Mining Trouble in the Philippines

The decision last week by a local official in the Philippine province of South Cotabato to shut down the country's biggest copper and gold project is emblematic of the mix of politics, nationalism, misplaced environmentalism and the antipathy of the Catholic Church that has frozen what in the 1980s was one of the world's 10 leading gold and copper industries.

The latest impasse is a confrontation between the federal government in Manila and the South Cotabato governor, Arturo Pingoy, who ignored national law to invoke a recently-passed local environmental ordinance banning open pit mining. That closed down the project, being explored by Sagittarius Mines Inc., whose major shareholder is the LSE-listed Xstrata Plc.

Jesse Robredo, the Secretary of the Philippines Department of Interior and Local Government, ordered Pingoy to suspend the implementation of the local ordinance on the grounds that it runs contrary to the Philippine Mining Act of 1995. Pingoy has so far refused to do so, throwing the mining venture, the Tampakan Copper and Gold Project, into uncertainty. Sagittarius has estimated that the US$5 billion project could yield 13.5 million tons of copper and 15.8 million ounces of gold.

The squabble illustrates many of the drawbacks to the multinational investment environment in the Philippines. It is a major frustration for President Benigno Aquino III, who has placed the mