small-Scale Mining 10. Administrative Structure

xxviii
 Part 11: Mineral Sector Macroeconomics and
Development Scenarios (1995-2010)

Historically, the Philippine mining industry has been a major component

of the Philippine macroeconomy; however, in 1993 the industry constituted only 1.2
percent of total GDP and 3.64 percent of the total industrial sector. In terms of exports,
however, the mineral sector comprised approximately 7 percent of total exports; a
substantial contribution considering the size of the industry.
Most analyses agree that the Philippine mining industry is badly in need of
revitalization. With one or two exceptions, the existing producers are financially
marginal at current metal price levels. Given this situation, the future of the Philippine
mining industry is intrinsically linked to the d.evelopmentof new projects rather than to
the rehabilitation of existing operations. As a result a substantial fiaction (but certainly
not all) of any new project development must come about as a result of foreign
investment rather than investment by the exisring domestic producers. The reason for
this change in ownership is simply that the existing domestic producers lack, to a greater
or lesser extent, the capital, exploration technology, and large scale development
expertise to bring major new projects into production.
The planning for a revitalized mineral industry needs to proceed in parallel at both
the macroeconomic and the strategic level. The elements of such a policy strategy would
involve two elements: (a) a balancing of fiscal measures between profit and revenue-
based instruments and (b) a selective policy designed to encourage diversification of the
mineral sector.
A major constraint on long-term planning is that the mineral resource potential of
the country has not been quantified by a comprehensive resource assessment. Utilizing a
Terrane/Deposit Model methodology and Delphi estimation such an assessment was
undertaken and completed as a part of the present study. The methodology utilized has
been previously successfully applied in Papua 'New Guinea; Xinjiang Province, China;
the United States; Canada; Bolivia and Costa Eta.
 The resource assessment study demonstrated that the Philippines has a high
mineral development potential. Estimates of the total number of new large to medium
scale deposits to be developed during the period 1995-2010 (see table below),

Deposit Type Years

0-5 5-10 10-20
Prophyry Copper-gold 1 2
Epithermal Gold 3 5 7
Nickel Laterite 1 1 1
Podiform Chromite 1 2
Massive Sulphide 1 1 1

*Figures from resource assessment and do not include known deposits presently under
exploration and/or development.

not including those presently under exploration and development, range fiom an estimate
of 11 new deposits at the .95 confidence level to 30 deposits at the .05 confidence level.
A total of 27 new deposits are estimated at the .50 confidence level. Regardless of the
actual number of new deposits developed, it is clear that the mineral potential of the
Philippines is both large and diverse.
The long-term development of the Philippine mineral sector depends on a number
of international and/or domestic factors which, in combination, will determine the scope
and pace of Philippine mineral development. These issues are (1) domestic mineral
policy and legislation (2) the retention or removal of the 60/40 provision fiom Financial
and Technical Assistance Agreement (FTAA), (3) global economic development, (4)
domestic factors impacting mineral exploration and mine development, (5) world metal
prices and (6) the capacity of the Mines and Geosciences Bureau (MGB) to support and
oversee mineral development.
Accounting for the possible variations of the above factors, three development
scenarios were formulated for future mineral development in the Philippines, i.e. a rapid,
a baseline and a slow scenario. The baseline scenario proposes that during the next 20
 years (1995-2015) approximately 40 large-to-small mineral developments may take
place. The largest developments will be large-to-medium scale porphyry copper and gold
deposits (1 1) followed by large to medium scale epithcnnal gold deposits (18) and the
remainder small to medium scale nickel, chromite and polymetallic sulphide (Besshi,
Kuroko, Cyprus) deposits. Clearly such a level of developments will require a very
positive mineral investment climate in the Philippines, a climate which does not presently
exist.
Based on the above scenarios, forecasts of future mineral sector activity to the
year 2010 was generated for four variables: export revenues, new project investment,
sector imports, and projected tax receipts. The summary forecasts for these variables are
given in the following tables for the baseline, rapid and slow scenarios:

>

Total (Million US$)

Baseline Scenario Mineral Output Investment Imports Fiscal Receipts
Value Capital
1995 605 143 62 30
1996-2000 1242 875 129 73
200 1-2005 2234 1520 229 185
2006-2010 3471 1730 352 3 19

-
Total (Million US$)
Rapid Scenario Mineral Output Investment Imports Fiscal Receipts
Value Capital
1995 605 142 62 30
1996-2000 1400 1040 143 76
200 1-2005 2913 2325 295 222
2006-20 10 4876 3040 496 469

Total (Million US$)

Slow Scenario Mineral Output Investment Imports Fiscal Receipts
Value Capital
1995 605 142 62 30
1996-2000 891 280 91 66
2001-2005 1652 1115 167 94
2006-20 10 2453 1210 140 186
 Since it is impossible to predict the exact nature of still-to-be-discovered ore
bodies. these variables were estimated using "model projects" representative of the
general characteristics of mineral deposits predicted fiom the resource assessment. This
methodology assumed that mine characteristics would either:
(a) be at the minimum profitability levels necessary to attract international
investment (e.g. projects would generate a 15 percent Discounted Cash Flow
Internal Rate of Return) or
(b) that new projects would have minimum ore grade levels which reflect world-
wide patterns for new investment (e.g. a gold content of 2 gramsltonne would
be required to meet the 15 percent DCFROI criteria).
For this reason the forecasts should be viewed as conservatively indicative of future
sectoral performance.
In interpreting the projections for the mineral sector the following issues should
be considered:
1. The development scenarios are based on a number of assumptions which may or may
not hold true for mineral development in the Philippines. To a large extent
Government policy will be the primary determinant.
2. The major revenue to be derived fiom future development will be fiom copper and
gold, two commodities which have historically shown major fluctuations in price.
Therefore, these sectors should be expected to be characterized by cyclical
investment, development and resulting production and revenues. This cyclical aspect
will impact the timing and the revenue flows of the projections.
3. The analyses of future developments places a significant emphasis on the
rehabilitation and contribution of the Nonoc nickel development. As the
rehabilitation has yet to be completed the revenues associated with thls deposit, and
those from related small developments, is problematic.
4. Overall, in the projections, it is assumed that mine production approximates export
revenue. Should the Philippine economy grow rapidly, a proportion of domestic
mineral production may be utilized in downstream industries. Although this would
 reduce direct export revenues the domestic use would be expected to contribute
significantly to value-added revenues in the industrial sector. As a result, the overall
contribution to the economy would be higher, even though export revenues decline.
5. Although fiscal flows to the government at the national and local levels will be
substantial, given a reasonable development of the mineral industry, the flow of
revenues will be retarded from 5 to 8 years, (on a project basis) due to tax holidays
and other incentives given to the industry.
The prospect of a large expansion of the m i n d sectors tax base is tantalizing to
consider. With projected annual fiscal receipts under the baseline scenario to be nearly
$US 500 milliodyear, by the year 2010, the mineral sector would be a major contributor
to the Government's fiscal outlook. Nevertheless, as with all projections, they must be
strongly tempered with reality. The reality of the Philippines at the present is that it has
the resource endowment to be a major mineral producing nation but it does not yet have
the policy and legislation to make this a reality.

Part 111: Philippine Mineral Legbhtion

Philippine mineral legislation is today comprised of the remnants of Presidential

Decree Number 463 (P.D. 463) issued in 1974, a number of Executive Orders (21 1 and
279) and Administrative Orders (57,82 and 82-A) promulgated in response to the
requirements of the Philippine Constitution of 1987. In simple terms the Philippines has
no National Mining Act. The result is that mineral investment in the Philippines is at an
all time low ;yet investment is expanding rapidly in the rest of the region.
The Philippine Constitution of 1987 specifies that (a) all minerals are "under the
full control and supervision of the State and that the exploration, development and
utilization of those resources may be undertaken by Mineral Production Sharing
Agreements (MPSAs) which are (b) "...joint venture , co-production or production
sharing agreements... with any Filipino citizen or corporation or association at least sixty
percent (60%) of whose capital is owned by Fllipino citizens..." or alternatively through
Financial and Technical Assistance Agreements (FTAAs) in which (c) the "President
may enter into agreements with foreign-owned corporations involving either technical or
financial assistance for large scale exploration. development and utilization of
minerals..." The specific isolation of Financial and Techcal Assistance Agreements
(FTAAs) from Mineral Production Sharing Agreements (MPSAs) is arguably in
recognition that the 60:40 ownership rule would not apply to FTAAs.
Pending mineral legislation, or subsequent implementing guidelines, must deal
with the issue of 60:40 Filipino-Foreign Ownership in FTAA Agreements (divestiture
clause) as it is the single greatest impediment to foreign investment in the Philippines.
In addition to addressing the 60:40 ownership rule, either in the Mining Act or the
Implementing Guidelines, proposed legislation (House Bill 10816 and Senate Bill 1639
presently undergoing revision) will need to address a number of other key issues: the
most important being the establishment of a fiscal regime which (a) levels the playing
field between MPSAs and FTAAs and (b) provides for better guidelines for the
negotiation of MPSAs and FTAAs. In the former case, the MPSA, which is available
only to the domestic industry under the 60:40 ownership rule, is financially much more
advantageous than the FTAA creating a bias which will be unacceptable to most foreign
investors. In the latter case, existing guidelines for both MPSAs and FTAAs lack
sufficient specificity to insure that the Government share is optimized in mineral
developments.
The negotiating process for MPSAs and FTAAs should be reassessed and
improved. The basic questions with respect to the negotiating process are outlined in the
following table:
. Question Issue
Why are the FTAA and MPSA Financial analysis indicates that FTAA and MPSA
Contract negotiated? Contracts may not optimize government revenues.

What is being Negotiated in Negotiations are based largely, if not completely, on

FTAAs and MPSAs? submitted analyses by Contractors without independent
models and analysis.

When are FTAA's and MPSAs FTAA's and MPSA's negotiated prior to complete
negotiated? feasibility analysis and comprehensive EIA.

Where are FTAA's and Predominantly in Manila without active involvement of

MPSA's negotiated? Regional or Local participants.

Who negotiate FTAA's and Lines of authority and responsibility unclear

MPSA Contracts? Low level of non-sector participation
Inadequate skill mix of Personnel

The guidelines for negotiating MPSA and FTAA agreements provide for a
specific administrative framework but do not address a number of key issues which may
significantly impact Governments achieving its objectives of optimizing its return on
mineral development and thereby promoting national development. In particular, the lack
of a clear definition of the fiscal regime of either the MPSA or the FTAA results in
negotiations within whlch virtually everythmg is negotiable.

Part IV: Key Issues of the Philippine Mineral Sector

Decentralization of planning and expenditure authority is a major consideration

in the future course of development activities in the Philippines. While it is too early to
define the precise impact of this decentralization strategy on the mining sector several
trends can be identified. These impacts can be categorized as:
1. Impact on the government's professional and administrative capacity;
 2. Impact on the disposition of fiscal revenues from the mining sector
(particularly disposition of funds under the natural wealth provisions) and;
3. Impact on the planning of mine-related investments by the public sector.
As might be expected, early experience with implementation of the
decentralization strategy has been uneven and not wholly satisfactory. In some areas,
significant legislative changes are necessary, while in other areas a reshaping of policy
and a realignment of responsibilities may be necessary. While the needs of the mining
industry clearly should not be the primary concern in any policy adjustment it is
important that the particular characteristics of the industry be factored into any future
reconsideration.
The decentralization strategy (as outlined in the Local Government code) has had
less effect on the administration of geoscience activities than the regionalization of
government functions which preceded it. Devolution of many central government
administrative functions to the 14 regions seriously eroded the role and importance of the
Mines and Geosciences Bureau (MGB). Evidence suggests that this erosion resulted in a
substantial reduction in the geoscience expertise available to government and in a
reduction in the control and reporting of mineral activities by private sector firms. Since
regionalization took place within the context of the reorganization of MGB's parent
organization, the Department of Environment and Natural Resources (DENR), it is not
possible to attribute the decline in geoscience expertise (or sector regulation) to the
strategy of regionalization but rather it has resulted in response to the manner by which
that strategy was implemented by DENR.
The Local Government Code reserves 40 percent of total central government
fiscal receipts from certain natural resource developments (including mining) for
allocation between various local government units (LGU's). Unfortunately, the Code
contains a drafting error which makes the precise allocation of the 40 percent share
ambiguous. This error needs to be corrected and the legislative intent made clear.
However, there is considerable theoretical and implementation evidence to suggest that
the intended allocation between LGU's allocates a disproportionate share of the national
wealthhaturd resource to the barangays. Under the most likely interpretation, the
barangay in which a mine is located would receive 14 percent of total fiscal receipts by
government. This is a staggering sum for a LGU which might contain as few as 5000
people. Not only is this revenue allocation inappropriate to the current functions of the
barangay, but the all-or-nothing nature of the grant means that social impacts will likely
affect adjacent Barangays who may or may not share in the fiscal benefits from mining.
The clear result of this national wealth allocation is to increase both regional and local
inequality.
The revenue-sharing scheme implied by the Local Government Code is well
intentioned but poorly timed vis-a-vis actual development needs. Since the LGU revenue
flows (however allocated) are tied to fiscal receipts there will be no flows whatsoever
until after a new mine is in actual operation. However, the critical time for dealing with
the impact of the mine is during early mine planning and construction (e.g. before mine
operation). Moreover, this predevelopment planning must, in many instances, move
from a broad regional focus (in such areas as infrastructure alignment, urban settlements
etc.) downward to detailed area plans. This process is essentially the opposite from the
bottom-up planning envisaged in the decentralization strategy. One solution to these
problems is to specifically define the responsibility for planning coordination to a
relatively broad (regional) level where both central government departments and LGU's
participate.
It is important to recognize that the existing residents of a new mining area will be
forced to bear a disproportionate share of the project costs including: adverse
environmental impacts; social and cultural disruption; and significant income
inequalities. If socioeconomic programs cannot be quickly developed to compensate for
these inevitable costs, a volatile social situation will be created. Elsewhere in the region
(notably at Bougainville and OK Tedi in PNG and at Ertsberg in Indonesia) unresolved
social grievances have erupted into armed insmection andlor strong anti-government
political movements.
 Environmental regulation of the Philippine mining industry is a joint
responsibility of the Mines and Geosciences Bureau and the Environmental Management
Bureau. The current regulatory scheme for mining runs along two parallel tracks. On
one track the environmental program administered by the Environmental Management
Bureau. with limited expertise in mining, seeks to impose a general policy framework on
a sector with special environmental problems. On the other track, MGB struggles, with
extremely limited resources, to find industry-acceptable regulatory solutions without a
clear idea of how the mining sector fits into the national (environmental)policy
framework. Neither regulatory system is adequately funded. As a result, well-
intentioned and competently-conceived policies often cannot be fully implemented or
enforced.
An overview of the environmental policy framework suggests several areas where
the current system needed to be improved. In particular, we see a need for:
1. greater incorporation of groundwater standards monitoring into the
environmental framework;
2. recognition of the potential environmental threat posed by acid mine drsunage
and;
3. expansion of the monitoring system to include chemical, as well as suspended
sediment testing.
These extensions of the current framework will provide a more comprehensive
system of environmental regulation. In addition, we believe that an area of equal
potential importance involves a review of the central role that Environmental Impact
Assessment (EIA)plays in industry regulation.
Over time, the EIA system has become a primary vehicle for environmental
regulation. While a continuing need for an EIA is accepted, its primary role may be
inappropriate from the perspective of the mining industry. We base this conclusion on
four observations: (1) the timing, funding, and review process for EIA's does not insure
environmentally sensitive mine design choices nor expeditious review by government;
(2) the environmental impact of a mining project undergoes considerable change as the
project matures, a change unlikely to be captured by an EIA submitted at the time of

xxxviii
project feasibility; (3) the EIA system tends to foster the view that environmental issues
are something that need only to be considered late in the project development cycle when,
in fact, environmental planning should be an integral part of each stage of mine planning
and (4) the EIA is really an environmental planning vehicle and is not ideally suited as a
regulatory instrument.
The legal basis for environmental regulation is currently in flux with omnibus
legislation introduced late on July 1994. A significant fature of this proposed legislation
is formalization of the Environmental Guarantee Fund (EGF) as a vehicle for
environmental regulation. We believe that this formalization is a major stride forward
and (notwithstanding concerns about the role of the EIA system) that the EGF scheme is
a solid, innovative approach which deserves to be further developed.
Reclamation policies for abandoned mines is a recurrent problem in mineral-rich
nations and is particularly acute in the Philippines for two reasons: (1) a number of
fairly large copper projects are currently in their sunset years and (2) the nation's mineral
resource endowment heavily favors future gold mines, which often have fhirly short mine
life. The former issue deserves immediate and detailed policy study and, at this late
stage, represents a problem that may well involve significant long term support from
government to resolve.
Foreign investment has been resisted and discouraged in the Philippines in the
more recent past, on the grounds that it can unfairly compete with domestic investment,
keep profits and other potential benefits offshore and degrade the natural environment.
However, large-scale mineral investments require levels of capital investment not readily
mobilized from domestic sources, so Filipino interests should not be displaced or
disadvantaged by projects of this magnitude. What is required now is to develop a more
favorable foreign investment climate in the Philippines.
In order to feel confident and comfortable investing in a given country, serious
foreign investors require long term investment security, requiring political and economic
stability and safety for the investors' field personnel. These criteria are being met in the
Philippines as Peace and Security issues are resulted; economic stability is rapidly
improving, with annual inflation dropping to less than 10 percent, and with foreign-
investment legislation protecting investors against uncompensated expropriation and
restrictions on currency conversion and remittances being eased.
Investors also require a transparent host-government legal framework, comprising
a comprehensive set of commercial laws which are unambiguous, predictable and
equitable in their application, and free from retroactive modification. Unfortunately, the
current Filipino legal framework governing foreign investment in general, and mineral
sector investments in particular, does not satisfy these basic standards. The legislation is
highly complex, ambiguous and difficult to comprehend. It is filled with exceptions and
discretionary procedures, characterized by dramatic short-term changes of direction and it
severely hurts the national interest by granting overly-generous investment incentives.
Mineral sector legislation has the additional severe defect of discouraging majority-
foreign-owned investments in projects whose scale virtually precludes domestic
investment. This is a lose/lose combination. The legal h e w o r k is demonstrably
deterring serious foreign investors while curtailing Government revenues.
Fortunately, this unsatisfactory situation can be corrected by a few bold
legislative reforms. With regard to foreign investment legislation in general, the
necessary measures are to integrate the Omnibus Investments Code and Foreign
Investments Act, to streamline incentives eligibility criteria, to simplify and extend to
five-years duration the Investment Priorities Plan, and to review and greatly reduce the
number and scope of investment incentives, replacing all tax and duty holidays with
uniform low rates for both foreign and domestic investors.
In order to successfully attract serious foreign investment, the Philippine
government must organize and operate a potent, integrated foreign investment
management system, with top level leadership and authority, and with jurisdiction over
investment policy, promotion and regulation. Effective promotion, in turn, should be
functionally comprehensive, spanning country image-building, source and sector
targeting and investor s e ~ c e s .
The Philippine Government's current foreign investment management system
does not adequately satisfy these requirements. The Board of Investments is essentially a
creature of the Department of Trade and Industry, a much lower level institution than the
Committee of Ministers performing this same function in neighboring governments. To
strengthen and streamline the Government's foreign investment management capability,
would require that the Board be elevated to a Committee of Ministers chaired by the
President (in effect, reviving the prior Council for Investments), that the Board be given
explicit authority over investment policy-making and incentive-setting, in addition to
promotion and regulation, and that Board membership be restricted to public-sector
representatives. The Secretariat, in turn, would need to be reorganized into functional
departments servicing the parent Board's policy-making, promotional and regulatory
responsibilities, and with the promotional department M e r divided into country image,
targeting and investor services divisions.
The Philippines can greatly benefit fiom attracting serious foreign investment, in
the mineral and other sectors, but today that investment is locating elsewhere in the
region. Two sets of initiatives for improving the Filipino investment climate initiatives
and which are fully within the control of Government are to increase the transparency of
the legal fiamework and to rationalize investment promotion and regulation. The keys to
both refonns are simplification, standardization and service.
Responsible foreign investment, guided and monitored by the Government, is
l l l y consistent with respect for the national patrimony, development of the domestic
private sector, with vigorous decentralization md with President Ramos' "Philippines
2000!" campaign. In contrast with the current status quo, the proposed reforms represent
a widwin scenario within which interested parties can dramatically benefit from
increased foreign investment in the Filipino mineral sector. The Government must take
the lead. For best results and appropriate visibility, the best launching pad for foreign
investment reform is in the Office of the President.

Part V: A Quantitative Approach to Philippine Mineral Policy

The Philippine fiscal regime that affects mining projects is a wide array of laws,
rules and regulations that are complex, confusing and vague. The fiscal regime is a
composite of taxes, controls and incentives that were put in place on an "as needed" basis
in response to Constitutional mandates, government revenue requirements or a particular
domestic mineral industry crisis.
The Mineral Production Sharing Agreement (MPSA) and the Financial and
Technical Assistance Agreement (FTAA) are products of administrative orders that were
required to fulfill the mandates for mineral development required by the Philippine
Constitution (1987). The implementing guidelines for both agreements were
unrealistically brief and simplistic in their descriptions of the fiscal regimes for each type
of agreement. The first detailed fiscal arrangements for the MPSA agreement were
suggested by industry, in an MPSA application to develop the Far Southeast copperlgold
project. With regard to FTAAs, the first detailed fiscal regimes were also suggested by
industry. The first FTAA contract approved by the Philippine government was with
Arimco. an Australian company. This FTAA proposed a fiscal regime that was infinitely
more detailed and descriptive than had ever been defined by the Philippine government.
The proposed Philippine Mining Act of 1994 (S.B. 1639) contains the basis for a
consolidation of the various rules, regulations and taxes that affect the industry into a
coherent fiscal regime for the mineral industry. Some of the provisions found in the
already negotiated MPSA agreement and the approved FTAA agreement have been used
as a basis for the fiscal regime. This is a reasonable approach, perhaps, but the
combination of these two very different taxation schemes into one document has resulted
in a proposed fiscal regime that is inequitable, redundant, and subject to broad
interpretation and negotiation.
A quantitative analysis of the existing MPSA and FTAA contracts, along with the
fiscal regime as proposed in the Mining Act was undertaken to assess how the MPSA and
FTAA compared economically. It was found that both the existing MPSA and FTAA
agreements and the proposed Mining Act create systems of taxation that are significantly
biased towards the MPSA. A comparison of effective tax rates and investor rates of
internal return (IRR)consistently resulted in more favorable economic outcomes for
mining projects taxed under MPSA rules and incentives. Since MPSA contractors must
be firms with at least 60 percent Filipino equity ownership, the appearance is given of

xlii
bias towards domestic producers. This bias has the potential to discourage foreign
investment, which is the most likely source of capital for the Philippine mineral industry.
The major cause of this inequity in the MPSAs and FTAAs was found to be the 5-
year income tax holiday. This incentive had a significant effect on the economics of
MPSA agreements, but was found to be ineff'ective in enhancing the economics of the
FTAAs.
Income tax holidays are somewhat outdated methods to provide incentives for mineral
development. In the case of foreign investors, income tax holidays provide only marginal, if
any, incentive to develop a mineral project. This is because, the investing finn receives a tax
credit or deduction in its home country for taxes paid abroad. If no taxes are paid in the host
country they will be, to a greater or lesser extent, collected by the f m ' s home country.
Quicker write-offs are generally preferable to a tax holiday for the following reasons.
First, the period of tax relief provided by a tax holiday is predetermined and is not responsive
to profitability. Thus, if the f h n loses money, the tax relief will have been of no use. Second,
in many tax holiday schemes the capital allowances (depreciation, amortization, etc.) due
during the holiday period are transferred to the period when the tax becomes liable. Thus,
taxable income is reduced after the tax holiday and tax payments to government are pushed
further out into time, lessening their present worth. The third reason is that dividends
distributed tax-free from a subsidiary in the host country might be taxed in the home country of
the shareholders, which is a revenue loss to the host country and also to the firm since any tax
paid can be creditable up to a prescribed amount.
The investment allowance (IA) made available to both MPSAs and FTAAs in the
proposed Mining Act is a form of accelerated depreciation based on 15 percent of the
value of net assets. This incentive, like the tax holiday, was much more effective in
increasing the IRR of the investor under the MPSA than the FTAA. It was recommended
that this incentive be made only available if the tax holiday is removed as part of the
fiscal package.
The effective tax rate of the MPSA agreement with a tax holiday results in an
effective tax rate that is extremely low, by international standards. The fiscal regime and
tax holiday that result in this low rate are included as part of the proposed Mining Act.

xliii
The effective tax rate for FTAA agreements (with or without a tax holiday) and the
MPSA agreements without a tax holiday are in line with international norms, and are not
so high as to discourage investment in the mineral sector.
The use of borrowed funds (leverage) can significantly increase the investor's
internal rate of return (IRR) ,depending on the profitability of the project. Conversely,
high debt to equity ratios can drastically reduce government tax revenues. This is
because interest payments to the lender are usually deductible from taxable income.
This is the case in the Philippines if the interest has been subject to withholding
tax. However, in the proposed legislation, this withholding is included as part of the
government's share in FTAA agreements and incurs no cash cost to the contractor. There
are no particular regulations in the Philippines that limit the percentage of a project that
can be financed through borrowing. In our recommendations, we have suggested that
reasonable limits be set in order to limit diminishing tax revenues caused by severely
high debt to equity ratios.

Part VI: Policy and Administration of the Mineral Sector

The principal Government agencies that promote, regulate and assist the mineral
industry of the Philippines are the Department of Environment and Natural Resources
(DENR) and specifically its Mines and Geosciences Bureau (MGB); the Department of
Energy (DOE) and the Department of Science and Technology (DOST) and specifically
its Philippine Council for Industry and Energy Research and Development (PCIERD).
The mineral sector of the Philippines is the overall responsibility of the
Department of Environment and Natural Resources (DENR) and within the DENR the
Mines and Geosciences Bureau (MGB) has specific responsibility for advising the
Secretary of the DENR on mineral-related activities. Under Executive Order No. 192 the
then Department of Energy, Environment and Natural Resources in 1987 was reorganized
into the present Department of Environment and Natural Resources. As a result of this
reorganization the MGB became a Staff Bureau rather than a Line Bureau which was its
historic role.
The reorganization of the MGB has resulted in a Bureau which is neither purely
staff nor line but rather it has an amalgamation of mandated duties. Overall, the MGB's
capacity to perform its activities has been downgraded due to a loss of personnel and the
resulting inefficiencies and costs created by its new relationships with the regional offices
of the DENR. These problems have resulted in proposals, within both the House and
Senate versions of proposed mining legislation, to assign the MGB from the DENR to the
DOE. Such a reassignment has numerous benefits and costs. Overall the reassignment
issue is of secondary importance to the larger issue of whether the MGB serves a Staff or
Line function. The preponderance of opinion is that it should be a Line Bureau.
Four options exist for the organizational and functional structure of the MGB,
however, only a Status Quo option would have the MGB remain a StaEBureau. All
other options would make it a Line Bureau: primarily to create a required critical mass of
expertise, to increase efficiency and above all to meet the nation's and industries' need
for a responsible mineral sector agency.
Information systems on the mineral sector are primarily in the MGB. Within the
MGB there are three existing and operational, although not complete, database system,
i.e. the Mining Titles System (MTS), the Mineral Reserves Inventory System (MRIS)and
the Mineral Industry Database (MID). Several other individual databases exist
throughout the MGB, as each Division has at least one computer system, but these are
neither linked or standardized with respect to other databases and systems.
The MTS project is designed to handle data on mining titles and their activities in
order for the MGB to efficiently manage its oversight of mine title permitting and
monitoring. This project has been largely supported by Australian AID. The Mineral
Reserves Industry System (MIS) is designed to compile, store and analyze data on
mineral reserves and resources in the Philippines. The Mineral Sector Study compiled
over 1,000 records for this database as part of its resource assessment activity. The
Mineral Industry Database (MID) is still a prototype database but is being developed to
ultimately handle most of the industry-related data both submitted by industry and
generated by the MGB.
The MGB is relying on an inadequate system of personal computers to develop
and maintain its mineral data and the system dqeS nnt meet the needs of the MGB. The
problem is even greater for the DENR overall as computer support for regional offices is
virtually non-existent. With the need for better communication and expanded data
transfer the system will be totally inadequate to meet the needs of the DENR and the
MGB. The lack of computer support naturally translates into a steadily declining
computer literate staff further complicating an already severe problem.
To improve the MGB database systems and to effectively plan and implement a
national database program within the MGB would require a minimum of
$US 50,000lyear for 5 years in hardware and software alone (this would include the five
major regional offices and most of the other offices where compatibility is required).

xlvi
 Recommendations

In order to stimulate the growth of the Philippine mineral industry a broad range
of actions must be undertaken, over an extended time frame, at the international, national
and local level. All such actions should be undertaken within the context of meeting the
Government's objectives of sustainable development, economic growth, decentralization
and people empowerment: all achievable m concert with mineral development. To
develop an appropriate environment for the revitalization of the mineral industry , while
achieving the above objectives, a number of recommendations have been proposed. As
some actions are more important than others, and the timing of their implementation
more critical. the recommendations are grouped by their respective time frames into those
for immediate action (within the time frame 1994-1996) and intermediate term
recommendations for the period (1 999-2010).

Recommendations for Immediate Action

1 . Enact a New Mining Code. A modern mining code should be enacted as soon as
possible if the Philippine Mineral Sector is to expand and develop.
2. Remove the Divestment Clause from ITAAs. The divestment clause of the FTAA
(Financial and Technical Assistance Agreement) should be removed either by the new
Mining Code or through the implementing guidelines as it presently represents the
single greatest disincentive for foreign investment in the mineral sector.
3. Removal of Income Tax Holiday. The income tax holiday within both the Mineral
Production Sharing Agreement (MPSA) and the Financial and Technical Assistance
Agreements (FTAA) should be removed for all future mineral development projects.
4. Establish New MPSA and FTAA Guidelines. Existing guidelines for both MPSA
and FTAA agreements should be immediately re-drafted to more clearly defined areas
that are negotiable and areas that are governed by the Mining Code and are non-
negotiable.

xlvii
5. Integrate the Omnibus Investment Code and Foreign Investments Act.
Integration of the Omnibus Investment Code and the Foreign Investments Act is
essential to establishing a single statute covering all major provisions governing the
rights and obligations of foreign investors in the Philippines.
6. Re-assess Distribution of Natural Wealth Allocation. Drafting errors in the Local
Government Code should be corrected and the allocation of 35 percent of Natural
Wealth funds to the Barangay level should be re-assessed. A Local Government
Trust should be established rather than the present direct allocation procedure.
7. Strengthen the Mines and Geosciences Bureau. The Bureau of Mines and Geology
should be redesignated a Line Bureau in order to more effectively support and
monitor mineral development. Critical components of the strengthening should be in
developing the Mines Title System, at the national and regional levels, and the
development of a skilled multi-sector analytical group which would provide financial
and economic analysis of proposed MPSAs and FTAAs.
8. Formalize the Environmental Guarantee Fund. The Environmental Guarantee
Fund should be formalized into law and thereby define the requirements of (1)
environmental monitoring, (2) pollution compensation, and (3) site rehabilitation for
the mining industry the negotiation of MPSAs and FTAAs in particular.
9. Improve MPSA and FTAA negotiations. There is an immediate need to
dramatically improved the procedures for negotiating MPSA and FTAA agreements,
in particular, to insure strong and continuous multi-sector participation at both the
national and local levels.
10. Promote the New Mineral Investment Climate. Following enactment of the new
Mining Code, if it removes the issues of 60:40 Filipino-Foreign Ownership in
FTAAs, steps should be taken to make the world's mining community aware that a
new, more enabling and transparent mining environment exists in the Philippines.

xlviii
Intermediate Term Recommendations

General Recommendations for the Mineral Sector

Government policy will be a major determinant in whether the Philippine mineral
sector develops along a slow, modest (intermediate) or fast development scenario. The
key components of this policy are the Mining Act, investment climate, and development
climate.
The following recommendations focus on the longer-term aspects of these issues
which the Government should address to insure rational development of the mineral
industry.
1. The Government should, to the extent possible, adopt and implement a "hands off'
policy with respect to the mining industry. The industry should be granted incentives
only within the context of establishing an internationally competitive investment
climate. Beyond that the industry must be competitive within the international
environment or fail. The history of the Philippines has been one of significant
government intervention in the industry which by-and-large would have to be
considered a failure (a failure largely assumed by the Asset Privitization Trust). A
long-term sustainable mineral industry must be an internationally competitive one.
2. The Government should recognize that the mineral industry is a cyclical industry
which provides cyclical revenues to the nation. As a result national planning should
be in place to deal with this issue. This will be particularly critical at the Local
Government level where cyclical revenues under the "National Wealth" provision
may have major negative impacts.
3. Central to achieving the above objective is the development of a Presidential
"Working Group on the Mineral Industry" which will have the responsibility of
monitoring the mining industry and its impact on the national and local economies.
This working group, recommended to be headed by NEDA, would have a broad
mandate to study and report on issues both "Upstream" and "Downstrearn" within the
mineral sector.
4. A stable investment climate for the mining industry requires a stable and transparent
fiscal regime: at both the National and Local Government level. This is not the case
at the present and is an issue which should be addressed. To achieve this objective it
is proposed that a "tax rationalization" Sub-committee, of the above Presidential
Working Group, be commissioned to prepare a long-term plan for developing and
implementing such a regime.
5. Overall there is a need to focus new attention on the mineral industry as a key
component of national development. If the industry expands significantly the
capacity of Government to handle renewed development, at the national and local
levels, will determine if the industry succeeds or fails in the long term. It is
recommended that the Government begins now to address these issues in a practical
rather than a relative mode.
6. Planning for a revitalized mineral industry should proceed in parallel at both the
macroeconomic and the strategic level and such policy strategy should include (a)
balancing fiscal measures between profit and revenue-based instnunents, and (b)
developing a selective policy designed to encourage diversification of the mineral
sector.

Recommendations for Negotiating MPSAs and FTAAs

1. A detailed analysis of Government objectives with respect to MPSA and FTAA
agreements should be undertaken with the objective of defining which areas are
negotiable and which areas are to be strictly guided by the Mining Act.
2. The negotiating process must in- the participation of regional and local personnel
as well as other government agencies. Regional inputs should be a priority.
3. A skilled economic analysis group should be formed to provide independent
verification of industry analyses and to provide Government negotiators with
alternative analyses. Dependence on industry submittals must be reduced and
ultimately eliminated.
4. The entire negotiation process should be made more transparent at both the national
and local levels, which recognizing the need for confidentiality, to insure both needed
inputs and broad concurrence with the terms of the final document.
5. The entire negotiating procedure should he modified to allow for negotiations to take
place & a comprehensive feasibility and Environmental Impact Assessment has
been conducted.

Environmental Recommendations
1. As part of a broader study, alternatives should be considered to the current
Environmental Impact Assessment regulatory system. Any alternative schemes
should specifically recognize the particular environmental issues of the mining sector.
2. Consider assessment of a substantial EIA processing fee and an "implied approval"
deadline for expediting government EIAECC approvals.
3. Consider inclusion of a condition (to mining leases or MPSARTAA) that a mining
operator must undertake a study, (within r; years of the commencement of
production), into the utilization/neutralizationof waste rock minerals and processing
residues.
4. Review existing environmental legislation with the intention of incorporating
groundwater monitoring programs.
5. Recognize the potential environmental threat posed by acid mine drainage h m open
pit mines; adopt appropriate release standards; establish design procedures for
retention of leachates; and establishing procedures for waste dump management.
6. Review regional surface water monitoring programs with a long term aim of
incorporating progressively greater chemical monitoring to augment current
suspended sediment monitoring.
7. Articulate a clear policy statement of objectives which recognizes that some
environmental degradation is inevitable in all mineral projects. This statement might
also set out an indicative timetable suggesting when typical environmental data and
analytical studies should commence.
8. Review whether the mine waste and tailing fee scheme is the best way to deal with
mine pollution and environmental compensation or whether there is scope for
merging it with a legally-recognized Environmental Guarantee Fund scheme.
9. Undertake a joint MGBIEMB study into how mine rehabilitation should be financed
and undertaken.

Decentralization Recommendations
1. Priority should be given to correcting the drafting e m r contained in the allocation of
natural wealth provisions of the Local Government Code. The allocation of a 35
percent share to the barangay should be reconsidered. Further, we recommend that
20-30 percent of the LGU designated funds (e.g. the 40 percent fraction of total
central government collections) should be placed in a LGU Trust Fund rather than
allocated specifically to a particular level of local government. This money could be
allocated by the Regional Development Council for addressing mine impacts which
extend across LGU boundaries.
2. We believe that preliminary policy attention should be given to defining the likely
costs of establishing social facilities (schools, health, law and order) in new mine
areas prior to mine operation. Meeting these establishment costs should be the
responsibility of the National Government.
3. In conjunction with the assessment proposed in 2 (above) government should prepare
and circulate a policy paper which describes the Government's expectations about the
social obligations of private mineral investors.
4. In addition to its role in meeting initial social impact costs, the national government
working through the appropriate Regional Councils should begin to develop
infrastructure strategies designed to insure that any new mining development has the
maximum regional impact and does not simply result in a new mining enclave. Of
particular importance is the development of criteria for extension of road and power
links.
 Government attention, at all levels, needs to be focused on the environmental and
social costs which a new mining region project will bring to the residents of the
mining region. Wherever possible, compensatory programs should be designed and
implemented to offset these inevitable development costs. Since major new mines
have not been developed for some time in the Philippines, we would suggest that the
identification of social costs-and definition of compensatory programs-might be
useful cooperative project between the Government and the Philippine academic
community.

Mineral Sector Promotion Recommendations

1 . Adopt a comprehensive environmental protection regime for all foreign investments
in the mineral sector.
2. Specifically declare foreign investments in the mineral sector (both under MPSAs and
FTAAs) eligible for "preferred areas" incentives offered by Book I of the Omnibus
Investments Code, subject only to the proviso that that Code, as recommended above,
should delete all corporate income-tax holidays.
3. Reduce the MPSAIFTAA threshold from $50 to $25 million, or establish the
threshold on a mine by mine basis. This threshold should be ~ ~ c i etonreserve
t
small-scale mining to domestic investors and yet open gold mining opportunities in
the $25-50 million range to legitimate foreign investment.
4. Integrate the Omnibus Investments Code and Foreign Investments Act so that one
single statute contains all major provisions governing the rights and obligations of
foreign investors in the Philippines.
5. Streamline the incentives eligibility criteria, reducing and preferably eliminating the
exceptions, waivers and BOI discretion. Drop the pioneerlnon-pioneer distinction; it
is too subjective and too easily bypassed.
6. Simplifjl and clarify the Investment Priorities Plan and extend its duration h m one to
five years in the interests of economic stability.

liii
7. Review and greatly reduce the number and scope of investment incentives, in
particular replacing all income tax (and import-duty) holidays with uniform 25
percent corporate income tax and 5 percent import-duty rates for both foreign and
domestic investors.
8. Revive the Council for Investments or a comparable inter-ministerial committee
chaired by the President to replace the Board of Investments. Permanent Members
should include, the Secretary of Socio-Economic Planning and Director General of
NEDA, the Secretary of Finance. the Secretary of Trade & Industry and the Governor
of the Central Bank. Additional members, invited to participate in Board
deliberations on an ad hoc as-needed basis, could include the Secretaries of the
sectoral ministries, including, for example, the Secretary of Environment & Natural
Resources in the case of mineral investments.
9. Give the Council explicit authority over foreign investment policy-making and
incentive-setting as well as regulation and promotion.
10. Remove private-sector representation from this regulatory body, instead of convening
a joint publiclprivate-sector investment forum to exchange views and recommend to
Government.

Fiscal Regime Recommendations

1 . Two actions need to be undertaken to remove the tax holiday for future mineral
developments:
a) Removal of the provision in the proposed Mining Act that, for FTAAs, calls
for a five-year "tax and duty holiday." This provision should be changed to
only encompass the duty holiday, which should be retained. Additionally, the
terminology "tax and duty holiday" also creates confusion about which other
taxes may be included, the most important being the excise tax.
b) Removal of the provision in the proposed Mining Act that gives MPSA
enterprises the right to be granted incentives provided under the Omnibus
 Investment Code by registration with the Board of Investments (BOI). The
income tax holiday should be specifically excluded from these incentives.
C) Future mineral developments should be excluded from the tax holiday
incentives provided by registration with the BOI under the 1994 and all future
Investment Priorities Plans.
2. Separate and distinct sets of guidelines regarding MPSAs and FTAAs should be
provided in the proposed Mining Act or in the implementing guidelines. Both the
MPSA and FTAA should have a separate, more detailed set of guidelines.
3. The areas that are negotiable between the contractor and the Philippine government
should be specifically identified as such in the legislation. This applies to both
MPSAs and FTAAs, but is most crucial with regard to FTAAs due to the rather
nebulous structure of the "government share." Areas that are to be strictly guided by
the Mining Act or the implementing guidelines need to be identified. If too many
areas are left open to negotiation, the purpose of a sound mind legislation is
defeated. This is because the ability to pre-determine the effects of the fiscal regime
is absent, making sound economic analysis impossible.
4. The issue of debt to equity ratios with regard to foreign loans needs to be addressed.
There are currently no guidelines in the proposed Act with regard to using debt to
finance mineral projects. Debt to equity ratio limits need to be set, with perhaps
different limits for different levels of project capital costs. These limits must be
competitive when compared to other countries with mineral exploration potentials.
5. The issue of the deductibility (from taxable income) of interest on foreign loans
needs to be clarified. There is no mention of the status of interest payments in the
proposed Mining Act. Under the Philippine National Internal Revenue Code
(NIRC), interest payments to foreign creditors is usually allowed if withholding is
made to the Bureau of Internal Revenue (BIR). However, inclusion of a specific
provision regarding the status of interest payments on foreign and domestic loans
would greatly clarify the intent of the fiscal regime.
6. The divestment provisions of the FTAAs should be dropped. This creates uncertainty
for the investor and encourages high-&ng of the deposit.
7. With regard to the negotiation of either MPSA or FTAA contracts, it is hrghly
recommended that the government negotiators provide their own quantitative
analysis of a project in order to assess the impact of any element, or elements, of the
fiscal regime. If the potential profitability of a project can be pre-determined, the
strength of the government negotiators will be greatly enhanced.

Mines and Geosciences Recommendations

The Mines and Geosciences Bureau (MGB) is presently mandated to provide both
Line and Staff Bureau support to the DENR which results in both conflicts in operations
and inefficiencies. To resolve these problems it is recommended to:
1. Designate the MGB as a Line Bureau and re-establish its direct links with DENR's
regional Offices.
2. Provide the necessary funding and manpower for the MGB to carry out its Line
Bureau function at both the national and regional levels.
3. Remove the MGB from the promotion of the mineral industry to oversight and
analysis.
Database activities and database support within the MGB is presently inadequate.
There is a need to immediately address these issues by the following:
4. The DENR should be provided the needed funds and personnel required to complete
and maintain the existing MTS, MRIS and MID Systems.
5. The regional offices of the DENR should be made "Computer Comparable" with the
MGB to facilitate data transfer and to provide rapid and efficient management of
leasing and exploration activities.
To meet the MGB's needs for a data information system which supports its needs
and the needs of the regional offices of the DENR the following is recommended:
6. That the MGB completes its master plan for the development of its information
system, including the regional offices of the DENR, and prepare a budget for
supporting the proposed activity.
7. That the DENR funds the MGB Master Plan for its information system either directly
or through outside funds. A comprehensive and efficient system cannot be developed
piecemeal as is presently being done.
8. The MGB should expand its data collection activities with respect to exploration and
development to better monitor the industry and to collect, store and analyze basic
geological, geochemical and geophysical data.
The resource assessment undertaken as part of this study shows the Philippines to be
well-endowed with commercially viable deposits. To better assess the resource potential of
the Philippines and to insure the discovery and development of its mineral deposits the
following recommendations are proposed for MGB action:
9. To better quantify the existing resource assessment, it is recommended that resource
assessment at the regional level be undertaken utilizing the same methodology.
10. The Mines and Geosciences Bureau should expand its data base and data analysis
activities in order to make data more readily available to industry and to the regional
offices of the DENR.
11. The Mines and Geosciences Bureau should broaden and concentrate more effort on the
exploration activities of domestic and international companies in order to develop the
basic data for more replied resource assessments.
12. A major component of the Mines and Geosciences Bureau should be to provide better
resource assessment data, particularly within an economic and development h e w o r k
rather than a geological h e w o r k , to both the DENR and to Congress.
13. The MGB should undertake a national mineral resource assessment on a periodic basis
(approximately every 5 years) and update resource potential and development scenarios
for planners.
 PART I: THE PHILIPPINE MINERAL SECTOR

CHAPTER I 1
Geology and Mineral Resources

Introduction
Mining in the Philippines is believed to have begun at least 1700 years ago b a d
on archeological findings in old copper and gold mines. From its earliest beginning until
the present the mining industry has been a key component of the Philippine economy.
The mining industry has however declined in importance since 1985 and is today only a
shadow of its size and importance during the 1%O's, 1970's and early 1980's. In terms
of its contribution to GDP the mining sector contributed 1.22 percent in 1992, which was
3.64 percent of the total industrial sector, and in terms of export earning contributed 7.37
percent of total exports. In tenns of tax revenues the mineral sector contributed a total of
$US 36.3 million (P 944 million) in 1992.
Although the Philippine mineral sector has decreased in significance as a
component of the GDP it still plays a major n ~ l ein the nation's economy, particularly in
terms of development and employment in many remote areas. It should also be noted,
and will be discussed in detail later, that the number of operatmg mines in the Philippines
is quite small (25 in 1993) yet they still constitute approximately 7 percent of total
exports.
In the following sections a general overview of the geology and mineral resources
of the Philippines will be presented, followed by a historical overview of the mining
-
industry fiom 1521 1985, an analysis of the present mining industry (1985 to the present)
and a review of some of the basic problems presently facing the industry. The purpose of
this introductory Chapter is to show that the Philippines is a mineral-resource-rich nation,
had a viable mining industry which can be revitalized and an industry presently beset by
several problems which impede the growth of'the industry but which can be overcome.
 Numerous summaries of the Geology and Mineral Resources of the Philippines
have been prepared (BMG, 1986; Chamber of Mines, 1991;Mining Journal Ltd., 1992;
Lopez, 1992; Hernandez, 1993 and Dorningo, 1993).
For a comprehensive review of the geology and mineral resources of the
Philippines the reader is referred to this studies accompanying the report "Mineral
Resource Assessment of the Philippines". For purposes of this introduction to the
geology and mineral resources of the Philippines the following summary was taken fiom
the 1991 Chamber of Mines promotional brochure and updated to the present.

Mineralization
The Philippines has long sustained a strong mining industry, attaining world-rank
with respect to copper, gold, chromium (chromite), and nickel for many years. In 1991,
the country was 13th in the world in copper production and 1lth in gold production.
These figures are even more impressive considering the Philippines' relatively small size,
since those countries with larger production figures are generally of sub-continental
extent (such as China, Australia, USA).

Precious Metals
Gold Lode and placer gold are found throughout the country. In recent years
most, if not all, of the country's 73 provinces have yielded some gold, whether h m
authorized or unauthorized operations.
Gold mining in the Philippines dates back to the 3rd century A.D., when Chinese
traders referred to Luzon as the "Isle of Gold." Gold was also mined during the Spanish
regime, as recorded in reports of expeditions in the 1570s, a period when extensive placer
mining was carried out in various parts of the country.
The early years of the present century saw a surge in local gold production, both
fiom primary (hard-rock) and secondary (alluvial) sources. By 1941,41 mines were
yielding 30 mt of gold per annum, a level exceeding present-day production.
 The industry collapsed during the Pacific War and recovered only gradually
thereafter. By the 1950s gold as a by-product of copper-mining began to assume
importance and, recently has accounted for around one third of the country's gold
production. The principal gold-producing districts are Baguio (Northern Luzon),
Paracale (Southern Luzon), Masbate (Bicol), Surigao (Northern Mindanao). For the past
six years, official gold production has steadily declined from a maximum of 35.4 mt in
1986 to 24.9 mt in 1992 .
Experts have observed that the largest and richest gold deposits tend to lie in the
vicinity of the Philippines' fault zone, but there are many exceptions. Recently, gold
exploration has been directed towards epithcrmal deposits. Wth the huge volumes of
Cenozoic volcanic rocks in the country it is certain that sophisticated exploration
techniques will yield considerable additional reserves of gold in the future.

Silver. The Philippines produces around 50 mt of silver per mum, entirely as a

by-product of gold and copper mining. Like gold, silver is widespread in the country,
although the ratio of gold to silver in various deposits exhibits a wide range.

Platinum. Platinum group metals have been detected in ophiolitic (ultramafic)

rocks in Zambales, in porphyry copper in Cehu, and with gold in the Paracale gold
district. Platinum has been recovered in small quantities together with alluvial gold at
some localities in the ophiolite belt of Samar island and in Mindanao.

Iron and Ferro-alloys

Iron. Iron mining dates back to pre-Spanish times when the art of smelting was
introduced into the country by the Chinese. In the modern era, serious mining of iron ore
did not start until 1934 (at Jose Panganiban, (hmarines Norte). Several other mines soon
followed, but all were closed during the war. Production resumed in 1948 and by 1952
output had reached 1 million mt. From 1971 to 1973 over 2.2 million mt was produced
annually, the highest ever recorded. Thereafter, the industry declined rapidly and
production ceased by 1977 when beach sand mining was banned for environmental
reasons. Only insignificant quantities have been produced in recent years, mostly as a by-
product of other operations.
The principal types of iron deposits in the Philippines are contact-metasomatic,
lateritic, and beach (magnetite) sands. Total resources are estimated to be about 4 billion
mt, but grades are generally low. These reserves, however, may come to assume greater
importance as a domestic steel industry develops.

Chromite. Mining of chromite commenced in 1934 in the south of Luzon,

followed in 1938 in Coto, Zambales, northern Luzon. The latter proved to be the largest
known deposit of refractory chromite in the world. Chromite production continued during
the Japanese occupation. After the war it experienced strong but rather erratic growth,
reaching a peak of 850,000 mt in 1955. In latter years production has declined to around
200,000 mt annually.
Historically, the bulk (85 percent) of the country's chromite has been derived
from the refractory ores of Zambales, which now contributes around 55 percent of total
production. Deposits of chemical grade chromite, are found in eastern Sarnar, and of
metallurgical grade in Dinagat Island, off northeastern Mindanao.
Chromite is hosted by ophiolitic rocks which are widespread in the Philippines.
Individual chromite bodies are of various sizes from small pods to several million mt. In
some cases, weathering and erosion of the host rocks have produced secondary (eluvial,
colluvial, or alluvial) accumulations of chromite.

Nickel. The vast nickel laterites of Surigao in northeastern Mindanao were first
reported in 1912, although these were not exploited until 1975. The first production of
nickel in the Philippines was h m nickel sulphide, which was found during the course of
chromite mining at Acoje, Zambales. Up to 400 mt of beneficiated nickel sulphide were
produced from 1970 to 1976.
The nickel deposits at Nonoc, Surigao del Norte were mined fiom 1975 to 1982.
During this period, production of nickel (as metal) ranged from 9,600 to 25,000 mt per
annum. Cobalt was an important by-product (up to 1,347 mt per annum). This put the
Philippines among the world's 10 biggest producers of both nickel and cobalt.
Like chromite, nickel accompanies the ophiolitic rocks of the Philippines. While
primary (sulphide) and epithermal (re-cycled) nickel deposits are known, the bulk of the
country's deposits are of lateritic type, formed by concentration during the processes of
tropical weathering.

Manganese. Small deposits of manganese are widespread in the Philippines.

Commercial exploitation started in 1940. Annual output had varied widely fiom less than
1,000 mt to 80,000 mt. Production in the past decade, however, has been at very low
levels, rising to 2,240 mt in 1988 and 3,000 mt in 1989. The principal mining areas have
been southeastern Bohol (Anda Peninsula), northeast Palawan (Busuanga Island),
Siquijor Island and western Samar.
Deposits are classified as primary and secondary. The former appears to be
volcanogenic and marine in origin and of very limited extent. On weathering, the
manganese from such deposits sometimes concentrates into extensive secondary layers
(up to 25 meters thick) with grades of 40 percent to 50 percent manganese. This latter
type has supported the main mining operations.

Non-ferrous Metals
Copper. Mining of copper in the Philippines also has a long history evidenced by
crudely-smelted copper being traded with the Chinese in the 14th Century. Late in the
Spanish era copper mines were opened at Carawisan (in Panay) in 1842 and at Mankayan
(northern Luzon) in 1864.
Until the second half of this century copper was inferior to gold in value. The
metal began to play a major role in the country's mining industry, as a result of the
potential of large-scale, disseminated (porphyry) copper deposits being realized. The first
porphyry mine (that of Atlas in Cebu) was opened in 1955 and the following year
Philippine copper production surpassed gold in value. Except for 1958, copper remained
the most valuable mining product in the country until 1985.
Deposits of vein, contact-metasomatic, Cyprus, Kuroko and Besshi type are also
of economic significance.
In 1974, there were 18 copper mines in operation, most of them of the porphyry
copper and gold type. Production peaked at 304,500 mt of copper metal in 1980, but
declined markedly beginning in 1982, and presently there are only 7 major copper-gold-
silver mines operating. For the past several years annual production has averaged around
500,000 mt, constituting 35 percent of the country's mine production by value. As
mentioned earlier, gold and silver are important by-products of copper mining.

Lead and Zinc. Deposits of lead and zinc, are widespread in the mobile belt,
particularly in the vicinity of the Philippine fault system. These metals occur in a variety
of deposit types --Besshi, Cyprus, Kuroko, contact-metasomatic and vein-type. Lead and
zinc have often been recorded in association with copper and gold mineralization,
particularly in gold-bearing veins, for instance, in Thanksgiving, Mine, Benguet and
Paracale, Camarines Norte.
Most of the deposits so far discovered, however, appear to be small or remain
largely unquantified because of ore-dressing problems. The largest known deposit is that
at Ayala Zarnboanga del Norte (6 million mt at 30 percent Zn,2.5 percent Pb, and 0.3
percent Cu).

Molybdenum. Molybdenum in the Philippines is associated with porphyry and

contact-metasomatic deposits. Molybdenum-rich porphyrys are found principally in
southwestern Negros and Larap, Carnarines Norte. In southwestern Negros, molybdenum
has constituted a by-product of copper mining.
A porphyry molybdenum deposit has been found and evaluated on Polilio Island,
to the east of Luzon, but appears to be sub-economic.
 Mercury. Mercury as cinnabar occurs in limited deposits in central Palawan,
Albay (Southern Luzon), Sibuyan Island, Romblon, and Bataan (central Luzon). It was
mined in Palawan from 1955 to 1975, with production pealung at 200 flasks (6.9 mt) in
1971. At present, reserves are estimated at 16 mt at grades of 0.15 to 10.4 lb per mt.

Aluminum. Extensive deposits of bauxite occur in Bocas Grande Island,

northeastern Mindanao and in Samar.
The Mindanao deposits are derived by weathering from ultramafic rocks and, as a
consequence, are high in iron.
In Samar, bauxite is associated with lower Miocene W c limestone, although it
again may have been derived fiom ultramafic rocks, or from volcanic ash. Reserves here
are calculated to be 116 million mt. Silica levels are high, often over 10 percent.

General Geology
The Philippine islands are generally composed of Cenozoic rocks, mostly
volcanic and sedimentary strata with some plutons of quartz dioritic character and of
generally limited size. All of the major islands, however, include a "basement," much of
which seems to be Cretaceous but which includes rocks ranging in age at least from the
Permian up to the Eocene. Ophiolitic bodies (ultramafic and related rocks of the oceanic
crust) of various dimensions and ages are widespread, indicating a complex structural
history.
In tectonic terms, a fundamental two-fold division of the achipelago is evident.
An elongate, NNW-SSE trending mobile (seismic) zone or belt in the east abuts a stable
(seismic) zone in the SW, centered in the Sulu Sea. The mobile belt is margined, both to
the east and west by opposed, inward-dipping subduction zones, various segments of
which have been intermittenly active through much of Cenozoic time.
The oldest rocks (Carboniferous to Jurassic) in the country seem to be restricted to
the stable zone. Pennian limestone has been proven in place in Palawan and in Carabao
Island, Romblon. Fossiliferous Carboniferous argillite occurs as float in Mindoro and
ancient schists underlie the permian outcrops. Similar metamorphic rocks occur also in
the Zarnboanga peninsula of western Mindanao. Most of the Philippines' metamorphic
rocks occur in the same area, together with all of the country's granitic intrusions
believed to be pre-Paleogene. Some ophiolitic bodies are also found and part of the area
is underlain by clastic sedimentary rocks and limestone of stable shelf facies, with minor
volcanic components.
The mobile belt also includes ophiolitic sequences, some of regional extent, but is
largely formed by island-arc-related volcanic, volcaniclastic and sedimentary strata of
Cretaceous to Quaternary age. Within these successions are diorite, quartz diorite and
andesite porphyry bodies up to batholithic dimensions, and generally thought to be of
Paleogene to Miocene date. Miocene to recent volcanic edifices are found in various
states of preservation.
Between sub-parallel magmatic arcs lie a number of long-lived Cenozoic
sedimentary basins, sometimes evidently fault-defined (grabens and half-grabens) and
generally with thick sedimentary sequences (up to 12,000 meters in the Agusan-Davao
trough of eastern Mindanao).
Unconforrnities in the succession at various levels and different localities often
point to extensive tectonic activity, which seems to have reached one culmination at least
in the Middle Miocene.
Subduction and related processes around the Philippines have brought into
contiguity a series of crustal platelets. For this reason, the archipelago has been described
as "collage of geologic terranes" or an "arc aggregate."
Oblique collision with the archipelago of a terrane from the southeast is the
probable cause of the well-known Philippine fault system which forms a prominent
feature approximately co-axial with the mobile belt. The fault system includes numerous
branches and, in northern Luzon, fans out into a number of splays. Tbis feature has
evidently been active from the Cretaceous.
These geological processes are still in progress as evidenced by historic and
current volcanic and seismic activity related both to the subduction zones and to the fault
planes.
Summary
The geologic environment of the Philippines is remarkably complex both in terms
of structures, rock types, tectonics and mineral occurrences.
The Philippines is generally composed of Cenozoic rocks mostly volcanic and
sedimentary strata into which has been intruded numerous mineralized and barren plutons
of quartz dioritic composition. All of the islands include a "basement", predominantly
Cretaceous but including rocks ranging in age fiom Permian to Eocene. Ophiolitic
bodies of various dimensions and ages are widespread, indicating a complex structural
history. Tectonically the Philippines can be divided into a NNW-SSE tending mobile
belt which in the cast abuts a stable zone centered in the Sulu sea.
The Philippines has major mineral resources in terms of porphyry coppers,
porphyry copper-gold-silver, disseminated gold, epithmal gold, podiform chromite and
lateritic nickel. In addition the Philippines has produced iron ore, manganese, lead, silver
and zinc from a variety of mineral deposit types.
 CHAPTER I 2
History of Philippine Mining

Introduction
It is beyond the scope of the present study to review the extensive mining history
of the Philippines, which dates back at least 1700 years, except as it may provide a partial
basis for understanding how such a history has impacted present day policy, legislation
and the structure of the industry itself. For the individual who wishes a comprehensive
history the excellent analysis and description by S. P. Lopez, in his book "Isles of Gold,
A History of Mining in the Philippines" is recommended. The brief historical review in
the following is abstracted from this work.

Spanish Era (1521-1898)

The Spanish era in Philippine mining history began in 1521, with the landing of
Ferdinand Magellan on the Island of Cebu. However, although the Philippines was
known to have significant mineral resources, in particular gold, no significant mine
development was to take place until the late L 800's and even then most mining was short-
lived and primarily for gold, iron ore and copper . Although the Spanish era was not
overall a period of major mine development it is worthy of note for three factors:
First, in 1846 the Spanish government introduced the Regalian Doctrine
stipulating that all minerals and substance underneath all lands public or private belong to
the State; (Francisco, V., 1950). The decree of Regalian Doctrine, in conjunction with
the Spanish Law of 7, July 1859 and the Royal Decree of 14, May, 1867 have served as
the foundation of much of both Colonial and present-day mining policy in the
Philippines.
Second, it was during this era that a royalty of 10 percent was introduced as a
remittance to the King. It should be noted that even in the 17th Century a royalty of 10
percent was considered excessive as was 5 percent @e Sande, F., undated).
 Third, in 1837 the Inspeccion General de Minas, (IGM) under the jurisdiction of
the Direction General de Administration Civil, was created to administer all mining
activities. The IGM was in many ways the predecessor of the present day Mines and
Geosciences Bureau.

American Era (1898-1935)

The American era saw the emergence of a major mining industry in the
Philippines, particularly &er the passage of the Philippine Bill of 1902 which set many
of the guidelines for the mining industry (Burritt, C. H., 1902).
To a great extent the provisions of the Philippine Bill of 1902 were patterned after
the Mining Act of 1872 of the United States. Particularly noteworthy in their similarity
were the provisions that (a) all mineral deposits in public land are fiee and open b) that
claims were patentable c) perfected claims of the Spanish regime were respected d)
claims must be staked and recorded. Unlike in the Mining Act of 1872, however, was
the provision that mineral deposits were fiee and open to citizens of the United States and
the Philippines: a highly contested issue the results of which are still felt today. These
provisions prevailed until the implementation of the Mining Act of 1936 under the 1935
Philippine Constitution.
-
The period of approximately 1902 1936 saw the initiation of approximately 180
mining companies within the Philippines including Benguet Consolidated Mining Corp.
now Benguet Corporation. To a large extent this rapid development was post- 1930 and
was triggered largely by a "gold boom".

Philippine Commonwealth Era (1935 1941) -

With the formation of the Philippine Commonwealth under the 1935 Constitution
the basic principles underlying the mining law of the Philippines were dramatically
altered. Among the most important were:
1. reinstatement of the Regalian Doctrine.
 2. specification that only citizens of the Philippines or corporations and
associations, at least 60 per centurn of the capital is owned by such citizens,
and would be given rights over mineral lands.
3. stressing the objective of conserving resources by asserting that the State
alone had the power of ultimate control.
4. emplacing a 25-year lease, renewable for the same period for mineral lands.
5. increasing the number of claims in one vein or lode to three.
6. withdrawing "patentability" of public land.
It is from the Mining Act of 1936 that the basic principles of present-day mineral
policy and legislation have arisen: largely it can be argued that many of these provisions
were in response to Spanish and American Colonialism. It should also be noted that
during this period Commonwealth Act No. 136 "An Act Creating the Bureau of Mines"
was approved on 7 November, 1936.

Japanese Era (1941-1945)

Japanese interest in minerds of the Philippines can be traced back to the late
1930's when their primary interest was in iron ore and other ferrous metals (Mn,Co, Ni).
During the Japanese occupation 18 individual mining f m s (9 in copper, 3 in nickel, 2
each in iron and coal and 1 each in sulfur and chromite) were in operation : (Lopez, S. P.,
1992).

Post-War Era (1946-1955)

Clearly the war devastated much of the Philippine mining sector with
approximately 80 percent of total investments in mining before the war being damaged
(Lopez, S. P., 1992). Rehabilitation of the industry was particularly difficult in that the
industry was faced with a) low gold prices b) lack of capital for rehabilitation c) civil
unrest d) rising costs and e) depletion of near-surface high grade ores.
Renaissance Era (1955-1972)
The favorable market conditions in the 60's bouyed by high metal prices hastened
mineral exploration in the Philippines. During this time private exploration companies,
numbering approximately 35, began operations in the country. This large increase in
exploration activity led not only to many new discoveries and developments but
demonstrated the rich mineral resource potential of the nation. With the advent of the
1960's a major structural change began in the Philippine mining industry i.e. the shift
away fiom a gold-dominated industry to a copper-dominated industry. With this
structural change come the emergence of what is virtually the mining industry of the
Philippines today. It was during this period that Lepanto was joined by Atlas
Consolidated Mining and Development Corporation, Marinduque Mining and Industrial
Corporation. Philex Mining Corporation and Marcopper Mining Corporation and as a
group led the spectacular growth of the copper industry during the 1960's and 1970's.
The series of peso devaluations which started in 1970 had serious repercussions
on the industry's profitability. Initially, it provided windfall profits but the real effects
were later translated into higher production costs as equipment, spare parts and other
inputs used by the industry were imported. The devaluation likewise added to the
burdens of meeting foreign currency obligations by several mining companies. Cost-
reduction measures failed to change the industry's conditions.
During this era the 1936 Mining Act, although broadly criticized and subject to 25
amendments, endured until 1969; when a substantial revision of the Act was proposed.
All during the period 1969 to 1972 both the Senate and the House introduced various
versions of a mining act. However, a compromise bill was never enacted as the
declaration of martial law in 1972 overtook such efforts.

Martial Law Era (1972-1985)

The martial law era can be best described as the rise and fall of the mining
industry in the Philippines. It was also a period of extreme volatility in world metal
markets and a corresponding period of volatility with respect to government policy and
legislation regarding the Philippine mineral sector.
A central feature of the martial law era was the promulgation of the Mineral
Resources Development Decree of 1974 (P.D.463). The Mineral Resource Development
Decree of 1764 (P.D.463) was heralded by the Bureau of Mines in 1976 as marking a
"transition from passive to active, from historic to relatively modernized system of
administration and disposition of mineral lands". Overall, P.D. 463's primary impact was
in two main areas:
1. It rationalized the mineral claim system of the Philippines in t e r n of defining
claim areas, recording and the handling of disputes.
2. Provided for service contracts, which authorized the Filipino company to engage
the services of its foreign partner as a service contractor, thus expanding the stake
of the foreign mining investor.
In the former case, the rationalization of the national claim system addressed a
number of problems that had beset the industry and had resulted in conflicts and
continual litigation. In the latter case the provision of service contracts was a vehicle to
maintain foreign investment, particularly from the United States, which many felt was
endangered as a result of the lapse of the "parity provision" of the 1936 mining law and
PD 463's requirement of at least 60 percent Filipino ownership in any mining endeavor.
Several other factors are of importance with respect to the Martial Law Era and
are summarized in the following:
1. Decline of the Philippine Mining Industry
2. Government Intervention
3. World Economic Factors
4. Increased Taxes
5. Industry Debt Structure
6. Interest Rates
7. Foreign Investor Flight
8. Environmental Factors
 Decline of the Philippine Mining Industry. The decline of the Philippine
mineral industry in the mid-to-late 1980's has been attributed to a number of factors e.g.
declining metal prices, peso devaluation, debt exposure, high interest rates, declining
grade of ore reserves and government intervention to name just a few. Regardless of the
causes, which were undoubtedly different for each mining company, the martial law era
saw the mining industry decline from approximately 80 mining companies in 1980 to 35
by 1985.

GovernmenfIntervention. With the increasing distress in the mining sector

during the late 1970's and early 1980's, largely attributable to price volatility of metals
on the international market; the government implemented a number of schemes which
impacted the mining industry overall and in particular the copper and gold mining
sectors. The imposition of export taxes and premium duties initially implemented in
1970 (P.A. 6125)' were made a permanent feature of the country's tax system in 1973
(Executive Order 230), modified in 1974 (Executive Order 425) and eliminated (for
copper only) in 1975 by virtue of Executive Order No. 450. Export and premium duties
on all mineral products were finally implemented in 1975 (Executive Order 587). The
instability of government policy during the critical period made financial planning
virtually impossible for the industry.
Indicative of further government action during this period was the promulgation
of P. D. 1070 "Authorizing the Grant of Assistance to Primary Gold Producers" in 1977;
C. B. Circular 960 of 1982 which provided a "Repurchase-Resale Scheme for Gold
Producers-Sellers" and the Letter of Instruction No. 1416 of 1984 which suspended all
duties, taxes and charges for "distressed" copper producers. Unfortunately, to a large
extent, all of these actions were designed to maintain what was largely a failing mining
industry.
With the continuing decline of the industry, LO1 1416 was implemented, granting
tax relief to copper-mining companies to allow them to continue operations and avoid
shutdowns. Firms classified as distressed by the Department of Trade and Industry @TI)
were temporarily exempted from the payment of duties, fees and taxes whether direct or
indirect. At the end of December 1985 the amount of deferred taxes from four major
mining companies amounted to approximately P 980 million.

World Economic Factors. The recessionary climate that started in 1975 in the
major industrialized economies, in response to the oil crisis resulted in a decline in global
industrial production and consequently to depressed demand for minerals. During this
time, prices of major metals plummeted to low levels. Aggravating the situation was a 15
percent cut-back in Philippine copper exports imposed by Japanese smelters.
In the early 1980's the high interest rates in the developed countries, particularly
in the U.S. where rates reached 15.32 percent in 1981, attracted speculators to intenst-
bearing instruments rather than commodities. This increased the cost of capital and
financial charges on foreign loans.

Increued Tarn. Further uncertainty was introduced into the industry when in
early 1981 Batas Pambansa 84 was implemented which increased ad valorem taxes h m
2.5 percent to 5 percent for metallic and 1.5 percent to 3.0 percent for non-metallics of the
value of minerals produced. Batas Pambansa 84 met with strong opposition from the
industry as it was implemented at a time when market conditions were unfavorable. As a
result a flexibility clause (Executive Order 674-B) relating ad valorem taxes to company
ROI was later implemented and several distressed mines availed themselves of this relief
and from 1981 to the end of 1984, a total of P214.28 million in foregone revenues fiom
these distressed mines was estimated by the BIR.

I n d m Debt Structure. Excessive borrowings in the mining industry were

indicated in 1982 and 1983. Based on Central Bank records, the industry's foreign loans
outstanding for the years 1978 to 1983 were as follows:
Year Loans (million $)
1978 379
1979 422
1980 417
1981 580
1982 843
1983 964
 The outgrowth of this borrowing was to result in both the development of
marginal mining operations and to create a debt structure which impacts the industry to
the present time.

Interest Rates. The contractionary policies pursued by the government in line

with its stabilization program in the early 80's such as the increase in interest rates and
import restrictions exerted adverse pressure on an already moribund industry. Interest
rates reached as high as 60 percent in 1985 which obviously raised capital cost
correspondingly. Were it not for these high interest rates some firms may have remained
profitable. A major downside was that the import restrictions, due to lack of foreign
exchange, prevented the industry from importing vital materials necessary to maintain
and/or expand operations.

Foreign Investor Flight. During the Martial Law Era and to the present the
interpretation by some government officials for nationalistic or personal reasons, that
sharing of revenues under service contracts should follow the 60 percent - 40 percent
equity rates in favor of the government or local m e r , even if all capital and cost are
borne by the service contractor, was a primary cause for the pullout from the Philippines
of several foreign-based exploration and mining companies. As of 1986, only one
foreign company was doing active exploration in the country.

Environmental Factors. The 70's were a period of rising awareness and concern
about the environment, that later swept the Philippines and the environmental priorities,
imposed by the government became an additional requirement to the industry. As
provided in P.D. 1151, impact assessment studies were required as planning tools to
ascertain that any proposed projects of mining firms would not contribute adverse effects
to the environment. P.D. 1198 required the restoration and rehabilitation of mined-out
areas to its original condition while P.D. 1251 imposed mine waste and tailings fees on
mining firms to compensate for damages to agricultural properties and private lands.
 As noted previously, the decline of the Philippine mining industry during the
Martial Law period can be attributed to a large number of both domestic and international
factors. Prevailing dogma was that the mines closed primarily because of low metal
prices and as a result of government policies viz-a-viz debt-financing of many projects
and subsequent high-interest rates. Clearly these factors were critical but there is one
other facet of the problem that is largely overlooked, i.e. of
not have beenobene
Many of these mines were at
best marginal mines even at high metal prices internationally. In other words their
profitability was highly leveraged to unrealistically high metal prices. When metal prices
declined even marginally many of the mines became unprofitable and with subsequent
drops in metal prices, coupled with high interest rates domestically, the mines were
destined to fail.
The lessons of the Martial Law Era are not lost on the present mining industry and
should not be forgotten by the present government, i.e. mine development in the
Philippine should be focused on those projects that are clearly profitable at low to
medium metal prices and not on those projects that are profitable when mineral prices are
abnormally high. Government tax breaks and incentives should focus on making the
profitable mines more profitable but should not encourage the development of marginal
mines which become a burden on the government, fail to provide reasonable revenues
and ultimately are abandoned with high social and environmental costs. This issue will
be discussed in detail in other sections of this report but is presented here, and
throughout, as a guiding principle for the development of the Philippine mining sector.

Post-Edsa Revolution (1985-present)

With the EDSA Revolution of 1985 the Philippine Mineral Sector, emerging from
a precipitous decline during the last years of Martial Law, entered a period of uncertainty.
At this time virtually all foreign investors in the mineral sector had either departed or
were adopting a wait-and-see attitude. The domestic industry, facing low metal prices
and for most high debt, were faced with foreclosure or dramatic downsizing to achieve
with increased efficiency.
Industry Overview. It should be noted that the Philippines was not unique during
this period as most of the international mining community faced similar problems,
particularly in the copper industry. Worldwide marginal mines closed, most never to be
reopened.
Table I. 1. provides a tabular overview of the Philippine mining industry during
the period 1985 to 1993 and provides several useM insights.
First, it will be noted that the number of operating mines in the Philippines has
declined overall to a low of 25 today (major producing mines and companies are
discussed in the following section). This trend is particularly noteworthy because it
clearly shows that while the mining industry of the Philippines declined, it has done so at
a time of increased worldwide investment in exploration and mining elsewhere in the
Asia Pacific region. This has been particularly true in Papua New Guinea and Indonesia.
Second, the number of abandoned/non-operating mines has increased by 83
percent (120 vs. 220)whereas the number of explored prospects, and under development
exploration properties has declined by 50 percent (101 to 50). That the number of
abandonednon-operating mines is at a high and the number of explored prospects and
those under development/exploration is at an all time low, at this time of rapid
exploration and development elsewhere in the mineral industry, is a clear sign that the
nation's mineral policy needs substantial revision.
Third, Table I. 1 also contains data on the Philippine non-metallic sector which
shows virtually an exact opposite pattern, with the number of producing mines at an all
time high (1 80 vs. 64) and a major increase in explored prospects and those under
development/exploration (1 1 1 vs. 192). The clear discrepancy between the non-metallic
and metallic sectors of the mineral industry are to a large part attributable to the different
nature of the industries in terms of capital requirements and domestic and international
markets.
 Table I. 1 . Summary on the Number of Producing, AbandonedMon-OperatingExplored,
Prospect, Under Development/Exploration Mines in the Philippines During
the Period 1985 to 1993.

1985 1986 1987

P A E P A E P A E

METALLIC 31 120 101 29 123 91 25 126 98

NoN-METALLIC 64 273 111 82 288 110 83 283 118

-

1988 1989 1990

P A E P A E P A E

METALLIC 29 125 101 35 126 105 33 199 14

NoN-METALLIC 88 296 102 84 260 121 80 317 57

1991 1992 1993

- P A E P A E P A E

METALLIC 32 207 29 32 197 46 33 220 50

w

NoN-METALLIC 113 354 56 167 381 146 190 373 192

P - Producing Mines
A - AbandonedhJon-Operating Mines
-
E Explored, Prospect, Under Development/Exploration

Source: Mine Technology Division, Mines and Geosciences Bureau

 Equity Investment. An additional barometer of the state of the mining industry
can be seen in the following Table I. 2. showing planned and proposed equity
investments in the Philippine mining industry

Table I. 2. Planned and Actual Equity Investments in the Mining Industry 1985 1992.-
Investment in % of Total
Year Mining PP'000 Investments
1986 250 0.01
1987 240,438 1.95
1988 560,841 1.71
1989 5,446.649 ' 7.70
1990 9,919,610 9.15
1991 1,823,747 2.16
1992 41,081 0.04
Source: BOI Planning and Research Department
'Primarily Freeport McMoran Sulphur Project (abandoned)
Primarily LepantoICRA Far Southeast Project (inactive)
Western Mining Development in Mindanao (deferred)

From the above table it will be noted that the major investments in the Philippine
mining sector during 1989-1991 are all projects which were planned but have not to date
materialized. They are presented as being illustrative of the scale and importance of
planned mineral developments which take place in the Philippines largely due to
government policies.

Mine Closures. Not only were investments not being made in the Philippines
during the period 1985 - present but a number of mines closed during this period (Table
I. 3.). Table I. 3. shows that out of the ten mine closures 4 are copper, 5 are gold and 1
chromite. Equally important is the fact that 4 closures have been since 1992 (Arnacan,
Biga, Balatoc and Paracale) strongly indicating that the problem of the mining industry is
unquestionally continuing until the present day.
Table I. 3. Major Philippine Mines Which Have Ceased Operations.

COMPANY NAMEOF PRODUCT LOCATION YEAR REASONS FOR TYPE OF TONNAGE & GRADE
MINES CLOSED CLOSURE DEPOSIT
I. Consolidated Mines, Ino Copper Marinduque Aug. 1980 Low price, high Porphyry 1 10,000,000 MT @ 0.495% Cu
Inc. production cost
2. Sabena Mining Corp. Tagpura Copper Davao Feb. 1981 Porphyry 50,700,000MT @ 0.365% Cu
3. Western Minolco Lobe/ Copper Benguet March, 1982 Porphyry 75,000,000MT @ 0.308hCu
Corp. Bomeng
4. Baguio Gold Mining Sto. Niflo Copper Benguet Feb. 1982 Uneconomic Porphyry 40,000,000MT @ 0.30% Cu
Co.
5. Black Mountain, Inc. Kenon Copper Benguet Sept. 1986 Porphyry 48,678,956MT @ 8.41% Cu
6. Construction Basay Copper Negro5 Sept. 1983 Porphyry 233,336,000MT @ 0.44% Cu
development
Corporation of the
Phils.
7. Batong Buhay Gold Batong Copper Kalinga 1985 Porphyry 84,549,000MT @ 0.57% Cu
Mines. Inc. Buhay -
8. North Davao Mining Amacan Copper Davao March, 1992 Porphyry 55,063,000MT @ 0.35% Cu
Co.
9. Atlas Consolidated Biga Copper Cebu Feb. 1992 Cash flow problems, Porphyry 252,901,000MT @ 0.40% Cu
low Cu price, high
production cost

10. Goldfields Nalesbitan Gold Camarines Oct. 1990 Vein 3,672,400MT @ 2.48 grn Au/MT
Philippines Norte
I 1. Apex Mining Co. Monkayo Gold Davao Vein 2,094,791 MT @ 7.32gm AuIMT
12. Surigao Consolidated Siana Gold Surigao del March 1991 Pit slides, low metal Vein 3,349,300MT @ 3.82grn Au/MT
Norte price

13. Benguet Corporation Balatoc Gold Bmguet Dec. 1992 Low metal price, Vein 3,143,128MT @ 3.03grn Au/MT
low grade of ore

14. Bcnguct Corporation Paracale Gold Benguet Feb. 1993 Vein 783,368MT @ 5.97 grn AuIMT
(O.P.)
May, 1992
(U.G)
15. Wilex Corporation Pecdal COW Benguet Dec. 1992 Low metal price Porphyry
Reduced work force
Summary
The preceeding brief history of the Philippine mining sector, from 1521 to present
is not intended to be comprehensive but rather to emphasize several characteristics of the
industry which impact, and to a greater or lesser degree, dictate how the industry is
structured today and its relationship vis-a-vis the Government during the Recent Era
(1 985-Present) which will be discussed in the following sections. Among the most
significant aspects are the following:
1. Unlike most southeast Asian nations the Philippine mining industry has had a
very long mining history; a large portion of which was under Colonial powers.
This Colonial history has dictated the form and intent of recent (1935-present)
legislation and policy.
2. The Philippine mining industry has been characterized by being a "boom or bust"
industry and therefore there is a widespread perception that it is not a stable
component of national development.
3. Government intervention in the mining industry, particularly during the Martial
Law Era, has set a precedent for pro-active Government support of the industry
which is largely considered a necessity today by the domestic industry.
4. The aforementioned "boom and bust" nature of the industry, coupled with an
exceedingly negative environmental record, has contributed significantly to the
widespread negative attitude with respect to mining by Government Officials,
local citizens and many NGO's.
It is against this historical backdrop and the resultant perception of the industry
that the mining industry of the Philippines functions today.
 CHAPTER 1 3
Present Day Philippine Mining Industry

Introduction
Although the Philippine base and precious metals mining sector consists of 25
major operating mines (Table I. 4.) the sector is dominated by 7 major copper and/or gold
producers (1) Atlas Construction and Mining Development Corporation (Atlas) (2)
Benguet Corporation (3) Lepanto and Consolidated Mining Company (Lepanto) (4)
Manila Mining Corporation, (5) Marcopper Mining Corporation (6) Maricalum Mining
Corporation and (7) Philex Mining Corporation. In the following a brief summary of the
major companies and their operations based on annual reports and previous compilation
(Mining Journa1)is presented.

Atlas Construction and Mining Development Corporation (Atlas)

Atlas gold operation consists of three underground mines and six open pits in the
Aroroy district in the north of Masbate island. The mines are based on quartz-calcite vein
systems within andesite and metavolcanic host rocks. Local grade enrichment occurs at
the intersection of faults. Gold occurs both in the veins and in surrounding solidified
volcanic rocks.
Production at Aroroy is split almost evenly between the underground and open pit
operations, all the output being treated in a 3,500 t/d carbon-in-pulp recovery plant. This
has recently been modernized with the addition of a horizontal rotary carbon regeneration
kiln. In addition, the company operates a 1,720 t/d heap leach plant.
Since 1955, Atlas Consolidated has operated open pit and underground mines in
porphyry copper deposits in the Toledo district in central Cebu. The company was the
first to open a porphyry copper mine in the Philippines, and throughout its history has
risen from 3,600 t/d from one open pit in the mid-1950s to the current level of 61,440 tld
Table I. 4. Major Precious and Base Metal Mines Operating in the Philippines - 1993.

Name of Company Commodity Location of Mine

Antamok Gold Project Gold Antarnok, Benguet
(Benguet Corporation)

Atlas Cons. Mining & Gold/Silver Sitio Bari-is, Aroroy,

Development Corporation Masbate
(Masbate Gold Operations)

Atok Big-Wedge Mng.Co., Goldsilver Gumatdang, Itogon,

(Oper. by Benguet Corp.) Benguet

Banahaw Mining and Goldsilver Co-0, Rosario, Agusan del

Development Corporation Sur

Balatoc Gold Operations GoldlSilver Balatoc, Itogon, Benguet

(Benguet Corporation)

Itogon-Suyoc Mines Inc. GoldlSilver Sangilo, Benguet Itogon

Suyoc, Mankayan, Benguet

Manila Mining Corporation GoldSilver Bo. Tinabingan, Placer,

Surigao del Norte

Paracale Gold Operation GoldSilver Sta. Rosa Norte, Jose

(Benguet Corporation) Panganiban, Camarines
Norte

United Paragon Mining Gold/Silver Longos, Paracale,

Corporation (formerly Camarines Norte
Abcar-Paragon)

Atlas Consolidated Mining Copper/Gold Silver DAS, Toledo City, Cebu

& Development Corp.

Dizon Copper Project Copper/Gold Silver San Marcelino, Zambales

(Benguet Corporation)
Table I. 4. (Cont.)

Name of Company Commodity Location of Mine

Lepanto Consolidated CopperIGold Silver Lepanto, Mankayan,
Mining Company Benguet

Marcopper Mining Corp. CopperlGold Silver Sta. Cruz, Marinduque

Maricalum Mining Corp. CopperIGold Silver San Jose, Sipalay, Negros

(Sipalay Mine) Occidental

North Davao Mining Corp. CopperlGold Silver Amacan, Maco, Davao del
(Arnacan Copper Project) Norte

Philex Mining Corp. CopperIGold Silver Pacdal, Tuba, Benguet

Hinatuan Mining Corp. Nickel (Beneficiated ore) Hinatuan Island, Surigao

del Norte

Rio Tuba Nickel Mining Nickel (Beneficid ore) Bo. Rio Tuba, Bataraza,
Corporation Palawan

Taganito Mining Nickel (Beneficiated ore) Bo. Taganito, Claver,

Corporation Surigao del No*

Acoje Mining Company Chrornite (Met'l & Lumpy Conception, Sta. Cruz
Incorporated pinagat ore) Zambales/Dinagat Is.
Chromite Project) Surigao del Norte

Heritage Resources and Chromite (Chemical Grade) Llorente, Eastern Samar

Mining Corp.

Krominco, Inc. Chromite (Met'l.) Tandang Sora,

GOV.Generoso,
Davao Oriental

Masinloc Chromite Chromite (Refractory) Coto, Masinloc, Zambales

Operation (Benguet
Corporation)

Velore Mining Corporation Chromite (Met'l) Libjo, Dinagat Island,

Surigao del Norte

Abubo, Vicente G. Manganese (Unwashed) Carranglan, Nueva Ecija

from two open pits (Figure 5.10) and two block caving underground mines. Daily
production reached over 100.000 during the late 1970s and early 1980s.
Current reserves are nearly 900 Mt of ore at a grade of 0.4 1 percent copper. Tbis
comprises 361 Mt in the Lutopan orebody, now being worked underground, 280 Mt in
the Carmen orebody, where the open pit is soon to be replaced by underground mining,
and 252 Mt in the Biga orebody, currently being mined as an open pit.
The operation uses two concentrators, one to handle ore h m the Biga pit, and the
other for ore fiom the Carmen and Lutopan deposits. The installation of new high-
volume and column flotation cells at the Biga concentrator has improved both concentrate
grade and recovery. Atlas produces both copper and pyrite concentrates which are
trucked 15 km to the company's port at Sangi for shipment.

Benguet Corporation
Benguet Corporation's gold operations are centered on the Itogon district of
Benguet province in northern Luzon. The company h a operated four mines in the
district, the Acupan, Antamok, Kelly and Atok mines, producing about 3,000 tld of ore
from both surface and underground operations. The ore from the Acupan, Kelly and
Atok mines were treated at the Balatoc recovery plant, which uses a cyanidation/Menill
Crowe recovery process. About 10 percent of the gold is recovered from pyrite floated
from the cyanidation plant tailings.
The company has also used a heap leach plant to treat over 200,000 t/d of 1.1 g/t
ore. This plant was converted to produce aggregates for both the underground mines and
the new Antamok Gold Project. Benguet Corporation deposits are typified by vein
systems, some of which are extensive in both strike length and vertical extent. Several
stages of vein emplacement have been recognized, with the gold occurring free, in
sulphides and as telluride. Bonanza-type mineralization has been found in parts of the
Acupan mine, where veins have intersected the brecciated rim of a recent volcanic
-
diatreme; here, the veins locally widen to over 60 m fiom the normal 1.0 1.5 m found in
most of the workings.
 The underground mining activities of Benguet (Acupan and Kelly) are presently
on caretaker status and the properties are for sale.
The company's underground reserves in the underground vein-mining areas,
based on a 4.0 gmlt cutoff, are 1.2 Mt at a grade of 6.39 grnlt gold The use of bulk
mining methods would make viable a further 2.1 Mt at 2.56 gm/t.
Located some 20 krn to the north of the existing operations, the Antamok Gold
Project encompasses four major vein-type deposits which are extensions of structures
previously mined underground. The Antamok operation equipped with a 3,500 tonne per
day carbon in leachlcarbon in pulp (CILICIP) plant which handles 2.4 g/t gold ore.
Reserves of the Antamok mine are reported as 9.35 Mt averaging 2.4gmIt.
Benguct Corporation's Paracale Gold operations, the subject of operating
agreements with Sta. Rosa Mining Co. and La Suerte Mining Corp. are located in
Camarines Norte, Luzon. These operations consist of the Sta. Rosa and J. G. Realty
underground mines and the Teddy open pit which operate on gold bearing quartz veins
associated with epithermal stockworks. The gold is found both free and in association
with sulphides. The gold is recovered in a 675 t/d carbon-in-leach plant. Total
underground reserves are 590,000 t at 6.71 gm/t gold, while currently delineated surface
reserves are some 130,000 t at around 3.6 gm/t gold.
The company's underground reserves in the underground vein-mining areas,
based on a 4.0 d t cutoff, arel.2 Mt at a grade of 6.39 g/t gold. The use of bulk mining
methods would make viable a further 2.1 Mt at 2.56 glt.
Tailings from nearby small-scale mininig operations are also treated to recover
residual gold.
At present the tailings activity is the only operational activity at the Paracale gold
operation. Total tailing processed during 1993 aggregated 26,968 tonnes averaging 5.30
grams gold per ton which produced 3.791 ozs of gold. The property is presently for sale.
Benguet Corporation's copper activities which are centered on the Dizon open pit
mine in Northern Luzon is operated under an agreement with the tenement owners, Dizon
Copper-Silver Mines. The orebody is some 600-650 m in diameter, and extends to a
depth of 280 m. Three types of mineralization are known: porphyry, supergene
enrichment and quartz-vein type.
The Dizon concentrator was the fmt in the Philippines to use semi-autogenous
grinding and is equipped with a computerized process control system. In 1990, a new
2,000 tlday crushing plant was installed to increase the mill capacity and in 1992 a 7 foot
cone crusher was installed. In April , 1993, the second phase upgrade of the crushing
plant was completed with the commissioning of a new SABC system.
The remaining minable reserves of the Dizon mine, as of the end of 1993, were
24,62 1,000 tomes averaging 0.3 percent copper and 0.77 grams of gold per ton.
Benguet Corporation is the principal producer of r e b t o r y chromite in the
Philippines which has operated the Masinloc (Coto) mine on behalf of the owners,
Consolidated Mines Inc., since 1934. During this time, the mine has shipped
approximately 15 Mt of chromite concentrate, marketed internationally under the trade
name 'Masinloc Chrome Ore'.
The Masinloc operations comprise both surfze and underground mines. The
underground sections use mechanize cut-and-fill extraction methods. Output has
increased from 1992 to 1993 (39 Mt vs. 49 Mt) and has concentrate shipped (60 Mt vs. 55
Mt).
The Coto orebodies form the largest single refractory chromite deposit in the
world. The principal Coto orebody outcropped at surface, the exposure measuring 550 m
by 290 m and from 30 to 76 m in thickness. Current reserves are calculated at 2.2 Mt
proven. Ore grades are over 30 percent Cr203. The ore is associated with the boundary
between gabbro and peridotite belts over a distance of 2.5 km. Additional blind
orebodies have been discovered by systematic exploration and fonn the basis for today's
underground chromite production. In addition to the Coto mine, the operation includes
mines in the adjacent Zambales Mineral (Chromite) Reservation; owned by the
government and leased to Consolidated Mines under a recently renewed 25-year
agreement. In Zambales Reservation the underground development of the Lower
Western Orebody has been completed, at a cost of $US 1.6 million and commercial
production of refractory chromite ore commenced, July of 1993. The minable reserves of
the Lower Western Orebody were 778,000 tonnes of runsf-the mine (ROM) refractory
chromite ore out of a total potential of approximately 2.6 Mt of ROM ore.

Lepanto Consolidated Mining Company

Lepanto operates the Mankayan mine in Benguet Province of Northern Lumn.
Although the property had been worked intermittently for over 6 centuries the deposit
was developed as a major mining activity by Lepanto in 1936. The deposit is unusual in
the Philippines in that the ore occurs in veins and the grade is significantly higher than
that found in porphyry coppers.
The main Lepanto orebody consists of a wedge-like deposit, fiom which many
veins branch into the hanging and footwalls. The ore zone extends axially for some 2 km,
and is up to 50 m wide at the top, tapering to around 4 m in width in the lower levels of
the mine.
The mine is operated using a cut-and-fill method in small stopes (an average of
117 stopes were in operation at any one time during 1990). New preparation techniques
have been recently introduced that will significantly increase fill deposition rates.
Lepanto has also undertaken a major mechanization program, with the introduction of
trackless mining machinery into some of the stopes. This has reportedly given a four-to
five- fold increase in productivity in the mechanized stopes.
Reserves currently stand at 4.9 Mt proven and probable, grading 1.87 percent
copper and 2.8 gft gold.
Copper concentrates arc trucked 163 km to Philex's port at Poro Point and
shipped to Leyte island where the bulk are treated in a roaster located close to the PASAR
smelter.

Manila Mining Corporation

Manila Mining is 25 percent-owned by Lepanto Consolidated Mining Co., which
manages the company's operation at Placer, Surigao del Norte. The mine produces gold
from both milling and heap-leaching operations and is currently one of the most
successful primary gold producers in the Philippines. Vein mining was carried out before
194 1 and restarted in 1983.
The ore is hosted in Pliocene andesites and consists of higher-grade veins within
lower-grade zones of mineralization. Production is obtained fiom four open pits in 1990
totaling 351,700 t of ore grading 1.58 g/t gold.
All production is now derived from the Brigg-Colorado area of the property. The
processing and curing plant was converted from a conventional cyanidation unit to a
CIP/CIL system in 1990. Heap-leach capacity was also doubled horn 1,000 to 2,000 t/d
with the installation of a new agglomerator unit and direct pad-loading system.

Marcopper Mining Corporation

Marcopper, 40 percent-owned by Canada's Placer Dome Inc., a significant
producer from porphyry deposits on the island of Marinduque, saw 1993 as its first full
year of production fiom the newly developed San Antonio orebody. San Antonio has
reserves of 200 Mt at average grades of 0.44 percent copper and 0.08 g/t gold, and 1.19
grams silver per ton. The ore will be treated in the existing Tapian concentrator.

Maricalum Mining Corporation

Maricalum Mining, currently held by the Asset Privatization Trust, operates the
Sipalay copper mine on the island of Negros, which was originally worked by
Marinduque Mining and Industrial Corp. The mine commenced operation in 1957 and
has been one of the biggest single copper, silver, gold and molybdenum producers in the
country since that time. Three orebodies have been mined by open pits, the Cansibit and
Binulig deposits in the south of the mine area and the Baclao deposit some 2 km to the
north.
Ore reserves at Sipalay are quoted as 375 Mt grading 0.52 percent copper and 0.1
percent molybdenum at a 0.25 percent copper cut-off.
 Since 1985, the company has had a marketing agreement with the Japanese
company, Marubeni, which funded the restarting of operations at Sipalay. In return,
Marubeni receives concentrates from the Sipalay operation, the advance being repaid
through deductions from concentrate sales. In addition, Maricalum owes the national
government some $US 120 million, representing the company's liability outstanding
when the Sipalay property was transferred from foreclosing Philippine banks to the Asset
Privatization Trust.

Pbilex Mining
Another major producing porphyry copper operation in Luzon is Philex's Padcal
mine in Benguet province. The Sto.Tomas I1 deposit was discovered in the mid-1950s
and production commenced in 1958, initially fiom an open pit, but subsequently h m an
underground block caving operation. The principal pipe-like onbody is oval in plan,
measuring some 400 by 500 m. It extends to a depth of over 1,200 m.
Production is drawn from 21 underground blocks. Ore is handled both by rail-
bound equipment and by a cable belt installation. The Benguet concentrator was re-
equipped with new flotation cells and a column cell, and a system was introduced to
recover copper contained in mine waste water from the main drainage level.
Underground mining of the Sto. Tomas I1 orebody has been fast-tracked by the
use of contract miners and through the pioneering use of special hydraulic fan hole rigs.
Sto. Tomas I1 ore reserves are estimated at 14.3 m tons averaging 0.32 percent
copper and 0.777 gm/t gold.
Construction and development work continued at the Bulawan project in N e w s
Occidental which is anticipated to produce 840 mtlday of gold ore for an annual
production of 90,000 oz of gold and 15,000 oz of silver.
Initial production is scheduled to begin in 1995.
Other Metal Producers
Nickel. Significant nickel producers in the Philippines include Rio Tuba Nickel
Mining Corporation, Hinatuan Mining Corporation and Taganito Mining Corporation.
Rio Tuba Nickel Mining Corp., 40 percent owned by Japanese interests, which operates
in the far south of Palawan. With reserves of 8.9 Mt at 2.62 percent nickel in garnierite,
laterite, Rio Tuba has been the mainstay of Philippine nickel production in recent years,
producing nearly two-thirds of total nickel exported.
Hinatuan Mining Corp. and Taganito Mining Corp. both have operations in
Surigao del Norte. Their reserves are respectively reported to be 500,000 at 2.4 percent
nickel and 0.09 percent cobalt, and 2.3 Mt at 2.53 percent nickel.
Annual capacity at Rio Tuba is 500,000 Mt, at Hinatuan 100,000 Mt, and at
Taganito 150,000 Mt of ore.

Chromiie. The Santa Cruz mine of Acoje Mining Co, has been the country's
leading producer of metallurgical chrornite for over 50 years. It has also produced nickel
from sulphide deposits associated with the chromite and platinum group metals which
were reported in association with both nickel and chromite. In recent years, ore grade of
around 18-20 percent Cr203have been mined underground.
The chromite occurs as sub-parallel, tabular and lenticular pods in dunites. There
are ten recognized ore horizons, the orebodies measuring fiom 10 to 600 m in length and
up to 40 m wide. The ore is found in massive, nodular, banded, disseminated and stringer
forms; massive ore contains up to 80 percent Cr203.
During the early 1980s annual ore production at Santa Cruz was in the order of
300,000 t/y, resulting in the recovery of some 70,000 t of metallurgical grade chromite
concentrate in the gravity plant. Around 1,200 people were employed at that time. The
operations have been unprofitable for a number of years, and production has subsquently
slumped to less than half the peak level. Current output is reported to be from surface
stockpiles, underground extraction having been suspended.
 CHAPTER 1 4
Philippine Mineral investment Climate

Introduction
A detailed discussion will be presented later in this report (Chapter IV) with
respect overall to investment promotion and the criteria for attracting foreign investment
to the minerals industry of the Philippines. To a large extent that discussion will deal
with the broader aspects of overall investment policy and promotion at the national level
and how it applies to the mineral industry. It will not, however, deal with the specific
criteria which a mining company utilizes in making a decision with respect to whether or
not it will undertake exploration and investment in a particular mineral deposit. In the
following discussion these criteria will be itemized and ranked in terms of importance. A
comparison of the status of the Philippines to other countries, both within and outside of
the region will then be made and the key issues of concern highlighted in order to provide
a comparative base for recommendations for Philippine policy.

Mineral Exploration Criteria

Mineral exploration is a highly speculative but vital investment activity for the
mineral industry. It is a dynamic activity that is influenced by many different factors,
including country-specific conditions. In order to survive and prosper, the mineral
industry needs exploration activity and ore deposit discovery to replenish ore reserves.
While the presence of potential mineral rich terranes is a necessary condition to attract
mineral exploration, geologic potential is not sufficient reason alone to make an
exploration investment. The groups of factors that are of the highest consideration
regarding exploration investment are briefly summarized in Table I. 5..
Table I. 5. Mineral Exploration Incentives

FACTORS THAT MOTIVATE MINERAL EXPLORATION

1. RELATIVE GEOLOGIC POTENTIAL '

2. RELATIVE ATITUCTIVENESS OF INVESTMENT CLIMATE
- Political Stability
- Fiscal and non-fiscal incentives
- Other public policy and regulatory factors (i.e. tax burden,
environmental regulatory regime, land access and mineral tenure,
capital repatriation rules, etc.)
- Perceived stability of public policies and regulatory regimes

3. OTHER CONSIDERATIONS

- Reports of spectacular discovery successes '

- Existence of a mining culture with attendant infhstructure, local
factors of production and services, etc.
- Particular needs of a mineral investor (such as pressure to
find ore reserves to service existing smelting or refining
facilities)

1
"Geological potential" has several dimensions: (i) overall potential in t e r n of
diversity and richness of geological terranes; (ii) unexploited surface and near-surface
potential (developing countries are generally the most attractive for this type of potential)
; and (iii) commodity specific potential, such as gold and copper.
2
"Investment Climate" refers to the nature and perceived stability of the political, public
policy and regulatory environment. If the investment climate is unacceptably risky,
geological potential is irrelevant.

Reports of major primary exploration discovery and exploration successes can have a
substantial impact on exploration investment psychology.

Source: I m v e, - Minerals Policy Sector, Department of

Energy, Mines and Resources, Canada.
 In addition to the presence of economic ore deposits, modern mining operations
require technical expertise and large capital outlays that often must be obtained from
competitive international markets. However, the availability of required financial
resources depends heavily upon the presence of a stable investment environment that
meets financial risk criteria, investor's rates of return and capital repatriation criteria.
While some countries, such as the Philippines, are better endowed geologically than
others, the conditions that have been imposed on mineral investment in the Philippines
are such that they have been unattractive to the international investment community. The
general categories of these unfavorable conditions are listed in Table 1.6. as components
of the "investment climate." All of these components have been negative in the
Philippines in the past decade for foreign and domestic mineral exploration investment.
Table I. 5. shows other considerations that can influence the level of exploration
activity which are positive in the Philippines. For instance, the actual existence of a
mining industry will almost certainly lead to further exploration to replace declining
reserves. A mining tradition will also lead to a mining culture in which the existence of
mine related infrslstructure, mine supplies and service industries, and the availability of an
experienced labor force will facilitate the development of new mining projects.

Mine Development Criteria

The criteria for investment in the mine development stage, while essentially the
same as exploration investment criteria, differ somewhat in relative importance.
Investment decision criteria for the exploration stage versus the mine stage are
compared in Table I. 6.. It is readily apparent that security of title and repatriation of
profits are of almost equal importance in either stage. In the mine stage, these two
criteria are followed in importance by return on investment, stability of mineral
agreements and ability to pre-determine tax liability. Actually, return of
Table I. 6. Ranking of Investment Decision Factors at the Exploration and Mining
Investment Stage (chosen from 60 possible criteria).

Exploration Mine Stage Decision Criteria Based On:

Stage
1 na Geological potential for target mineral
na 3 Measure of profitability
2 1 Security of tenure
3 2 Ability to repatriate profits
4 9 Consistency and constancy of mineral policies
5 7 Investor assumes management control
6 11 Mineral ownership
7 6 Unrestrictive foreign exchange regulations
8 4 Stability of explorationlmining agreements
9 5 Ability to predetermine tax liability
10 8 Ability to predetermine environmental obligations
11 10 Stability o f fiscal regime
12 12 Ability to raise external financing
13 16 Long-term national stability
14 17 Established mineral titles system
15 na Ability to apply geological assessment techniques
16 13 Method and level of tax levies
17 15 Import-export policies
18 18 Majority equity ownership held by investor
19 21 Right to transfer ownership
20 20 Internal (armed) conflicts
21 14 Offshore banking for project revenues
..
Source: Otto, James; 0 0
P a c i f i c u n i t e d Nations ST/ESCAP/l197, New York 1992.
investment (IRR) cannot be correctly estimated until the tax liability has been calculated,
so the pre-determination of tax liability becomes critically important.
Pre-determination of tax liability for foreign investors in the Philippines has been,
and continues to be, a virtual impossibility until the actual FTAA or MPSA agreement
has been negotiated. Even with the passage of the proposed Mining Act, accurate tax
calculations will not be possible until the implementing rules regarding accounting
guidelines are issued. If large parts of the FTAA agreements are left open to negotiation,
pre-determination of the outcome of the negotiation will not be possible until the actual
agreement has been finalized, a process that in the past has taken years to accomplish.
The ranking of investment decision criteria in Table I. 6. reveals why there has
been very little foreign investment in the mineral sector of the Philippines. Only one of
the top ten criteria listed for either the exploration and the mining stage, i.e. geologic
potential, has been a constant component of the mineral sector investment climate over
the past decade.
The absence of these criteria is confirmed by the low ranking received by the
Philippines when compared to other countries for mining investment. Table I. 7. shows
that out of fifteen countries with a large or potentially large minerals industries, the
Philippines ranked thirteen when evaluated by a set of ten criteria. Chile and Indonesia
were at the top of the list. Both Chile and Indonesia have seen a large influx of foreign
capital into their mineral industries over the past decade. Papua New Guinea, which
developed a fiscal regime once regarded as a model for attracting foreign investment, is
ranked at the bottom of the list (fifteenth) due to the civil disorder throughout the country
in general and at Bougainville in particular, and because of recent changes in government
policy regarding equity participation in projects.

Mineral Sector Specific Issues

In the preceeding text the major investment criteria for exploration and
development internationally were compared against the investment climate of the
Table I. 7. Ranking of Selected Countries for Mineral Investment.

CRITERIA*
COUNTRY 1 2 3 4 5 6 7 8 9 10TOTALRANK
Chile 5 1 6 1 1 1 4 5 9 4 37 1
Indonesia 4 3 2 4 5 5 7 4 1 3 1 48 2
US 1 4 15 7 10 13 1 1 3 2 57 3
Canada 2 2 13 12 1 1 1 1 2 3 2 8 66 4
Australia 3 10 14 4 12 3 3 2 1 1 5 67 5
Argentina 8 7 8 1 7 2 9 9 6 1 0 67 6
S. Africa 7 5 5 12 2 5 4 14 3 13 70 7
Mexico 6 6 10 6 3 8 6 6 12 10 73 8
Vietnam 1 1 1 1 2 3 1 3 5 1 2 8 6 4 75 9
Brazil 9 8 I2 10 4 9 8 7 10 6 83 10
Zimbabwe 12 12 2 11 8 3 10 12 5 12 87 11
China 13 15 6 5 14 10 1 1 10 10 2 96 12
Philippines 10 8 9 9 5 11 13 11 14 8 98 13
Russia 14 14 1 8 15 3 14 13 8 13 103 14
Papua-New 15 13 11 15 8 15 15 15 15 7 129 15
Guinea

Source: Australia Mining Monthly, February, 1993

1. Sovereign risk (including the threat of nationalization or mothballing a project due to

domestic political reasons).
2. Access to land for exploration.
3. Environmental controls (green tape as an investment decision risk).
4. Risk associated with activities and land claims by traditional land owners.
5. Government bureaucracy.
6. Social impact risk
7. Infrastructure related risk.
8. The risk of civil and foreign hostilities to investments.
9. The risk of natural disasters such as earthquakes, hurricanes, volcanoes, etc.
10.The industrial relations system in each country.
Philippines. As part of this overall evaluation investor's specific concerns were also
undertaken. Based on inputs from the Chamber of Mines, various chambers of commerce
and discussions with mining executives the major issues to be addressed, to improve the
investment climate of the Philippines are the following :

Lack of Modern Mining Code. The lack of modern mining code in any nation is
a major disincentive to both foreign and domestic mineral investors - the Philippines is no
exception. A finite body of law, as opposed to the present mass of Executive and
Administrative orders and piece-meal legislature, is required to provide the stable
investment regime that an investor requires.

60:40 Filipino-Foreign Ownership. Perhaps no greater dis-incentive to foreign

investment exists in the Philippines than that of the 60:40 Filipino-Foreign ownership
rule that is applicable to Philippine mineral resources. The 60:40 rule does not recognize
either modern contractual arrangements or provide for an equitable return on investment
and thus it strongly inhibits investment. It further constrains development because the
lack of domestic capital pre-cludes the domestic industry from assuming the 60 percent
equity required for joint ventures.

Peace and Security Issues. Although most peace and security issues have been,
or are being resolved, they nevertheless continue to act as a disincentive. Almost no
investor will undertake an investment in any nation if they cannot first guarantee the
safety of their personnel and secondly, over the longer term, the success and continuity of
the mining venture they would invest in.

Land AccessSecurity of Title. The unresolved issues of laqd access and security
of title are major unresolved issues which act as a major disincentive to foreign
investment and which seriously constrain the development of the domestic industry.
These uncertainties, when coupled with the long time h e s for adjudication of such
issues are unacceptable to most companies.
 Negotiated Vs. Declared Development Environment. The lack of clear and
comprehensive guidelines and principles for the negotiation of mineral sector agreements
imparts a level of uncertainty which is not acceptable to an investor who desires a "level
playing field" with all other similar developments. Presently, negotiated agreements are
believed to be subject to judicial challenge and therefore do not provide the investment
security required.

Lack of Transparency. The inter-related problems of the lack of a mining law,

diverse Administrative and Executive Orders and a complex hierarchy of incentives and
exemptions result in an extraordinarily complex investment climate. The lack of
transparency with respect to how-to-do business in the Philippines is another major dis-
incentive.

Environmental Uncertainties. The negative public perception of the mining

industry based on past experiences has created a broad-based distrust of the industries'
environmental agenda. This, coupled with the lack of a coherent and standardized set of
environmental regulations pertaining to the mining industry are major concerns both for
investors and for the people of the area to be impacted. In particular, issues of Contingent
liability and open ended liability need to be addressed.

Local Government Issues. The rising importance, politically and economically,

of the Local Government Units (LGU's) represents a major uncertainty for mine
developers. In particular, concerns over local taxation andlor fees, environmental
compensation and infrastructure expenses all result in dis-incentives to investment. The
issue is further compounded by being highly evolutionary at the present time which only
adds to the concerns for the future.

Litigation in the Mineral Sector. A major disincentive for both domestic and
foreign investors is the high level of litigation in the mineral sector (A.O. 57, VAT on
expertsllocal sales and Land ownership) relative to Government Policy. This, coupled
with the seemingly easy access to the Supreme Court on all issues creates a highly
unfavorable legal environment.

SmallScale Mining. The impact of small scale miners on land access, security of
title and long tern compensation issues are considerable dis-incentives for most large-
scale investors. These issues coupled with the "high grading" of deposits and the
emergence of medium-scale illegal mining constitute further significant dis-incentives.

Administrative Structure. The Mines and Geosciences Bureau of the DENR is

the Government Agency responsible for mineral resource development in the Philippines.
However, the recent reorganization of DENR,moving the MGB h m a "line" to a "staff'
function has seriously impacted its capacity to deal with the issues of mineral investment
and associated issues. In particular the MGB's lack of "one stop" capacity to both service
and monitor the mining sector is both a major administrative problem and a dis-incentive
to those who would wish to invest in the Philippine Mineral Sector.
The above 11 areas of concern for both domestic and foreign investors represent
major dis-incentives and as a result must be addressed and successfully resolved if the
Philippine mineral sector is to grow and prosper. All of the above issues will be
addressed in other sections of this report but are listed here to demonstrate the magnitude
and nature of problems besetting the industry.

National Investment Climate

Besides the criteria that are mineral-industry specific, investment criteria that
affect the investment climate of the whole economy are also critical factors. Table I. 8.
is a comparative analysis of overall investment criteria, based on a poll of fifty regional
business managers in the region. The investment climate in the Philippines is compared
with those in neighboring countries. Three of these countries, Thailand, Malaysia and
Indonesia, are competitors of the Philippines in attracting foreign mineral investments.
The Philippines did not receive a superior rating (5) in any of the eighteen categories.
Table 1.8. A Comparative Evaluation (1991)

SINGAPORE THAILAND MALAYSIA INDONESIA PHILIPPINES

A1

A2
ECONOMIC
ENVIRONMENT
POL~CAL
ENVIRONMENT
/x/
/HHA/
4
/ 0
4
0
2

3
0
2

2
0

t
A3 INFRASTRUCTURE

A4 PEOPLE

H Af l / t /
-
INPUTS AVAllABlLrrY 3 3 3
A5
AND COSTS t
B1 CURRENCY

DOMESTIC MARKET
82
QUALITY
ALLOWABLE EQUITY
B3
PARTICIPATION
LEGAL
84
ENVIRONMENT
FAIRNESS OF THE
85
COMPETITIVE ENVIRONMENT
CORRUPTION
B6

C1 SECURITY

C2 REGIONAL MARKET
/HA//
4
0
3
0
3
0
4
0

C3 TAXES

EXPORT MARKET
,4/
3
H / / 1
3
0
,3 I
3
4
0
4

4
C4
ACCESSINCENTIVES / 7 4 / /
0
0 0 // 0

C5
PRIVATIZATION
H / H At / , 4 0
2
0

xA<<<
OPPORTUNITIES 2
,. . GOVERNMENT
INCENTlMS & AlTTUDE
3
0 2 t
3
t
4
1 2
C7 BUREAUCRACY
/f/ 0

The number 1-5 indicate the current perception: 1 is poor, 5 is excellent. Arrows indicate the direction
t
the country is likely to take in the near future on that issue, i.e. - it will get better, (--;0-no change.
Source: AYC Consultants Inc., Enhancing the Investment Climate, 1994
Overall, the investment climate, compared to the other four countries evaluated, was
below the average of the other countries in almost every category. In those categories
where the Philippines was perceived as above the average, most notably people and taxes,
the outlook was for a decline in the qualities of those criteria.
 Summary
The investment climate of the Philippine Mineral Sector appears to be perceived
by the worldwide mining industry as extremely negative towards foreign investment. For
example, the Philippines was ranked thirteenth for mineral investment desirability when
compared to fourteen other countries with mineral exploration potential. Absent £?om the
mineral investment climate are key criteria that are regarded as essential for mineral
investment. Even those criteria that are present ,unfortunately, combine to form an
unstable and unpredictable fiscal regime. In particular, there is no reliable fiscal model
upon which to base a quantitative estimate of mine profitability and not being able to
make this type of estimate, with some acceptable level of confidence, is a major deterrent
to mineral investment. There is some good news, however. There are two criteria that are
effective attractions for mineral investment in the Philippines. These are its geologic
potential and the presence of a long standing "mining culture." However, these two
criteria alone are not sufficient to attract mineral development.
The absence of effective mining specific investment criteria are made worse by
the perceptions of the Philippine economic environment overall. In a comparative
evaluation of overall economic criteria, those of the Philippines, when compared to
investment criteria in Indonesia, Malaysia, Singapore and Thailand, were considered in
most cases worse, or no better than, the criteria in those four countries.
The recommendations to alleviate the absence of mineral investment criteria in
the Philippines are similar to recommendations made elsewhere in this report to address
other problems. This repetition should be an indicator of the importance and usefulness
of the overlapping recommendations. However, this should also be an indication that
many of the problems affecting the mineral sector of the Philippines stem from the same
source, i.e. an overall unstable and unpredictable regime for mining activity.
Recommendations:
Specific recommendations which address the many issues raised in the introductory
chapter are presented in detail throughout this study, in association with those sections
which discuss them in detail. Therefore, the following recommendations are broad-based
and intended only to highlighted major issues to be addressed later.
1. A new Mining Act is an absolute necessity if the mining sector is to expand. An
enabling Mining Act which addresses the specific concerns of both foreign and
domestic investors should be passed as soon as possible.
2. The 60:40 Filipino - Foreign Ownership rule should be deleted for mineral resource
development projects in the Philippines as it is the single greatest disincentive to
foreign investment.
3. The level of government intervention in the mining industry should be reduced.
4. Steps should be taken by the Chamber of Mines and the mining industry and to
improve the image of the industry: in particular, with respect to the environment.
5. After passage of the Mining Act, steps should be taken to make the world's mining
community aware that a new, more enabling and more transparent set of regulations
exist for mining in the Philippines.
 PART 11: MINERAL SECTOR MACROECONOMICS AND
DEVELOPMENT SCENARIOS (1995-2010)

CHAPTER 11 1
Historical Contribution of the Minerals Sector

Although it is difficult to forecast accurately the htm impact of the mineral

sector on the Philippine economy, there is ample documentation of the role that the
mineral sector has historically played. In the following section, this macroeconomics
impact fiom 1980 to the present will be examined. In the next section, how this historic
role may be altered by forecasts derived fiom the present resources assessment work
will, be discussed.

Impact on Gross National Product (GNP)

Over the 12 year period 1981-92, the value of mineral production has steadily
declined whereas the GNP has expanded substantially. Table 11. 1. presents data both on
the absolute (Constant 1985 pesos) value of the mining sector's contribution to GNP and
its relative contribution (measured as a percent of GNP).
Table 11. 1. seems to suggest that a major increase in the GNP contribution of the
mineral sector occurred between 1984 and 1985. However, much of this apparent (peso
measured) growth in mineral-related GNP can be associated with the substantial
devaluation of the peso which occurred in 1984-85. This can be seen by comparing Table
11. 1. data with the volume of exports and value of production (Tables 11.2. and 11.3.
respectively), which were relatively stable over this period. Since 1985, the peso-
denominated contribution has remained fairly constant at about 11 billion pesos per year.
A similar picture emerges when compared with general industrial performance.
Here, a 1985-92 comparison shows a significant increase for industrial activity, while the
contribution of the mineral sector remained flat. Annual growth rates for GNP and the
contributions of the industrial and mineral sectors are presented in Figure 11. 1.
Table 11. 1. Contribution to Gross Domestic Product (In Million Dollars).

Total Growth lndustrisl Growth Mining & Growth % To Total O h To Industrial

Year GDP (%) Sector (%) Quarrying (%) GDP (ye)

1981 38,397 14,037 862 2.24% 6.14%

1982 39,883 3.87 14,354 2.26 715 (16.98) 1.79% 4.98%

1983 33,226 (16.69) 11,953 (16.72) 607 (15.08) 1.83% 5.08%

1984 3 1,496 (5.21) 10,848 (9.25) 566 (6.79) 1.80% 5.22%

1985 33,011 4.8 1 10,805 (0.40) 62 1 9.73 1.88% 5.75%

1986 30,681 (7.06) 10,028 (7.19) 609 (1.98) 1.98% 6.07%

1987 34.353 11.97 11,280 12.48 660 8.33 1.92% 5.85%

1988 39,121 13.88 13.129 16.40 758 14.89 1.94% 5.77%

1989 44,184 12.94 14,763 12.44 754 (0.48) 1.71% 5.11%

1990 46,380 4.97 15,268 3.42 699 (725) 1.51% 4.58%

1991 45,058 (2.85) 15,367 0.65 634 (9.30) 1.41% 4.12%

1992 52,808 17.20 17,610 14.60 642 1.26 1.22% 3.64%

Ave. 39,050 3.15 13,287 2.39 677 (2.15) 1.77% 5.19%

Source: 1993 Statistical Yearbook,NSCB

Exchange Rate: 1991 $1.OO - 427.625
-
1992 S 1.OO 425.342
Table 11. 2. Value of Exports (FOB Value in Thousand Dollars).

Year Metallics Non-Metallics Total Total Philippine % Total Export

Export
1981 889,132 2 1,446 910,578 5,722,157 15.91%

1982 67 1,255 29,254 700,509 5,020,593 13.95%

1983 5 15,930 9,325 525,255 5,005,291 10.49%

1984 635,560 4,600 640,160 5 390,646 11.880h

1985 736,427 6,35 1 742,778 4,628,954 16.05%

1986 748,548 949 749,497 4,84 1,781 15.48%

1987 837,922 2,294 8402 16 5,721,238 14.68%

1988 1,063,498 271 1,063,769 7,074,190 15.04%

1909 993,539 1,154 994,693 7,820,7 13 12.72%

1990 886,247 488 886,735 8.1 86,027 10.83740

1991 783,154 913 784,067 8,840,000 8.87%

1992 708,577 5,412 713,989 9,693,000 7.37%

1993* 826,789 4,676 83 1,465 NIA

Total 10,296,578 87,133 10,383,711 77,944,590 13.32%

Estimates
NIA - Not available
Source: Mineral News Service, MGB
Central Bank of the Philippines
Table 11. 3. Mineral Production (In Thousand Dollars).

* Estimates
Figure 11. 1 . Mineral Sector As Percent of GDP.

MINERAL SECTOR AS % OF GDP

YEAR
 It is interesting to note that the national planning targets published by NEDA
forecast that mineral growth (although doubling the 5 percent rate forecasted for 1994)
will continue to lag behind general industrial growth. However, the sector is expected to
outperform overall GDP growth (Table 11.4.).
Details of the underlying assumptions behind the mineral sector growth target are
not immediately available. However, this growth must be ultimately related to the
nation's potential mineral resources base. This relationship will be further explored in the
resource assessment section below (Appendix A, Chapter 11.2.) of this report.
A number of factors have contributed to the decline in the contribution of the
mineral sector vis-a-vis other GNP sectors. Of particular relevance to performance in
recent years (1991-92) has been:
(a) a contraction in the number of operating mines (4 gold and 3 major copper
operations have closed since 199 I),
(b) chronic power shortages which have interrupted production, and
(c) sluggish prices in international metal markets.
While some of these problems are transitory and cyclical, the widespread closure
of mines suggests that there may be fundamental problems in the continued viability of
the mining sector. The relative stagnation of the value of mine output can also be seen in
export statistics.

Impact on Export Levels

Mineral exports have historically accounted for a substantial share of Philippine
exports. In 1980, minerals exports accounted for over 20 percent of total export receipts
but, by 1992, minerals exports had declined to less than 7 percent of total exports. Figure
11. 2. presents data on foreign exchange earnings from mineral exports in both US$ and as
a percentage of total exports.
Table 11.4. Planning Targets-Real GDP by Industrial Origin (Growth rates, in percent).

SECTOR Target Average Annual

1994 1998 1994- 1998
Gross Domestic Product 4.7 10.0 7.6
Agriculture 2.4 4.6 3.7
Industry 6.0 12.4 9.7
Manuf- 5.5 13.0 9.9
Mining 5.0 10.0 7.8
Construction 9.0 11.3 10.3
Utilities 5.1 10.0 7.4
Services 4.9 10.3 7.8
Figure 11. 2. h\ilirieral E:cptrrts and I+so Earn~ngs.
- - -

MINERAL EXPORTS

1 2 3 4 5 6 7 8 9 10111213

years
 Interpreting Export Trends. The meaning of the export statistics vis a vis the
mineral sector's GNP contribution requires some explanation. Gold in the Philippines (as
in many other nations) comes fiom two sources: (1) primary gold mines and (2) as a by-
product of copper mining (Table 11. 5.). By-product gold is associated with the
production and sale of copper concentrates (a common semi-processed product) which is
sold both to the Pasar smelter/refinery and exported to Japan/Europe.
While by-product gold contained in the copper concentrates clearly is reported in
the export statistics, gold sold to the Central Bank may be reported as "monethtion of
gold" rather than as a merchandise export. Sales of gold metal fiom the Central Bank's
stock may also be reported elsewhere in the statistics. This distinction becomes
important when interpreting export trends, since the volume of copper concentrate
exports are declining while locally-recovered gold subject to Central Bank purchase is
relatively constant. The consequence of this situation is that merchandise exports of gold
may decline much more abruptly than actual gold production. This is illustrated in Table
11. 5. which presents data on primary (gold mine/Pasar recovered) production versus
secondary (recovered from copper concentrate) production.

Factors Afleccting Gold Exportr. TWOfundamental factors influencing the

declining value of export earnings fiom copper/gold are international price levels and the
declining physical production of the mining sector. Figures 11.3. and 11.4. present data
on these trends for the period 1980-92.
While depressed metal prices played a significant role in the value of mineral
exports during the 1984-1986 period, the decline in physical production of minerals has
been a more important influence in recent years.
Several fundamental factors have affected recent industry production levels. Since
the importance of these factors varies tiom mining company to mining company it is
difficult to quantify their impact on aggregate production levels. However,
some, or all, of the following considerations appear to have affected major producers of
copper and/or gold:
Table 11. 5. Philippine Gold Production, by Sector (In Kgs).

Year Total Primary Secondary SSM

1980 20,024.00 6,345.00 13,679.00 -

1981 23,585.00 9,005.00 14,580.00 -
1982 25,953.74 9,993.00 15,960.00 0.74

1983 25,397.14 10,665.00 14,596.00 136.14

1984 25,727.25 9,222.00 15351.OO 1,254.25

1985 33,062.95 9,529.00 15,449.00 8,084.95

1986 35,426.93 9,835.00 14,155.00 11,436.93

1987 32,780.00 9,667.00 15,066.00 8,047.34

1988 30,482.18 9,683.00 13,517.00 7,282.1 8

1989 30,045.90 9,483.00 11,865.00 8,697.90

1990 24,590.90 8,363.00 10,718.00 5,509.90

1991 25,916.29 7,845 .OO 8,867.00 9,204.29

.
1992 24,922.00 8,815.00 8,693.00 7,414.00
Figure 11. 3. FOB Prices Received For Mineral Exports.

FOB Prices received for Mineral Exports

!
500

i o
+COPPER METAL
1980 1982 1984 1986 1988 1990 1992
I
YEAR
I
 Figure 11. 4. Volume of Mineral Production.

Volume of Mineral Production

I Year
I
I
! Ilcopper concentrate mcopper metal +-gold I
 (a) declining ore grade of primary metal product (Atlas menpet),
(b) declining content of co-producthy-product gold in ore (Philex),
(c) reduced production through-put due to poor design or equipment
misspecification (North Davao), and
(d) high debt burden (AtladBenpet).
These factors reinforce the impression that, collectively, Philippine mining companies are
only marginally viable under cunent market conditions.
Due to its precarious financial position, the industry has postponed the
modernization of existing operations and deferred promising exploration programs.
When viewed fiom a national perspective, the most regrettable consequence of the
current state of the industry is that companies have not been able to undertake the
necessary exploration work to maintain their mineral resource base. As existing
resources are depleted, some producers may well be forced to leave the industry. Without
the entry of new firms, the slow deterioration of mineral production and exports is likely
to continue.

Impact on Imports
The mining industry is a major consumer of imports. These imports are consumed
both directly (e.g., processing reagents and chemicals) and indirectly (e.g., fuels for
power generation and ore transport). Obviously, direct imports can sometimes be
identified with the mining industry, while indirect imports are much more difficult to
isolate. The situation is complicated since there are often financial reasons for mining
companies to shift between direct and indirect imports. For example, the decision to
import ore haulage truck parts and engines rather than importing fully assembled new
trucks may be made for tax reasons (e.g. haulage truck parts used to rebuild the existing
haulage fleet are usually "expensed" for tax purposes) in the year in which the expense is
incurred, while new trucks would be treated as capital expenditures, with cost recovery
through a less favorable depreciation schedule.
 Lack of Sector-Speczjlik Import Statistics. Typically, operating costs in a large-
scale mine comprise between 60 and 65 percent of total costs. Of these operating costs
the largest single cost item is energy for fuel and power (21 percent of gross costs for
copper and 33 percent for nickel). Since the Philippines commercial energy sector is
importdependent for much of its fossil fuel supplies, as are those mines with their own
power supplies, one can assume that a large fraction of mine energy costs are direct
imports. Other major operating costs with a high import content are explosives, chemical
reagents and grinding media. There are no published statistics on mine imports although,
through the use of input-output estimates, it is possible to estimate their magnitude.

Inferences from Input-Ou@ut Analysis An unpublished study at the University

of the Philippines (UP) (Soriano, 1992) uses an Input-Output matrix for the Philippine
mining sector developed by the Mines and Geosciences Bureau and the National
Statistics Board. Unfortunately, the study lumped both fuel and non-fuel minerals
together so that the aggregate matrix coefficients are not perfectly suited to our current
purposes. On the other hand, since the desegregated data contained estimates for nineteen
(19) individual mineral commodities (including copper and gold), the study is extremely
useful within the context of our forecasts of future mineral activity in the Philippines.
The import matrix used in the Soriano (1992) study suggested a fairly high
import dependency for most major metallic mineral commodities. Of the metals, copper
and nickel use substantially more imports in their production than other metallic minerals.
In addition, they have an import-requirement-per-unit-of-output
which is considerably
higher than the average for all sectors (an 1 1.O1 percent for copper versus a 7.96 percent
all-sector average). On the other hand, the import dependency of gold production was
only about 10 percent greater than the average for all sectors. The production cost
structures of important metals from the UP study are presented in Table 11. 6.
Although the data examined in the UP study is somewhat dated (1985),
experience with input-output studies generally is that the coefficients change fairly slowly
over time and it is expected that the analysis is still generally indicative of import patterns
at the present time. Translating these estimates into indicative imports for the mining
Table 11. 6. Production Cost Structure of Selected Metals (In percent).

Inputs Metals
Copper Gold Silver Nickel Zinc/Mg.
Intermediate 33.3 26.2 25.3 53.2 38.4
primary 66.7 73.8 74.7 46.8 61.6
Imports 11.0 8.7 8.5 11.3 7.5 1
Compensation 16.3 23.3 24.1 5.9 13.5
Depreciation 12.2 9.2 8.8 13.8 5.0
Indirect Tax 11.3 6.3 5.7 .6 2.8
Value Added 15.8 26.4 27.7 15.2 32.9
Gross Value Added 55.7 65.1 66.2 35.5 54.1

Source: Soriano, 1992, p. 28.

sector involves simply applying them against the value of different types of mineral
production over the past decade.
The UP study went on to examine the backward-forward linkages as measured by the
Index of Sensitivity in which coefficient > I indicates that a sector sells most of its output
to other sectors; a coefficient < 1 means that output is purchased/consumed in final
demand sectors including exports of the various mineral commodities. Not surprisingly,
the mineralscommodities had only modest forward linkages to other sectors of the
economy, i.e., they were sold to meet the need of foreign entities rather than being used
as inputs to domestic industries. On the other hand, some of the mineral commodities did
show significant backward linkages with other domestic sectors. Nickel was the most
notable and had the fifth highest backward linkage index coefficient (Index of
Dispersion) of any sector in the Input-Output Matrix. Other minerals with significant
backward linkages (e.g. diversion coefficients >1) were zinc, manganese, and limestone.
The results of the sectoral backward-forward linkage studies are presented in Table 11.7.
From Table 11. 7., it is clear that insofar as the known resource base in the
Philippines (see resource assessment following Chapter) suggests the continued
development of copper and gold resources which historically had relatively weak forward
or backward linkages that industrial policy should be targeted on increasing domestic
value added to these commodities. Such downstream industries as jewelry-making and
fabricated metal "shapes" would seem to be obvious targets. Likewise, a resurgent metal
mining industry might well create demand for upstream products such as mine supplies as
activated charcoal, grinding media, etc. As with most developing countries, it is usually
easier for mining companies to deal with established buyerlsuppliers than to be part of a
scheme to foster new domestic industries.

Multiplier Impact of Mineral Sector on Economy

The UP study estimated the impact of final demand on production and calculated
output multipliers for three components of final demand: consumption, investment, and
exports. On the assumption that the future Philippine mining industry will continue to be
 Table 11. 7. Sectoral Backward-Forward Llnkages of Major Mineral Commodities and
Selected Economic Sectors.
-
Commodity/Sector Lmkage
Backward Forward
Metals
COPF .9635 .82 18
Gold .8946 3714
Silver 3865 .6584
Nickel 1.1829 .6912
Chromite .9167 .6536
ZincNaganese 1.0098 .6657
Economic Sectors
Food/Beverages/Tobacco 1.2640 1.2648
Textiles 1.0391 .9884
Lumber, Wood Products 1.3314 3679
Chemicals and Chemical .9056 1.5529
Products
Nonmetallic Minerals 1.1644 3.7939
Basic Metal Products 1.2942 1.0728
Trade Services 3924 3.0214

Source: Soriano, 1992, p. 4 1

export-oriented and will involve substantial new mining investment to come into
production. we can directly use the export and investment multipliers in our forecast of
the impact of our future mine scenarios. The multipliers used to translate final demand
into total production are 1.64 for new demand in exports and 1.75 for new investments.
These multipliers will be incorporated into the forecasts of mineral activity presented in
the new section of the report.

Government Revenues and Fiscal Policy

For several decades the mining industry has been a significant contributor to the
national treasury from the follwing tax sources:

Excise Tax Until recent legislative changes, there has been an excise tax of five
percent of gross revenues on metallic minerals since 1980. As will be shown later in
this report, such a tax can cause a mining firm to "high-grade" a deposit . This tax was
among the highest revenue-based taxes on mining in the world. The excise tax was
changed in 1994 by Republic Act 7729, which amends Section 151 (a) of the National
Internal Revenue Code. The tax base is the "actual market value of gross output." The
rate was set at two percent for gold and chromite, effective June, 1994. Copper and other
metallic minerals are to be taxed at one percent fiom 1994 to 1997, one and a half
percent in 1998 and 1999, and two percent thereafter.
Non-metallic minerals and quarry resources are also to be taxed at the two percent
rate. The rates for coal and coke are set at ten pesos per metric ton, and indigenous
petroleum will be taxed at fifteen percent of the "international market price."

VAT Tar. This tax has probably caused more financial problems to mining firms
in the Philippines in recent years than the excise tax. All registered businesses in the
Philippines are required to pay Value Added Tax (VAT) of 10 percent on the importation
or domestic sale of goods and services. However, mineral exporters were supposed to be
included in a category where sales are zero rated for VAT. Businesses in this category

II- 18
are entitled to a refund on the tax paid to the Bureau of Internal Revenue on a quarterly
basis.
Gold-producing companies had been forced by law to sell their primary gold
production to the Central Bank which denied them the opportunity to export the gold and
automatically qualify for the "zero-rated" export category. Even though the Bureau of
Internal Revenue (BIR) ruled in 1988 that the sales of gold to the Central Bank (required
by law at that time) were to be classified as "export sales", the BIR has made no r e h d s
to gold producers. The BIR reversed itself in 1992 and ruled that sales of gold to the
Central Bank and sales of copper concentrate to PASAR (state-owned) should not be
considered as export sales and were therefore a VAT taxable transaction. This is in spite
of the fact of an opinion by the Department of Justice that the sales to the Central Bank
were to be zero-rated. The mining industry appealed against the BIR ruling and a
decision is still pending.
At the end of 1992, unrefunded VAT claimed by Philex was 25 1 million pesos,
while Marcopper unrefunded VAT claims amounted to 175 million pesos. This is a
significant amount compared to Marcopper's net profit of 32 million pesos for 1992.
The mining industry was explicitly included in the "zero-rated" category in the
recently revised (1 994) VAT law (Republic Act 7716). In addition, recent changes at the
Central Bank have given all gold producers (except small miners) the option of selling
production to the Central Bank or exporting to other buyers (Bank Circular 1353).

Income Tar. The income tax rate on revenues after allowable deductions is 35
percent. Many domestic Philippine mineral f m have been granted an income tax
holiday under incentives provided by registration with the Board of Investments (BOI).
Mining projects that are undertaken under h1PSA agreements can make use of the BOI
incentives. In addition, the proposed Mining Act grants a five-year "tax and duty
holiday" to firms that enter into an FTAA agreement. The period commences with the
start of commercial production. Proposed deductions under the new Act include
operating costs, ongoing exploration and development costs (after production starts), and
the excise tax. Also proposed in the new Mining Act are allowances for accelerated
depreciation and the loss-carry forward of operating losses.
Interest payments are currently allowable if the payments have been subject to
withholding tax, regardless of the debt to equity ratio of the financing arrangements.
There are no formal debt to equity rules in the Philippines.

Withholding Tar. Dividends remitted to foreign stockholders are subject to a

withholding tax of thirty five percent. There is a withholding tax of twenty percent for
interest paid on foreign loans. The proposed Mining Act considers these taxes as part of
the "government share" under an FTAA.

Property Tuxes. The provincial maximum rate is one percent and the city
maximum rate is two percent of the assessed value. Under the proposed Mining Act
pollution control devices, such as tailings, dams, will be excluded fiom this tax.

Import Duties. Import duties on many products utilized by the mining industry
were reduced in 1994 to three percent (Executive Order No. 189). A tax credit is
granted to enterprises registered with the BOI for taxes and duties paid on raw materials
and semi-manufactured products imported for the use in manufacture, processing or
production of export products. The proposed Mining Act provides for a five-year tax
and duty holiday for FTAA's, which presumably includes import duties.

Local Twes. Under the proposed Mining Act, mining operations would not be
subject to any additional taxes that may be imposed by local governments.
Considering all of these taxes, the MGB estimates that between 1968-1985, the
mineral sector contributed over 6.3 billion pesos in taxes. These fiscal payments equated
to approximately 8.7 percent of sales revenues (BMG, 1991). It should be noted that
although historically, fiscal receipts have come directly to the central government, but
with the decentralization initiative of the early 1990s, important new taxing powers were
given to local governments. Since pending mineral legislation may effectively limit most
of this authority, it is useful to focus simply on those tax vehicles which have
traditionally been used by the central government.
Due to the aggregation of tax data a complete picture of all fiscal receipts fiom the
mineral industry is not available from govenunent statistics. As an alternative, we have
developed a time series of total direct fiscal payments fiom Philippine Chamber of Mines
statistics. This data is presented in Table I1 8. (Total Direct Fiscal Payments by Major
Mines in the Philippines). Although the Chamber of Mines data covers only 6 firms
these firms represent nearly 75 percent of the value and production of the Philippine
mining industry.
As illustrated in Table 11. 8., there has been a marked decline in the fiscal
contribution of the mineral sector since 1980. Table 11. 8. shows dramatically that fiscal
receipts fiom the mineral sector are highly volatile. This volatility results from several
interrelated factors including cyclical fluctuations in commodity prices, the structure of
the tax regime, changing government policies and the heavy indebtedness of many
Philippine mining companies.
While there is little that can be done to influence international metal prices, the
government has direct influence over its policy on how it taxes the mining industry. In
recent years the government has moved to address this volatility problem (and to simplify
tax administration) by adopting a fiscal strategy where taxes are based on revenue or sales
flows (through excise and royalty taxes) rather than on company profitability. As a
result, in 1992 this policy resulted in a situation where major producers collectively
incurred substantial operating losses but still had a tax liability of 1.7 billion pesos.
High debt levels have limited the tax base subject to income tax and threatened
the f m c i a l viability of several major mining f i m in recent years. The precise reasons
for this heavy indebtedness are not clear although two reasons suggest themselves. First,
it is possible that concessionary debt terms available from domestic lending sources may
have encouraged the mining companies to continue to borrow money beyond n o d
benchmarks. Second, it is also possible that the mining companies have adopted dividend
policies designed to distribute as much profit as possible to shareholders and using debt
to fund necessary working capital re-investment. In any event, the large interest
Table 11. 8. Taxes Paid (In Thousand Dollars).
payments required to service mining company debt have had a sigmficant impact on
taxable income.

Planning for Improved Macroeconomics Performance

Most analysts agree that the Philippine mining industry is badly in need of
revitalization. With one or two exceptions, the existing producers are financially
marginal at current metal price levels. Over the past 5 years, a number of mines have
closed, while substantial losses have been incurred by surviving mines. This has resulted
in a general decline in mine output. There is little need to repeat the problems of the
industry other than to say that most existing mining operations are well past their peak
productive years and a number of mines are in their sunset years. Given this situation, the
future of the Philippine mining industry is intrinsically linked to the development of new
projects rather than to the rehabilitation of existing operations. In turn,we believe that a
substantial fraction (but certainly not all) of any new project development must come
about as a result of foreign investment rather than investment by the existing domestic
producers. The reason for this change in ownership is simply that the existing domestic
producers lack to a greater or lesser extent, the capital, cutting edge exploration
technology, and large-scale development expertise to bring major new projects into
production. It seems to us that the critical policy issue over the coming decade in
achieving our potential growth rates will be whether the government is willing to let the
mining sector be internationalized. Despite the rhetoric of deregulation and foreign
investment promotion, the Philippines has a long tradition of protecting domestic
producers against foreign competition in all forms. Whether this tradition can be
overcome seems to us to be an open question at this juncture: An issue discussed in some
detail later in this report in our discussion of MPSA's and FTAA's.
The current state of the industry is particularly unfortunate in the light of the
nation's large mineral endowment. Since this endowment is addressed in our resource
assessment work, only a brief overview of the general parameters of economic
performance need be addressed here. At the outset, it needs to be recognized that a
resurgent mining industry would provide different types of economic benefits in different
stages of its revitalization process.
(a) Initially, new mine development would necessitate major new capital
investments. These new investments would provide a substantial boost to
construction industry activity. Associated with this investment period would,
of course, be an influx of foreign capital and potential expansion of local
equity markets.
(b) As the new mines began production, export revenues (and associated mine-
linked imports) would increase. Likewise, various non-profit based fiscal
flows (such as royalties and excise taxes) would expand.
(c) Sometime between the 5th and 10th year of operations the new project will
have retired its senior debt and will begin to pay significant dividends to
shareholders. These benefits would be augmented by income tax flows to
govemrnent as the new projects work through their investment incentive
packages.
The point here is that new mi
n e8-10 8-10-

For the sector as a whole, the achievement of maximum benefits will be largely
determined by the policy framework adopted by government. Most important, of course,
are the policy conditions which encourage/discourage new entrants andlor expanded
exploration by established producers. Ideally, the government should strive for a policy
framework where foreign explorationists with cutting-edge exploration techniques and
ideas are encouraged and feel relatively comfortable, but do not dominate the exploration
arena. To attract new companies necessarily implies creation of an attractive fiscal
system. We believe that the government might have greater success with its tax
arrangements if it were willing to shoulder some of the uncertainties associated with
mining. This implies greater emphasis on profit-related tax instruments. The government
has recognized this problem and has moved to reduce excise tax levels and to review the
implications of its complex incentives package for new project development. However,
we believe that fundamental fiscal reform must involve greater risk-sharing by
government through an increasing emphasis on profit-related fiscal measures.
The planning for a revitalized mineral industry needs to proceed in parallel at both
a maroeconomics and a strategic level. The elements of such policy strategy will be
discussed below and would probably involve three elements:
(a) a balancing of fiscal measures between profit and revenue-based instruments,
(b) a selective policy designed to encourage diversification of the mineral sector
and/or counter cyclical fluctuations in mineral demand and prices.
Clearly, the most important element in any revitalization strategy lies in encouraging the
development of new projects. Strategic planning considerations includmg the
diversification of mineral exports should be seen as general long-term goals but should
not be pursued at the expense of new project development.
Summary
Historically, the Philippine mining industry has been a major component of the
Philippine macroeconomy; however, it is perhaps at its lowest point as in 1992 the
industry constituted only 1.2 percent of total GDP and 3.64 percent of the total industrial
sector. In terms of exports, however, the mineral sector comprise approximately 7
percent of total export; a substantial contribution when one considers that the industry
today consists of only 25 producing metal mines in total and over 75 percent of total
production comes from only 7 major companies.
Most analysis agree that the Philippine mining industry is badly in need of
revitalization. With one or two exceptions, the existing producers are financially
marginal at current metal price levels. Given this situation, the future of the Philippine
mining industry is intrinsically linked to the development of new projects rather than to
the rehabilitation of existing operations. In turn, we believe that a substantial fraction (but
certainly not all) of any new project development must come about as a result of foreign
investment rather than investment by the existing domestic producers. The reason for
this change in ownership is simply that the existing domestic producers lack to a greater
or lesser extent, the capital, cutting edge exploration technology, and large scale
development expertise to bring major new projects into production.
The planning for a revitalized mineral industry needs to proceed in parallel at both
a maroeconornics and a strategic level. The elements of such policy strategy will be
discussed below and would probably involve three elements: (a) a balancing of fiscal
measures between profit and revenue, based instruments, (b) a selective policy designed
to encourage diversification of the mineral sector andlor counter cyclical fluctuations in
mineral demand and prices.
Although the Philippines has a long mining history and at present a small but
viable mining industry the mineral resource potential of the country has not been
quantified by a comprehensive resources assessment. Utilizing a TerraneDeposit Model
methodology and Delphi Estimation was undertaken and completed as a part of the
present study. The methodology utilized has been previously successfully applied in
Papua New Guinea, Xinjiang Province, China, the United States, Canada, and Bolivia
and Costa Rica.
The study relied on basic geologic data provided by the Mines and Geosciences
Bureau, a team of mineral resource specialists fiom DENR's regional offices and the
MGB and industry representatives. The results of the assessment show the Philippines to
have both a diverse and large number of deposits yet to be discovered and developed.
Recommendations
In order to insure that the Philippine Mining Industry will play a major role in the
macroeconomic development of the nation it is recommended that:
1. As foreign investment is the most likely means of rapidly developing the Philippine
mining industry it is recommended that the Government internationalize the mining
industry by creating an enabling policy framework including a new Mining Law.
2. Government policy should target increasing value-added llnkage for copper and gold
in the domestic economy. Such downstream industries as jewelry-making and
fabricated metal shapes would seem to be obvious targets.
3. Planning for a revitalized mineral industry should proceed in parallel at both the
macroeconomic and the strategic level and such policy strategy should include (a)
balancing fiscal measures between profit and revenue-based intruments and (b)
developing a selective policy designed to encourage diversification of the mineral
sector.
 CHAPTER I1 2
Philippine Mineral Resource Assessment

Introduction
In discussions with national and local government officials, (Appendix B) a
diverse set of evaluations were put forward with respect to the mineral potential of the
Philippines and the long tenn prospects for the industry, As examples it was variously
asserted that "...all the good mineral deposits have been mined out...", "...the mining
industry is a sunset industry in the Philippines...", "...the Philippines is the most
mineralized of all the Southeast Asian nations...", and "...there is more gold in the
Philippines than anywhere else in Asia ..." We believe that such a divergence of views
can in large part be attributed to the fact that a comprehensive mineral resource
assessment of the Philippines has not been undertaken. Therefore, as part of the present
study such a comprehensive mineral resource assessment was undertaken and completed
(Appendix A).
The mineral resource assessment was undertaken for the additional reason of
providing the required basic data for developing the intermediate to long-term
development scenarios of the Philippine mining sector. In the following, a brief summary
of the assessment procedure and activities is given as summary data on the resource
potential of the Philippines. Based on expert opinion the development potential of the
estimated resources was evaluated and became the basic data for the development
scenarios.
For the reader who wishes a detailed discussion of the concepts, methodology,
analysis and other application of the resource assessment, in addition to all the basic data,
please see Appendix A.
Resource Assessment
According to Clark, (1 977) "a resource assessment is an effort to establish the
total aggregate volume of any commodity which is economically or potentially
economically recoverable whether it is known or yet to be discovered". In such an
assessment, attention is centered on materials in such form, concentration, and location
that they might be extractable under foreseeable economic and technological conditions.
In practical terms, there is no such thing as an all-purpose resource assessment. Diverse
groups of people interested in such assessments, be they mineral exploration planners,
economic analysts, land use planners, or policy makers, will look for aspects that are
most pertinent to their own field and time frame of interest. For example, explorationists
would be most interested in the geological potential for discovering certain types of
deposits in a region; mining engineers in the physical and chemical characteristics of
deposits already discovered; and economists in the possible mineral supply stream that
might be generated in the future.No single assessment can shed light on all aspects of
conceivable interest, and every type of assessment will have its conceptual and analytical
limitations.
In the Philippines, problems to be addressed by assessments of discovered and
undiscovered resources will concern both large area andlor regional issues, as well as site
specific studies. The large area andlor regional issues involve location of physical
infrslstructure, multiple mine development, and social investment requirements. The site-
specific studies would be focused on individual mine or exploration areas. Therefore, for
the Philippine resource estimation the resource assessment methodology utilized must
produce a level of disaggregated estimates sufficient for both site-specific and regional
studies.

Objectives of Resource Assessment

The primary objective of the resource assessment conducted herein is to assess the
geologic potential of the Philippines in order to enable government authorities to makt
more informed decisions on how to effectively and efficiently search for and develop
mineral resources to facilitate economic growth. Although prediction and even
discovery of a mineral deposit does not ensure development, knowledge of the mineral
potentials of the Philippines is a crucial component to successful development planning
in the Philippines for the reasons given in Table 11.9.
To accomplish the overall objective of the resource assessment, a series of
activities were undertaken in a sequential order. These activities included the
compilation of an inventory of known mineral deposits and reserves, the selection of an
appropriate resource assessment techniques (dependent on levels of data availability and
cost limitations), the collection and interpretation of worldwide data on deposit types
predicted to occur in the Philippines, and selecting a team of experts to undertake the
resource assessment.

Estimation of Mineral Resource Potential

The estimation of the mineral potential of the Philippines was based on two broad
resource assessment techniques, i.e. (1) Delphi estimation and (2) Geologic Terrane and
Deposit Models. These are discussed in detail in Appendix A.

Delphi Estimation Procedure and Results

The Delphi technique takes its name from the famous Oracle of Delphi of ancient
Greek mythology; however, there is little mystery about the technique today. The Delphi
technique is a sophisticated methodology that uses the opinion or judgment of an
informed set of individuals to assess the that a mineral deposit will occur and
what its attributes will be. In its simplest form, the Delphi methodology substitutes the
subjective probabilities (opinions) of a geologist for a specified mathematical inference.
The Delphi methodology has been applied successfblly to the estimation of mineral
resources in Papua New Guinea, Alaska, British Columbia and the Yukon Territory of.
Table 11. 9. Needs and Benefits of Resource Assessment in the Philippines
--

Needs Benefits
1. To evaluate known or discovered 1. Define commodities for both
mineral resources nationally, internal consumption and for
provincially, and locally. Cxpo*.

2. To compile a national inventory of 2. Provide a basis for fonnulation of

mines and deposits considered or national mineral policies.
prepared for mining.

3. To estimate and validate mine 3. Provide a basis for development of

reserves. a multi-commodity mineral
economy.

4. To define local deposits or deposit 4. Provide a basis for defining the

areas suitable for exploitation. Philippines' role in regional
cooperation or development
Programs.

5. To estimate the undiscovered 5. Provide a basis for the Philippines

resource base of the Philippines and to seek foreign aid and lending
assess the recoverable portion. fiom multilateral lending agencies.

6. To improve the efficiency of mineral 6. Provide raw data which can be

exploration activities and new made available to attract foreign
technologies. investment into mining or use for
actual sale.
Canada, the Northern Sonora area of Mexico, and to the uranium resources of New
Mexico. As a result. the methodology is both welldocumented and has a sufficient
breadth of application that could be modified and utilized specifically for the Philippines
The Delphi procedure, although relying heavily on subjective probabilities, is a
formal methodology of resource assessment, which allows for the use of the estimates in
a geological, mathematical, and statistical analyses. The general procedure for the Delphi
assessment is shown in Figure 11. 5.
A critical element in the implementation of the Delphi methodology within the
Philippines was the compilation of as much basic geologic data as were available for use
as a primary input to the resource assessment procedure ( Figure 11.6.). Implementing
the activities shown in Figure 11. 6. were undertaken as follows:
1. A fundamental principle of geology is that certain types of mineral deposits are
associated with specific geologic attributes such as the chemical and mineralogical
composition and age of rocks. Therefore, the first step is to define, for all of the
Philippines, a series of geologic terranes (i.e., areas of similar rocks that have a
similar geologic history). Figure 11.6. Activity 1 shows the broad spectrum of
geologic attributes integrated to produce the resultant Philippines terrane map (Figure
11. 7.). It should be re-emphasized that such terrane maps, based on highly
quantitative and reliable data, are a basic input to the more subjective Delphi
estimation procedure.
2. The next stage to add information pertaining to exploration and known mineral
deposits to the data compiled for the terrane maps. In essence the initial terrane
compilation provided the data needed to assess the types of mineral deposits based
solely on geologic data that mlght expected to occur in an area based solely on
geologic data. Mineral resource inventories list the types of mineral deposits that
&e been discovered within an area (Table 11. 10.). The integration of these data
with the terrane maps in the first activity allows the development of a mineral
distribution map. The mineral distribution map provides an objective evaluation,
once again based almost entirely on quantitative data, of the areas most favorable for
a given type of mineral deposit.
Figure 11. 5. Generalized Schematic of Delphi Estimation Procedure
Proposed for the Philippines.

1) Formuhte definition of

1sl_171

2
121 20) Appoint Delphi monitor

3s) Construct Dophi qumthnain in 3b) Compik boric data inpub for
m u l t r t i o n with diont a d pmgmn a d for expert into*
construct mapom fomut

I 6) Expetts aamw uncertain

punmn

7) Analyze ?at&nate~
and atatirtiulty
sumrmme resub

al rounds
Figure 11. 6. TerraneDeposit Resource Assessment Methodology.

Resource Assessment Activities

Activity 1 Activity I1 Activity U1

- - - - - - - -

Basic Inputs Product Basic Inputs Roduct Basic Inputs Product

u
a u
Geologic

Tectonic
Geochemical

Studies arc
known dcposit
Intcmatwnal
M i d
Deposit
Data
---------
Tome
Gr&
Distribution
-
tonnage Number

Mineral Mineral
Resource
Fmorability Local-
Map
Favorability
Regional -
Nmionrl
Exploration Rcsourcc
History Asscssmcnt

Delphi
Estimation
Undimvercd
Deposits

Inventory
 Table 11. 10. Philippine Mineral Deposit Types.

Gold Manganese
Veidvein sheets Volcano/Sedimentary
Placer Residual (laterite)
Contact Metasomatic ( s h )
Disseminated
Carlin Type
Manto Type
Porphyry

Iron Copper
Contact Metammatic Por~hm
Laterites Kuroko
Beach Sands CYPm
Bedded Besshi
Hot Spring Contact Metasomatic (Skam)
Bog

Chromite Lad-Zinc
Podiform Besshi
Bedded (Magmatic) Kuroko
Placer Contact Meeasomatic (Skarn)
Strataform
Vein

Nickel Molybdeaum
Laymd (Magmatic) Cu/Mo Porphyry
Epithemal Skarn
Laterite

Fertilizer Minerals Aluminum

Guano Laterite
Phosphate
Limestone
Dolomite
Magnesite

Sulfur Mercury
Volcanic Opalite Vein

Barite Platinum
Vein Basal Sulphide
Gaunge Oxide Magmatic

Bentonite Tak
Gypram Asbtstos
Limestone Perlite
M8gnmitt silic~
 Additionally, the mineral distribution map can provide a r,a&g of areas fiom most
favorable to least favorable based on geologic criteria.
3. A concurrent activity to developing the terrane and resource distribution maps was the
collection and interpretation of information on the number, tonnage, grade, and
geology including both producing and "to be" produced of known mineral deposit
types in the world.
This resulted in a detailed deposit description (genetic model) with an accompanying set
of graphics and statistics for each deposit type,including distributions of both primary
and secondary minerals. An example of such a description is given in (Table 11. 11.)
along with the statistical distribution for contained metals in gold-rich porphyry coppers.
These distributions are essential for establishmg upper and lower boundaries of tonnages
and grades that are economic. The distributions also establish the average values of
tonnage and grade of deposits that may be expected to occur and be developed.
Within the Philippines, the known mineral deposits of each deposit type were
compared to the respective international curves developed for that deposit type. This
provided a basis for comparison and estimates acquired during the subjective estimation
phase of the program.
The work undertaken through Activity 3b (Figure 11. 5.) has been for the
collection and analysis of relevant data to provide a comprehensive and consistent data
set for use in the subjective estimation procedure. These activities comprised
approximately 85 percent of the program's geologic inputs.
As Figure 1 shows, the initial activity after selection of the Delphi monitor (Step
2a) was to solicit (Step 2b) from the scientific and geologic community a number of
individuals who are experts about the geology and mineral potentials of the Philippines.
For purposes of the present study regional experts of the DENR, with representatives
from industry were selected (Appendix A). These individuals were selected as they have
Table 11. 11. Porphyry Copper Gold Model.

DESCRIPTION: Stockwork veinlets of chalcopyrite, bomite, and magnetite in porphyritic

intrusions and coeval volcanic rocks. Ratio of Au (ppm) to Mo (percent) is greater than 30 (see
fig. 77).
GENERAL REFERENCES: Sillitoe (1979), Cox and Singer (in press)
GEOLOGICAL ENVIRONMENT:
Rock Types Tonalite to momgranite; dacite, andesite flows and tuffs coeval1 with intrusive
rocks. Also syenite, momnite, and coeval high-I& low-Ti volcanic rocks (shoshonites).
Textures Intrusive rocks arc porphyritic with fine- to medium-grained aplitic groundmass.
Age Range Cretaceous to Quaternary.
Depositional Environment In porphyry intruding coeval volcanic rocks. Both involved and m
large-scale breccia. Porphyy bodies may be dikes. Evidence for volcanic center; 1-2
km depth of emplacement.
Tectonic Seningts) Island-arc volcanic setting, especially waning stage of volcanic cycle. Also
continental margin rift-related volcanism.
Associated Deposit Types Porphyry Cu-Mo; gold placers.
DEPOSIT DESCRIPTION:
Mineralogv Chalcopyrite f bomite; traces of native gold, electrum, sylvanite, and hessite. Quartz
+ K-feldspar + biotite + magnetite f chlorite f actinolite f anhydrite. m t e + sericite*
clay minerals f calcite may occur in late-stage veinlets.
TexturdStructure Veinlets and disseminations.
Alteration Quartz f magnetite f biotite (chlorite) f K-feldspar f actinolite, f anhydrite in interior
of system. Outer propylitic zone. Late quartz + pyrite + white mica f clay may
overprint early feldspar-stable alteration.
Ore Controls Veinlets and fractures of quartz, sulfides, K-feldspar magnetite, biotite, or chlorite
are closely spaced. Ore zone has a bell shape centered on the volcanic-intrusive center.
Highest grade ore is commonly at the level at which the stock divides into branches.
Weathering Surface iron staining may be weak or absent if pyrite content is low in protore.
Copper silicates and carbonates. Residual soils contain anomalous amounts of mtile.
Geochemical Signature Central Cu, Au, Ag; peripheral Mo. Peripheral Pb, Zn,Mn anomalies
may be present if late sericite pyrite alteration is strong. Au (ppm): Mo (percent) 30 in
ore zone. Au enriched in residual soil over ore body. System may have magnetic high
over intrusion surrounded by magnetic low over pyrite halo.
EXAMPLES:
Dos Pobres, USA2 (Langton and Williams, 1982)
Copper Mountain, CNBC (Fahmi and others, 1976)
Tanama, PTRC (Cox, 1985)
as broad a background as possible, both in the Philippines and internationally, to ensure a
comprehensive estimate from a broad perspective. After selecting the various experts and
compiling the basic data. the Delphi estimation procedure continued through Activities 4-
9 (Figure 11. 5.).
In Activity 4, each expert was briefed on the geology of individual t m e s and
on information on known mineral resources within each area (Appendix A).
Additionally, detailed discussions were undertaken for deposit types not identified in the
Philippines but which may be inferred, on the basis of geologic analogs to occur within
the Philippines. At this point each expert had access to all available geological
knowledge, which can be logically provided on the basis of known data within the
Philippines. The final briefing activity consiszed of a review of the worldwide tonnage,
grade, and distribution parameters of individual mineral deposit types.
After acquiring and presenting background data to the experts, they were then
asked, individually on the basis of their own persod knowledge, expertise, and available
data to estimate the number of undiscovered deposits of a specific type to be discovered
within each geologic tcrrane.
In estimating the occurrences and attributes of mineral resources within the
Philppines, each expert was asked to provide his estimates at various probabilities or
levels of confidence. The confidence levels chosen for this study were .95 (near virtual
certainty), .50 (equal chance of occurrencelnon-occurrence), and .05 (relatively
uncertain). Such estimates can be grossly described as highly conservative, best estimate,
and highly optimistic.

Estimation of Philippine Resource Endowment

Estimations of the resource endowment and development potential of the
Philippines can be divided into two basic subsets. The first group of estimates are for
short-term development potential and rely heavily upon the already-known and partially
well-explored deposits. Conversely, the second sub-set of longer term estimates deals
almost exclusively with resources that are presently unknown but may be discovered and
developed. This second sub-set is therefore necessarily biased by estimates centering on
known favorable areas, with possible effects of decreasing estimates of the potential in
truly frontier areas.
The pronounced bias in the estimates toward the known resource potential of the
Philippines was accommodated for, at least partially, by conducting the estimation
procedure at various confidence levels (.95, .50, and .05). As pointed out earlier, the .95
confidence level would be the most conservative and hence would be expected to present
only known deposits; whereas, the .05 confidence level would be the most optimistic and
therefore represents the known plus, to be discovered, deposits. Similarly, the .50
confidence level would be expected to represent the "most likely" scenario for discovery
and development. Table 4 provides a group consensus constructed by aggregation and
averaging the number of mineral deposits expected to be developed to the production
stage within the time periods of 0-55-1 0, and 10-15 years. The estimates of Table 11. 12.
are for all types of deposits, ranging from e p i t h d gold to porphyry coppers. A
breakdown by individual deposit types is provided in Table 11. 13.
It is virtually certain that changing economics, technology, corporate philosophy,
and a host of other factors will interact to modify the development scenario presented in
Table 11. 13. Nevertheless, this study does show a generalized development trend that is
predicated largely upon the development of medium- to large-sized gold and copper-gold
properties with a high probability that medium-sized, massive sulfide deposits will be
discovered and exploited in the intermediate time frame. In the shorter term, a number of
known deposits (Table 11. 14.) are almost immediately (0-5 years) available for
development.
 Time Period

0-5
5-10
.95
2
4
-
Table 11. 12. Number of New Mineral Deposits Estimated to be Developed
in the Philippines During the Period 1995-201 5 .

.SO
5
9
.05
8
9
10-20 5 11 13
Total 11 25 30

*Figures from resource assessment and do not include known deposits presently under
exploration and development (Table 11- 14).
Table 11. 13. Deposit Type and Number of New Deposits to be Developed
(SO Confidence Level)*

Deposit Type Years

0-5 5-10 10-20
Porphyry Copper-gold 1 2
Epithermal Gold 3 5 7
Nickel Laterite 1 1 1
Podiform Chromite 1 2
Massive Sulphide 1 1 1

*Figures from resource assessment and do not include known deposits presently under
exploration andlor development (Table 11. 14.)
Table 11. 14. Known Mineral Deposits with High Development Potential, 1995-2000.

Deposit Tonnage Grade

Porphyry Copper-Gold
Didipio 106 MT 0.5% Cu
1.1 gm/t Au

Far Southeast 365 MT

King-King 314 MT

Gold
Bulawan-Negros 9 MT
Dizon Extension 20 MT
Longos 1.6 MT
Summary
The Delphi estimation and Terrane-deposit model analysis of the mineral
resource potential (Appendix A) clearly demonstrate that the Philippines has a high
mineral development potential. Estimates of the total number of new deposits to be
developed during the period 1995-2015, not including those presently under exploration
and development, range fiom an estimate of 1 1 new deposits at the .95 confidence level
to 30 deposits at the .05 confidence level. A total of 25 new deposits is estimated at the
.50 confidence level. Regardless of the actual number of new deposits developed it is
clear that the mineral potential of the Philippines is both large and diverse.
With increased exploration, major new discoveries will be made. The resource
assessment estimates that the major new deposits of the future will be predominantly
epithermal gold deposits, porphyry copper-gold deposits and polymetallic massive
sulphides (Cu/Pb/Zn). Traditional deposits of podiform chromite and nickel laterite will
also be developed although most will be small to medium size.
Recommendations
The resource assessment undertaken as part of this studies shows the Philippines to
be well endowed with commercially viable deposits. To better assess the resource potential
of the Philippines and to insure the discovery and development of its mineral deposits the
following recommendations are approved.
1. To better quantify the existing resource assessment it is recommended that resource
assessment at the regional level be undertaken utilizing the same methodology.
2. The Mines and Geosciences Bureau should expand its data base and data analysis
activities in order to make data more readily available to industry and to the regional
ofices of the DENR.
3. The Mines and Geosciences Bureau should broaden and concentrate more effort on the
exploration activities of domestic and international companies in order to develop the
basic data for more replied resource assessments.
4. A major component of the Mines and Geosciences Bureau should be on providing
better resource assessment data, particularly within an economic and development
M e w o r k rather than geological, to both the DENR and to Congress.
5. The MGB should undertake a national mineral resource assessment on a periodic basis
(Approximately every 5 years) and update resource potential and development scenarios
for planners.
 CHAPTER I1 3
Mineral Sector Development Scenarios

Factors Controlling Mineral Development

Resource potential, domestic mineral policy and legislation and international factors will
undoubtedly combine to influence the medium to long term development of the Philippine
mineral sector. The resource assessment results of the present study, coupled with the extensive
mining history of the Philippines, clearly demonstrate that the Philippines is richly endowed in
many metals, and with gold and copper specifically. Therefore, the resource endowment factor is
very favorable for the Philippines.
Domestic mineral policies and legislations, at the time of this report, would have to be
considered unfavorable, (Part I. Chapter 4) particularly with respect to foreign investment.
Equally negative is the low level of the domestic mining industry activity. Pending legislation
and recent improvements, particularly with respect to taxes are, however, key components which
may stimulate both domestic and foreign interest in the mining sector. Therefore, it can be
concluded that the Philippine mineral sector is poised to develop rapidly if recent and pen*
policy and legislation is acted upon andlor passed. Similarly, the global economic malise of the
early 1990s seems to be passing with economic growth expanding globally and in particular
within the Asia-Pacific region. Metal prices in particular have firmed considerably above their
early 1990s low and with continued economic growth should stay near or above present levels.
Therefore, one can conclude that the timing and circumstances for the development of the
Philippine mineral sector are opportune. Whether the industry and government can move
expeditiously in order to capitalize on the circumstances is an unanswered question. Because of
this uncertainty the Study has developed three scenarios for mineral sector development which
are dependent on the following factors which will in large part determine both the scope and pace
of future mineral development in the Philippines. These factors and their impact are as follows:
1. Modem and enabling mineral legislation will attract significant foreign investment into
the mineral sector of the Philippines. Without a Mining Act the Philippines will continue
 2. to be non-competitive in attracting foreign investment, whether under MPSA or
FTAA agreements.
3. The 60140 requirement is the primary deterrent to foreign investment into the
mineral sector as it creates a non-competitive economic environment and results
in unacceptable risk for the foreign investor. The extent to which this requirement
is either eliminated or accounted for in legislation and agreements will largely
determine the level and foreign investment.
4. Global economics and economic development will determine both metal demand
and price. In the case of many Philippine deposits, which have lower
profitability, small changes in price and demand in response to global economics
will have a strong impact on the levels of investment and development within the
Philippines.
5. Project delays from exploration to production, and beyond, are critical both to the
profitability of the mine and in terms of in-tional perceptions of the Philippine
mineral sector. Unreasonable delays in present projects will have a pronounced
"ripple effect" on future investment and development.
6. The MGB, as the principal agency dealing with MPSA and FTAA applications,
approvals and negotiations is presently, in its Staff position, severely hampered in
carrying out these functions. Failure to respond rapidly to strengthen the MGB
may well defer development and result in a diminished interest in the Philippine
mineral sector.

Development Scenario Assumptions

As previously noted, the development of the Philippine mineral industry depends
on a number of international and national factors which will expedite or inhibit mineral
development. It is critical to note that these issues are strongly linked in detexmmmg
..
overall development of the sector. Recognizing this linkage, we have developed three
scenarios for the Philippine mining sector termed the rapid, modest (baseline) and slow
scenarios. In determining the total number of deposits to be developed, the results of the
resource assessment estimates (Section xx) were combined with known deposits presently
under exploration and development. This combination of undiscovered and known
deposits comprises the estimates that are presented in Tables 11. 15., 11. 16., and 11. 17.
Tables 11. 15., 11. 16. and 11. 17. and are those upon which the "Forecast of Future Mineral
Sector Development in the Philippines (Chapter 11.4.) are based.
The basic assumptions for each of the three scenarios are also given in Tables 11.
15.,II. 16., and 11. 17. A review of Tables 11. 15,II. 16., and II. 17. shows that there is a
significant difference both in the number of deposits to be developed and the tuning of
developments.
In the three scenarios it is assumed that for rapid development in the short-term
large-scale capital formation will initially be foreign investment. With the development
of the domestic industry it will begin to play a larger role in medium-to-long tern capital
formation and mine development. In the modest and slow development scenarios it is
assumed that after an intial investment, by foreign investors for known deposits, the level
of foreign investment will decline substantially. This slowdown in investment will
adversely impact the capacity of the domestic industry to raise capital. As a result, both
the pace of mineral development will be slowed and the number of deposits developed
reduced.
In the analysis we have also not included a substantial number of small high-grade
gold mines, such as Diwalwal, as such activities we believe will continue to be by small
scale or illegal intermediate scale miners with few, if any revenues accruing to the
government. Finally, the development of nickel projects projected in this study are based
on the assumption of the re-establishment of Nonoc nickel under an MPSA. The small-
scale nickel mines projected to be developed would sell to Nonoc and hence will not be
developed if Nonoc does not proceed.
Table 11. 15. Scenario A Rapid Development.

Number of Deposits
Deposit Type 0-5 Years 5-10 Ycars 10-20 Years
FTAA MPSA FTAA MPSA FTAA MPSA
1 Porphyry
Copperlgold
Large 1 - 2 1 2 2
Medium 1 1 1 2 2 4
2 Epithermal Gold
Large 1 - 2 1 2 2
Medium - 4 - 7 - 8
3 Lateritic Nickel
Large - 1
Small - 1 - 2 - 3
Kurokoht esshi 1 - 2 1 3 1
Chromite - - - 2 - 2

Assumption
1. Enabling mineral legislation completed by end of 1994.
2. 60140 provisions for mining sector agreements (FTAAIMPSA) is deleted or
substantially modified.
3. Global economic growth continues and Philippine economic growth rate reaches 6-8
percent per year.
4. Metal prices stay near or above present levels.
5. Ongoing mineral development projects are completed without major problems at
either the national and local level.
6. Restructured MGB becomes an efficient "one stop center" for mineral activities.
 Table 11. 16. Scenario B Baseline Development.
-
Number of Deposits
Deposit Type 0-5 Yeats 5-1 0 Years 10-20 Years
FTAA MPSA FTAA MPSA FTAA MPSA
Porphyry Copperlgold
Large 1 - 1 1 1 1
Medium 1 1 - 2 - 2
Epithermal Gold
Large - - - 2 1 2
Medium - 3 - 4 - 6
Lateritic Nickel
Large - 1 - - - -
Small - 1 - 1 - 1
Kuroko/Besshi - - - 1 - 1
Chromite - - - 2 - 2

Assumption
1. Enabling mineral legislation completed by mid- 1995 because of issues of
reorganization environment, ancestral lands and local government concerns.
2. 60140 provision and divestment are retained for FTAAs but with negotiated flexibility
regarding divestiture
3. Global economic growth continues but at a slower pace and Philippine economic
growth is approximately 5-6 percent per year.
4. Metal prices decline ( 4 0 percent) or stay at present levels
5. Major projects experience limited delays at the local level but not at the national
level.
6. MGB functions remain primarily staff with no increase in capacity for dealing with
MPSAIFTAA issues.
Table 11. 17. Scenario C Slow Development.

Number of Deposits
Deposit Type 0-5 Years 5-10 Years 10-20 Years
FTAA MPSA FTAA MPSA FTAA MPSA
Porphyry Copperlgold
Large - - - 1 1 1
Medium - 1 1 1 - 1
Epitherrnal Gold
Large - - - 2 - 1
Medium - 2 - 3 1 3
Lateritic Nickel
Large - 1 - - - -
Small - - - 1 - 1
Kuroko/Besshi - - - - - -
Chromite - - - 1 - 1

Assumption
1. Enabling mineral legislation is not completed within 1995
2. 60:40 provisions and divestment retained for FTAAs as in the past.
3. Global economic growth slows and Philippine economic growth steadies at 4.5 -5.5
percent per year
4. Metal markets stagnate and prices fall (parhally for copper and gold) by more than 10
percent.
5. Major projects presently underway are delayed due to both national and local
problems.
6. MGB functions are eroded still further with respect to its overall role and its capacity
for dealing with MPSA/FTAA issues specifically.
Otber Development Scenarios
A review of the mining history of the Philippines will show that in addition to the
copper, gold, chromite and nickel deposits discussed in the preceeding section, the
Philippines also has produced iron ore, manganese, lead, zinc and silver. Alternative
development scenarios for the Philippines, which would include the preceding metals
and more, can be postulated. However, for the present study it was determined that these
metals would not unto themselves represent significant mineral developments unless
linked with other industries. As most of the above metals would be essential components
of either the iron and steel industry or of other downstream industries, they were not
considered in the present study. It was concluded that since the Philippine iron and steel
industries and the ferro alloy industries are highly problematic given their present state,
these metals were not considered in the present analysis. Should the downstream
industries expand however, they could be a substantial contributor to overall mineral
development.
Summary
The mineral resource assessment portion of this study (Chapter 11.2. and
Appendix A), coupled with the known mineral potential of the Philippines, clearly shows
that the nation has the resource base to support a relatively large and viable mining
industry. The long-term development of the Philippines mineral sector, however,
depends on a number of international andlor domestic factors, which, when combined
will determine the scope and pace of Philippine mineral development. These issues arc
(1) domestic mineral policy and legislation (2) the retention or removal of the 60:40
provision from FTAAs (3) global economic development, (4) domestic factors impacting
mineral exploration and mine development, (5) world metal prices and (6) status of the
MGB to support and oversee mineral development.
To account for the possible variations of the above factors three development
scenarios have been developed for future mineral development in the Philippines, i.e.
rapid, a baseline and a slow scenario. The two critical dctamhnts of the pace of
development are (1) the level of foreign investment and (2) government policy which are
strongly correlated. The baseline scenario proposes that during the next 20 years (1995-
20 15) approximately 40 large to small mineral developments will take place. The largest
developments will be in large to medium scale porphyry copper and gold deposits (1 1)
followed by large to medium scale epithermal gold deposits (1 8) and the remainder small
to medium scale nickel, chromite and polymetallic sulphide (Besshi, Kuroko, Cyprus)
deposits. Clearly such a level of development will require a very positive mineral
investment climate in the Philippines which does not presently exist.
 CHAPTER LI 4
Forecast of Future Mineral Sector Development in the Philippines

Overview of the Forecast

The forecast of future mineral sector activity derives directly h m the resource
development scenario, the financiaVtax analysis, and estimates contained in the University of the
Philippines Input-Output Study. The forecast was generated for four variables: export revenues,
new project investment, sector imports, and projected tax receipts. Since it is impossible to
predict the exact nature of still-to-be-discovered ore bodies, these variables were estimated using
"model projects" representative of the general charabstics of mineral deposits predicted from
the resource assessment. In deciding exactly which characteristics (e.g. ore grade, minable
reserves, etc.) to include in the model projections a conservative methodology was adopted. This
methodology assumed that mine characteristics would either:
(a) be at the minimum profitability levels necessary to attract international investment
(e.g. projects would generate a 15 percent Discounted Cash Flow Internal Rate of
Return) or
(b) that new projects would have minimum ore grade level which reflect world-wide
patterns for new investment (e.g. a gold content of 2 grams/tonne would be required
to meet the 15 percent DCFROI criteria).
We believe that these assumptions represent a conservative forecasting methodology and we
fully expect that many new projects will exceed the ore body characteristics of the model
projects. However, we simply cannot say how much better the characteristics of the average
project will turn out to be than the characteristics used in our model projects. For those projects
with "better-than-model-project" characteristicswe would anticipate substantial increases in
export revenues and government tax revenues but only minor adjustments to capital investment
levels. For this reason, the forecasts should be viewed as conservatively indicative of future
sectoral perfonnance.
Accounting for the sizable impact of the small scale mining of gold in the Philippines is a
particularly difficult methodological problem in the forecasts. Experience over the last decade
has suggested that the small scale mining sector in the Philippines has been able to mine
progressively larger gold deposits using labor intensive methods. Although there are clearly
limits to how far this trend can continue, there currently exists a gray area where gold deposits
with certain types of characteristics (high grade, near surface, straightforward metallurgy) might
be developed by either small miners using labor-intensive methods or by corporate miners using
traditional methods. Short of a major indepth examination of the role of small mining sector,
there is no straightforward way of addressing this gray arca forecasting problem.
In 1993, small miners produced roughly one third of total Philippine gold output. We
believe that this fraction is primarily attributable to the disarray of the corporate mining sector
rather than any comparative advantage associated with labor-intensive mining methods. The
disarray of the corporate mining sector is reflected in two major ways. First, the corporate
miners simply were lacking the financial resources to mount exploration programs which might
have resulted in "gray area" discoveries. Second, as mesult of major personnel retrenchments in
corporate mining firms a substantial number of mined mining professionals suddenly became
available to small mining activities. These professional engineers and metallurgists made it
possible to extend mine mechanization, the use of explosives, and more efficient metal extraction
technology to the small mines sector. While further gains in these areas still seem highly likely,
we believe that a rehabilitated corporate mining sector will, in the future, account for an
increasing hction of gray arca production. For this reason, our forecast anticipates a decline in
the small mining fraction of total gold output from current levels to about 25 percent of total
production. However, it needs to be pointed out that even a relative decline still suggests a quite
robust small mining sector in the Philippines.
Projections of Future Mineral Sector Activities
The impact of future mineral sector development in the Philippines can be measured in
terms of four main variables, i.e. export revenues, new project investment, mineral sector imports
and projected tax receipts. In the following these four variables are discussed in terms of their
overall impact on the sector and in terms of this absolute value. The analysis is based on the
development projection of the rapid, baseline and slow development scenarios given in the
preceeding section.

&port Revenue. The growth of the Philippines mineral sector has been set out in the

preceeding mineral sector development scenarios. Table 11. 18. shows our forecast of the three
scenarios for mineral revenues for the next 15 years. The data in Table 11. 18. are net of the
anticipated mine closures and expansions and are primarily based on the development of copper,
gold, chromite and nickel resources. While other resources such as zinc and silver are known to
exist in the Philippines there is no indication that future discoveries will be significant vis-a-vis
gold/copper/nickel/chromite. In other words, we believe that the contribution of other minerals
will be marginal to sectoral performance over the forecast period.
From the data of Table 11. 18., it is clear that gold will play an increasing role in the future
development of the Philippine mining sector. Indeed, the data in Table 11. 18. are somewhat
deceiving in that they list revenues by "type of mine" rather than by "mineral product". This
distinction is important because Philippine copper mines traditionally produce large quantities of
by-product gold. For our model mines, the value of gold by-products from copper-mining ranges
fiom 38-44 percent, an amount equal to about 35 percecnt of a mines total revenue.
The implications of this increasing dependence on a single mineral with highly volatile
demand and price characteristics is an important finding of the study and will require special
policy measures by the Philippine government. These policy measures by the Philippine
government should include how the Government will internally manage its fiscal receipts (see
Fiscal Receipts section below) fiom the sector. However, it is also quite important that the
Government carefully considers how it will deal with the impacts of cyclical swings on the
fortunes of private mining firms.
Table 11. 18. Value of Mineral Output (Rounded to Millions of $US).

Baseline Scenario
Year Existing' New Cu New Au Nonoc Total
1995 425 0 0 180 605
2000 425 410 184 223 1242
2005 425 988 623 197 2234
2010 425 1567 1282 197 3471

Slow Scenario
Year xis sting ' New Cu New Au Nonoc Total
1995 425 0 0 180 605

Rapid Scenario
Year Existing' New Cu New Au Nonoc Total
1995 425 0 0 180 605
2000 425 410 342 223 1400
2005 425 1229 1062 197 2913
2010 425 2435 1818 197 4876
1
Includes small-scale gold mining input as approximately 25 percent of total gold value.
Assumed constant throughout analyses.
 If volatility is to be an important characteristic of future mineral exports then several
difficult decisions will have to be taken about defensive strategies which might be involved in
protecting the industry. As the gold sector grows, the already considerable pressures for
industry.protection through government fiscal concessions will mount. In response to these
pressures, the government might choose to adopt any of a number of policy courses ranging fiom
a strict hands-off attitude, where the industry is allowed to sink-or-swim without government
support, to fairly draconian macroeconomic measures such as subsidies, previously used in the
Philippines, or manipulation of the foreign currency exchange rate (as practiced in South Africa).
We favor the hands-off approach for two reasons. First, we believe that the Philippine
experience of the last decade has shown that heavy intervention by Government through
financing, fiscal and other measures, tends to encourage an inefficient industry. Second, we
believe that investment decisions based on some implicit assumptions about a government bail-
out will encourage development of marginal deposits at the expense of a sound exploration and
development program.
The revenue projections of Table 11. 18. imply substantial investment in new mine
capacity, the increased import of certain operating supplies, and eventually the generation of
fiscal revenues to Govemment. Each of these variables has direct implications for the Philippine
economy which we will now examine.

Capital Investment. Projections of capital investment for the mining sector are
summarized in Table 11. 19. For the most part, these capital cost estimates have been taken
directly fiom actual project estimates for new or anticipated developments. By international
standards these investment projections (per tonne of new capacity) appear to be relatively modest
although within normal ranges. This is probably attributable to the low unit labor costs
associated with Philippine mining industry and to the impact of wage costs on the capital-labor
factor mix.
In examining the investment projections, it should be noted that a large fiaction to the
anticipated investment is associated with a few relatively large (copper) projects. Indeed, since
Table 11. 19. Investment in New Mining Capacity (Rounded to Millions of $US).

Baseline Scenario
Year Existing New Cu New Au Nonoc Total
1995 0 0 0 142 142
1996-2000 0 740 135 0 875

Slow Scenario
Year Existing New Cu New Au Nonoc Total
1995 0 0 0 142 142
1996-2000 0 190 90 0 280
2001-2005 0 740 3 75 0 1115
2006-2010 0 910 300 0 1210

Rapid Scenario
Year Existing New Cu New Au Nonoc Total
1995 0 0 0 142 142
1996-2000 0 740 300 0 1040
1650 675 0 2325
2006-2010 0 2200 840 0 3040
many of the anticipated new developments are medium-scale gold projects, 5 large projects
account for over 50 percent of total anticipated investment. We would expect that most if not all
of these large projects will involve the participation of multinational mining firms capable of
underwriting the necessary financing.
We would expect that most of the large scale projects will involve substantial debt
financing from international banks, although multilateral financing of related infhstmcture
development is also probable. For projects financed by international loans it is likely that lenders
will require off-shore escrow accounts ( h m sales proceeds) to ensure the availability of
principal and interest repayments. Clearly, such offshore escrow accounts will restrict the short
term flexibility of the central bank to manage sectoral flows but this constraint will be limited in
time (to the repayment period of the loan) and will be relatively modest given total foreign
currency flows in the economy.
The use of bank debt to finance new mine developments has a very poor record in the
Philippines and it will be important for the government to carefully examine the recent
experience with financial restructuring and bankrupcy. Furthermore, as explained elsewhere in
the report, debt financing has significant implications for project appraisal and eventual
profitability. It is our impression that there is only a very limited capacity to analyze these
effects by officials charged with negotiating tax arrangements.

Imports. Each new mining development implies an increase in the importation of certain
critical supplies which are not domestically available. Estimation of this import requirement was
based on data from the University of the Philippines Input-Output Study described in the
Macroeconomics section. Import requirements for copper and gold were 11 percent of output
value for copper and 9 percent of output value for gold. These factors are based on estimates
contained in the University of the Philippines Input-Output study of the mining sector (Soriano
Study page 28). As noted, while it is possible to directly identify a few mine specific imports, in
many cases imports are used by several economic sectors and it is difficult to identify the specific
value of imports by SIC category. Forecasted imports required to support the increased mining
sector output are presented in Table 11.20.
While the import forecast is believed to be broadly accurate, readers should be aware that
the Input-Output Study did not specifically examine the import patterns of small gold miners.
However, even if small miners do have a significantly different propensity to import than
corporate miners, the overall impact on the estimated import bill is likely to be fairly small.

Fiwaljlows. Fiscal flows to government have substantial time lags fiom both initial
investment and from revenue generation. Table 11.21. summarizes anticipated fiscal receipt
flows for the forecast period. These fiscal flows are derived from the detailed cash flow studies
of the different model projects under the alternative (MPSA or FTAA) fiscal arrangements.
Detailed projections for each financial model can be found in Appendix C.
In assessing the projected flow of fiscal receipts, it is important to keep in mind that the
timing and magnitude of tax and other fiscal flows are extremely sensitive to the actual (as
opposed to "model") characteristics of the ore bodies which are actually discovered and
developed. Since we have deliberately assumed commercially marginal projects, we would
expect that in many cases actual fiscal flows may substantially exceed those projected in Table
11.21. Again, the question comes down to developing a logic for arguing "how-much-bettcr-
than-marginal", the ore body characteristics of undiscovered deposits may, turn out to be.
Under the current tax regimes better-than-modeled ore body characteristics would have
two distinct impacts on fiscal flows and fiscal receipts. Improved ore grade would, other things
being equal, increase annual revenues and correspondingly excisereceipts fiom the beginning
of mine production. In addition, increased ore grades would increase incomeflows to
government. However, the timing of the increased income tax receipts would obviously be
heavily influenced by the tax holiday concessions and 60140 operating surplus provisions which
were incorporated into specific MPSAETAA investment packages. Thus, we would npt expect
to see any changes in income tax flows for at least five years. In short, while fiscal flow
associated with excise taxes would increase immediately as a result of improved ore body
characteristics, we would, in general, expect a five-year delay in seeing any improvement in the
Table 11. 20. Imports for Operating Supplies for Major Projects.

Baseline Scenario

Slow Scenario

Rapid Scenario
 Table 11. 21. Projected Fiscal Receipts from Mining Roundtd to Millions of $US).

Baseline Scenario
Tax 1995 2000 2005 2010 2015
New Cu Excise 0 8 20 31 31
New Cu Income 0 0 76 146 233
New Au Excise 0 4 12 25 25
New Au Income 0 0 25 65 143
Nonoc Excise 10 12 11 11 11
Nonoc Income 0 29 21 21 21
Existing Excise 15 15 15 15 15
Existing Income 6 6 6 6 6
Total Tax 30 73 185 319 484

Slow Scenario
Tax 1995 2000 2005 2010 2015
New Cu Excise 0 2 11 20 20
New Cu Income 0 0 5 49 127
New Au Excise 0 2 10 17 17
New Au Income 0 0 16 49 90
Nonoc Excise 10 12 11 11 11
Nonoc Income 0 29 21 21 21
Existing Excise 15 15 15 15 15
Existing Income 6 6 6 6 6
Total Tax 30 66 94 186 304

Rapid Scenario
Tax 1995 2000 2005 2010 2015
New Cu Excise 0 8 26 49 49
New Cu Income 0 0 76 192 395
New Au Excise 0 7 19 34 34
New Au Income 0 0 49 142 250
Nonoc Excise 10 12 11 11 11
I I
I I I I I

Nonoc Income I 0 1 29 1 21 I 21 1 21
I I
I

Existing Excise I 15 I 15 I 15 15 I 15
Existing Income 6 6 6 6 6
Total Tax 30 76 222 469 779 d
(much larger) income tax receipts. Conversely, it is not possible to generalize about the fiscal
impact of a larger-than-forecast ore body size. Increased ore tonnage could either be reflected in
extended mine life or, alternatively, through an increase in mine throughout (implying greater
investment, higher annual revenues etc.).
The prospect of a large expansion of the mineral sectors tax base is tantalizing to
contemplate. With projected annual fiscal payments under the baseline scenario projected to be
nearly $US 500 million/year the sector could provide a substantial boost to the Govenunent's
fiscal outlook. On the other hand, to the degree that gold projects play an increasing role in the
sector, the flow of these fiscal benefits may be highly volatile and uncertain.
The volatility of fiscal flows derived from gold mining suggests a need for some sort of
revenue stabilization fund to buffer government fiscal revenues from year-to-year swings in the
gold market. Successful funds along these lines have been attempted in many developing
countries but, unfortunately, political expediency has undermined most efforts. The most
successfid trust fund arrangements that we know about are the Kuwait Fund and the Heritage
Fund in Alberta, Canada. In addition, a successfid stabilization scheme operated for many years
in Papua New Guinea.
In general practice, a stabilization fund receives fiscal payments generated by the mining
sector. In turn, the fund allocates annual transfers to the Government's general revenue account.
These transfers are managed to insure that even during periods when mineral revenues are
depressed, the government will continue to receive tax receipts from mining. The establishment
and operation of such a scheme requires an enormous amount of political discipline since during
"good" years the surplus funds in the account are extremely tempting.
A second interesting policy question related to the flow of fiscal receipts is the magnitude
of income tax receipts vis-a-vis excise tax receipts. It is reasonably clear that the degree to which
the government benefits from future mineral development is largely a function of the size of
income tax collections. While our general attitude is that fiscal reform in the mineral sector
should stress fiscal risk-sharing by emphasizing income rather than excise taxes, this conclusion
needs to be seen in the context of an increasingly heavy dependence on receipts from gold
mining. There is a fairly delicate balance to be struck between these considerations and we
believe that this balance should be a primary focus of the revitalization and refonn discussions
currently underway.
 Summary
The forecast of future mineral sector activity derives directly from the resource
development scenario, the financial tax analysis, and estimates contained in the University of the
Philippines Input-Output Study. The forecast was generated from four variables: export
revenues, new project investment, sector imports, and projected tax receipts. Since it is
impossible to predict the exact nature of still-to-be-discovered ore bodies, these variables were
estimated using "model projects" representative of the general characteristics of mineral deposits
predicted from the resource assessment. This methodology assumed that mine characteristics
would either:
(a) be at the minimum profitability levels necessary to attract international investment
(e.g. projects would generate a 15 percent Discounted Cash Flow Internal Rate of
Return) or
(b) that new projects would have minimum ore grade level which reflect world-wide
patterns for new investment (e.g. a gold content of 2 grarndtonne would be required
to meet the 15 percent DCFROI criteria).
For this reason the forecasts should be viewed as conservatively indicative of future sectoral
performance.

Table 11.22. Summary Table of Resource Development Scenarios

r
Total (Million US$)
Baseline Scenario Mineral Output Investment Imports Fiscal Receipts
Value Capital
1995 605 143 62 30
1996-2000 1242 875 129 73
200 1-2005 2234 1520 229 185
2006-20 10 347 1 1730 352 319
 TableII. 22. (Cont.)

Total (Million US$)

Rapid Scenario Mineral Output Investment Imports Fiscal Receipts
Value Capital
1995 605 112 62 30
1996-2000 1400 1040 143 76
2001 -2005 2913 2325 295 222
2006-2010 4876 3040 496 469

-
Total (Million US$)
Slow Scenario Mineral Output Investment Imports Fiscal Receipts
Value Capital
1995 605 142 62 30
1996-2000 89 1 280 91 66
200 1 -2005 1652 11 15 167 94
2006-2010 2453 1210 140 186

In interpreting the projections for the mineral sector the following issues should be
considered:
1. The development scenarios arc based on a number of assumptions which may or may not
hold true for mineral development in the Philippines. To a large extent Government policy
will be the primary determinant.
2. The major revenue to be derived fiom future development will be h m copper and gold, two
commodities which have historically shown major fluctuations in price. Therefore, the
sectors should be expected to be characterized by cyclical investment, development and
resulting production and revenues. This cyclical aspect will impact the timing and the
revenue flows of the projections.
3. The analyses of future development places a significant emphasis on the rehabilitation and
contribution of the Nonoc nickel development. As the rehabilitation has yet to be initiated
the revenues associated with this deposit, and that fiom related small development is
problematic.
4. Overall in the projection, it is assumed that mine production approximate export revenue.
Should the Philippine economy grow rapidly, a proportion of mineral production may be
 utilized in downstream industries. Although this would reduce direct export revenues, the
domestic use would be expected to contribute significantly to value added revenues in the
industrial sector. As a result the overall contribution to the economy would be higher, even
though export revenues decline.
5. Although fiscal flows to the government, at both the national and local levels will be
substantial, given a reasonable development of the mineral industry, the flow of revenues will
be retarded from 5 to 8 years, (on a project basis) due to tax holidays and other incentives
given to the industry. These delays should be accounted for at both the nationid and local
levels.
Overall the prospect of a large expansion of the mineral sector's tax base is tantalizing to
consider. With projected annual fiscal receipts under the baseline scenario to be nearly $US 500
milliodyear, by the year 2010, the mineral sector would be a major contributor to the
Government's fiscal outlook. Nevertheless, as with all projections, they must be strongly
tampered with reality. The reality of the Philippines at the present is that it has the resource
endowment to be a major mineral producing nation; only, it does not yet have the policy and
legislation to make this a reality.
Recommendations
As noted throughout this part Government policy will be a major determinant in whether
the Philippine mineral sector develops along a slow, modest (intermediate) or fast development
scenario. The key components of this policy (Mining Act, investment climate, and development
climate) are discussed elsewhere in this study in .terms of individual components. As a result the
following recommendations focus on longer-term issues which the Government should address
to insure rational development of the mineral industry within the context of Government's
objectives.
First, the Government should, to the extent possible, adopt and implement a "hands off'
policy with respect to the mining industry. The industry should be granted incentives only
within the context of establishing an internationally competitive investment climate. Beyond
that the industry must be competitive within that environment or fail. The history of the
Philippines has been one of significant government interventions in the industry which by-and-
large would have to be considered a failure (largely now assumed by the Asset Privitization
Trust). A long-term sustainable mineral industry is an internationally competitive one.
Second, the Government should recognize that the mineral industry is a cyclical industry
which provides cyclical revenues to the nation. As a result national planning should be emplaced
to deal with the issue. This will be particularly critical at the Local Government level where
cyclical revenues under the "National Wealth" provision may have major negative impacts.
Central to achieving this objective is to develop a Presidential "Working Group on the Mineral
Industry" which will have the responsibility of monitoring the mining industry and its impact on
the national and local economies. This working group, recommended to be headed by NED&
would have a broad mandate to study and report on issues both "Upstream" and "Downstream"
within the mineral sector.
Third, Central to a stable investment climate for the mining industry is a stable and
transparent fiscal regime: at both the national and local Government level. This is not the case
at the present (Part V) and is an issue which should be addressed. To achieve this objective it is
proposed that a "tax rationalization" Sub-committee, of the above Presidential Working Group,
be commissioned to prepare a long term plan for developing and implementing such a regime.
 Fourth, overall there is a need to focus new attention on the mineral industry as a key
component of national development. If the industry expands significantly the capacity of
Government to handle renewed development, at the national and local level, will be key
component in determining if the industry succeeds or fails in the large term. It is recommended
that the Government must begin now to address these issues in a practice rather than in a relative
mode.
 PART 111: PHILIPPINE MINERAL LEGISLATION

CHAPTER 1111
Legislation and Policy

A very brief overview of the history of Philippine mineral legislation has been
presented in the historical overview of the Philippine mining industry in the introductory
chapter of this study. It was noted that a driving force behind the formulation of the
nation's mineral legislation was to address (a) grievance and problems that arose out of
the colonial times of the Philippines and (b)a broad range of land and title-related issues
which had arisen since the Mining Act of 1936. In the following discussion, the
emphasis is placed on the impact of the 1987 Philippine Constitution on mineral
legislation, past and proposed, and the resulting Executive and Administrative Orders that
were promulgated to implement the constitutional mandate.

Philippine Constitution of 1987

The Philippine Constitution of 1987 addresses the development of the mind
industry directly in Article XI1 (National Economy and Patrimony) and Article XI11
(Social Justice and Human rights). From the titles of these two articles it can be seen that
the Constitution closely linked the mining industry with the overall well being of the
Filipino people. This relationship is more clearly seen in the individual sections of the
above articles which are quoted below as background for subsequent discussion.

-
Article XII National Economy and Patrimony
The most relevant Sections under Article XI1 are Section 1, which defines the
goals of the national economy, Section 2 which defines the framework for undertaking
mineral exploration, development and utilization and Section 3, which defines public
domain and the limits on leases.
"Section 1. The goals of the national economy are a more equitable distribution
of opportunities, income, and wealth; a sustained increase in the amount of goods and
services produced by the nation for the benefit of the people; and expanding productivity
as the key to raising the quality of life for all, especially the under privileged..."
"Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and
other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora
and fauna, and other natural resources are owned by the State. With the exception of
agricultural lands, all other natural resources shall not be alienated. The exploration,
development, and utilization of natural resources shall be under the full control and
supervision of the State. The Sate may directly undertake such activities, or it may enter
into co-production, joint venture, or production-sharing agreements with Filipino citizens,
or corporations or associations at least sixty per centum of whose capital is owned by
such citizens. Such agreements may be for a period not exceeding twenty-five years,
renewable for not more than twenty-five years, and under such terms and conditions as
may be provided by law. ....The Congress may, by law, allow small-scale utilization of
natural resources by Filipino citizens, ....The President may enter into agreements with
foreign-owned corporations involving either technical or financial assistance for large-
scale exploration, development, and utilization of minerals, petroleum, and other mineral
oils according to the general terms and conditions provided by law, based on real
contributions to the economic growth and general welfare of the country. In such
agreements, the State shall promote the development and use of local scientific and
technical resources."
"Section 3. Lands of the public domain are classified into agricultural, forest or
timber, mineral lands and national parks.....Alienable lands of the public domain shall be
limited to agricultural lands. Private corporations or associations may not hold such
alienable lands of the public domain except by lease, for a period not exceeding 25 years,
renewable for not more than 25 years, and not to exceed 1,000 hectares in area. Citizens
of the Philippines may lease not more than 500 ha, or acquire not more than 12 thereof by
purchase, homestead or grant."
Taking into account the requirements of conservation, ecology, and development, and
subject to the requirements of agrarian reform, the Congress shall determine, by law, the
size of the lands of the public domain which may be acquired, developed, held or leased,
and the conditions therefore."

Article XI11 Social Justice and Human Rights

The Agrarian and Natural Resources discussion of Article XIII provides for the
following:
" Section 6. The State shall apply the principles of agrarian reform or
stewardship, whenever applicable in accordance with the law, in the disposition or
utilization of other natural resources, including lands of the public domain suitable for
agriculture, subject to prior rights, homestead rights of small settlers, and the rights of
indigenous communities to their ancestral lands... 99

The preceeding sections of the Article XI1 and XIII are interpreted to constitute
both the basic framework for m i n d exploration, development, and utilization of mineral
resources and to provide a philosophical context for their application. There can be little
doubt that the framers of the Constitution were justifiably guided by the strong
nationalistic sentiments of that time. It may also be argued, as it will be subsequent
discussions, that they were also guided by a .pragmaticview of what was required to
encourage mineral development.
With the Constitution in place, the congress of the Philippines began the task of
framing a Mining Law, based on the Constitutional guidelines, to guide mineral
exploration, development, and utilization. IJnfortunately, to date there is no Mining Law
but rather the Philippine mineral sector is governed by a number of Executive and
Administrative Orders which are briefly discussed in the following.
Existing Mineral Legislation and Orders
Although Presidential Decree (P.D.) 473, issued in 1974 is still in effect it has
largely been superseded by numerous Executive and Administrative Orders issued in
response to the 1987 Philippine Constitution. In reality P.D. 473 is presently valid only
with respect to perfected claims and leases. Therefore, for all intents and purposes, the
Philippines is without a Mining Law and the mineral sector is governed by Executive and
Administrative Orders; promulgated in response to the 1987 Constitution. The most
important of these are given in Table 111. 1.

Table 111.1. Mineral Sector Executive and Administrative Orders.

-
Orders Date Title
Executive Order 2 11 25/7/89 Prescribing the interim procedures in the
processing and approval of applications
for the exploration, development, and
utilization of Minerals.

Executive Order 279 25/7/87 Authorizing the Secretary of

Environment and Natural Resources to
negotiate and conclude joint venture, co-
production, and production sharing
agreements.... and those agreements
involving technical and financial
assistance by foreign-owned
corporations......

DENR Admin. Order 57, Guidelines on mineral production

Series of 1989 sharing agreement under E.O. 279.

DENR Adrnin. Order 82, 2011 1190 Procedural guidelines on the award of
Series of 1990 Mineral Production Sharing Agreement
(MPSA) through negotiation.

DENR Admin. Order 82A, 03/12/90 Amending the last sentence of Section
Series of 1990 14 of DENR Admin. Order 82, Series of
1990......

The various Executive and Administrative Orders in Table 111. 1. in association

with P.D. 473, constitute the mineral legislation of the Philippines and are focused on the
implementation and negotiation of Mineral Production Sharing Agreements (MPSA) and
Financial and Technical Assistance Agreements (FTAA). In subsequent sections of this
report the individual Orders, MPSAs and FTAAs are discussed in detail.
To date only FTAAs and 12 MPSAs have been negotiated and approved under
existing guidelines.

Pending Mineral Legislation

As noted, preparation of a new Mining Act for the Philippines has been under
consideration since the Philippine Constitution of 1987 and still is being considered.
House Bill 10816 was reported out of the Committee on 2 1 September, 1993; however,
the corresponding Senate Bill (S.B. 1639) is presently being redrafted and is anticipated
to be presented to the Committee during September/October of 1994. As the Senate Bill
is still undergoing revisions or comprehensive comparison of S.B. 1639 and H.B. 10816
is not possible. Nevertheless, based on available versions a tabular comparison of P.D.
463, H.B. 10816 and the draft of revised S.B. 1639 has been prepared by the Mines and
Geosciences Bureau and is presented in Table 111.2.
As part of the present study, an analysis of the original version of S.B. 1639 was
prepared and forwarded to the drafting committee presently revising S.B. 1639.
Although a final revised version was not available at the time of preparation of the draft
Final Report for this project (16/9/94) a preliminary revised version of S.B. 1639
indicates that the majority of the suggestions have been accepted. Nevertheless, there
remains a number of key issues which must be addressed in any future legislation if the
Philippines is to have an internationally competitive Mining Act and acquire the foreign
investment needed for mineral development. Chief among these is the 60:40 Filipino -
Foreign Investment Rule, initiated in the 1936 Mining Act, retained in P.D. 463 and in
the 1987 Philippine Constitution under Article XII, Section 2 concerning Mineral
Production Sharing Agreements.
Table 111.2. Comparison of Past and Proposed Mineral Legislation.
193511973 P.D. 463 HOUSE AMENDMENT O F ORIGINAL REMARKS
VERSION HOUSE SENATE VERSION
VERSION, ETC.
A. BASIC
CONSTITUTIONAL1
LEGAL FRAMEWORK

1. Mining Rights Ownership Leasehold System Contract System Based on 1987 Constitution
1. MPSA, CP, JV
2. FTAA
2. Capital Ownership 60:40 MPSA, CP, JV 60- Based on 1987 Constitution
40 FTAA - can be
100% Foreign-
owned
3. Taxation 1973 Metallics & Non- R.A. 7729
Metallics -5% Metallic - 2%
Non-Metallics - 3%
Issues: Options:
I. With regards to FTAA, how 1. Governed by 60:40
do you share the net earnings limitations
exclusive of tax? 2. Sharing is to be
negotiated.
a) Based on loan
repayment scheme.
b) Government share to
be not lower than 2
percent of gross.
c) Adopt sharing
scheme on energy,
i.e. 60:40 but the
following to be
deducted from
government share.
1. Income Tax
2. Special
Allowance
d) % foreign but a
-% share in net
income.
- - -
 Table 111. 2. (Cont.)
1935J1973 P.D. 463 HOUSE VERSION AMENDMENT OF ORIGINAL REMARKS
HOUSE VERSION SENATE
VERSION
A. SETTLEMENT Panel of Panel of Panel of HouseISenate Versions
OF 1) investigators Arbitrators (Regional Office) Arbitrators means faster resolution of
CONFLICTS (MGB). (Region) conflict

Functions well-defined
2) SecretaryIDENR Mines Adjudication Board (SEC, Mines
(Panel of USEC & MGB) Adjudication
Investigators --- Committee (3
DENR) Commissioners
with Rank
Associate Justice
of Court of House Version - No new
A~~eals) sbucturcs & no budget

3) Office ofthe Supreme Court Supreme Court Senate Version - New

President structures & new budget

4) Supreme Court

B. PENAL Low penalties and Low penalties and not realistic Penalties increase to Supreme Court
PROVISIONS not realistic properly address and
discourage mining
violations.
7

C. TRANSITORY All mining rights Existing lease contract & pennits Supreme Court Looks OK but holders
PROVISIONS including leases must recognized except expired lease must notify the
convert to MPSA, contracts which must be converted Government of his
CP, JV within 1 year into MPSA, CP, JV and mere availment for purposes of
from effectivity of DOLSIAPPL. must be applied under monitoring accounting
A.O. 57; But A.O. MPSA and Incentives granted under etc. without need of
No. 6 respected Article -& Gov't. share shall approval.
existing lease automatically apply to existing leases
contract until expiry. and MPSA holdm unkss holders do
not agree in writing to the SEC.
Table 111. 2. (Cont.)
193511973 P.D. HOUSE AMENDMENT ORIGINAL REMARKS
INCENTIVES (ECONOMICS) 463 VERSION O F HOUSE SENATE
VERSION VERSION
A. Basic Incentives under Omnibus E.0.226 None SEC. 92 & 96-99 Supreme Court Basic Incentives under EO 226
Investment Code (EO 226) (Income 4 Senate Version placed in the Act for the
Tax-Cany Forward of leases purpose of:
accelerated depreciation; investment 1. Stability of Investment.
allowance, investment guarantees) ruledregulations for
mining.
2. Institutionalize
implementation.

B. Exemption of Mining Activities SEC. 52, None SEC. 94 Supreme Court 1. 2% excise tax already
from other charges Chapter X of being imposed on
P.D.463 metallicdnon-metallics
2. Additional tax on gross
revenue like 2% Business
tax and 10% quarrieslsand
and gravel tax imposed by
the Local Government
Code will render in
effective the reduction of
the excise tax under R.A.
7729 intended to assist the
mining industry.

C. No Taxeslcharges on tailings Dam SEC. 52 SEC. 93 Supreme Court Tailings darn/structure are anti-
and other similar structures which Chapter X of pollution devices required by
are anti-pollution device/sbuctures. P.D.463 the government. Taxing them
will not be an incentive.

President prerogative to declare None None SEC. 95 Supreme Court Institutionalize to givelfacilitate
distress mining activity and grant immediate relief to the
suspension or moratorium on tax industry.
payments and obligations under the
mineral agrtementfFTAA

-
D. Transitional Duty FreeJimportation EO 226 thru None SEC. 99 (7) Supreme Court Traditional practice in the
of capital equipmentlsome parts, etc. IPP but expiring industry and recognized by
- - - - - -
Dee. 1994 - - ---- - m ,
govemment. a
Table 111. 2. (Cont.)
193511973 P.D. 463 HOUSE AMENDMENT O F ORIGINAL REMARKS
VERSION HOUSE VERSION SENATE
VERSION
ORGANIZATIONAL CHARGES

A. Transfer of MGB None None None SEC. 107 LEGAL EFFECTS:

I . Affected Laws
a) EO 192
(Re-Organization
Law-DENR)

b) Law creating the

DOE
2. Senator, Congressman,
Directors and Secretaries
- to discuss
B. Line Function Line function under SEC. 9 SEC. 106 LEGAL EFFECTS:
P.D. 1281
1. Affected Laws
a) E0 192 (Re-
Organization Law)
b) Senator,
Congressman,
Directors and
-
Secretaries to
discuss
Table 111. 2. (Cont.)
193511973P.D. 463 HOUSE VERSION AMENDMENT OF ORIGINAL
HOUSE VERSION SENATE REMARKS
VERSION
BENEFITS TO LGU

A. EGF (Environmental None None None None LGU will be a member of

Guarantee Fund) EGF Committee monitoring
environment activities and
compliance

B. Occupation Fee SEC. 5 1, P.D.463 SEC. 78 SEC. 89 lnstutionalize

C. Retention of Social SEC. 47, P.D.463 SEC. 52 SEC. 59 Institutionalize

Infrastructures after Mining
Activities

D. Engage in activities for SEC. 48-49 SEC. 55 lnsitutionalize

development of community
Table 111. 2. (Cont.)
193511973 P.D. HOUSE VERSION AMENDMENT OF ORIGINAL REMARKS
463 HOUSE VERSION, SENATE
ETC. VERSION
ENVIRONMENTAL MEASURES

EIS SEC. 6 1 SEC. 69 Institutionalize for mining

activities and purposes.

EGF (Environmental Guarantee None None None None Institutionalize based on

Fund) (Private + Public) work program of contractor.
SEC. 70 2nd par. for Senate
Version

Mine Waste and Tailings Fee P.D.125 1 SEC. 77 SEC. 88 Institutionalize

Private Ownership 1. Inc. P300,OOO to Monitory fund Jowlnot
6o0,ooO realistic
monitory fund
2. Deposit Easy access to fund
Government
Bank
Table 111. 2. (Cont.)
193511973 HOUSE VERSION AMENDMENT ORIGINAL SENATE REMARKS
P.D. 463 OF HOUSE VERSION
VERSION
OTHER FEATURES:

A. Recognition of Ancesh-al
Domain
None SEC. 16 SEC. 17 (C) But should be To prevent conflicts
defined and delineated by law between ICC's and mining
activities.
To ensure stable and
harmonious relationship,
between mining activities
and ICC's

8. Science and Technology None SEC. 48 SEC. 56

-
C. HRD Filipino SEC. 60 SEC. 53 SEC. 60

D. Mine Safety and Sanitation SEC. 61 - SEC. 54,55,56,57, SEC. 61 - 66 Improved provisions
65 58 & 59 Licensed Mining
Engineer150 workers

E. Approval of Lease MPSA, CP, JV MPSA, CP, JV and FTAA Only FTAA is approved by
AgreementsIFTAA Contract approved by Sec. Transmitted to President and . the President
approved FTAA-APPROVED reported to Congress
by Sec. by the President MPSA, CP, JV approved by
the Secretary.
 -
60:40 FitMino Foreign Ownerd@Rule. No single issue is more contentious
nor damaging to mineral development in the Philippines than the 60:40 ownership rule.
The negative impact of this provision has been higbhghtcd by the Australia-New Zealand
Chamber (1992), the Philippine Board of Investment (1993), the President's Task Force
on the Mining Industry (1 993) and by all of the foreign mining companies interviewed as
a part of this study. Why then, one asks, if the 60:40 provision is so onerous, why has it
not been changed? The universal answers to this question during the study was because it
would require a constitutional amendment. Although this may be true,in the case of
MPSAs the issue is less clear with respect to FTAAs which is the focus of the following
discussion on FTAAs and the 60:40 Ownership Rule.
As previously noted in the Philippine Constitution (Article XII, Sec.2) provides
that "The President may enter into agreements with foreign-owned Corporations
involving either technical or financial assistance for large scale exploration, development
and utilization of minerals ... ..." As such the FTAA is clearly set apart from other types
of mineral agreements (as specified in Article XI, Sec. 2) defined as ". . . Co-production,
joint venture, or production sharing agreements with Filipino Citizens, or Corporations or
associations at least 60 percentum of whose Capital is owned by such Citizens."
From the above it would seem the intent of the Constitution was to clearly provide
for two separate types of agreements i.e. the FTAA which is an agreement, or contract,
- for other specified
between the Government and a wholly owned foreign corporation p~
mineral agreements (Co-production, joint venture and production sharing) which require
60/40 participation.
The definition of the FTAA agreement, or contract, in the Constitution, separate
from other mineral agreements is based on the recognition that for certain large-scale
projects the government would require financial andlor technical assistance fiom wholly
foreign-owned companies. Further the nature of the FTAA recognizes that the agreement
or contract can take several forms including:
a) Financial Assistance (Loans, Crelts:)
b) Technical Assistance (Technology transfer, Management)
c) Financial and Technical (Combination of above, Senice Contract)

III- 13
which would not in themselves be considered mineral agreements per se. As such the
condition on an FTAA. as called for in the Constitution, specify only that it be a) a
separate agreement or contract b) executed between the Government and a wholly
foreign-owned corporation, c) continuing as long as it is executing the terms and
conditions of the FTAA but d) subject to a 25 year life unless renewed.
The above analysis is presented specifically to attempt to present a rational
argument against the 60:40 ownership rule in the case of FTAAs. This analysis
apply to MPSAs which are clearly and specifically covered by 60:40 ownership rule in
the Constitution which would require a Constitutional amendment to change.
In the following an analysis of the evolution of the MPSA and FTAA is presented
with a preliminary analysis of the changes being proposed by S.B.1639 to the existing
Executive and Administrative Orders which govern the MPSAs and FTAAs.
 CHAPTER N 2

Mineral Production Sharing Agreements

and
Financial and Technical Assistance Agreements

As defined by the Constitution (Article MI,Section 2 ) and presented previously

there are c-tly two types of agreements between government and mining companies
for mineral development in the Philippines. 'Ihe fust of these, the Mineral Production
Sharing Agreements (MPSA) applies specifically to those companies whose equity is at
least sixty percent (60 percent) Filipino-owned. The second type of Agreement the
Financial and Technical Assistance Agreement is specific to wholly foreign-owned
companies who commit to the development of large scale (greattr than $US 50 million)
investments for mineral development.
The following discussion focuses on the legislative and administrative history
behind the development of the MPSA and FTAA guidelines,and highlights significant
changes in the MPSAs and FTAAs which arise based on an analysis of the proposed S.B.
1639. This is followed by an overview of the critical issues arising with respect to the
negotiation of MPSAs and FTAAs fiscal reghes(an indepth analysis is contained in
Chapter V), a discussion of the negotiation process itself and concludes with a
comparison of agreements showing the importance of these issues.
Emphasis is placed on these issues as the MPSAs and FTAAs constitute the
basic enabling documents issued by the Government for exploration, development and
utilization of the nation's mineral resources. As such the negotiations and the resulting
agreements are the critical link in assuring that mineral development will be undertaken
responsibly and that such development will optimize returns to the nation while
providing an acceptable level of remuneration to the mining industry.
Evolution of Mineral Production Sharing Agreements
As noted above, the Philippine Constitution of 1987 specified the use of Mineral
Production Sharing Agreements (MPSAs)for certain mineral development projects. The
guidelines for MPSAs were developed as a result of the following legislation and
executive orders.

Elwecutive Order Numkr 279. Issued in July, 1987 this order authorized the
Secretary of DENR "...to negotiate and conclude joint venture, co-production, or
Qfor the exploration, development and utilization of
mineral resources with any Filipino citizen or corporation or association at least sixty
percent (60 percent) of whose capital is owned by Filipino citizens."

Adminktrative Orders Number 57 and 32. Administrative Order No. 57 was

issued by DENR in 1989 and is the set of guidelines for accepting MPSA agreements
pursuant to Executive Order 279. These guidelines provide detailed provisions for the
responsibilities and requirements of both government and the contractor. Of particular
importance for?thisdiscussion is the section on government share of mineral production.
Section 5.1 states that Government share "...shall be composed of a basic share in
production or gross output plus a share in windfall profits which shall be determined
through negotiations, taking into account the following considerations: (a) capital
investment; (b) risks involved; (c) contributions to the economy; and (d) such other
factors as will help in determining a share that is fair and equitable to both parties. The
basic share shall be expressed as a percent of production or gross output."
A 0 32, (Series of 1990) amended A 0 57 with regard to Section 5.1 . The
amended version defined government share to be composed of a "...basic share in
production or gross revenue plus a share in net revenue determinable through
negotiations, taking into account the following considerations: a) capital investment; b)
risks involved; c) contribution to the economy; and d) other such factors as will help in
determining a sharing that is fair and equitable to both parties. The basic share shall be
expressed as percent of production or gross output."
 It should be noted thatm sDeclfic regarding government share were
prescribed in either A 0 57 or A 0 32.

Senate Bill 1639. This bill, which is under consideration but has not been passed
by the Senate (as of the date of this document) contains only one sentence (Section 80)
on revenue sharing with regard to MPSA agreements.
"The government share in a Mineral Production Sharing Agreement shall be the
excise tax on mineral products provided for under Section 15 1 of the National
Internal Revenue Code, as amended."
This clause is of particular importance in that it eliminates the government share
of net revenue that was previously found in A 0 82 and contained in the Far Southeast
MPSA agreement.

New Provisions or Changes of S.B. 1639 from A 0 57 and 32

Although Senate Bill 1639 does not e'laborate on revenue sharing it does provide
for a number of incentives which apply to MPSA and FTAA agreements, many of which
are additional to those specified in A 0 57 and A 0 32 or represent substantial changes to
elements of A 0 57 and A 0 32. Among the most significant are the following:
(a) Eligibility to register for incentives provided by Board of Investments (Sec.
88) which includes eligibility for an income tax holiday.
(b) Exemption of pollution control devices (tailings, dams) fiom property taxes.
(Sec. 89)
(c) Operating losses may be carried forward as a deduction fiom taxable income
during the first 10 years of operation. (Sec. 92)
(d) Accelerated depreciation .(Sec. 93)
(e) Investment allowance. An investment allowance of fifteen percent of net
assets is allowed. (Sec. 94) The investment allowance is defined as "...an
amount based on net assets as defined herein which is deductible h m
taxable income."
 It should be noted that neither A 0 57 or the Far Southeast MPSA had
previously defined this item as being deductible from taxable income. It was
a deduction fiom net revenues, which was the basis for the government's
share of net revenues. In sample spreadsheets submitted to government for
both the Far Southeast Project MPSA and the Arimco Didipio Project FTAA,
the investment allowance was nnt considered a deduction from taxable
income.
(f) Exemption fiom additional taxes imposed at the local level. (Sec. 90)

Evolution of Financial and Technical Assistance Agreements

As noted previously, the Philippine Constitution of 1987 specified the use of
Financial and Technical Assistance Agreements for some large scale mineral
development projects. The guidelines for FTAAs were developed as a result of the
following legislation and executive orders.

Executive Order Number 279. This order was issued in July, 1987 and
authorized the Secretary of DENR "...to negotiate and concludejoint venture, co-
production, or production sharing agreements for the exploration, development and
utilization of mineral reseources, and prescribing the guidelines for such agreements and
bv foreien-owned
9'

Section 4 authorizes the Secretary to "... accept, consider and evaluate proposals
from foreign-owned corporations or foreign investors for contracts or agreements
involving either technical or financial assistance for large-scale exploration, development
and utilization of minerals, which, upon recommendation of the Secretary, the President
may execute with the foreign proponent." Section 4 defined "large-scale" as a single
project that would require a committment capital investment of at least $US 50 million.
 Section 5: "Any contract or agreement entered into by the President pursuant to
Section 4 hereof shall be reported to Congress by the Executive Secretary on behalf of
the President within thlrty (30) days from its execution."

Administrative Order Number 63. This order was issued by DENR in 1991 and
is the set of implementing guidelines for accepting FTAA agreements pursuant to
Executive Order 279. This order sets out the technical and financial qdifications
required by the applicant. Among the financ~alqualifications is the commitment of at
least $US 50 million to the project. Some of the other provisions of A 0 63 are as
follows:
(a) Provides for a 25 year lease, renewable for an additional 25 years. Five years
of the initial period may be for exploration and feasibility studies. (Sec.7)
(b) Defines the negotiation process and the government negotiating team. (Sec. 9)
(c) Revenue sharing: Net revenue shall be shared by government and contractor
on a 60-40 basis after recovery of presperating expenses. (Sec. 13 a)
(d) Defines pre-operating expenses as "...all activities conducted towards the
discovery, location and delineation of commercial ore bodies...". The pre-
operating expenses described include all exploration expenses, payments
made to claimowners and landholders, administrative costs related to the
project, feasibility studies, and all costs of mine construction and
development. (Sec. 13 a)
(e) Ten years after recovery of capital (pre-operating expenses), divestment to
Filipino-owned entities until 60140 ratio is reached is required. One year is
allowed for this process. (Sec.14)

Senate Biff1639. This bill, which is under consideration but has not been passed
by the Senate (as of the date of this document) proposes some fiscal regime guidelines
for FTAA agreements. Some of the guidelines are similar to those found in A 0 63 and
the Arimco Didipio agreement, while other rules are unique to S.B. 1639. It should be
noted that the incentives (Chapter XVI, Sections 88-95) proposed under this legislation
will apply to lz& MPSA and FTAA arrangements. Previously, each type of agreement
had its own set of implementing guidelines. Some of the most significant additions to the
fiscal regime compared to the fiscal regime of A 0 63 are listed below.

New Provisions or Cbanges of S.B. 1639 from A 0 63

(a) A 0 63 called for a "government take" or share of sixty percent (60%) of net
revenues after recovery of pre-operating expenses. (Sec. 13 a) and this
provision was incorporated into the Arimco FTAA. S.B. 1639, however,
calls for a "government fee," with no pre-set percentage split. (Sec.82)
(b) Defines the "government fee" as including contractor's corporate income
tax, special allowance payments to surface rights owners, withholding tax for
dividends or interest paid to overseas stockholders or creditors, and "...other
such taxes, duties, and fees as may be determined by agreement or
negotiation between the parties." (Section 82)
(c) Provides for a five-year "recovery period" for pre-operating expenses. (Sec.
82)
(d) Tax and duty holiday from the date of signing the FTAA agreement until 5
years fiom start of commercial production. (Sec. 82)
(e) Eligibility to register for incentives provided by Board of Investments. (Sec.
88)
(f) Exemption of pollution control devices (tailings, dams) fiom property taxes.
(g) Operating losses may be carried forward as a deduction from taxable income
during the first 10 years of operation. (Sec. 92)
(h) Accelerated depreciation .(Sec. 93)
(i) Investment allowance. An investment allowance of fifteen percent of net
assets is allowed. (Sec. 94).
 Cj) Exemption from additional taxes imposed at the local level. (Sec. 90)
Although the proposed S.B.1639 is much more specific regarding some aspects
of MPSA and FTAA agreements, certainly more definitive than AO's 32,57 and 63, it
also provides that most of these issues are negotiable in determining the final structure of
an MPSA and FTAA agreements.
 CHAPTER 1113
FTAA and MPSA Negotiations

Negotiation Structure
The overall structure of review, recommendation, negotiation and granting
procedures for FTAAs and MPSAs is mandated by Executive Order 279 which directs
that the Secretary of the DENR shall prescribe the guidelines and procedures for
negotiation and conclusion of both MPSA (joint venture, co-production and production-
sharing contracts) and FTAAs as called for under Section 2, Article XI1 of the 1987
Philippine Constitution.
The specific guidelines for the review, recommendations, negotiation and granting
procedures to be utilized were subsequently set forth in Administrative Order 57 of 1989
which under Article 7 calls for the creation of'specific bodies for negotiating and
concluding MPSAs. These include (a) a negotiating panel (created by virtue of
Administrative Order No. 68 of 1988) (b) a Technical and Administrative Review
Committee and (c) a Regional Monitoring Ciroup. A 0 57 W e r directed that for
negotiating Contracts of less than 100 million pesos the Secretary shall constitute a Sub-
Committee, chaired by the Secretary, with members drawn fiom the members of the
Panel or from other units under the Department. In cases of bidding, the Secretary may
also constitute a Bidding Committee and designate the members fiom Competent
Officials of the Government. The organizational chart of the respective Committees
created under A 0 57 of 1989, implementing EO 279, are shown in Figure 111. 1., along
with the names of the respective members, agencies and sectors, and these functional
responsibilities are given in Figure 111.2.

Problems in the Negotiating Procedure

During the study detailed discussions were held with individuals fiom industry
and government who have participated in the negotiation process. From these
Figure Ill. 1. Organizational Chart Committees Created Under A 0 57, Series of
1989 Implementing €0279 showing Names/Agencies/Sectors.

t
Mgotloting Pam1 ' Sub-Commlttn

+
-
Chairman Angel C. Almia
-
V i h o i r m a n NEDA (not Active)
Members:
Romub Son Juan (DENR)
Joel D. Muyco (MGB)
Aurora Tmbol (DTI)
Elmer Heman- (BOI)
- -
Chohmsn Angel C. Abala
-
Member8 Romub Son Juan (DENR)
-
Joel D. Muyco (MOB)
-
Edwin G. D o m i (MQ%)

DENR Special Order # 808. Od 1989

Romeo Bemardo (Financs)
Guilbrmo S o l i n (CB)
-
DENR Special Order # 172, Feb. 19QO

T u h n i t r l & Adm. Rwkw Cotnmltbn

-
t
Tochnlcal Socrebrht*

Chairnun Danib Luna

Chairman - Joel D. M u y c ~
~~ :
Nida R. DOdd (OSECRIEA)
Members : J. Melvin Glenn P.Batilando (FOO)
Salvador G. Mattin (MGB) Jmfa P d i n u o l Banaag (MGB)
Nelia C. Haicon (MGB) Timoshenko RonquUlo (MGB)
Nida R. M I(OSEWIEA) Hdrminio Toquiqui (MGB)
J. Melvin Gknn Batilando (FOO) Marcslo Gbnn Nobb (MGB)
Timoshenko Ronquillo (MOB)
Vicente Madomba (MGB) DENR S p e d Order # 1236, Doc. 1990
Michael Cabaldo (MGB) omendii SO t15. Jan. 1990
Juancho Pablo Cshrsz (MGB)
Maximo Garcia (MGB)
Concerned Regional Tschnical
Directors for Mines or Mineral
Operations Officers
-
Representative Academs
-
Repremtatwe Chamber of Mines

DENR Special Order # 1237. Dec. 1990

Rogioml Monitoring Group

-
Chairman RED
Mmben :
1
RTD, Mines %or
RTD for Environment
Mineral Operations Omwr
chief, Legal OfFicer

DENR Special Order # 123. Dec. 1990

Figure 111. 2. Functional Chart Committees Created Under Administrative
Order No. 57, Series of 1989 Implementing Executive Order No. 279.

Negotiating Panel
1. Tasked to acmen prolpedon
2. Conduct negotiations
3. Rstornmnd rrrnrds to succautul conbrcton
for approval of Pmident I

Sub-CommRtea
w n a of invabmg inuosbnentr
of lrrr Uun 1 rn~llkn
Technical & Administrative
Review Commitbee
1. Rwiaw m d waluab wry h m h (12) month8 or u
the need a r k s , the perfamance and compfirncs of
each Contractor.
t
Technical Secretariat
2. Deliimte on probkmr m W to or arirmg from tM
operation of mining contmcb, a d m n d 8pcMc Provide Tachnicrl m d Secretariat support to
course of actions to the Secmtary or Pmident.
3. Monitor and evaluate bal and Interrution8l
development likely to the tmhavior and
performance of the loul mining operation8 and
Contractors.
4. Determinethe proper amounts due ths Gowmmnt in
the form of sham in produdion and other faea or
charges provided in the Contract. It shall 8bo
determine If the rnlnimum Investment8 nquW of each
Contnctor am compld with, and mamwrmnd wimn to
mleas8 bond -h.
5. Review, anripe and bvalwte the report of the
Regional Monitoring Group.
6. Undertake or contract i n & # h rerrarchea to suppart
the ftOOdS of the SOUebry 8nd ths w dsting
with data m d related krfomutionrobwant b ttm
operatiina of mining contracb or about dw&pmmb in
local and world minsnl awmodi markets, particutnrty
supply, demand prices, market orgrnhtion, t8chnokgy
and trends in policies.

v
Regional Monitoring
1. Provide intemted prrtm with infonnrtion on areas open for dispaul, infomution on various p h a m or
aapecta of mining including the mquimmnts in acquiring v8fbus types of mining rights 88 well as the
f o r m and other doanrsntory nqukanenh diropprovab.
2. To clurlfy, collate, 8- and wrluate docummb on hand to dst.nniM pafcmance and compliance
of Contnctam wtth the trm of the Contract, it shall rsfer to the Secret8y or 0th.r higher authorltier
documents for approval or dimpproval, ttttkrg dsarly the c o u m of action reammended and the m ~ s
thmfom, such u Work hognms.
3. It shall keep track of the start and termination of the difkfmt phases of mining in any Contract Ares,
indudhg ~ 8 8 nlhrquishod
8 and wM mquimnnta are already fuMlled or mstill to k fulfllkd; and what
amas am put into Mlning Produdion.
4. Conduct inrp.cbon8 of Mining rrmm or ~ n t i a n when s authorized by the Swmtary, to dotermins
performonce of the Mining Op.ntionr and complknw with the tema of the Contnd by the Contndor.
5. Recommend to the Technical m d Adminkhtika Review Commlttm or to the Samt8ry for approprtotb
action s p a d k p m b b m or irsrm w r d l n g poor pmfomunca which m y ba unpfwad, ruch u
nonmpliance or violation of certain bmu of the Contracts. Such mcommnd.tin must be clear a d
provided wkh tha newwry lnfomutkn to mske &cbionr.
6. Prepam or c o m d to pnpsn a data b a n m d artognphic syrbm so that all mkting
contracts, including such Infomution u W i n , contractor, minanl depodta and expimbon d8t8, among
others, can tm nu& rvailabb to the public at c a t anti can be updated u frequently u quarterly or
8enmsrmlly.
discussions and on evaluation of the procedure overall a number of concerns have arisen
and which we believe need to be immediately addressed by the DENR. To large extent
many of the problems arise from the structure of the negotiating panels and the nature of
the negotiating themselves; other problems are more administrative in structure. To
address these issues the discussion is framed in the context of the questions the DENR
should ask.
This basic questions can be framed in terms of Why are the contracts being negotiated,
What is being negotiated, When are the agreements negotiated, Where are the contracts
negotiated, and Who is doing the negotiation?

Why are FTAAs and MPSAs Negotiated

Both MPSAs and FTAAs have on their principal objectives, the exploration,
development and utilization of the nation's natural resources based on real contributions
to the economic growth and general welfare of the nation. As specified by Section 1 of
Article VII of the Constitution " The goals of the national economy are a more equitable
distribution of opportunities, income and wealth; a sustained increase in the amount of
goods and services produced for the nation for the benefit of the people and an expanding
productivity as the key to raising the quality of life for all, especially the under-
privileged". As such it is argued the FTAAs and MPSA Contracts are negotiated in order
to:
(a) To promote equitable access to, economically efficient development of, and
fair sharing of benefits and costs derived from the exploration, development
and utilization of minerals;
(b) To enhance the contribution of mineral resources to economic recovery and
sustain national development particularly in developing host rural
communities as well as local science and technology resources;
(c) To promote the rational development and conservation of mineral resources
under full control and supervision of the State; and
 (d) To enable the Government to recover full economic rent andlor its equitable
share in the production and utilization of minerals.
Central to achieving these objectives must be the optimization of the Government
Share, in any mineral development, through the negotiating process. The analysis of
existing FTAA and MPSA documents (Part h') indicates that present agreements may not
be achieving either the goal of Government share optimization or of achieving even the
lesser objective of an appropriate rate of return on resource utilization. If, as Part V
indicates that this is the case, then the question immediately arises as to why this primary
objective may not be being met. Obviously, this is a complex issue but in the following
discussion several factors which are of critical importance will be reviewed in the context
of why the objectives are not being met.

What is being Negotiated in FTAAa and MPSAs

Although the number of MPSAs and FTAAs which have been negotiated is
relatively small i.e. only 18 MPSAs and 1 FTAA have been approved, an evaluation of
the negotiation procedure indicates the following:
(a) Evaluations of MPSA and FTAA proposals are to a great degree, if not
completely, based on the contractor's submitted analysis.
(b) A comprehensive financial analysis and cost-benefit analysis if not
independently performed by the Government.
(c) Financial analysis and negotiation takes place without clear-cut baseline
criteria which defines explicitly Government share and how it is to be
calculated.
(d) Negotiations focus more on the technical and administrative components of
the FTAA and MPSA than on the financial and economic analysis which is
the reverse of normal procedures.
The result of the above is that although a relatively clear organizational structure
is proposed for FTAA and MPSA agreements, in reality, the p-y issues of financial
and economic analysis and negotiation are a secondary consideration. With respect to
 is being negotiated it is worth noting that in the contract format for an MPSA,
consisting of 15 Sections, only Section VII deals with the fiscal regime and provides only
the following basic guidelines for the fiscal regime.
-
"8.1 General Principles The financial regime of this Agreement shall be
governed by the principle according to which the Government expects a
reasonable return in economic value for the utilization of non-renewable natural
resource under its national sovereignty while the contractor expects a reasonable
return on its investment with special account to be taken for the high risks of
exploration, the tenns and conditions prevailing elsewhere in the industry and any
special efficiency to be gained by particularly good performance of the
Contractor".
Within the implementing guidelines for FTAAs ( A 0 63) the discussion of
financial terms is confined to Article 13, dealing with revenue sharing, as follows:
"(a) The net revenue shall be shared by the Government and Contractor on a 60-
40 basis of which 60 percent of the net will be the Government take and the
remaining 40 percent will be for the contractor. The collection of
government's share shall commence after the Contractor has l l l y recovered
its pre-operating expenses.
Net revenue means gross revenue derived from operations less allowable
deductions which are attributed to exploration, development and actual
commercial production. Commercial production shall include mining,
utilization, processing, marketing expenses and depreciation of properties
directly used in the operations.
(b) In each year contractor may recover fiom the gross proceeds resulting from
the sale of minerals produced under the FTAAs an amount equal to all
operating expenses."
This lack of specific guidelines creates an environment of contradiction between
what is included in the nation's mining law (present and proposed) and what evolves in
practice. All too often it would appear that virtually eve- is negotiable but without
proper guidelines and safeguards.
When is the FTAA and MPSA Negotiated
In both the MPSA and the FTAA negotiation of the terms and conditions of the
agreement take place after a period of exploration but before a comprehensive feasibility
study has been completed. Under an MPSA a contractor may elect to negotiate terms
based on an "Integrated Agreement" which embraces all mining activities after the
exploration period. In either case the award of the MPSA may be on the basis of bidding
or negotiation. In the former case, which covers operations which are "previously
explored and determined to be economically viable for mining operations", a feasibility
study may or may not be available even though the area has been declared economically
viable. Alternatively, the MPSA may be issued for exploration either prior to, or with
limited exploration. In the case of the FTAA application, it may also be before or after
exploration is completed but will, in most cases, be prior to a complete feasibility study.
The singular point to be emphasized is that the requirements of both the MPSA
and FTAA to conclude n e g o t i a t i o n to a comprehensive feasibility study is a distinct
disadvantage for the Government in negotiations. In particular it requires that decisions
with respect to the government's share of revenues must be negotiated and agreed upon
prior to a complete understanding of a project's final configuration and worth. An
ancillary problem is that with the terms and conditions defined before it is difficult, if not
impossible, to adequately address the issues of environmental costs, not to mention
overall environmental feasibility in t e r n of actually completing the project.
These factors closely tie back to the preceding issues of why are FTAAs and
MPSAs negotiated and what is being negotiated the impact being that the When i.e. prior
to a comprehensive feasibility study, makes achieving the government's objective highly
problematic.

Where are the FTAAs and MPSAs Negotiated

The present administrative procedure for the negotiation of MPSAs and F T A h
provides for considerable input fiom the regional ofices of the DENR as well as from
other agencies. The procedures do not however require that regional or other agency
personnel actively participate in either the technical evaluation or the negotiations: these
activities all take place in Manila. The evaluation and negotiation of the MPSAs and
FTAAs in Manila, rather than in the region where the mine is to be developed has both
positive and negative impact.
From our interviews with regional personnel it is obvious that, virtually without
exception, they believe that the evaluation and negotiation would be better served if their
were regional representatives present during all phases of the evaluation and negotiation
of a project. In this regard the study team strongly concerns. It is worthy of note that in
discussions with Governors of provinces where major activities are being undertaken
under either MPSA or FTAA the Governors have not seen the respective agreements.
From a practical perspective it should also be noted that the members of the
technical advisory team and the negotiating team may not be familiar with the project site
and the unique problems associated with the proposed development. As a result it would
mean imperative that both groups visit the proposed project site, at least once, preferably
several times, and that they hold a series of discussions and information dissemination
meeting at the regional and local levels. Similarly, regional and local experts should
participate in the evaluation and negotiation activities in Manila
The present system of concentrating all evaluation and negotiation activity in
Manila is both counterproductive and in terms of a lack of diverse viewpoints, and may
well result in negotiation which does not optimize the Government's position vis-a-vis
the LGUs

Who Negotiates the FTAAs and MPSAs

Perhaps no aspect of the negotiations of FTAAs and MPSAs is more contentious
than that of who actually negotiates the agreements. Figure 111. 1. defines the various
Committees and the representatives of individual agencies, who participate in or support
the negotiations of FTAAs and MPSAs. The actual negotiations are to be undertaken by
the negotiating panel.
 From discussion with individuals participating in previous negotiations it would
appear that the process has been more "ad hoc" than defined. In particular, organizations
such as NEDA have placed their participation in the negotiation process in an inactive
status, others such as the Central Bank participate nonnally by providing comments on
minutes of negotiating committee meetings provided by the Mines and Geosciences
..
Bureau. There can be little doubt that for a variety of admmmative and other reasons
the process of MPSA and FTAA negotiation has largely devolved solely to the MGB
with limited external inputs. Such a "de facto" devolution of responsibility, largely to a
single organization, would seem to be counter both to the mandate of the Secretary of the
DENR (under E. 0.No. 279) fkom Congress and the Department guidelines as put forth
in A 0 57.
Although it may be argued that the structure defined by A 0 57 for evaluating and
negotiating MPSAs and FTAAs is intact and operational, such an argument would not
coincide with the observations of individuals both on the respective Committee or
intimately familiar with their operations.
In addition to the procedural problems attendant to the evaluation and negotiation
of the FTAAs and MPSAs there is a continuing lack of comprehensive financial and
economic analysis available to the Technical and Administrative Review Committee and
the Technical Secretariat. As a result, as commented on previously in the what portion of
the discussion, negotiations take place without a strong analytical component which
would assess the options and impacts of the f i c i a l terms of the FTAAs and MPSAs.
(These issues are discussed in detail in Chapter V).
The lack of broad based "hands on" participation of multi-sectoral agencies plus
the lack of qualified financial analyses make the resolution of & negotiates the FTAAs
and MPSAs a critical issue that must be addressed and resolved if the nation is to be
assured of responsible development of its mineral resources. To highlight this issue, the
following economic comparison of MPSA and FTAA agreements is provided. A
complete analysis of the fiscal regime of the MPSAs and FTAAs is given in Chapter V.
An Economic Comparison of the MPSA and the FTAA Agreements
The intent of MPSA and FTAA arrangements was to create separate vehicles for
development of projects by both foreign and domestic f m s . Intended or not, the result
of the fiscal regimes that have evolved for these two types of contracts are quite different.
To demonstrate this difference two actual mineral deposits in the Philippines were
analyzed using the fiscal regime for both an FTAA and an MPSA. Data such as tonnage,
grades, mining technique, production rates, etc., were taken fiom various issues of the
Mining Journal and the Mining Annual Review. The fiscal regime for the MPSA
agreement is based on the MPSA agreement between Lepanto, Far Southeast Gold
Resources Inc., and the Department of Natural Resources (DENR)of the Philippines
(1 990). The fiscal regime for the FTAA model was derived from the FTAA agreement
between DENR and Arimco, Inc., signed in 1994. It should be mentioned that these are
public documents and no proprietary information is disclosed. A gold price of $365 per
ounce and a copper price of $.90 per pound were assumed. The results of this analysis
are shown in Table 1 for the Far Southeast Project and Table 2 for the Arimco project.
A comparison of Tables 111. 3. and 111.4. show that the effective tax rate was
significantly higher for both projects under the FTAA agreement. A discussion of
effective tax rates is presented in Volume V, Chapter 2. The effective tax rate for the Far
Southeast was 46.16 percent with the FTAA versus 27.62 percent under the MPSA. A
similar difference was found in the effective tax rates of the Didipio project, which were
40.52 percent under FTAA rules and 23.3 1 percent under MPSA rules. It should be
expected that this higher effective tax rate will lower returns to the investor and was
demonstrated clearly in both models. The internal rate of return (IRR) for the Far
Southeast declined from 22.42 percent (MPSA) to 18.3 1 percent (FTAA) and the decline
in IRR for the Didipio project was fiom 25.15 percent (MPSA) to 2 1.05 percent (FTAA).
If the IRR for the investor declines, then the revenues to government, due to the
higher effective tax rate, should increase. For the Far Southeast project, the switch fiom
the MPSA to the FTAA caused total government revenues to rise fiom $836.4 million ( P
21.75 billion) to $1.33 billion ( P 34.5 billion). The difference in total government
Table 111. 3. Far Southeast Project: Comparison of MPSA and FTAA Fiscal Regime.
Dollar amounts are $US million.
Peso amounts are 42 x million.

MPSA FTAA

Effective Tax Rate

Government Total Revenues $836.36 (e 21,745.4) $1,327.42 (e 34,512.9)

Government NPV @ 15% ' $114.08 (e 2,966.1) $ 197.81 (e 5,143.1)

Investor IRR
Investor NPV @ 15%

1
Net Present Value. The present worth of total government revenues.
Internal Rate of Return

Source: Appendix C

Parameters

Analysis is based on existing MPSA and FTAA contracts.

These contracts differ somewhat fiom the proposed Mining Act of 1994.
MPSA-Investment allowance not deductible fiom taxable income.
MPSA-Includes ten percent (10%) government share of net revenues.
Table 111.4. Arimco Project (Didipio): Comparison of MPSA and FTAA Fiscal
Regime
Dollar Amounts are $ US million.
Peso Amounts are 42 x million.

Effective Tax Rate 23.31% 40.53%

Government Total Revenues $213.65 (P 5,554.9) $360.89 (P 9,383.1)

Government NPV @ 15% ' $44.57 (P 1,158.8) $ 77.98 (P 2,027.5)

Investor IRR
Investor NPV @ 15%

I
Net Present Value. The present worth of total government revenues.
Internal Rate of Return

Source: Appendix C

Parameters

Analysis is based on existing MPSA and FTAA contracts.

These contracts differ somewhat fiom the proposed Mining Act of 1994.
MPSA-Investment allowance is not deductible fiom taxable income.
MPSA-Includes ten percent (10%) government share of net revenues.
revenues with the MPSA versus the FTAA for Didipio was $213.6 million ( @ 5.6 billion)
versus $360.9 million ( &9.4 billion).
Tables 111. 3. and 111.4. clearly indicate that there is a substantial difference in the
economic outcomes to both the investor and to government in the two fiscal regimes. It
is obvious that the MPSA regime results in significantly higher returns to the investor.
Leaving the fiscal regime wide open to interpretation within the negotiation process
would not seem to be a wise approach. Such an approach defeats the Govemment
objective as there is not a transparent description of the financial paxameters that must be
incorporated into the financial analysis in order to optimize the agreement between
investors and government.
 Summary
The guidelines for negotiating MPSA and FTAA agreements provide for a
specific administrative framework for the negotiating process but do not address a
number of key issues which may significantly impact Governments achieving its
objectives of optimizing its returns on mineral development and thereby promoting
national development. In particular, the lack of a clear definition of the fiscal regime of
either the MPSA and the FTAA results in negotiations within which virtually everything
is negotiable. In addition the negotiating process itself should be reassessed to ascertain
how it may be improved. The basic questions with respect to the negotiating process can
be framed in terms of ....

t
Question Issue
Why are the FTAA and MPSA Financial analysis indicates that FTAA and MPSA
Contract Negotiated Contracts may not optimize government revenues

What is being Negotiated in Negotiations are based largely, if not completely, on

FTAAs and MPSAs submitted analyses by Contractors without independent
models and analysis

When are FTAA's and MPSAs FTAA's and MPSAs negotiated prior to complete
Negotiated feasibility analysis and comprehensive EIA.

Where are FTAA's and Predominantly in Manila without active involvement of

MPSAs Negotiated Regional or Local participants

Who Negotiate FTAA's and Lines of authority and responsibility unclear

MPSA Contracts Low level of non-sector participation
Inadequate skill mix of Personnel

The importance of the negotiating process is best seen in a comparison of the

terms and conditions of the fiscal regimes of MPSAs and FTAAs wherein returns to
investors andlor Government vary dramatically depending on the terms negotiated.
Recommendations
1. A detailed analysis of Government objectives with respect to MPSA and FTAA
agreements should be undertaken with the objective of defining which areas are
negotiable and which areas are to be strictly guided by the Mining Act.
2. Separate and specific guidelines should be set forth in the proposed Mining Act or
incorporated into the Implementing Guidelines for both the MPSA and FTAA.
3. The negotiating process must insure the participation of regional and local personnel
as well as other government agencies. Regional inputs should be a priority.
4. A skilled economic analysis group should be formed to provide independent
verification of corporate analyses and to provide Government negotiations with
alternative analyses. Dependence on Contractor Submittals solely must be reduced.
5. The entire negotiation process should be made more transparent at both the national
and local level, recognizing the need for confidentiality, to insure both needed inputs
but also concurrence with the final document.
6. The entire negotiating procedure should be modified to allow for negotiations to take
place after a comprehensive feasibility and Environmental Impact Assessment has
been conducted.
7. Guidelines should include specific definitions and where incentives will be applied in
determining tax liability or government share. For example, in the MPSA agreement
the "government share" should be more explicitly defined. Further detailed
recommendations are made in Volume V, Chapter 1.
The discrepancies in the tax burden imposed on domestic versus foreign mining firms
should be narrowed in order to avoid the appearance of deliberate bias towards domestic
companies. This can be accomplished to a great extent by eliminating the income tax
holiday for future mine developments. Eliminating the tax holiday will raise the effective
tax rate on MPSA agreements and bring this rate more into line with the effective tax rate
of FTAA contracts. The tax holiday has very little effect on FTAA contracts. However,
the tax holiday should also be excluded from FTAA agreements to avoid the appearance
of a bias towards foreign investors. The reasons for this are discussed in Volume 5,
Chapters 1 and 3.
 PART IV: KEY ISSUES OF THE PHILIPPINE MINERAL
SECTOR

The Potential Impact of Political Decentralization

on the Mineral Sector of the Philippines

Introduction
Decentralization in the Philippines is seen as a n a d extension of the "People
Power" revolution of 1986. In addressing the implications of the decentralization strategy
for the mineral sector, it is important to understand that decentralization was perceived
primarily as political empowerment rather than as an attempt to address socio-cultural
geography or regional inequalities. In this regard, it had a different motivation than the
decentralization initiatives mounted elsewhere in the region.
The designers of the decentralization strategy saw the devolution of power from
the center to the regions and to local government units as a means of fostering greater
grass roots participation in both political and economic decision making. This led
naturally, perhaps even unconsciously, to a premise that people at the grass roots level
should have a greater say in how natural resources (including minerals) are developed.
As a political theory, this notion is both attractive and elegant. As a practical policy
mechanism for the mineral sector, the concept has inherent problems.
Conceptually, two types of potential policy issues are associated with the
decentralization strategy: issues related to the transfer of
. . ..
,- and issues which may result h m
i-. Problems of relevance to the mineral sector in the transfer of existing powers to
local authorities revolve mainly around ques~onsof
(a) administering the prospecting and exploration pennit system;
 (b) insuring that local interests are reflected in the terms and conditions of
MPSA and FTAA development agreements and;
(c) the impact of Local Government Units (LGUs) taxing power and
revenue-sharing facilities.
Policy questions related to future mineral development involve the impact of
decentralization on inducing regional and local inequalities, and on the regional planning
of infmtructure. Of these issues, the most important questions for the minerals sector
relate to the potential for increased local and regional economic and social inequalities.
The original devolution impulse has necessarily been focused on the transfer of
government functions rather than on anticipating and planning for future development.
However, it is in the area of anticipating the needs of future mining projects that the
framework for local decision-making must be expanded if the requirements of a resurgent
mineral sector are to be met. Elsewhere in the developing world, failure to address these
questions has led to acute social unrest as at Bougainville in Papua New Guinea and
Ertzburg in Indonesia, where grievances over the sharing of the benefits of mine
development led to insurrection and civil war.
Before examining the specific implications of the decentralization planning
questions, it is worth briefly reviewing the basic legal framework (expressed in the
provisions of the Local Government Code of 1991) and the early implementation
experience with the devolution of power to the LGUs. For the purpose of the following
comments the term Local Government Units has the same meaning as set out in the Local
Government Code of 1991. It refers jointly and individually to powers and authorities
given to Provinces, Cities, Municipalities, and Barangays but excludes activities
undertaken by the 14 administrative regions.
 Decentralization and the Transfer of Existing Functions

The Local Government Code of 1991

The 1991 Local Government Code set up the framework for the devolution of
economic and administrative powers. The strategy which formed the foundation for the
code was based on the premise that national development would be fostered through a
process of bottom- up planning. Inherent in this strategy was the idea that local
development could occur only through a fairly massive transfer of financial and
administrative manpower from the central government to local government units.
What is fairly unique about the approach to decentralization in the Philippines is
that this transfer was done almost equally for all governmental functions and it was done
in an extremely short period of time. In retrospect, it seems that the crusade for
decentralization was driven by a desire that as much power should be transferred as
possible in the shortest time. Not surprisingly, this laudable goal led to significant
implementation problems since not all local government units were equally prepared or
competently M e d to assume these responsibilities. As with any new system of
governance, the decentralization strategy is currently experiencing implementation
problems ,most of which will eventually be resolved. Indeed, some commentators
believe that the devolution of power to local government units has proceeded better than
originally expected.
In parallel with the devolution of power under the Local Government Code the
national government reoriented its own operations from a centralized system based in
Manila to a decentralized organization focused on the 14 administrative regions. The
heart of this regional orientation was the Regional Development Board which sought both
to plan and coordinate national activities as well as to create a policy link with the LGUs.
The new system implied significant realignment of important administrative procedures
and alterations to the role of central government agencies. These changes fundamentally
altered the traditional role of the Mines and Geosciences Bureau (MGB).
Impact on Administration of the Prospecting/Exploration Permit System
The most immediate effect on the mineras sector of the "devolution" process,
which covers activities transferred from central government agencies to other levels of
government have been the changes in the functions and operations of the Mines and
Geosciences Bureau (MGB). MGB's manpower went h m 1,087 in 1990 to 377 in
August, 1994. Causes of this attrition included staff transfers to regional offices which
report to DENR,transfers to other departments, and a number of professional
resignations. In addition, MGB was redesignated fiom a line to a staff agency.
As a result of MGB's regionalization and altered role as a staff organization,
government's geoscience capability have been significantly reduced by the devolution
initiative. In addition. communications between geological staff in the regions and MGB
technical support officers has been complicated by an indirect reporting system which
requires that communications flow through the Regional Operations of DENR rather than
directly to MGB. Finally, devolution has meant that the regional offices of DENR play a
prominent role in the granting of exploration/prospecting rights. This role was previously
the sole prerogative of MGB's headquarters. One unanticipated consequence of this
regionalized administrative network was that no central record was maintained of areas
under exploration, expenditures by prospectors, or company work program commitments
and reports. However, due to separate reporting requirements under the Mineral
Production Sharing Agreement (MPSA), some annual exploration reports are filed with
the MGB.
An important policy area where MGB has maintained full authority is in the
granting of FTAA and MPSA agreements for new mining ventures. In addition, MGB in
its staff role, is the focal point for discussions about legislative changes and is responsible
for liaison with the legislature on all mining matters.
In summary, political decentralization has meant four things for the administration
of mineral activities in the Philippines:
(a) There has been a decline in professional geological activities,
(b) MGB has been transformed from a line to a staff support function,

IV- 4
 (c) Communications between field activities and the MGB have deteriorated as a
result of the replacement of a direct reporting by a system of indirect reporting
through the DENR and the lack of a clear procedure for infonnation transfer,
(d) The exploration activities of private companies are less closely controlled and
monitored than previously.
Intangible offsetting advantages associated with increased local control are less
easily defined and, indeed, some knowledgeable commentators argue that
decentralization resulted in increased cronyism and corruption in the small scale mining
sector. (Domingo, 1993)

Revenue Sources of Local Authorities

One inevitable consequence of decentralization is that the overall cost of
government increases. Since the central government has historically been severely short
of fiscal resources, the necessary assumption was that, over time, the LGUs would have
to raise a significant fiaction of their own finance. This was anticipated in the Local
Government Code through pints of new taxing powers and through special revenue-
sharing arrangements.

Internal RevenueSLaring and LGL' Taxation. A portion of the initial financial

needs of the LGUs are met through direct Internal Revenue Allocation (IRA) grants fiom
the national government. However, since the IRA grants barely cover the cost of
transferred personnel and responsibilities, there was a need to supplement them with a
local tax base. This taxing authority was granted under Sections 134-155 of the Local
Government Code and is fairly broadly defined. In general, two types of local taxes
affect the operation of the mining sector:
(a) a general business tax of up to 2 percent of gross revenues and;
(b) a large family of special fees and taxes including real property taxes, a vehicle
tax, and levies on idle land.

IV-5
 In addition, LGUs are entitled to a 40 percent share of the proceeds of national
taxes on natural resource projects under the provision for the "Sharing of National
Wealth" (see following section). Mining industry sources have suggested that
theoretically the overall impact of the local government taxing authority and "National
Wealth" provisions could exceed 25 percent of the operating surplus of mining
projects...an enormous potential revenue source for LGUs.

Enect of LGU T a m on the Mining Sector. While tax payments to local

authorities are deductible against national tax liabilities, no provision exists for a direct
tax credit. This means that local taxes represent an increase in the tax burden borne by
the mining industry. A significant feature of the taxing authority of local authorities is
the fact that all of these taxes are levied on operations or on sales, and are independent of
company profitability. This means that the local tax burden must be met whether the
mining venture is profitable or not. The direct implication of this taxation strategy for the
mining industry is to discourage the development of marginal resources.

Allocation and Flow of **NationalWealth" Funds. Beyond the direct taxing

powers given to LGUs, the decentralization strategy anticipated that special revenue
sharing should take place with local government units in areas with natural resources
projects. The consequence of this policy is favorable to the mineral (and other natural
resource based) industries since it creates a major financial incentive for local
governments to support new mine developments in their area.
The legislative basis for this "national wealth" revenue sharing is set out in
Section 289 of the Local Government Code as follows:

"Section 289. Share in the proceeds from the development and utilization ofthe
national wealth. LGUs shall have an equitable share in the proceeds derived from
the utilization and development of the national wealth within their respective
areas, including sharing the same with the inhabitants by way of direct benefits."

IV- 6
 The following section (Section 290) then goes on to provide that:

"LGUs shall in addition to the IRA, have a share of forty percent (40%) of the
gross collection derived by the national government h m the preceding fiscal
year".

Unfortunately, while the 40 percent reservation is clearly defined,

v\ is unclear as of what appears to be a drafting error in Section

29 1 . The apparent drafting problem arises two sections later in Section 292 which states,
"Allocation of Shares, the share in the immediately prec&ng article shall be distributed
in the following manner..." To include the 40 percent revenue sharing provision for
natural resource receipts (Section 290) the word "wshould have been "-."
Without this adjustment the allocation of the 40 percent is simply unspecified. As a
result, the actual impact of the sharing-of-the-National-Wealth-provision is ambiguous.
In the event of a major new mining project, we would expect that this allocation will be
hotly contested by the various levels of local govcnunent.

Eflect of "National Wealth" Revenue Sharing . Since the national wealth

funds are derived from the fiscal receipts of the national government, there are
considerable fluctuations reflecting world mineral prices and the tax incentive packages
offered to a particular mineral development. From the day that initial mine sales begin,
royalty/excise taxes are collected on company revenues. These royaltylexcise collections
are the first and earliest increment of money to the LGUs under the "national wealth"
formula. Fiscal flows fiom royaltylexcise collection are relatively more stable than
revenues which are linked to company profitability.
Somewhere around production year five, a "normal" mining project will begin to
pay substantial income taxes. Revenues from this tax source are likely to be
volatile...with considerable variation fiom year to year. The uncertain nature of these
profit-linked flows can restrict the usefulness of the money to the LGUs. For example, it

IV- 7
might be inappropriate to use natural wealth money based on income tax flows to meet
recurrent or stafling costs.
The fundamental difficulty with "national wealth revenue sharing is that flow
to thebv funds.Since LGU
revenue is linked to central government tax collection, "National Wealth" receipts can
normally be expected to grow over time. However, the need for government expenditures
to establish social services in a new area are at their greatest during
constructionldevelopment and during early operation of a new mine (e.g. before any tax
revenues are collected by government).
The allocation of funds to the various levels of local government under the IRA
and the "National Wealth" provisions are significantly different. These differences are
suggested in Table IV. 1.

Table IV. 1. Revenue Distribution at the Local Government Level

IRA "National Wealth"

Provinces 23% 20%

Municipalities 34% Shares 45 % with cities
Cities 23% Shares 45 % with municipalities
Barangays 20% 35%

These allocation shares have considerable significance for new mining projects
which may accentuate problems already experienced in the allocation of IRA. This
significance is linked to the increasing share which is allocated to the barangays which
already appear to receive a disproportionate share of funds under the IRA formula (see
next section on early implementation experience).
Under the "national wealth" formula, the allocation of a 35 percent share to a
single barangay implies that nearly 14 percent of 1will

IV- 8
accrue to the lowest level of local government. To put this allocation into some
perspective we might take the example of Manila Mining. In 1993, Manila Mining
would have generated P 36.55 million pesos from excise tax collections of 5 percent
applied to gross company revenues of 73 1 million pesos and 2.15 million pesos fiom
income tax receipts about 14 percent of the 1fi .4 million pesos in income taxes paid by
Manila Mining in 1993 would have accrued directly to the budgets of the local barangay.
Theoretically, this money might have been spent on services to as many as 5,000
barangay residents.

Early Implementation Experience of Decentralization Strategy

Based on a series of reviews by the Local Development Assistance Program,
several problems have been identified in implementing the decentralization process.
Five of these implementation trends are of particular interest to the mining sector. These
areas are:
(a) In comparing revenues against the costs of meeting responsibilities, the IRA
allocation formula appears to favor cities and barangays to the detriment of
provinces and municipalities.
(b) The system for return of the 40 percent "national wealth" share from natural
resources projects to local authorities does not seem to be functioning well.
(c) Most development planning activities being undertaken by the LGUs focused
on barangay level projects.
(d) There appears to be increasing involvement of NGOs and private
sector representatives in LGU deliberations.
(e) The LGUs see little role for themselves in environmental matters. Where
environmental issues have been addressed by LGUs it has been with the
assistance of pressure fiom NGCIs.
Since the whole decentralization process continues to evolve, such observations
represent a sort of interim report on the status of the devolution process rather than any
conclusion about its ultimate course or character. Nevertheless, it may be useful to
consider what continuation of these trends may mean for the mining sector.

Inequifies in the Current IRA Formulas. are compounded by the revenue-

sharing scheme adopted in the "National Wealth" provision. The "National Wealth"
formula reduces the revenue allocation to relatively hard-pressed provinces while
increasing the allocation to relatively well-provided-for baragays. The implication here! is
that the natural wealth formula should either be revised or the division of responsibilities
between LGUs reconsidered.
However, since the objective of the natural wealth provision is to supplement the
basic IRA provision for areas impacted by natural resource development,
amount (e.g. IRA + "national wealth") of revenue available to each LGU is important.
however is not possible to generalize about the adequacy of this amount. As we shall
examine later (in the discussions as inequalities induced as a result of the decentralization
process), the allocation of funds between LGUs is a complex matter in the context of a
new mining project.
. .
To the degree that
-, the attitude of LGUs toward new mineral development projects is likely to be
negative. Without the "national wealth" transfers, new mining projects imply new and
expanded responsibilities but with few new financial resources. Clearly, under these
circumstances, new projects are likely to be seen as a drain on all levels of local
government. In the short term, new projects imply costs but only small benefits to the
LGUs. Under this situation, new mining projects might well be opposed by local
governments. Alternatively, it is possible that the LGUs might impose unreasonable
claims on the mining activity. The important point is that failure to disburse the "national
wealth" funds appropriately represents both a burden and a blame due to the shift in the
roles of national and LGU authorities.
AWJably, thefocusGIJ devJ lev&
detrimentalto dealing with the impact problems of a major mining project. First, it is
obvious that a focus on the barangay level is not consistent with optimal regional
infrastructure planning. Second, it should likewise be clear that the impact of any major
project is likely to extend across several adjacent barangays and that replication of
programs in each barangay would be costly and inefficient. Third, since the barangay
containing the mining district will receive 35 percent of the natural wealth revenues,
while adjacent barangays will receive nothing, a focus on barangay level projects is likely
to encourage disparities between adjacent areas. The "all" or "nothing" nature of the
"national wealth" provisions make barangay level planning extremely problematic.
The increasing b v 0 1 of~NGO a d v - m

.- . . Of particular importance is the role that NGOs are likely to play in

shaping local government attitudes toward the environmental consequences of mining.
Insofar as NGO input provides local oficials with an alternative to the viewpoint of
mining project proponents, this contribution is useful. However, as NGO and
representatives of private mining companies are not elected officials, there exists the
potential that undue influence by either group may not accurately represent true public
opinion and may not result in public opinion based on fact. This situation might
represent a major step toward special inter& (and away from elected) government at the
local level.
The fact that early experience with the decentralization strategy has led LGUs t~
or no@r is
.. On the one hand, since environmental impact is one of
the major costs which local residents must face in new mining ventures, vital local
interests are at stake in environmental policy decisions. On the other hand, it is fairly
difficult for local people or their elected representatives to constructively contribute to
technical environmental debates or negotiations. In the environmental section of the
report this question is explored further, but the general feeling of people interviewed in
the course of this study was that concern with environmental issues is mainly an urban
phenomena. To the degree that this impression is accurate, a limited LGU role on
environmental policy questions may reflect the current state of rural public attitudes
toward the issue. A further contributing factor may be the rapidly changing regulatory
framework of the Environmental Management Bureau which simply is not well
understood at the LGU level.

Decentralization and the Costs of Establishing New Projects

The decentralization strategy quite properly focuses on the operational role of

local government agencies in day-to-day policy and administrative questions. Thus,the
LGUs are given fiscal authority to impose new taxes to supplement the direct support
received from the national treasury. However, one issue which does not appear to have
been explicitly resolved by the local government strategy is how the LGUs will fund the
sizable establishment expenditures in social services which will accrue before any local
tax, supplemental IRA, or "national wealth" receipts are available. This is an almost
universal problem with large projects which involve an influx of people to a remote area.
In a typical large-scale mining project, two to four years may be required for
project construction. During this time people will migrate to the area on the merest
promise of eventual employment. These people will need schools, health facilities, local
police, and other social services. There will also be a need for constructing or expanding
urban infrastructure (particularly water reticulation) and for assistance in siting and
building even minimal housing. To be sure, some of these services may be provided by
the mine developer or construction contractor but it is unlikely that these companies will
provide much assistance to unemployed migrants. Providing even minimal care for these
people will ultimately become the responsibility of local authorities, who must suddenly
find money (and staff) from an already overstretched budget (and overworked staff) to
cater to the needs of the migrants.
The obvious resolution of this dilemma is for national government funding to
meet these early establishment expenses. But- is such an initiative to be mounted?
will be funded? long will there need to be a national presence and funding in
the area? b the local government cope with a sudden expansion of services in a
potentially remote area? To what level of local government should the support be
funneled? In trying to alleviate these critical establishment problems the national
government will have to tread carefully if it is to avoid total dependency (on the one
hand) or usurpation of its own decentralization strategy(on the other hand). Although
there are no easy answers to these sorts of questions, it is reasonably clear that some
preliminary contingency thinking is warranted as a supplement to the basic
decentralization strategy.

Decentralization and Induced Inequities

The desire of government to strengthen local fiscal autonomy and encourage
greater grass roots control over development is a laudable objective. However, there
remains substantial implementation issues which have not been expressed in any policy
statement. These implementation issues involve inequalities which may emerge or be
accentuated directly as a result of increased local control. Such "induced" inequalities
involve questions relating to how d i f f m t local groups share the costs and benefits of
new mine development. Here,there are two somewhat contradictory effects which relate
to: (1) regional inequalities between the mining district and adjacent areas, and (2) the
cost and benefits of mining development on residents in the immediate mining district.

Inequality Between Adjacent Areus. Whatever the arguments in favor of

decentralized control over the development process, it should be recognized that local
control brings with it the potential for increased inequality between adjacent areas.
Experience in other developing countries suggests that there are no simple or easy
solutions to these issues and, indeed, workable strategies must be formulated in the
crucible of a real, evolving project rather than through some abstract or a priori policy
generalization.
Local government, of necessity, operates on the basis of administrative units
based on arbitrary geographic boundaries. Exactly where in a province1
municipalityharangay a mineral deposit exists is a function of geology, not of
administrative boundaries or of a deliberate planning decision. Under such
circumstances, it is inevitable that some people will prosper from the capriciousness of
nature while their equally needy (and, possibly, equally impacted) neighbors may receive
little or no benefit at all.
Even though the Philippine decentralization strategy is designed to move political
power and financial resources closer to grass roots control, the reliance on local
administrative jurisdictions may exacerbate the inequality issue. Indeed, to the degree
that local political or administrative decision-making is perceived to be taken out of self-
interest, decentralization may inflame rather than soothe a sense of inequality.
Clearly, a solution to the question of regional inequality lies in making financial
resources available to the entire region impacted by mining rather than just to the
administrative district where the new mine happens to be located. As we will shortly
consider in more detail, these financial resources might be used to offset the problems of
in-migration, to establish local business opportunities, and to address broader regional
questions of transportation or power. In short, the logic of revenue-sharing fiom mineral
development needs to be carried beyond the administrative boundaries of the LGUs.
To address the inequality problem squarely requires a comprehensive series of
development policies which may well run counter to the intended decentralization
objective of greater local control and autonomy. Local authorities will not be happy with
employment policies which deliberately extend recruitment outside the province or
municipality, nor will they be elated when infrastructure is deliberately planned to serve
adjoining LGUs. Even with a successful regional planning effort designed to provide
benefits to the largest group possible there will remain the ticklish question of how to
meet recurrent costs where services are provided in one area but the tax base lies in
another LGU.
Failure to deal with the division of natural resource wealth between neighboring
administrative units can create a volatile social situation and can aggravate historic
grievances and cultural enmities. Such regional inequality is nqt an academic issue. The
history of major mining projects around the world clearly shows that disgruntlement over
the division of mineral wealth can easily lead to violent social struggles and sometimes
even to armed conflict. (Prominent examples include conflicts in Katanga Province of
Zaire, the Amazoninan gold rush of Brazil, and most recently, the Bougainville secession
in Papua New Guinea).

Costs And Benefrts of Mine Development to Local Residents. Because mines are
often discovered in remote rural areas, their development poses special problems for local
residents. Experience elsewhere suggests that these special problems are often either
unrecognized by social planners or are ignored in the rush to bring a new project into
production. In many cases, the problems themselves are disguised by the intensive
construction period which precedes actual mine operation. During construction, long-
term social problems can sometimes be mistakenly associated with the transient nature of
mine development. Indeed, the construction period is a critical period during which
unattended social issues can easily become the source of resident grievances which
chronically plague later operations of the mine.
In addressing the social consequences of mine development, it is important to start
with a few basic assumptions about (1) the nature of the development costs and benefits
which accrue to different groups and (2) the handicaps and barriers to participation which
residents of the mining district may face. It needs to be recognized from the onset that the

n f Residents
. will be adversely
affected by:
(a) any negative environmental effects of the mine;
(b) social and cultural disruptions caused by the immigration of outsiders;
(c) an increase in the incidence of communicable diseases and;
(d) significant income inequalities.
It is difficult to directly address these social costs. On the other hand, it is
sometimes easier to develop Government policies designed to provide compensatory
benefits to residents of the mining district for the costs that they bear.
 Compensatory Programs and Barricrs to Participation. Common compensatory
programs might include employment preferences for residents, small business
development programs, village development schemes, and improved health and education
services. While there is little mystery in all of this, the almost universal problem with
mounting such compensatory benefit program lies with three problems: (1) inherent
barriers to resident participation; (2) the allocation of development resources through
local political institutions whose priorities may not coincide with the interests of the
residents; and (3) the mistrust of government by rural residents.
Residents from remote mining regions often suffer from social, health, and
educational handicaps which severely restrict their ability to participate in a new mining
development. Normally, rural people will have few of the job skills or necessary
education to capture better paying construction or operating jobs with the mine or to
capitalize on small business opportunities. As a result, many mine jobs go to skilled
outsiders. This results in both accentuated income inequality and in social resentment
against outsiders. Even where job skills and education are available, nual residents may
suffer health or nutritional deficiencies which create barriers to employment participation.
The situation is further complicated by the lengthy construction period associated
with major mine development. During the construction period, the demand for unskilled
labor is at its peak and many residents will be pulled into the construction labor force.
Unfortunately, these unskilled construction workers will not be available for mine or
government-sponsored training programs related to the operational phase of the project.
Thus, local residents often find themselves in a circular situation where their long-term
interests (for skill training related to mine operations) are being pre-empted by their short
term needs (for construction employment).
Such practical implementation problems although formidable, could theoretically
be addressed by specially "targeted" remedial (or compensatory) development programs.
Regrettably, the implementation of compensatory programs is often undermined by the
channeling of development funds through local authorities, whose experience and
priorities reflect political rather than developmental realities.
 versus "Political" Priorities. The assumption behind any
"R~sident"
decentralized development funding scheme is that local leaders are better placed to
identify and address local development needs than are central government plannersf
development specialists. While such an assumption may be accurate for some types of
development needs, the assumption is probably gqt true for development of a mining
mega-project whose impact is beyond the experience (and perhaps imagination !) of most
local officials.
The problem of channeling "mine impact" development funding through the local
barangay, province or municipality is also heavily influenced by political realities. Often,
elected officials owe their primary allegiance to those constituents who elected them to
office. While it might be the case that these electors are from the mining district, it is
equally likely that these constituents are fiom some other region or local government
area. This divergence of political and development realities is especially compelling
when the local politician may fear that the emergence of a new nexus of political power
in the mining district may upset the political balance of the entire electorate. That local
political leaders should direct the flow of development funds to their own political
constituency is both natural and entirely predictable.
Once the influence of political considerations is recogmid, the likely response of
budgetary authorities is to "tie" the funding of compensatory development programs to
expenditures in the mining district. The first problem with this approach is that it violates
the self-rule principle on which decentralization /people power strategy was established.
But "tied funding" is unlikely to be the development panacea that it might at first seem to
be for other reasons as well.
Clearly, money is not the only local resource subject to political prioritization.
Indeed, manpower and development expertise are probably of equal or greater importance
than money. Even where competent staff arc available in the local government unit, it is
unlikely that the best development officers will be sent to the mining district if it means
removing them fiom areas which are politically more important. This scenario of
politically driven development priorities has been repeatedly observed in the mining
districts of other ASEAN nations, in the Pacific Islands, and throughout much of Africa.
Thus, there is ample evidence to support it as a possible pattern in the Philippines.

Mistrust of Government Intentions. Central and local government initiatives in

remote areas may suffer from psychological handicaps associated with resident
perceptions of past neglect. An often-heard resident's comment in many new mining
districts is that, "Government did not take notice of us until we had something that it
wanted." This often reflects hostility toward real or imagined favoritism shown to other
nearby (usually more politically important) areas. Although this hostility tends to
dissipate as mine development progresses, there often is a residual sense that government
agencies. including LGUs do not represent the interests of mining district residents. This
feeling is encouraged by the fact that residents bear the brunt of the costs of mine
development while major benefits flow to non-residents. This perception, in many cases
is unfortunately the reality.
In parallel with this resident skepticism toward government is a tendency to see
the mining company as a local benefactor. After all, the mining company provided jobs,
minimal medical care, and (possibly) schools, to local people during exploration while
government resources went elsewhere. To the degree that the mining company continues
to adopt a paternalistic attitude toward residents, this feeling will be encouraged.
The point here is that early compensatory programs designed to overcome barriers
to resident participation are much easier to conceive than to actually implement for
historical, psychological, and political reasons. While the enthusiastic support of local
people may not be the only factor in a successful project, it is imperative that local
grievances not be permitted to turn into the sort of violent hostility seen at Bougainville
in PNG or at Ertsberg in Indonesia.

Decentralization and Regional Infrastructure Planning

Mining projects require substantial investments in infrslstructure. A large base
metal project may involve a total capital investment of several hundred million US
dollars with 35-50 percent of the total being spent on idkastmcture. At a minimum, mine
development involves a substantial power requirement and good road access. Beyond
this minimum, different types of minerals and different processing stages may entail
additional infrastructure. Normally, base metal development necessitates a port facility
and sometimes the construction/expansion of a mine township. There are two particular
problems which plague infrastructure planning for major mineral projects. These
problems involve: (1) the potential conflict between local and developmental planning
priorities and (2)the need to synchronize infrastructure choices with the basic timetable of
the mining project.

"Local" versus "Optimal" Infrastructure Priorities. Given that many mining

projects are in remote areas, the cost of infrastructure development can represent a
substantial fraction of total capital and operating costs. Where a new mining project has
access to already existing infiastructure, the attractiveness and integration of the project
will obviously be increased. Conversely, where new, mine-necessitated infrastructure
must be built, the development potential of the region is increased. The important issue
in mine infrastructure vis-a-vis decentralized economic development obviously lies in
planning the infrastructure links in such a manner that the optimum development impact
is achieved (e.g. insuring that road or power transmission link routes to serve rural and
nearby urban centers). Even in the best of circumstances achieving this goal often
involves substantial planning and a major financial input from the national government.
Major infrastructure planning in the Philippines is a primary responsibility of the
Regional Planning Board and is only marginally subject to the direct influence of the
LGUs. On the other hand, the long term intention of the decentralization strategy seems
to be to eventually turn many recurrent costs of infrastructure (such as road maintenance)
over to local authorities. Thus, local authorities have a vital interest in how infrastructure
in their areas is planned and built. This leads to a rather difficult dilemma since
infrastructure decisions which may be optimal from a development perspective may not
always appear optimal from the parochial perspective of local officials. Given the
significant shift in political power which is implied by the decentralization strategy, the
views of these local officials must be carefully addressed and factored into any
infrastructure decision-making. This potential weighing of "local" versus "optimal"
infrastructure concerns is likely to become a contentious issue in any new mine
development and may require special administrative arrangements between the various
LGUs and regional hfhstmcture planning authorities.

Infrastructure Choices and Project Timetables. Most of the problems with

planning new mine-related infrastructure relate to the scheduling of the infiastmcture vis
a vis other components of the project. While the building of a pioneer road is often on
the critical path of early construction activities, the more difficult scheduling problems
usually relate to the timely provision of power to the project. With power requirements
for a major base metal mine often exceeding 50-75 Megawatts there are few regions in
the Philippines where a new mine would not throw the existing power development plan
into chaos.

Power and the Region. Planning for a power supply to a new mine is
complicated by the fact that the project's timing is difficult to anticipate. Often the lead
time to augment power systems with new thermal/hydro/geothermal generating capacity
will be longer than the time required to construct the basic mine. This
scheduling/sequencing problem is a serious constraint on power planning and restricts
electricity generation options. In turn, once initial generation choices have been made
they tend to influence the pattern of subsequent power planning decisions. In other words,
the initial construction schedule for the non-power part of the mining project will heavily
influence the power supply strategy for the entire mine life. This inherent scheduling
problem is independent of who finances and constructs the power supply itself, and can
usually only be avoided in situations where excess system capacity exists or is under
construction before the mine construction is committed.
When these scheduling problems are overlaid with the need to see power
development within the context of regional and/or local power demand projections, the
planning task can become extremely complex. Often, the response is some sort of
company-provided-power-plant-based-onquick-to-build diesel technology. Although
everyone recognizes that a diesel solution is the least optimal generation option fiom
either the local or national perspectives, at least it removes power fiom the critical path of
project construction. However, the diesel plant itself is less likely to be a long-term
problem to regional planning than the psychology implied by its construction. The
psychology of the diesel solution is (1) the mine can take care of its own needs, and 2) its
needs are independent of the surrounding region. Although diesel plants have a relatively
short operating life, experience suggests that once established, they continue to operate
and are seldom rationalized into the larger regional network.
Typically, there are two common barriers to integrating the mine's power system
with the surrounding region. First, unless undertaken as part of a power transfer scheme
in the initial construction there is unlikely to be a transmission link with the regional
power grid. Although not of overwhelming f i i c i a l or technical sisnif~cancein its own
right, the transmission line becomes an incremental cost whose inclusion makes mine
connection a marginal financial decision. Second, unfortunately, mining companies can
often generate their own diesel power at a Iower cost than they can buy it fiom the
regional grid. The reasons for this are complex and site specific but the general
conclusion is reinforced by the experience of existing mines in the Philippines.
One fairly obvious planning approach to these issues is to develop an optimal
regional master plan "with" and "without" the mining project. The "with" version would
obviously have to incorporate a grid connection and the use of a substantial diesel
capacity but at least, a least-cost framework would be established for eventual
regionalization of the mines power system. With such a plan on hand, some sort of cost-
sharing arrangement between the mine and power utility might be worked out which
minimizes the discounted cost difference to the mining project.

Exploration Access: A Secondary Consideration. A seldom recognized aspect of

infrastructure development is the importance of surface access to mineral exploration and
prospecting activities. Surface access to areas of high mineral prospectivity will
encourage a broader range of exploration ventures and result in a more rapid and detailed
geological assessment.
Since most mineral prospecting does result in commercially viable
development, it would be a misallocation of scarce development funds to plan roads
solely to serve the exploration companies. On the other hand, it seems entirely proper to
consider how improved access may benefit mineral exploration as a criteria in
the routing/alignment of rural roads. Such an approach has been adopted in other parts of
the world and has been used in Scandinavia, Canada, and Papua New Guinea. Since
responsibility for rural roads lies primarily with local authorities, the integration of this
need with other road-routing considerations must take place at a local level and may
require development of a modified rural road planning methodology. This methodology
can draw directly on the results of the resource assessment section of this report.

Recommendations

Suggestions for the Existing Situation

In considering the consequences of decentralization for the mining sector, it is

clearly important to focus on developing policy alternatives for new projects, and to
assume that the inevitable implementation problems now being encountered will be
sorted out with time. There are, however,.two exceptions to this generally fbture-looking
approach: (I) revenue allocation problems associated with the current "national wealth"
formula and (2) development of a mechanism which permits amalgamation of local
government units while maintaining some fonn of local autonomy and control. Since
these questions clearly have greater implications than the narrow mineral sector
perspective adopted in this report, and since the authors are not experts in local
government or political science, only a few rudimentary ideas will be advanced here.
The "National Wealth" Formula
Since the National Wealth Sections (Sections 289-292) already contain a drafting
error, amendment of this part of the Local Government Code seems inevitable. As
discussed above there are four main problems to be faced:
(a) correcting the formula for revenue allocation between different local
govemment units,
(b) the "all" or "nothing" nature of the sizable allocations (14 percent of the total
national government receipts) given to the impacted barangays,
(c) trying to buffer local government revenues fiom the volatility of tax flows
and,
(d) finding a mechanism which more closely matches revenue flows with
development needs.
Clearly, we are dealing with two distinct problems here. The first two of the above
(allocation) problems involve devising a better way to cut up the "national wealth pie. In
contrast, the third and fourth problems involve the timing and volatility of local
government receipts.

The Allocation Problem While it is not possible within the boundaries of the
current study to examine the allocation question in detail, there would seem to be three
fundamental choices:
(a) redistribute responsibilities;
(b) redistribute the revenue shares, or;
(c) create a flexible vehicle for moving a portion of the funds fiom one level of
local government to another.
At the risk of complicating an already complex funding scheme, we favor the
latter course as most likely to meet the needs of the mineral sector. Whether this approach
meets the needs of other natural resources sectors or, indeed, is acceptable to local
government leaders is another matter.
Nevertheless, we would suggest that a significant fraction (20-30 percent) of the
money available under the "national wealth" formula should be put into a development
fund which would permit the money to be caned forward fiom budget year to budget
year. This fund might be managed by the Regional Development Council and allocated
in annual tranche. The money could be allocated chiefly for capital rather than recurrent
projects, based on two priorities:
(a) perceived needs in barangays adjacent to, and including, the mining district;
(b) regional projects which serve more than one province, city or municipality
impacted by the mining development.
To obtain money from the fund, an applicant would have to demonstrate that the
purpose of the project is directly related to some impact of the mining project. We
believe that this approach effectively permits an amalgamation of LGU development
interests by circumventing the rigid tying of funds to particular levels of local
government while insuring that the funds are, in fact, targeted on the impacts of the
impacted region. An important side benefit of such a scheme is that it makes it possible
to identify certain development projects specifically with the costshnefits of the mining
project.

The Timing and Volatili@Problem The problem with the "national wealthn
scheme as it currently exists is that payments are based on agovernment receipts
(basically excise tax and income tax). The real complicating factor here is the inclusion
of income tax (and any residue from the 60-40 profit split) which will only accrue at
some point well into the project. Even when these receipts begin to flow they are likely to
be highly variable from year to year. We would suggest that the "national wealth"
allocation be redefined to minimize these difficulties. This might be accomplished by
linking LGU payments to (1) mine revenuelexport receipts, and/or (2) by creating a
stabilization fund. Such a stabilization scheme might, for example, use some sort of
moving average formula. Under such a formula, annual projections of LGU receipts, for
say, the upcoming two years might be averaged with "Actual" receipts for the last three
years to arrive at a time-weighted annual LGU share.
 Amalgamation of LGU Deuelopment Planning Interests. In its most rigid form,
development programs in the Philippines occur on two parallel tracks: one track pursued
by the National Government1 Regional Development Councils and the other track
pursued by the LGUs. While in practice, there are numerous complimentary areas, we
believe that for a large-scale project (like a new mine) formal joint h d i n g mechanisms
may need to be developed. We would suggest that the national government consider a
scheme for co-fmancing arrangements with groupings of local government units. For
example, if several barangays want to establish a common development scheme for some
purpose related to the impact of the mine development, they could approach the national
government on a 50:50 (matching) funds basis. Since the LGUs are unlikely to have any
funds available to meet establishment costs-such a co-financing scheme would be more
appropriate to meet medium or longer term development needs. In addition, such scheme
may even possibly meet establishment costs if the LGUs were willing to pledge an
offsetting fraction of their eventual "National Wealth" entitlement. In order to avoid
national government paternalism and protect local prerogatives, the scheme would
probably best function where the initiative is entirely in the hands of local authorities, i.e.
the national government should not "suggest" or promote pet projects for the region.

Suggestions for Addressing Future Mining Development

The problem of establishing social services in a new mining district is not directly
taken cared of under the decentralization strategy. This is a major potential problem
which needs to be addressed before construction begins on any new project. Clearly, in
addition to the local government units, clearly both the national government and the
mining company must be involved in pre-construction social planning.

Responsibilities and C o ~ r a t i vAdvuntage.

r Insofar as the mining company is
expected to contribute to the solution of social problems, its responsibilities (e.g. through
the building/sMng of workers' housing, schools, health clinics, etc.) need to be clearly
communicated sometime prior to commencement of the feasibility study. Early
agreement on the scope of the company's social obligations will enable these costs to be
included in project estimates and the project's profitability analysis.
Indeed, there are good arguments for taking a step further. We would favor
adoption of a national policy on the social obligations of mining companies, rather than
leaving this to a d hoc negotiations. Such a policy should be a natural compliment to the
Social Impact Assessment required under the Environmental Impact Assessment (EIA)
and should set out what the Government expects the company to provide, what the central
government will provide, and the role of various local government units.
In deciding who undertakes which sorts of programs, there are three major
considerations:
(a) Who provides the finance and ultimately pays the bill;
(b) Who has the manpower capacity on-the-ground to get the work accomplished
efficiently; and
(c) What are the recurrent implications of undertaking the program.
Again. these all sounds fairly obvious but the efficient implementation of joint
social programs require that the responsibilities of each party reflect their comparative
advantage. For example, the local government may have lots of experience in operating
schools or health clinics but may have no experience in designing or building them.
Similarly, while the national government may be the best agency to design and fund such
facilities, the mining company might have a comparative advantage in school
construction since they will already have a massive work force mobilized for construction
of the mining facilities.

Costs of Mining Company Involvement. In planning the division of social

responsibilities, the national government needs to keep a watchful eye on the true costs of
various decisions. For example, there is often a strong temptation to push substantial
social costs into the mining company. Beyond the direct costs of the capital and
operating costs of such decisions, the government needs to realize that the company is not
a non-profit or charitable organization. When it assumes social costs, the mining
company implicitly expects that the retum on its total investment
(mine+infiastructure+social)will earn a finax&l return equal to its profitability threshold
for new investments (usually in the after-tax range of 15-20 percent). In contrast, the
government might normally expect such an investment to have an yield closer
to its social discount rate of 8-12 percent. Without too much imagination it is easy to
construct a comparative analyses which suggests that company financing of, say, a new
school, is twice as expensive as Government S i c i n g .
At the other end of the scale, the imposition of a substantial recurrent budget
obligation on local government units might result from high health or education
standards adopted by the mining company for its workers. Such high education or health
standards may easily be unsustainable fiom the recurrent budget resources of the LGUs.
In such, situations high-worker-oriented social services may be counter-productive to
everyone's interests. The point here is that the allocation of social development costs
associated with a new mining project should not be casually pushed into the mining
company or into the local government.
To overcome this dilemma, we suggest that as part of Government's "social
obligation" policy, it needs to be made explicitly clear that:
(a) All healthteducation facilities should be open to the general public whether or
not they are mine employees.
(b) All facilities will receive recurrent budget support from the local LGUs in
conformity or consonancewith general LGU or national standards.
(c) Where the mining company wants higher healthleducation standards it must
either establish its own facilities and pay all recurrent costs, or meet the
incremental recurrent costs of upgraded services (for workers plus other
residents).
Although the subsidized services would be available to both workers and other
residents, the subsidy scheme might have some geographical or other restrictions. For
example, the higher standards subsidy might be restricted to certain designated facilities
or, perhaps, restricted only to those facilities which, in fact, serve the mine labor force.
Either way, such a policy would have the effect of limiting the recurrent support of the
LGUs to a politically and financially justifiable level while providing the mining
company with a mechanism for obtaining higher standards of service for its workers.

Frameworkfor Natwnal Government Involvement. From the foregoing, it

should be clear that we believe that direct nationaI government involvement in supporting
the social and physical inkstructure associated with new mining development is
inevitable. The current division between the LGU responsibilities, under the
decentralization strategy, and the development programs of the national government lacks
a formal mechanism for such intervention. Naturally, with intelligent good-will on both
sides, these problems can be informally resolved. However, we believe that it might be
preferable to create a formal vehicle for collaboration rather than to address such
cooperation on an ad hoc basis.
We would suggest that one possibility for expanded LGU-National Government
collaboration during the period of mine establishment could be for all parties to enter into
an explicit regional development agreement. Such an agreement is potentially important
because it would articulate the development expectations and responsibilities of each
party toward the project. The agreement should have a finite life (probably ending at the
conclusion of the first year of mine operation) and would specify the h c i a l and
manpower contribution of each party. A useful side effect of such an agreement would
be to minimize the potential for political favoritism and cronyism which might accentuate
inequalities between adjacent areas. If such an agreement is pursued it must be
undertaken in the spirit of decentralization but with the recognition that a large scale mine
requires extraordinary arrangements to supplement the Local Government Code.

Planning Physical Infrastructure. While the most challenging part of new

mining project development involves social infrastructure, the most expensive (in terms
of initial capital outlays) is related to the development of physical infrastructure. As a
general rule, developing countries view mine-related infktmcture as the responsibility
of the mining company and normally, mining companies are willing to accept this
responsibility. In the context of a remote region, the major problem with this approach is
that the mining project can easily become an enclave with only very limited connections
to the surrounding hinterland. Indeed, many mining projects in developing countries
function pretty much as autonomous regions with only limited access to outsiders is
permitted.

Mining Enclaves and Rrgional Infrartructure Links. To the degree that

development enclaves in nual areas may be an inevitable part of mine development,
govemment policy should insure that mine infrastructureextends into the surrounding
regions in socially optimal ways. Basically, this means designing and aligning roads and
power transmission/distributionlinks to serve the largest nual population possible. This,
in turn, implies the development of an infrastructure master plan at a more circumscribed
(detailed) level than is customary with regional infrastructure plans. Even where the
mining company is willing to provide a major fraction of the money for basic
infrastructure construction, incremental funding to maximize the regional impact of
development is likely to become a government responsibility.
Assuming that a master infrastructure plan has been prepared, the next issue to be
faced is synchronizing this plan to the basic schedule of the mining project. At different
stages in the construction program, road and power are likely to be on the critical path of
mine development. Given the amount of money at stake in the construction of a new
mining project it is imperative that construction delays be avoided. Indeed, recent
worldwide studies of large projects by the Rand Corporation in the United States have
concluded that a major difference between the long-run profitability and unprofitability is
the existence of construction delays and cost overruns. This may effectively constrain
govemment planning options.
An important but often overlooked element in achieving this synchronization of
inhstmcture schedules is to place all construction activities under one management
contract. Such a consolidated construction management approach does not imply that the
actual construction work needs to be undertaken by the mine contractor and, in fact, this
would probably prove inefficient and prohibitively expensive. Rather, what is envisaged
is the master contractor supervising a series of local contractors with experience in
building schools, health facilities, rural roads etc. The important point is to synchronize
schedules and define responsibility. In practice, this might mean using the mines'
construction contractor to undertake government's regional infirastructure program.
While this sometimes involves some administrative harmonization like insuring that the
government and mining company's bidding and procurement procedures are compatible
it is often the cheapest and most efficient arrangement for all parties and the only way to
insure that project construction schedules are met.
 Summary of Recommendations

The following issues are suggested as areas where further policy analysis by
government might be profitably directed:
1. Priority should be given to correcting the drafting error contained in the allocation of
natural wealth provisions of the Local Government Code. In this context, we strongly
suggest that the allocation of a 35 percent share to the barangay should be
reconsidered. Further, we recommend that 20-30 percent of the LGU-designated
funds (e.g. the 40 percent &tion of total central government collections) should be
placed in a LGU trust rather than allocated specifically to a particular level of local
government. This money could be allocated by the Regional Development Council
for addressing mine impacts which extend across LGU boundaries.
2. We believe that preliminary policy attention should be given to de-g the unlikely
costs of establishing social facilities (schools, health, law and order) in new mine
areas prior to mine operation. Meeting these establishment costs should be the
responsibility of the National Government.
3. In conjunction with the assessment proposed in #2, government should prepare and
circulate a policy paper which describes the Government's expectations about the
social obligations of private mineral investors.
4. In addition to its role in meeting initial social impact costs, the national government
working through the appropriate Regional Councils should begin to develop
infrastructure strategies designed to insure that any new mining development has the
maximum regional impact and does not simply result in a new mining enclave. Of
particular importance is the development of criteria for extension of road and power
links.
Government attention, at all levels, needs to be focused on the environmental and
social costs which a new mining project will bring to the residents of the mining
region. Wherever possible, compensatory programs should be designed and
implemented to offset these inevitable development costs. Since major new mines
have not been developed for some time in the Philippines, we would suggest that the
identification of social costs and definition of compensatory programs, might be
useful cooperative project between the Government and the Philippine academic
community.
 CHAPTER N 2
Environmental Regulation of the Mining Industry in the Philippines

Introduction
In the course of discussions with a wide range of government and private sector
organizations, we inquired about the support base for environmental regulation. This
question was prompted both by the glaring inconsistency in environmental attitudes
toward small miners vis-a-vis corporate miners, and an attempt to place environmental
policy issues in the context of the devolution of power to the grass roots levels (i.e., the
national decentralization strategy). The almost universal response to the questions was
that environmental issues and activism are an urban phenomena based on a network of
articulate Non-Government Organizations (NGOs). Respondents felt that the rural
people's concern over environmental questions, seem to be focused on issues of
environmental compensation rather than ecological degradation.
This is a stunning (though not surprising) perception, given the broad range of
respondents who held these views. Assuming that the response to our questions is
broadly representative, this perception should give both environmental regulators and the
NGO community itself cause for reflection. If there is a substantial difference between
the environmental attitudes of rural people affected by mine-induced pollution and
environmentally-oriented NGOs, then policy-makers need to exercise extreme care in
framing environmental objectives for rural projects such as mines. In particular, it is
important to insure that rural people understand fully the environmental consequences of
any proposed mining project and that public opinion is not manipulated by either mine
proponents or by aggressive NGOs.
Equally stunning is the generally poor public image that the Philippine mining
industry has on environmental issues. In our experience, we have never seen a mining
industry with a poor environmental image. Interestingly, the industry has historically
seemed content simply to react to unfavorable environmental publicity rather than to
aggressively put forth its positions on environmental questions. This poor public image is
partly the result of past abuses and partly a consequence of the fact that a modem mine
has not been developed in the country in the last decade. As a result of the industries'
poor public image, and seemingly continuing indifference, new mining projects are
likely to face hostile and generally skeptical regulatory and public opinion forums.

Legal Structure of Environmental Regulation

Environmental policy was clearly articulated in the Philippine Constitution of
1987, appearing in four articles and mentioned in 18 different sections. The 1987
constitutional provisions represented the culmination of a decade of increasingly
comprehensive attempts at environmental regulation. Many of the major elements in this
comprehensive environmental framework were brought into existence in 1977.
For mining, this M e w o r k both incorporated prior environmental initiatives and
augmented them with new, more detailed provisions. The most notable pre-1977
legislation was the Mining Code of 1974 (Presidential Decree No. 463). The major piece
of augmenting regulation was Mines Administrative Order No. 20 (1977) which laid
down a fairly detailed environmental policy for mining and is the backbone of current
attempts to regulate the industry. A 0 No. 20 includes provisions requiring :
(a) environmental protection in mining areas;
(b) surface mining;
(c) underground mining;
(d) tailing disposal and water conservation;
(f) socio-economic development;
(g) restoratiodrehabilitationof mined-out areas;
(h) requirement for posting of an environmental performance bond; and
(i) establishment of an environmental enhancement and protection unit in every
mine.
 As the comprehensive environmental approach continued to evolve, there
apparently was only limited interest in addressing specific pollution issues associated
with mining. Presumably, the regulatory notion here was that since mining would have to
comply with general legislation, there was no pressing need for sector-specific
legislation. As we shall see in later sections, this comprehensive approach may have
overlooked important mine-related questions.
The next important piece of law touchrng on environmental questions did not
appear until 1987 when Executive Order No. 279 set up the fiamework for the MPSA and
FTAA agreements. EO No. 279 required that all MPSAfFTAA agreements must include
special conditions for: (1) adoption of anti-pollution and industrial safety measures and
(2) restoration and/or protection of the environment. Important institutional
developments also took place in 1987 with the promulgation of Executive Order No. 192
which established DENR and its subsidiary bodies. From the perspective of the
environmental regulation of the mining industry, the most notable of these subsidiary
agencies was the Environmental Management Bureau (EMB) which handles matters
relating to environmental management, conservation, and pollution control and the
Pollution Adjudication Board which was empowered to settle pollution cases and
compensation claims. EMB also heads an inter-agency group that administers the Mine
Waste and Tailing Fee Fund (1977).
In parallel with the creation of a legal and administrative framework of
environmental standards and institutions, several attempts were made to develop the key
concept of an Environmental Impact Assessment (EIA). These efforts began in 1977 and
were followed by supplemental regulations in 1978, 1981, 1984, and 1985 which
elaborated the EIA process (UNDP, 1988). These efforts eventually culminated in
preparation of EIA Scoping Guidelines by MGB in 1992.
For completeness, mention should be made of general environmental policies
designed to protect particular ecosystems. The National Integrated Protected Areas
System theoretically excludes mining (and other activities) fiom development at all
altitudes above 1,000 meters. Designed to protect old growth forests existing at higher
altitudes, this scheme effectively removes a sizable portion of the nation's mineral

IV-35
potential from explorationldevelopment.The impact of ecosystem-preservation policies is
likely to be fairly strong in some traditional mining regions like the Cordillera
Autonomous Region of Central Luzon.
The general legal framework for environmental regulation in the Philippines is
reasonably well-developed. Clearly, substantial thought has gone into establishing an
environmental policy which has sufficient flexibility to meet the needs of several
development sectors. However, there are clear differences in what the government
requires under its various environmental laws and regulations and what the government
can afford to enforce in practice.
With limited enforcement capacity, the government is forced to focus its attention
on major pollution incidents and hope that its legal standards and regulatory procedures
provide a framework for industries to self-police their own activities. While historically,
such self-policing behavior has not always been the case with the Philippine mining
industry, there is reason to believe that tomorrow's mining sector will be less polluting
than in the past.
In the course of a recent UNDP project, a useful volume of reference materials on
the major environmental laws and regulations governing the mining sector was compiled
(UNDP, 1988). From this document, potential investors should have a deceptively
comprehensive but inadequate and incomplete overview of the government's current
environmental expectations and reporting procedures. It is important that the UNDP
document be presented in the context of a dynamic environmental M e w o r k which has
evolved enormously since 1992.

IV- 36
Industry Promotion versus Environmental Regulation: An Old Problem Revisited
Primary responsibility for overall environmental management lies with the
Environmental Management Bureau in DENK. The objective of the EMB can be
summarized as follows:
(a) environmental management
(b) conservation
(c) pollution control
In its day-to-day operations, the EMB closely coordinates with MGB for policy
and technical assistance on the environmental impact of mining. This assistance is
provided through the Mines Environmental and Geomechanics Section of MGB's Mine
Technology Division. The informal arrangements between MGB and EMB reflect a
dilemma faced by environmental regulators in many developing countries.
On the one hand there are strong reasons for centralization of environmental
responsibility and generalization of regulatory standarddactivities. But, in the case of
mining, there are equally compelling reasons why regulation of the industry should be in
the hands of people knowledgeable with the somewhat unique environmental character of
the sector. An example of thls dilemma are the setting of environmental release standards
which we shall shortly examine. Since manpower trained both in mining and
environmental management are often in short supply in developing countries, a common
accommodation is, as in the Philippines, a shiuing of expertise.
The difficulty with the joint sharing of expertise by sister organizations is that the
mandates/roles of the organizations may be at variance. The most common example of
this is where an organization whose basic purpose is to promote an industrial sector (like
MGB's interest in promoting mineral development) collaborates with an essentially
regulatory agency (like EMB). While such conflicts are often amicably worked out at a
personal level, it is more difficult to reconcile policy differences which spring directly
from the diffmnt mandates of the two organizations. Moreover, within an industry-
promoting organization the allocation of funds provided to essentially regulatory
functions may be less than required.
 This conflict of organizational mandates is replicated at the policy level. On the
one hand, where environmental regulation is entirely independent of sectoral needs,
environmental procedures/standardslcompliancetimes may be developed which are either
economically unrealistic or un-enforceable. The predictable outgrowth of these situations
is either that the regulatory standard will be ignored or the conflict will be escalated to the
political level where it will be cast as a "prodevelopment" versus "anti-development"
issue. Many examples of both situations can be found in the Philippines as well as in
most other developing countries.
We would suggest that one way around this dilemma is to structure environmental
regulation as two complimentary parts. The Environmental Management Bureau clearly
should set overall environmental policy and objectives through administrative orders and
legislation. But rather than try to incorporate detailed compliance standards or procedures
into legal or regulatory statements, the policy should simply refer to
pn a sectpr bv s e w . Preparation of these implementing regulations for the mining
sector would then be the task of the MGB's Environmental Branch.

Resource Utilization and Environmental Management

As developers of new mines have been forced to meet increasingly stringent
environmental regulations they have developed a wide range of pollution abatement
strategies. Many of these strategies share one thing in common: an almost inescapable
..
conclusion that
.. .
mb e t t e. - vr a To be sure, pollution abatement
still canies a substantial price tag, but seldom is environmental protection the only factor
in deciding whether a modem mining project will be developed.
The environmental retrofitting of existing mines is a difficult and often
challenging task. There are two chronic problems in dealing with existing mines: (1)
inadequate compliance time (which results in patchwork rather than strategic) pollution
solutions and (2) financial constraints imposed by mine owners or lenders. While the

IV- 38
compliance time problem is fairly obvious, the financial constraint problem is a subtle
matter and requires elaboration.
Over the past twenty years, mining technology has made it possible to profitably
mine progressively lower grade ores. For new mines, this improved recovery has meant
that less mineral or processing chemical waste is discharged to the environment. While
state-of-the-art technology characterizes new projects, its adoption in existing mines has
tended to be much slower. One result of this slower adoption is that lower grade resources
are not extracted and often end up as environmental pollutants.
A common example of this occurs in large copper mines where the relatively high
cutoff grade of existing mines results in large tonnage of near-cutoff grade waste rock. It
is often possible to extract the copper h m h s waste rock using alternate recovery
techniques like heap leaching. The effect of heap leaching is to convert a potential
pollutant (copper leachate) to a profitable by-product. Unfortunately, such alternate or
secondary technologies may not be as profitable as primary extraction. Where a major
difference in profitability exists, mine operators may feel that the alternative technology
does not meet their profit criteria for new investments. This is precisely what happened
in Papua New Guinea. Heap leaching was rejected based on a project Return on
Investment of 12 percent against a company investment criteria of 15 percent.
The problem here is how the incremental investment in alternative recovery
technology is viewed by the mining company. If seen as a pollution abatement strategy,
heap leaching might well be perceived as both cost effective and attractive to the
company; if seen as a profit opportunity, such a strategy may be rejected. It is possible for
the government, through its regulatory system, to encourage the view that such decisions
should be approached from an environmental rather than an investment perspective.
Underlying Requirements of the Regulatory System
The system adopted in the Philippines relies on submission of an investor-
prepared Environmental Impact Assessment @A). This is a fairly conventional
approach to environmental regulation and, in one form or another, is widely used in both
industrial and developing countries around the world. The system performs satisfactorily

IV-39
for most developmental sectors but is not ideally suited for mining projects due to the
sequencing and character of pre-development decision-making.

Setting Appropriate Standards. To be effective, the system requires

environmental standards against which environmental impacts and mitigation measures
can be assessed. Unfortunately, standards developed in industrial nations may not be
wholly appropriate to tropical developing countries since they are based on the
sensitivities of temperate climate organisms. Further, release standards developed in
industrial nations often vary considerably from country to country.
Examples of particular relevance to the Philippine mining industry are release
standards for free and complexed cyanide (used in gold processing) and the
environmental acceptability of marine mine-tailings discharge. Historically, the standards
for release of free and complexed cyanide have been considerably higher in the European
community than in the United States. A similar situation exists with respect to marine
discharge of mine tailing from copper mines. Marine discharge of mine tailings is
discouraged, if not prohibited, in the U.S., while it is an acceptable environmental
practice in Canada.
Thus, while environmental standards are an essential regulatory element, their
temperate climate biological basis and the considerable variation in acceptable release
levels from industrial country to industrial country means that they should not be adopted
without careful study. Since the Philippines is unlikely to develop its own scientifically-
based standards, periodic reviews of the scientific basis and variation of industrial
country standards should be undertaken.

Environmental Monitoring. In the Philippines environmental release standards

are set out in DENR Circulars 34 and 35. These publications outline applicable release
concentrations for different aquatic and marine environments and seem generally well-
drawn. However, it is understood that for budget and manpower reasons, sample testing
by DENR's field offices is almost wholly focused on studies of suspended sediment
rather than on an analysis of surface water chemical pollutants (MGB's environmental
section does undertake limited chemical sampling, on a selected basis). Under these
circumstances it is not clear exactly how enforcement of the chemical standards for
effluent release is accomplished.
There are two additional problems with the existing environmental monitoring
scheme for mines. First, the potential problem of acid mine drainage (e.g., the release of
copper leachate), although recognlzcd, is not currently being addressed in either the
environmental standards or in the monitoring program. Second, the applicable
regulations appear to be primarily focused on surface water pollution with little or no
mention of groundwater contamination or monitoring. Both of these issues need to be
addressed in future reviews of the environmental monitoring program.

The Problem of Changing Mine Releases h r Time. Environmental regulation

of the extractive industries is complicated since the environmental impact of a mine will
change as it matures. For example, a common problem with large open-pit copper mines
is the release to the aquatic environment of copper leachate (acid mine drainage) fiom
waste rock dumps. This release is a h c t i o n of the interrelationships between the
chemical composition/size gmhon/volume of mine waste, levels of bacterial action, and
rainfall. In a typical copper mine all of these factors are subject to considerable variation
over the life of the mining project.
Furthermore, the environmental impact of mine releases is a function of the
aciditylalkalinity of the river in which the residues are carried. River aciditylallcalinity
may change over the length of the river (depending on the geology of the river course)
and over time (as the river course changes). While these problems and appropriate
remediation measures are sufficiently well known to be assessed in an EIA there may
well be genuine uncertainty over "when" and to "what extent" remediation measures and
costs will be required. These unavoidable uncertainties mean rigid environmental
regulations based on the EIA can be problematic.
Problems in Implementing an EIA Scheme for the Mining Sector

The En-Planning or Regulatory Vehicle. A thoughtful recent study (IEMP,

1993) of the EIA system in the Philippines concluded that,
"...the EIS System has evolved from an original emphasis on project
planning to the country's pre-eminent environmental management tool.
The DENR has expanded the use of the environmental compliance
certificate beyond its planning origins and ends to reach traditional
regulatory objectives such as permitting, compliance monitoring, and
financial responsibility...."
"DENR can unburden the currently stressed EIS system through a
combination of emphasizing planning and decoupling regulatory
elements...."
"The EIS system can be affirmatively strengthened, first, by an
institutional formulation that the ECC is not intended to manage a project
into the indefinite future but rather serves principally to document
compliance with a process that identifies impacts and the rigorous
decision-making to address them.. .."
The report goes on to suggest a number of ways in which the EIA system might
be separated from the Environmental Permitting and the Environmental Guarantee Fund
(EGF)in a number of ways. These recommendations have considerable merit and should
be considered in detail, and when appropriate, implemented. Stated simply, we believe
that the EIAJECC scheme may have been pushed beyond a useful point as a policy
vehicle.
Clearly, this matter extends beyond our narrow sectoral focus and needs to be
addressed as a general policy question. Unfortunately, the current direction of EMB
thinking appears to be moving in the opposite direction as expressed in recently proposed
environmental legislation. The remainder of this paper will focus on unique problems of
the mineral sector which are associated with the current approach to EIA (e.g., the
planning-cum-regulatory role).

IV- 42
 The FeasibilityZL4 Dilemma Unlike industrial projects where environmental
impacts can be largely predicted on an a priori basis, mining projects are extremely
sensitive to site-specific factors. With an industrial project there is always the option of
resiting the project to a less environmentally sensitive area; with an ore body, this option
does not exist. The importance of site-specific factors means that a successful EIA must
extend substantially beyond baseline data collection into sophisticated and often
expensive, areas of environmental analysis. For a large mining project, environmental
analysis can easily cost several million dollars. Of equal importance, a good
environmental analysis often requires a substantial period to complete. As a result of
both the cost and time required for environmental studies, mining investors and
environmental regulators can find themselves in a difficult dilemma. On the one side,
investors are understandably reluctant to commit large sums of money to environmental
analysis until a viable project is in view. This normally occurs at the conclusion of the
feasibility study. On the other hand, once a mining project is dctmnined to be
commercially viable, there is often insufficient time to undertake the time-consuming
environmental analysis without delaying mine development. Even where sufficient time
exists to complete the necessary studies, the results of the EIA may hdamentally affect
the design and technical assumptions on which the feasibility study was based with the
result that the whole feasibility process must be repeated.
The extended delay of a mining project to accommodate regulatory review of an
EIA is an investor's worst nightmare. Regulatory delays can have a serious effect on a
project's overall profitability in two ways. First, if a regulatory delay occurs before major
investment funds have been committed, the project may fail to realize important
marketing opportunities linked to cyclical swings in world metal prices. Second, if the
delay occurs after significant investment funds are committed or expended, the project
may incur large interest charges on borrowed capital as a direct result of construction
schedule slippage. Of course, it is entirely possible that a project might suffer both sorts
of regulatory review costs with devastating consequences for project profitability.
A major project delay resulting fiom EIA review1ECC issuance has recently
occurred in the case of Manila Mining's proposed expansion plans. The EIA was
reportedly submitted in 1992 but the EMB review process has not yet been completed (in
August. 1994). It is generally acknowledged that the major reason for this delay was
acute staff shortages in EMB's badly over-stretched EIA section.
One possible way around such administrative constraints might be to impose a
"EIA processing fee" on investors. This fee could either be used to augment EMB staff
or alternatively to hire consultants to undertake some parts of the review. We believe that
imposition of such a fee might be entirely acceptable to investors if they could be assured
that the EIA submissions would be promptly processed. Such processing deadlines are
common for many types of regulatory approvals in other parts of the world and should be
relatively easy to model. We believe that a fee up to 300-400,000 pesos might be
acceptable. The fee proposal might be more palatable if accompanied by a suspense date
of, say, three or four months. If the preliminary review has not been completed in the
period, the ECC would be assumed automatically issued.
There are three possible solutions to this EIA sequcncing/timing dilemma: force
the investor to start the environmental assessment work earlier, accept that the EIA is
really an (as opposed to "anticipated") study; or have the government
undertake the necessary work on a cost-recovery basis. In many countries environmental
data collectionfanalysisis undertaken by a government agency and paid for by the mining
project when the feasibility demonstrates that a viable project is on hand.
Where the tirningfsequencing dilemma is recognized, many governments
implicitly accept that:
(a) EIA submissions will necessarily be indicative statements of likely
environmental outcomes rather than detailed analytical investigations, and;
(b) the actual design assumptions of the mining project may not be overly
sensitive to the environmental character of the specific site.
As an approximation, this approach to an EIA may be expedient but it is hardly
ideal. In our view, the best course is to create a regulatory system which sets out clear
environmental objectives and establishes environmental requirements linked to the
evolution of a project from its early exploration stage. We will explore this notion in the
next section.

IV-44
Articulating Objectives and Timetables of Environment;: ; Policy for the Mineral
Sector
To interpret their environmental commitments, prospective mining investors want
to know the context and intention of regulation. None of the environmental policy
goals/objectives contained in the UNDP reference documents are satisfying in this regard,
nor does there seem to be a recognition that mineral development almost certainly implies
unavoidable environmental degradation. This needs to be specifically acknowledged
together with an appropriate set of goaldobjectives. One logical place for such a
statement is as a preface to the MGB Scoping Guidelines.
The MGB scoping paper is a competently drawn document which touches on
most of the major environmental questions of concern to government. The scoping paper
is obviously of value both as a guideline to procedures and as a statement advising
potential prospecting companies of their environmental obligations in the Philippines
(i.e., as part of a policy statement). The usefulness of the Scoping Guidelines would be
increased if they were expanded to include direct statements about:
(a) government objectives in environmental regulation of the mining industry.
(b) normal expectations about the timing of various types of environmental work.
(c) the company's environmental monitoring responsibilities.
Incorporation of these issues would help alleviate mining investor concerns about
open-ended environmental commitments, whlle improving the realism of the eventual
EIA submission. The necessity for this supplementary policy guidance is recognized by
MGB Environmental Section who, in late 1992, initiated a long-term program to extend
and expand the Scoping Guidelines.

Environmental Objectives. The defining of environmental objectives for the

mining sector is a fairly difficult but absolutely necessary prerequisite for an effective
environmental policy. Environmental objectives adopted elsewhere for the mining
industry have focused on a range of more or less stringent targets. Typical objectives are:
(a) Minimizing the environmental impact on the subsistence lifestyles of local
people,

IV- 45
 (b) Minimizing the degradation of directly impacted natural resources (i.e., rivers,
forests, coastal areas etc.),
(c) Preserving pristine or undisturbed ecosystems or endangered species,
(d) Complying with international environmental treaties or protocols, and
(e) Minimizing the sociaVcultural impact of the project.
It should be obvious that these objectives imply quite different environmental
strategies. Furthermore, an EIA which focuses on one of these objectives would, in all
likelihood, be quite different from an EIA focused on any other objective.

Timing OfActivities. Beyond stating the government's environmental

objective(s), there is a need to place government's environmental expectations into some
sort of time frame. For example, the guidelines might break the compilation of baseline
data into a time sequence which corresponds to the evolution of a project. Thus, certain
types of long-lead-time data such as hydrological or meteorological measurements might
begin fairly early in the grass roots exploration period as soon as a signif~cantmineralized
area has been defined. This might be followed up, at say, the pre-feasibility study stage
by a report which sets out the company's study plan and schedule for meeting the EIA's
requirements. Finally, at the feasibility stage, the company might be asked to
demonstrate how variation of certain design assumptions (such as the mining rate, waste
dump design, or metal extraction technology) are affected by site specific features (such
as the impact of sediment releases, or different levels of processing chemicals in mine
tailings). The idea is that by focusing attention but not necessarily expenditure at each
successive stage in the project's evolution there is a greater chance that environmentally-
sensitive design choices can be made.
This approach contrasts with the current sequencing which anticipates that the
EIA and the feasibility study will take place simultaneously on essentially parallel paths.
In other words, with some modest additions, the MGB Environmental Scoping
Guidelines could become more operationally oriented and directly linked to predictable
stages in mine development. Other things being equal, this would enhance the likelihood
for improved realism in the EIA.

IV- 46
 The policy framework needs to be more specific abour environmental monitoring
during project operations. Currently, monitoring (together with environmental standards)
are only briefly dealt with in Section 6 of the Scoping Guidelines. Since environmental
monitoring is of critical importance to assessing and dealing with the actual (versus
anticipated) impact of the mine and is a primary determinate of environmental
compensation, additional thought needs to be given to this area.

Environmental Compensation: A Tale of Two Schemes

The Tailing/waste Rock Fee Scheme We are not comfortable with the
government's policy on mine waste and tailings fees. As a basic principle, mine tailings
should be retained rather than discharged. DENRMGB clearly recognizes this fact but,
through assessment of the fee, implicitly treats tailings and waste rock as a pollution
source. This occurs since the sole use permitted (under Section 2 of PD 1251) of the fees
is to pay for c o m t i v e action, "...caused by pollution due to the operation of mining
companies". Thus, the mere (and inevitable!) generation of mine tailings is seen as
pollution. While it is certainly not worth splitting semantic hairs over such distinctions,
the implications of the tailings fee system are potentially far-reachmg.
PD 1251 directed that all collected fees should be directed into a reserve fund
charged with (among other thmgs) the responsibility for settling all environmental
compensation claims. By removing the mining companies from the compensation
process, the reserve fund has the unfortunate effect of limiting their environmental
liability to their tailing fee contributions. Effectively the scheme shifts environmental
liability from the mining companies to the government and charges a government
administrative agency, the Pollution Adjudication Board, with settling all claims
(Chapters 111, IV, V, and VI of DENR Administrative Order 85 (1990) pursuant to
Presidential Decree 1251). It might also be argued that the mere existence of a
compensation fund encourages environmental compensation claims.
In its favor, the scheme does have advantages. First, the scheme is
administratively simple. Second, by avoiding court litigation, it makes it possible for poor

IV- 47
claimants, who might be unable to afford a court suit, to be compensated for
environmental damage. Third, it relieves mining companies of the burden of continuing
litigation over relatively minor compensation claims. Against these advantages must be
weighed several disadvantages.
The biggest problem with compensation under this scheme is that the Evaluation
Committee created under P.D.1251 to handle assessment of claims for damages from
mining operations must often make compensation decisions with limited supporting (i.e.,
environmental monitoring) evidence. For example, in recent years a number of
compensation claims have been made against the Baguio mines by downstream
landowners. These landowners have alleged that the release of mine tailings have caused
environmental damages for which they should receive compensation. This allegation has
been disputed by the miners who point to the large natural sediment loads of the rivers in
the Baguio watershed. Without accurate river monitoring data, there simply is no way to
determine either the environmental liability or the extent of compensation which might be
awarded. In the absence of monitoring data it is unlikely that cases such as these could
be brought to court.
The point here is that an administrative committee designed to settle
compensation claims can easily find itself with little or no scientific basis for its
decisions. It seems to us that this is an untenable position for a government agency to be
placed in. While the remedy lies with improved monitoring rather than with the
operation of a government committee, the system does seem to encourage claims which a
conventional judicial system would have rejected outright for lack of evidence.
Other problems arise with actually administering the reserve fund. Although we
refer to a "compensation fund," the Tailing Fee receipts are, in practice, simply deposited
into the government's general revenue account (rather than into an interest-bearing
reserve account). Based on historic and anticipated claims, an annual compensation
budget is drawn against these receipts. This process effectively limits the ability to carry
compensation money across budget years and creates a budgeting nightmare for those
charged with paying compensation claims. In the process of allocating its compensation
budget within the limits of the mine waste and tailing fee receipts, the committees'

IV- 48
compensation decisions may be artificially constrained below levels that might have been
achievable through court litigation.
While the entire scheme is clearly well-intentioned, its underlying logic needs to
be better articulated and, perhaps, rethought. Fortunately, most of the shortcomings of the
Tailing Fee scheme are selectively met by a parallel program initiated under the
Environmental Management Bureau-The Envmnrnental G-te Fund (EGF).
However, since this program does not apply to all mining areas or projects it is not a
universal solution.

The Environmental G~loranteeFund The heart of government environmental

compensation/rehabilitation policy is the Environmental Guarantee Fund (EGF) scheme.
The Fund is an innovative attempt to remedy some of the operational shortcomings and
limitations of earlier environmental legislations. The Fund addresses three separate issues:
(1) environmental monitoring, (2) pollution compensation,(3) and site rehabilitation. The
scheme, established in 1992, has no formal legislative basis and is imposed as a condition
of EIA approval by the EMB.

Operation and Funding. Participation in the EGF scheme is on an ad hoc basis

with a case-bycase dekmhaiion being made by the EMB. Not all mines are required to
establish EGFs; nor are the selection criteria used in determining who will participate, clear.
However, it is reasonable to assume that any new major mining project will be required to
establish an Environmental Guarantee Fund as a condition of its environmental compliance
certificate.
The EGF is administratively o r g a d into two components: a monitoring fund (to
pay for environmental monitoring) and a trust h d (to provide for compensation and
rehabilitation). The monitoring fund is established based on a monitoring budget prepared
by a multi-partite monitoring team. The project proponent is expected to replenish the
monitoring fund annually to insure that the costs of environmental monitoring budget can
be met. On the other hand, the Trust Fund is established through an initial Memorandum of
Agreement (MOA) between the EMB and the project developers. This MOA sets out an

IV- 49
initial contribution and a schedule of payments designed to provide funding adequate to
restore the environment at mine closure and to compensate for environmental damage
during operation. Once the trust fund has reached its MOA-agreed ceiling level, the mining
project is only required to make such further payments as might be necessary to maintain
the fund at its ceiling (i.e., to offset any compensation awards). Presumably, the Trust Fund
ceiling might be amended through revisions to the MOA although no such revisions have
thus far been made. Early experience with the scheme have suggested that EGF
negotiations often become deadlocked on (I) the basis for computing the trust fund amounts
and (2) a company's loss of opportunity costs for the funds put in trust.
Administration of payments fiom the fund is the responsibility of an EGF
Committee composed of representatives fiam the project: the regional EMB office, the
local government unit, and the affected community. The EGF guidelines describe
Committee functions as follows:
(a) manages, controls and operates the EGF in accordance with internal procedures
as shall be established by the committee;
(b) resolves issues involving the rehabilitation and similar damages that maybe
brought before it;
(c) issue decisions on complaints/questions involving the implementation of the
rehabilitation program between the proponent and the aggrieved party;
(d) designates such entities or individuals in the event that the resolution of the
issues and cases must be resolved by an independent body;
(e) hires highly credible experts to do independent studies and research regarding
the environmental and socio-cultural impacts of the project in order to assist the
EGF Committee in making judicious decisions about the environmental issues
related to the project.
Conceptually, environmental monitoring under the EGF is the responsibility of
the something called the Multi-Partite Monitoring group. Although the exact composition
of this group is not precisely defined, the name and context of the description suggests
that this group is composed of the same members as the EGF committee. Administration
of the monitoring program is undertaken by DENRfEMB. Overall, the EGF committee

IV- 50
has considerable authority over questions of environmental monitoring, rehabilitation,
compensation, and monitoring. During most of a mine's life, the major role of the
committee is likely to involve resolution of disputes between the project and local entities
or individuals who have been adversely affected by the mining project.

Potential Problems with the EGF Scheme. The EGF scheme is designed to
operate on a decentralized, extra-legal basis. It represents a series of trade-offs between
flexibility and local control, on the one hand, and uniform application and predictability, on
the other hand. In trying to insure flexibility and decentdizcd administration, the EGF
runs the risk of creating a patchwork of environmental regulation and compensation
standards. Further, since the local EGF committee theoretically has the power to "run its
own show," regulation and standards may be dictated as much by the perceived needs of the
committee as by rigorously applied procedures or standards. It is too early to say whether
problems such as these will become major impedimentsto the future expansion of the
scheme.
In so far as attracting new foreign mining investments is concerned, the EGF may
have a slightly negative impact. First, the selective imposition of EGF requirements is likely
to create uncertainty over environmental policy in the minds of prospective investors. This
uncertainty will arise on two grounds:the uncertainty over the requirement of a negotiated
MOA and the uncertainty over how the EGF Committee will administer its hctions.
Second, since the EGF and the tailinglwaste rock fee scheme appear to be targeted on the
same environmental compensation issue, investors may see this whole area as simply
another form of indirect taxation which can be manipulated by administrative fiat as the
administration of the Tailing Fee Fund. Third, the informal basis of the EGF may suggest
to potential investors that government might at some future point arbitrarily change the
rules-of-the-game without due process or consultation. Fourth, since the EMB sets the
parameters of the trust frmd contributions at the conclusion of the EIA review process (i.e.
via the Environmental Compliance Certificate:),it will be difficult for these contributions to
be considered in the financial analysis of the project, i.e., as part of the investment decision.

IV- 5 1
 Once in operation, other problems may crop up with EGF operation. For example,
we believe that it is highly likely that the initial MOA (established at EPA approval) may
have to be modified during the course of the project. This is likely because mining projects
are seldom built or operated in rigorous compliance with the feasibility study assumptions.
At some point during the life of the mine, operational changes having direct environmental
implications are likely to be made.
There are two possible consequences of this evolution of the mining plan. First, it is
quite possible that the EGF Committee will not be aware of the environmental implications
(particularly for reclamation) of mining plan changes. This could result in a situation where
previous trust fund provisions eventually prove inadequate to meet eventual rehabilitation
costs. It should also be noted that since the normal pattern is for mines to become less
viable as they exhaust their high-grade ores, an increase in rehabilitation contributions
which occurs late in a mine's operating life may have a disproportionate impact on the
continuing operation. Second, even where the eventual implications are reco& the
need to amend the MOA may well lead to direct legal complications and challenges. We do
not believe that any of these problems are fbndamental reasons to abandon the EGF
scheme. However, it seems to us that it is very important that the whole EGF process should
be formalized into law.

Proposed EnvironmentalReguiathn. In mid July, 1994, a draft environmental

legislation was prepared for presentation to Congress. This legislation specifically
addressed, among other things, the Environmental Guarantee Fund. The initial draft
legislation which was made available to our study, suggested major modifications to the
EGF scheme described in the 1992 Guidelines. In particular, the proposed legislation:
(a) removed any reference to (mine) rehabilitation;
(b) effectively stripped the EGF Committee of any meamnghl role in
administration of the Fund although retaining a multi-partite body to oversee
the monitoring program;

IV- 52
 (c) while establishing the need for a mechanism to provide for environmental
compensation, was silent as to how the funds would be managed or as to how
compensation levels or decisions would be set.
It should be noted that there are no shortage of environmental compensation
committees already in existence and the drafters of the legislation may simply have
presumed that the compensation funds would be administered by the Pollution
Adjudication Board or by the PD125 1 Evaluation Committee.
The result of the proposed legislation vis-a-vis the Guideline EGF is to centralize
control of the funds in the hands of DENRIEMB. In the process, the proposed approach
appears to eliminate one area of investor uncertainty: the EGF Committee. It is
inappropriate to critique a piece of embryonic legislation which is only beginning its
legislativejourney. However, we suspect that any eventual environmental legislation may
be substantially different from the draft which we reviewed. Perhaps the most significant
point to be made about the current proposed legislation is that it legally formalizes the
current EGF scheme which in our view is a significant stride forward.

Reconciliation of Envhnmentai CompensationSchemes into a Unifrcd

Environmental Policy. As with other policies in the mineral sector such as the proliferation
of investment and tax incentives, there appears to be a tendency to create government
programs which overlap or duplicate the intention of already-established lawdregulations.
In the present case, the environmental compensation fi-amework created by the EGF scheme
and the MGB tailing fee scheme can be confusing and counter to the purpose of attracting
responsible investors to the mining sector. For this reason we believe that an attempt
should be made to integrate, or at least develop a single comprehensive explanation of the
two overlapping programs. Such an integration should include a concise description of lines
of responsibility, intentiobjective of regulation, and the legal and regulatory basis for each
program. A corollary to this need to consolidate environmental regulation is the need to
define a single vehicle for determining compensation claims. C m t l y , there are at least
three agencies set up to settle these claims: (I) the Pollution Adjudication Board, (2) the PD
1251 Evaluation Board, and (3) the EGF Committees. While informal understandings no

IV- 53
doubt exist about who handles which sort of case, the understandings are not clear from the
regulatory mandates and any prospective investor is likely to be somewhat bewildered.
Both the regulatory frameworks and the compensation tribunals need to be streamlined1
consoIidated into a single process.

Reclamation of Mining Arem

The reclamation of mining areas has received considerable attention as part of a
comprehensive environmental policy for the mining sector. The clear, but seldom stated
objective of rehabilitation is to maintain abandoned mine workings in.
Rehabilitation schemes often focus on revegetation or biological rehabilitation on the
premise that if an abandoned mine site can be returned to some harmony with nature, the
future will take care of itself. The imperative behind rehabilitation schemes is simple-the
greatest environmental threat from a mining project is, after it closes. Massive waste rock
dumps andlor large volumes of impounded tailings which have accumulated over the
course of the mine's operating life will have to be carefully maintained or rehabilitated.
Failure to deal with these mining residues can make closed mines an environmental
catastrophe waiting to happen. Waste dump failures or tailing impoundment ruptures can
destroy whole ecosystems in one cataclysmic moment.

Planning R e c l u ~ t w n .Conceptually, there are two parts to a rehabilitation

scheme: defining the scope of the rehabilitation effort (and costs) and making provisions
for raising the funds to finance the effort. Currently, the scope of rehabilitation in the
Philippines is defined as the cost of reforesting the abandoned mine. While serious
reservations might be raised about such a narrow definition of "rehabilitation," this
approach does lead to a reasonably clear and defensible basis for determining future
rehabilitation costs. Once aggregate costs have been estimated, they can be easily
translated into a series of annual contributions by the mining company. This eminently
practical approach represents an excellent first step in the rehabilitation process, but it
may fall short of generating ~ ~ c i efunding
n t to fully cover eventual costs. Shortfalls in
rehabilitation funding may result fiom many circumstances including the possibility that
revegetation may not be possible or effective; or that the best use for the mine site in
question may not be as semi-natural rural land. It is unlikely that either the individual
mining company or the mining industry at large will pay for these shortfalls, with the
result that some part of the financial burden for reclamation may fall back on
government. The preparation of a rehabilitation strategy needs to be formally recognized
as a joint obligation of the mine operator, the national govenvnent and the appropriate
LGUs. The primary responsibility for planning the rehabilitation effort must rest firmly
with local authorities who are in the best position to evaluate alternative uses of the site in
the light of other regional developments. In thls regard, the composition of the EGF
Committee is well suited to plan and implement reclamation programs.

Vehiclesfor Funding Reclamation Schemes. Most reclamation schemes are

based on establishment of a trust fund or on the posting of a performance bond. In either
event, money for rehabilitation must be set aside prior to mine closure. The problem with
implementing such reclamation schemes in countries with large established mining
industries is to find a balance which neither shortens the life of existing mines nor
penalizes the opening of new mines. This problem is compounded in the Philippines
since a fairly large number of existing mining activities will be nearing the end of their
productive life over the next decade or two.
For existing mines to set aside adequate provisions for mine closure, rehabilitation
over the remaining life of their ore bodies may imply a prohibitive financial burden. If
forced to make such contributions, it is possible that some existing mines will shut down
earlier than they might otherwise have done.
An altemative approach to individual-self-financingis to establish a national
rehabilitation fund financed by a fee on all operating mines. A major advantage of this
approach is that funds might be available for rehabilitation of already abandoned areas.
On the other hand, the major difficulty is the need to impose a higher financial burden on
new projects to offset the anticipated shortfall due to the limited life of mines already in
operation. Such a burden may mean that some new projects are not viable and are never
developed. Since the costs of rehabilitating mines will vary enormously, developing an
equitable basis for making contributions to an industry-wide scheme would be quite
challenging. This whole policy area requires a carefully detailed examination.

IV-56
Recommendations
The current environmental framework for the mineral sector has been competently
and comprehensively drawn. However, it suffers fiom several problems which limit its
optimal use as a practical policy instrument. These problems involve the need to:
(a) wherever possible, structure environmental legislation in such a way that
implementing regulations are, at least! the joint responsibility of appropriate MGB
officers;
(b) consider including a condition (to mining leases or MPSAIFTAA) that a mining
operator must undertake a study, (within x years of the commencement of
production), into the utilization/neutralizationof waste rocks, minerals and
processing residues;
(c) review existing environmental legislations with the intention of incorporating
groundwater monitoring programs and standards.
(d) formally recognize the potential environmental threat posed by acid mine
drainage from open-pit mines; adopt appropriate release standards; establish
design procedures for retention of lmhates; and establishing procedures for waste
dump management;
(e) review regional surface water monitoring programs with a long tern aim of
incorporating progressively greater chemical monitoring to augment current
suspended sediment monitoring;
(f) articulate a clear statement of objectives which recognizes that some
environmental degradation is inevitable in all mineral projects;
(g) set out an indicative timetable suggesting when typical environmental data should
be gathered;
(h) review whether the mine waste and tailing fee scheme is the best way to deal with
mine pollution and environmental compensation or whether there is scope for
merging it with a legally recognized Environmental Guarantee Fund scheme; and
(j) undertake a study into how mine rehabilitation should be financed and undertaken.

IV- 57
 In our view, none of these problems are insurmountable. We are confident that
with a modest amount of thought, the current environmental framework could be
improved from both the government's and investor's perspectives.

IV- 58
 CHAPTER IV 3

Attracting Foreign Investment To The Philippines Mineral Sector

Introduction
Given the large scale of major mining projects, private direct foreign investment
is one obvious source of new financing, know-how and export markets which should be
emphasized when formulating any feasible strategy for revitalizing the Philippines
mineral sector.
The following discussion of this topic highlights four interrelated themes, both
with regard to foreign investment in general and the mineral sector in particular:
(1) Why is foreign investment needed in the Philippines and what can it contribute to
national socioeconomic development?
(2) If foreign investment is desirable h m the host-country perspective, what
requirements are sought by prospective foreign investors and how can foreign
investment be effectively promoted by the Philippine Government?
(3) How well does the current Philippine foreign investment climate satisfjr those
investor requirements and what concrete host Government initiatives can be
recommended to improve that climate?
(4) How effectively does the Board of Investments currently manage and promote
foreign investment and what concrete structural and functional initiatives can be
recommended to improve that effectiveness?

The discussion concludes with an analysis of how the recommended refonns are
fully consistent with the best current practice by other regional governments and are fully
respectful of the enlightened self-interest of all key public and private sector Filipino
constituencies. This is a win1wi.n strategy for economic regeneration.

IV-59
The Current Economy and the President's Recovery Agenda
Although there are preliminary indications of improvements in 1994, the past 20
years have been economically catastrophic for the Philippines. In harsh contrast with the
recent boom enjoyed by Southeast Asian neighbors, the Filipino economy has continued
to stagnate. When adjusted for inflation, per capita GDP was no greater in 1992 than it
had been in 1975. It actually dropped between 1989 and 1993. Taking the 1980s as a
whole, per capita GDP grew slower in the Philippines than in sub-Saharan Africa.
National income was exactly the same as Thailand's in 1972 but less than half of
Thailand's 20 years later.
Recent private investment figures are equally discouraging. Probably not
coincidentally, they closely parallel downward GDP trends. Between 1991 and 1993, the
peso value of BOI approved new investments dropped 33 percent. Annual new foreign
investment commitments were 30 percent lower in 1993 than in 1989. (At this writing,
preliminary figures for the first quarter of 1994 look more promising, but no sustainable
turn-around can yet be confidently predicted).
In a direct and dynamic response to this economic inertia, President Rarnos has
launched his "Philippines 2000! " revitalization campaign. The campaign recognizes the
catalytic role which foreign investment can play in jump-starting the stalled economy.
Accordingly, the President's 1993 Socioeconomic Report (published in February, 1994)
includes among its priority measures important for macroeconomic stabilization and
industrial restructuring (1) an intensive promotion effort to attract foreign investors,
combined with (2) further liberalization of the legal framework through amendments to
foreign investment legislation.
The mineral sector has a significant role to play in foreign investment
regeneration. In terms of natural resource potential, the Philippines endowment is
extraordinary. It ranks second, -
, in potential gold resources, fourth for copper
and sixth for chrornite and nickel. Today, those resources are not being actively exploited
and accordingly the potential economic impact is a missed opportunity. The historical
trend of mining investments in the Philippines is even more negative than the GDP and

IV- 60
overall foreign investment declines mentioned just above. In 1980, the sector was a
major contributor to national export revenues, accounting for $1.2 billion or 2 1.3 percent
of total exports. By 1990, when the number of large-scale operating mines had dropped
by fully 50 percent, those same revenues were down to $0.7 billion or 8.8 percent of total
exports.

The Potential Benefits of Foreign Investment for National Socioeconomic

Development
Foreign investment can bring into the Philippines a fresh infusion of vitally
needed, hard currency capital. It can introduce and transfer current technology, in forms
ranging from equipment to patents and processes to managerial and technical know-how.
It can employ literally hundreds of thousands of Filipino professionals, technicians and
laborers, training them and building their skills while paying salaries and wages. It can
stimulate domestic investments in ancillary support industries, contractors and suppliers.
It can stimulate Filipino exports and open access to foreign markets, helping to relieve
balance of payments deficits. Perhaps most important, foreign investment can generate
vitally-needed Government revenues (again in crucial foreign exchange) from taxes and
duties, royalties, fees and equity income.
Mineral sector investments offer all of these generic benefits and others as well.
A single large-scale gold mining investment can be expected to mobilize $US 150 million
in capital investment and to generate $300-500 million in total host-Government
revenues. It might directly employ 3,000 workers and create as many as four times that
number of jobs in ancillary industries. Equally important, many new large-scale mines
will be located in remote rural areas. Regardless of their location, their development
directly serves Philippine Government objectives of decentralizing economic
development, upgrading local infrastructure (especially roads and electrification) and
community services (housing, schools, hospitals, etc.), and mating local employment.

IV-61
Offsetting Risks of Foreign Investment and How They Can Be Controlled
Like all major economic developments, foreign investments will inevitably
disrupt the status quo. That disruption can be unsettling and even threatening to domestic
interests. Past foreign investments in the Philippines have been criticized for three major
sets of negative effects: unfairly competing with domestic investment, keeping profits
and other potential benefits offshore, and despoiling the natural environment.
Undeniably, significant abuses did occur in all of these areas. However, thoughtfbl
legislation and vigilant administration can avoid and diminish major problems and
protect national interests.
In the context of large-scale mining projects, unfiir competition is not a serious
threat since few domestic investors have demonstrated an ability to mobilize capital at the
levels of investment required. In practice, only major multinational corporations and
their international banking sponsors have sufficient financial resources to commit to $150
million mineral projects. No Filipino firms are being displaced or shunted aside.
Again, with reference to transfer-pricing and related investor abuses to deprive the
host economy of a fair share of investment proceeds, there is less of a problem in the
mineral sector than in other export industries. For major minerals, international markets
and prices are well established.
Environmental degradation has been and remains a legitimate threat and concern,
with mining investments historically among the worst offenders. Surface scaning, water
pollution fiom tailings, runoffs and air pollution from mineral processing constitute the
best known abuses. In this area, however, much can be learned fiom current
environmental protection strategies of neighboring countries. In fact, environmental
quality be protected and restored and responsible foreign (and domestic) investors
should be willing and required to pay the price of doing so. To cite just one recent
example, the standard-fonn Mineral Exploration and Production Agreement recently put
into use by the Government of Laos includes the following environmental management
and protection provisions:

IV- 62
(1) The (foreign investor shall), in accordance with international standards and any
environmental and natural preservation laws and regulations in force in Laos,
conduct its operations so as to (i) control waste or loss of natural resources, (ii)
protect natural resources against unnecessary damage, (iii) protect sacred and
historic sites fiom damage, (iv) prevent pollution and contamination of the
environment, and (v) in general maintain the health and safety of its employees
and the local community. The investor shall be responsible for reasonable
preservation of the natural environment within which the investor operates and for
taking no acts which may unnecessarily and reasonably block or limit the further
development of the resources of the area.
(2) The investor shall include in the feasibility study for each mining operation an
Environmental Impact Study (designed in accordance with generally recognized
inter-national standards) that identifies and analyzes the potential impact of its
operations on land, water, air, biological resources, human settlements, sacred and
historic sites, and agriculture in the region of the enterprise. (A standard EIS
format is attached to the Agreement). The environmental study will also outline
measures which the investor intends to use to mitigate adverse environmental
impacts of the enterprise and for rehabilitation of the contract area at the end of
mining activities.
(3) The shareholders in the investor shall be jointly and severally liable for costs of
reclamation of land and environmental clean-up costs relating to the enterprise in
direct proportion to their equity shareholdings if such costs cannot be paid by the
investor.

In sum, the main point of this discussion is not to deny that foreign investments
bear real potential risks for national public and private sector interests within the host
country. Instead,the message is that mineral-sector investments present lower risks in
some areas than investments in other industries and that, with regard to the crucial topic

IV- 63
of environmental protection, tested approaches are available for adaptation to safeguard
the Philippines.

What Do Prospective Foreign Investors Require and How Can Their Investments
Be Effectively Promoted?

Investor Prerequisites
Numerous studies have polled prospective foreign investors to determine their
priority pre-investment concerns. Three sets of investment prerequisites are
representative:
(1) Long-ten- investment security;
(2) A transparent host-country legal framework and effective, equitable host-
government administration of that legal regime; and
(3) An internationally competitive rate of estimated Return-On-Investment.

Investment security embraces such concerns as political stability, economic

stability and, particularly for investments in sectors like mining which necessarily operate
in remote areas, safety for the investors' personnel operating on the ground in the field.
Political stability translates into prospective investors' desire that the basic host-
government institutions can be expected to remain intact, at both the national and local
levels, during the operating life of the investment. Obviously, armed insurrections would
be perceived as major threats to such stability but so also would the prospect of
fundamental policy shifts vis-a-vis foreign investment. Economic stability, from the
prospective foreign investor's perspective, is ensued by host government guarantees
preferably constitutional but at a minimum statutory against expropriation or confiscation
of investors' assets except for a public purpose and upon payment of prompt, adequate
and effective compensation; against arbitrary government interference in investment
operations; and protecting investors' freedom to convert and remit earnings h m

IV- 64
operations and invested capital upon liquidation. Reasonable rates of inflation and the
existence of and investor access to local banking facilities are among other key economic
reassurances. Field safety for investors' (especially expatriate) personnel for example,
mining companies' exploration geologists, construction supervisors and mine operators
relate to such potential threats as civil unrest, unexploded ordnance and natural disasters.

A transparent host-government legalframework for prospective foreign

investors, represents a comprehensive set of commercial laws, unambiguous and
available (preferably in English language), f k e from retroactive modification.
. .
adrmIllstratlon of those laws, in turn, implies swift regulatory processing and decision-
making, free of excessive discretion or perceived favoritism (especially to competitors).
"Transparency", in essence, describes legal rules which are knowable in advance,
consistent in their application, and hence predictable for purposes of investors' risk
assessment and business planning.

A competitive Return On Investment (ROI) means competitive in terms of

returns currently obtainable in alternative host-country investment venues available to a
prospective investor for comparable projects. Moreover, investors will expect that rate to
be increased if local political, economic or safety risks are perceived to be unusually
acute. A prospective investor's ROI projection will entail a preliminary fmancial and
economic analysis. Potential benefits in the mineral sector, for example, will take into
account the quantity and quality of accessible ore bodies, as well as fiscal and other
incentives being offered by the host government. Potential costs, in turn, will include
exploration, construction and operating costs (for example, khstructure construction,
capital equipment, energy, labor, land and environmental protection), tax and royalty
payments to the host government, and possible equity participation by domestic public-
andlor private-sector joint-venture partners.

IV- 65
Essential Characteristics of an Effective Host-Government Foreign Investment
Promotion Effort
In order to successfully attract serious foreign investment and effectively respond
to prospective investors' concerns and requirements, two conditions, one structural and
one operational, must be satisfied.
The structural condition is that investment promotion must be conducted as one,
but only one, core function of a potent, integrated foreign investment management
system. To be potent, that system must be directed at a high, preferentially ministerial,
level. It should embrace key agency interests (financial as well as sectoral). It should
have unambiguous authority as well as responsibility. To be integrated, the system must
encompass policy and law-making responsibilities and investment regulation (registration
and compliance) responsibilities in addition to promotion.
The operational condition, in turn, is that the management system's promotion
component must be functionally comprehensive and rationally organized. Its scope of
activities should embrace:
,- . . including the identification of the Philippines'
(1)
comparative advantage and "market niches", and the formulation and
dissemination of promotional messages celebrating that advantage and
challenging negative stereotypes;
(2) Sector n,
focussing promotional efforts on foreign
investments' most promising home regions and countries and on industries and
firms most likely to match with and respond to Philippine investment
opportunities; and
(3) ,- both prior to firms' investment decisions and following
registration as those finns start up and implement investment operations.
These promotional steps are logically and chronologically sequential. They
commence with a broad, even universal casting of the Philippines' net, progressively
narrows the focus to particular home countries, sectors and individual firms,closing the
net to catch the most interested and promising fish, and finally "feeding" those fish with

IV- 66
information and assistance so they can begin producing for the national interest. All
promotional activities should be designed and executed to contribute to this integrated
campaign. All should be evaluated for results and modified to continuously improve
effectiveness.

How Well Does The Current Philippines Foreign Investment Climate Satisfy
Investors' Requirements And What Concrete Host-Government Initiatives Can Be
Recommended To Improve That Climate?

Long-Term Investment Security

Political instability constituted a severe impediment to new foreign investment
throughout the 1980s. This situation now appears to be rapidly improving, as a direct
result of President Ramos' peacemaking initiatives and pro-active stance on foreign
investment.
Economic stability is also improving. The 1986 Constitution recognizes the
"indispensable role" of the private sector and explicitly encourages private enterprise and
investments. It guarantees that no person shall be deprived of property without due
process of law and that private property shall not be taken for public use without just
compensation. The Omnibus Investments Code of 1987 declares that all investors and
registered enterprises (i.e., foreign as well as domestic investments) are protected by these
Constitutional guarantees. The Code then enumerates the following additional "basic
rights and guarantees":
(1) Unimpeded repatriation of investments upon liquidation;
(2) Unimpeded remittance of earnings;
(3) Unimpeded remittance of sums necessary to pay interest and principal on foreign
loans and to pay for foreign technical assistance contracts;
(4) Freedom h m expropriation (i.e., except for public use or in the interests of
national welfare or defense and on payment of just compensation); and

IV- 67
(5) Freedom from requisition (i.e., except in the event of war or national emergency
and on payment of just compensation).

It might be mentioned that, strictly speaking, these protections are located in a

section of the Code which applies only to investments entitled to incentives. Still, the
operating assumption within the BOI (as reflected in its promotional literature) appears to
be that the basic rights and guarantees are enjoyed all foreign (and domestic) investments,
with or without incentives.
As a final encouraging index of improving economic stability, Philippine inflation
was only 7.6 percent in 1993, down fiom 18.7 percent as recently as 1991.
Field safety for foreign investors' on-the-ground personnel is beyond the scope of
this paper. As a general observation, conditions vary widely fiom island to island and
province to province. Clearly this remains a severe constraint in some parts of the
country which might otherwise hold great potential interest for foreign investors in the
mineral sector.

A Transparent Legal Framework

For Foreign Investment in General. The major instruments erecting the

Philippines legal fiamework governing foreign investment are the just-mentioned 1987
Constitution and 1987 Omnibus Investments Code, the Foreign Investments Act of 1991,
and the Implementing Rules and Regulations for both of these statutes. As a general
guideline, the 1991 Act sets out the main rules for foreign investments not seeking special
incentives, whereas the 1987 Code continues to govern foreign (and domestic)
investments which seek eligibility for incentives. Several subsequent Presidential
Executive Orders and subordinate Departmental Orders elaborate on details of this basic
M e w o r k . As discussed below, while inferior to the Constitution and statutes in the
hierarchy of legal rules, the latter administrative promulgations can be highly significant

IV- 68
and influential, as in the case of the DENR Guidelines governing details of mineral sector
Financial & Technical Assistance Agreements (FTAAs).
Unfortunately, this framework is the virtual antithes~sof the transparency required
by serious prospective foreign investors. Taken as a whole, the Philippine measures are
highly complex, ambiguous and difficult to comprehend, riddled with exceptions and
discretionary leeway which appear to serve special interests, and are subject to sweeping
short-term changes. The result is that it would be literally impossible for a prospective
foreign investor to quickly read through this body of laws and confidently determine its
fundamental legal rights and obligations in the Philippines. Equally harmful to the host
Government and national economy, the legislation is overly generous in granting
investment incentives.
To appreciate the complexity and related problems involved, one has only to
consider the topic of eligibility for incentives:
(1) Book I of the Omnibus Investments Code offers extensive incentives, to
investments in "preferred areas" or economic sectors.
(2) But those areas change annually when published in the Investment Priorities Plan.
(3) As formulated by the BOI, the lengthy Plan is anything but clear, including a list
of priority investment areas which differs in substantial measure from sectors
highlighted in the introductory Plan goals.
(4) Moreover, as an exception to the general rule, an investment can still earn
preferred area incentives even though not proposing to engage in a listed Plan
project, if it satisfies one of four conditions enumerated in the Code. These
include, among others, proposing to export at least 50 percent of total production
or to engage in rendering technical, professional or other services.
(5) Moreover, whereas as a general rule in order to be eligible for Book I incentives
an investment must be at least 60-percent-owned by Filipino investors which
would exclude most foreign investments this requirement can be avoided by
satisQing three different conditions.

IV- 69
(6) Moreover. one of those conditions ("Pioneer status") can itself be avoided by
locating an investment in a remote location. And another (eventual conversion
fiom majority to minority foreign ownership) is subject to BOI discretion and
waiver.
(7) All of which would seem to favor most mining investments' eligibility for
incentives, but for the additional condition that an investor must not be proposing
to operate in a sector reserved by the Constitution or other laws to Philippine
citizens or corporations This raises the unresolved fundamental issue whether
Article XI1 of the Constitution, by implicitly authorizing 100 percent foreign
ownership of f i m entering into FTAAs with the Philippine Government, thereby
intended to remove mining investments £tom this in-eligibility constraint, despite
the fact that that same Article elsewhere limits some mining joint ventures and
production-sharing agreements to majority Filipino owned h!

The preceding example should suffice to demonstrate the complexity,

incomprehensibility, ambiguity, exceptions, discretion, and short duration of the current
Philippine foreign investment laws. In addition, the legal framework can be faulted for
granting excessive, unnecessary incentives. To illustrate the latter point, Book I of the
Ornnibus Investments Code grants all investments in preferred areas total holidays (i.e.,
exemptions) from corporate income tax of four to eight years' duration, depending on
satisfaction of several detailed conditions.
Make no mistake, every incentive is a subsidy; it represents a direct loss to the
national treasury. And when the general corporate tax rate is 35 percent as in the
Philippines, that loss must represent tens of millions of dollars annually, especially in the
near term when the Government is critically short of revenues in general and foreign
exchange in particular. Such losses might be justifiable if deemed necessary to attract
foreign (and domestic) investment. But in fact, to the contrary, uniform current trends
throughout the region point in the contrary direction.

IV- 70
 Host governments are all coming to agree: (1) that, because reasonably low tax
rates are far more attractive to foreign investors than start-up tax holidays, denying or
deleting tax holidays will not deter serious investors; and (2) that, because many home
governments (including Australia, Canada and the USA) give their corporations home
country income tax credits for taxes paid abroad, the chief beneficiaries of host-country
holidays are not foreign investors but industrialized country governments! (For these
same reasons, the recently adopted World Bank Guidelines on the Treatment of Foreign
Direct Investment strongly discourage host governments from granting tax holidays and
similar fiscal incentives to foreign investors. '[nthe words of the Guidelines,
"Competition among States in providing such incentives, especially tax exemptions, is
not recommended. Reasonable and stable tax rates are deemed to provide a better
incentive than exemptions followed by uncertain or excessive rates.")
For the Philippine Government, the message should be crystal-clear: tax holidays
are not necessary to attract foreign investment; do not significantly help most foreign
investors, and severely hurt the national treasury.
In 1994, President Ramos is already moving to liberalize the Philippines foreign
investment regime by proposing numerous detailed changes in the Foreign Investments
Act of 1991, particularly with regard to minimum equity requirements for foreign-owned
firms. In addition to these salutary reforms already in the legislative pipeline, the
following transparency-enhancing recommendations can be offered. In all cases, the
guiding principles are sjmDllficatlonand-
. . so that the resulting legal
framework is knowable, predictable and equitable:
(1) 1so that one
single statute contains all major provisions governing the rights and obligations of
foreign investors in the Philippines.
. . ..
(2) Streamline reducing and preferably eliminating
the exceptions, waivers and BOI discretion. Drop the pioneerlnon-pioneer
distinction; it is too subjective and too easily bypassed.

IV-7 1
 . ..
(3 the C
to five v e m in the interests of economic stability.
(4) vlew ,Q in
particular replacing all income tax (and import-duty) holidays with uniform 25
percent corporate income tax and 5 percent importduty rates for both foreign and
domestic investors.

For Mineral Sector Investments in Partr'cular. Apart from the elaboration of

detailed rules regarding MPSAs and FTAAs, which have been previously discussed,
another set of legal fiamework issues applying to mineral sector investments involve the
intended treatment of those investments under the general foreign investment legislation:
i.e., the Foreign Investments Act and the Omnibus Investments Code. The Act, for
example, includes exploration, development and utilization of natural resources
(including minerals) among the categories of foreign investments which are subject to a
40 percent-limitation rule, under "Negative List A". In imposing this limitation, the Act
relies upon the previously-discussed Constitutional provision (i.e., Article XII, Section 2).
But by making explicit reference to FTAAs, the Negative List reaffllrms that foreign
investments utilizing that mechanism would be exempt fiom the rule.
Less clear is whether foreign investments in the mineral sector, whether organized
under MPSAs or FTAAs, can be eligible for "preferred areas" incentives under Book I of
the Omnibus Investments Code. Arguing for an affirmative interpretation is the fact that
the Code mentions foreign investment in mining as being encouraged by the State and
being eligible for pioneer enterprise status. Moreover, the 1994 Investment Priorities
Plan includes mining investments in its list of priority investment areas.
On the other hand, Book I specifically excludes foreign investments which are
proposing to operate in a sector reserved by the Constitution to Philippine citizens or
corporations (e.g., by Article MI'S 40 percent limitation rule for natural resources
investments). It would appear that this exclusion flatly disqualifies fiom eligibility
incentives for foreign investments under MPSAs. But the exclusion arguably does not

IV-72
apply to foreign investments under FTAAs. When the new Mining Code is adopted, it
will presumably specify its own fiscal incentive packages, thereby rendering less
important the incentives offered by Book I of the Omnibus Investments Code. But in the
interim, at least, the possible exclusion remains vitally significant.
To summarize the preceding analysis, the current legal fiamework governing
foreign investments in the Philippines mineral sector is insufficiently transparent. To
remove legal ambiguities and enhance equal treatment, both between mineral-sector
investments and other foreign investments and between foreign and domestic investments
within the mineral sector, the following recommendations are proposed:
..
(1) new e .
Follow the lead of the current
Senate draft of this legislation in excluding any requirement of 60140 revenue
allocation or 10 year divestment in FTAA investments. Instead, grant 25 year
initial duration, with negotiable extension, for FTAA investments, without any
mandatory divestment during that period.
(2)

(3) In conformity with the fiscal approach recommended above with regard to foreign
investment in general, or o m
. Instead, let all foreign investments in
the mineral sector pay the uniform 25 percent corporate tax on net income
recommended above. Then, in order tc) raise aggregate Government revenues to an
internationally competitive 40 percent of total project revenues, utilize a
combination of royalties on gross sales and net profits plus withholding taxes on
repatriated earnings.
(4) For all foreign investments in the mineral sector,
,- like the Laos formula previously described.

IV- 73
(5) To the maximum extent feasible, _ t h e S A and FTAA
0 . . .
Too many legal
..
instruments risk
duplications, gaps, overlaps and inconsistencies.
* e -d
. . fboth
(6)
bv Bpgk I of the
Investmenfs.ts, subject only to the proviso that that Code, as
recommended above, should delete all corporate income-tax holidays.
.. ..
(7) uce the MPS- $50 al&ulJ~ $25 m. This
threshold should be sufficient to reserve small-scale mining to domestic investors and yet
open gold mining opportunities in the $25-50 million range to legitimate foreign
investment.

An Internationally Competitive Return on Investment

Prospective foreign investors in the mineral sector are no different from investors
in other industries. They undertake benefitlcost analyses in order to project their likely
returns and risks, and they compare those prospects with alternative comparable
investment opportunities.
As previously discussed, the Philippines offers mining investors dramatic
potential benefits in the form of truly world-class resource endowments. Additionally
attractive are a Presidential regime convincingly committed to promoting foreign
investment, an established domestic mining industry wellqualified to produce joint-
venture partners, and a domestic labor force able to supply skilled and unskilled workers.
Countervailing risks are presented by investors' concern over political instability,
especially in remote mine site areas, by clouded land titles and uncertain foreign
leasehold rights, and by other ambiguities in the legal framework. Crucial to investors'
assessment of both benefits and costs is the prevailing fiscal package. Undeniably,
foreign f m ' potential interest in large-scale mining projects will be severely curtailed if
not totally extinguished by any legal limitation of foreign ownership and control to
minority positions.
 Given the perceived uncertainty of political stability conditions, it is imperative
for the Philippine Government to move promptly and resolutely to address investors'
other concerns. And particularly, to clarify and simplify the legal framework. Concrete
recommendations for accomplishing that objective are offered above. FTAAs are
uniquely attractive since they alone partially bypass the 40 percent limitation rule. The
recommended fiscal package reserving 40 percent of total returns to the Government (i.e.,
25 percent corporate income tax plus royalties and/or excise tax) is internationally
competitive. Tax holidays emphatically are not necessary to attract serious foreign h;
and those holidays significantly reduce Government revenues.
The Philippine Government can offer serious foreign investors in the mineral
sector an internationally competitive rate of Return On Investment. To do so, the
Government must strengthen its legal framework with a few bold but manageable reform
measures. The pending sectoral legislation constitutes the perfect timely vehicle for that
reform. With that legislative foundation in place, persuasive foreign investment
promotion can then be conducted. To organize that promotion will require parallel
restructuring of the BOI administration. The latter effort is the subject of the next section
of this analysis.

How Well Does The Board of Investment Manage and Promote Foreign Investment
and What Recommendations Can Be Offered To Strengthen Its Capabilities?

The Structure, Authority and Placement of the Board

Earlier in this analysis it was proposed that effective host-government foreign
investment promotion administration requires high-level (preferably departmental)
authority spanning the interests and representation of key core and sector agencies. For
this reason, the Board of Investment in s e v d Southeast Asian governments is a high
profile inter-ministerial committee, chaired by the Prime Minister and encompassing
within its membership the Ministers of Finance, Economic Planning, the Central Bank,

IV- 75
Agriculture. Commerce and Industry, Energy. Science and Technology, etc. Those
bodies create and amend foreign investment policies and laws in addition to managing
investment promotion and regulation.
The Philippine Government originally had a comparable body, the Council for
Investments, which included among its main functions responsibility for coordinating
investment development efforts within the Government and recommending to the
President amendments to existing foreign investment laws and procedures. Today,
however, that intenninisterial Council is apparently dorxnant, having effectively been
replaced by the Board of Investments, wholly constituted within a single ministry. Under
the terms of the Board's enabling legislation, Chapter I1 of the Omnibus Investments
Code of 1987, the Secretary of Trade and Industry serves as Chairman. Together with
three Undersecretaries from that same Department, the Chairman leads a controlling
majority of the seven-member Board, since only four affirmative votes are necessary for
all Board decisions. Interestingly, private-sector representatives are eligible to occupy
some of the remaining three Board seats, thereby converting the body into something of a
public/private sector forum, at least for purposes of discussion. The Code gives the
Board more than 20 specific powers and duties, embracing investment regulation as well
as promotion. Policy-making, however, is reserved to the President, and incentive-setting
likewise lies outside the Board's jurisdiction.
There are several disadvantages inherent in this institutional placement. First,
foreign investment is relegated to a subordinate function within a single sectoral ministry.
Not only does this effectively demote investment to a lower status than that accorded in
other governments. It also isolates the subject fiom direct control or participation by
other keenly concerned ministries. It is not clear, for example, why the Department of
Agriculture should take seriously, much less obey, D m 0 1 decisions taken with regard
to foreign investment in that sector. Yet, the ability to enforce other ministries'
cooperation and compliance is essential for effective performance of the Board's alleged
one-stop action capacity. Second, by depriving the Board of policy-making power, the
arrangement segregates planning fiom execution and ruie-making h m administration.

IV- 76
Third, by admitting private-sector representation to the Board, potential conflicts of
interest are unavoidably created; the regulated gain access to influence the regulations.
To correct these perceived weaknesses and restore foreign investment
management to the toplevel priority awarded it by other governments, the following
adjustments are recommended:
(1) Revive theor a comparable inter-ministerial committee
chaired by the President to replace the Board of Investments. Permanent
Members might include, for example, the Secretary of Socio-Economic Planning
and Director General of NEDA, the Secretary of Finance, the Secretary of Trade
& Industry and the Governor of the Central Bank. Additional Members,invited
to participate in Board deliberations on an ad hoc as-needed basis, could include
the Secretaries of the sectoral ministries, including, for example, the Secretary of
Environment & Natural Resources in the case of mineral investments.
.. . .
(2) Give thattnp level over a
as w s .
(3) body, instead of
convening a joint publiclprivate-sector investment forum to exchange views and
recommend reforms to the Government.

The Structure and Functions of the Board's Secretariat

As previously discussed, it was proposed that the professional secretariat which
executes a host government's foreign investment management work should be organized
along functional lines. Thus, distinct units should be responsible for (1) supporting
Board initiatives in the areas of investment policy and law-making, (2) investment
promotion and (3) investment regulation. The investment promotion department, in turn,
should logically be organized into divisions responsible for the three key-promotion
functions: country image building, source and sector targeting, and investor services. The

IV- 77
regulation department, similarly, should be divided into registration (applications,
approvals and record-keeping) and compliance (monitoring and enforcement) divisions.
When measured against this proposed standard, the current structure and functions
of the Philippines BOI reveal numerous functional overlaps and ambiguities. The
following observations are illustrative:
(1) The
s - Investments Assistance Division performs
both investor services (i.e., promotional) and registration (regulatory) hctions.
(2) That same Group's Investment Marketing Division conducts country image
building missions but also maintains country desks offering investor services for
firms from top priority home countries.
(3) There is no indication that the country image building, source and sector
targeting, and investor service components of investment promotion are conceived
or administered as an integrated chronological sequence of promotion activities.
(4) It is also not clear that a single unit within the Group is responsible for generation
of promotional statistics andlor production of promotional materials.
(5) The Promotion Group's Entrepreneurial Development Services Division
apparently offers entrepreneurship training for small and medium business
enterprises. This activity serves only domestic investors, unlike Investments
Assistance and Marketing which serves primarily foreign firms. Accordingly,
such training does not seem to blend easily with the Group's other functions.
Perhaps it might be more effectively relegated to DTI or to chambers of
commerce.
(6) The Grow is sectorally organized and focusses on "preparing
the framework for the development of sectors and subsectors". This economic
development or industrial-planning orientation seems better suited for the NEDA,
if indeed, such directive interventions by Government are in fact appropriate or
effective.

IV- 78
(7) The Group's supervision of work projects is basically a monitoring function. As
such, it more properly belongs in a compliance division under regulation; not
promotion.
(8) Similarly, responsibility for preparing the Investment Priorities Plan is arguably
more of a policy-making than a promotional function.
(9) The current Board's TechnicalGrow seems to be something of a catch
all. It contains Finance and Administration, Legal, Incentives and Policy, and
Systems and Budget Divisions. Some of this work is policy and law making.
Some relates to registration and record keeping. The latter activities might be
more appropriately organized within a regulation department, along with the
monitoring activities presently conducted by this Group. If this recommended
division were implemented, the need fix the Technical Services Group might
disappear.
(1 0) Note also that the present Technical Services Group's registration activity seems
to duplicate that of the Promotion Group's Investments Assistance Division. Its
monitoring activity covers the same ground as the Industry Planning Group. Its
IPP preparation studies may also overlap with Industry Planning.

In summary, one comes away fiom an examination of the Board secretariat's

present organizational structure with two overall impressions. One, is that the present
structure may reflect a series of historical mergers and acquisitions as much as it does
deliberate management decisions. As such, the structure is probably not getting optimal
productivity out of its highly competent professional staff, nor motivating those personnel
to do their best work. A second impression is that, the secretariat's potency can be
..
significantly enhanced by a reorganization and along logical, functional
lines. This reorientation can help all staff members and units to perceive more readily
how their inputs contribute to the coordinated performance of the entire Board, to see
how and why their distinct and distinctive contributions make a difference.
Simultaneously, reorganization can be expected to help prospective investors better grasp

IV- 79
and appreciate the Board's intended roles and available resources. With that clearer
picture in mind, these clients can make more effective use of Board services. The
tangible results of this upgrading should include more and better investment applications
and more effective investment management.

IV- 80
Summary
The Philippines can greatly benefit from attracting > rious foreign investment,
both across the full economic spectrum and in particular in Ine mineral sector.
Investment brings vitally-needed capital, technology, employment, exports and tax
revenues.
Today, the Philippines is not realizing that potential. Foreign investment remains
at historically low levels. Major multinational firms are conspicuous by their absence or
worse, their withdrawal. Meanwhile, the Government is granting unnecessary,
excessively generous fiscal incentives to those who remain. This is a losellose scenario.
Foreign firms are missing out on remarkable investment opportunities. Domestic firms
are missing invaluable joint-venture opportunities. Domestic workers are missing
chances for jobs and training. Local communities, especially in remote areas, are missing
projects which would develop basic infrastructure and community services. The
Philippine Government at national, provincial and local levels is foregoing critical
revenues.
Foreign investment is not disappearing. It is going elsewhere. Major mining
investments are being made today throughout the region in Indonesia, Papua New
Guinea, China, Vietnam, Laos.
The Philippines can and should participate in this development. Its mineral
resources and human capital are second to none. But to do so, it must compete. And to
compete, it must demonstrably improve its foreign investment climate. This can be
accomplished by markedly improving the transparency of its legal framework and by
strengthening the administration of its foreign investment management system. These are
not impossible tasks. Neighboring governments are pointing to the direction. Closer to
home, the President has already launched the appropriate reform campaign. Needed next
steps are readily identifiable and have been recommended in this discussion. The keys to
. .
reform are SimDllfication, and service.

IV- 81
 Foreign investment is fully consistent with respect for the national patrimony,
protection of the natural environment, development of the domestic private sector and
decentralization. In contrast to the status quo, refom represents a W w i n scenario. All
interested parties can benefit fiom increased foreign investment in the Filipino mineral
sector. But the initiative must come fiom the Government. And for best results, the best
place for that initiative to be launched is the Office of the President.

IV-82
Recommendations

(1) Adopt the New Mining Code as soon as possible. Follow the lead of the current
Senate draft of this legislation in excluding any requirement of 60140 revenue
allocation or 10 year divestment in FTAA investments. Instead, grant 25 year
initial duration, with negotiable extension, for FTAA investments, without any
mandatory divestment during that period.
(2) Grant long-term land leases to joint ventures in the case of MPSAs and to foreign
firms in the case of FTAAs, with durations paralleling the term of the underlying
Agreements, including extensions.
(3) In conformity with the fiscal approach recommended above with regard to foreign
investment in general, omit from the Code any 5-year or other corporate income
tax holiday for future mineral investments. Instead, let all foreign investments in
the mineral sector pay the uniform 25 percent corporate tax on net income
recommended above. Then, in order to raise aggregate Government revenues to
an internationally competitive 40 percent of total project revenues, utilize a
combination of royalties on gross sales and net profits plus withholding taxes on
repatriated earnings.
(4) For all foreign investments in the mineral sector, adopt a comprehensive
environmental protection regime, like the Laos formula previously described.
(5) To the maximum extent feasible, replace the DENR's MPSA and FTAA
Guidelines with the new Mining Code. Too many legal instruments risk
duplications, gaps, overlaps and inconsistencies.
(6) Specifically declare foreign investments in the mineral sector (both under MPSAs
and FTAAs) eligible for "preferred areas" incentives offered by Book I of the
Omnibus Investments Code, subject only to the proviso that that Code, as
recommended above, should delete all corporate income-tax holidays.
(7) Reduce the MPSAIFTAA threshold from $50 to $25 million. This threshold
should be sufficient to reserve small-scale mining to domestic investors and yet

IV-83
 open gold mining opportunities in the $50-$25 million range to legitimate foreign
investment.
(8) Integrate the Omnibus Investments Code and Foreign Investments Act so that one
single statute contains all major provisions governing the rights and obligations of
foreign investors in the Philippines.
(9) Streamline the incentives eligibility criteria, reducing and preferably eliminating
the exceptions, waivers and BOI discretion. Drop the pioneerinon-pioneer
distinction; it is too subjective and too easily bypassed.
(1 0) Simplify and clarifjr the Investment Priorities Plan and extend its duration from
one to five years in the interests of economic stability.
(1 1) Review and greatly reduce the number and scope of investment incentives, in
particular replacing all income tax (and import-duty) holidays with uniform 25
percent corporate income tax and 5 percent import-duty rates for both foreign and
domestic investors.
(12) Revive the Council for Investments or a comparable inter-ministerial committee
chaired by the President to replace the Board of Investments. Permanent
Members might include, for example, the Secretary of Socio-Economic Planning
and Director General of NEDA, the Secretary of Finance, the Secretary of Trade
& Industry and the Governor of the Central Bank. Additional Members, invited
to participate in Board deliberations on an ad hoc as-needed basis, could include
the Secretaries of the sectoral ministries, including, for example, the Secretary of
Environment & Natural Resources in the case of mineral investments.
(1 3) Give that top-level body explicit authority over foreign investment policy-making
and incentive-setting as well as regulation and promotion.
(14) Remove private-sector representation from this regulatory body, instead
convening a joint publiclprivate-sector investment forum to exchange views and
recommend reforms to the Government.

IV- 84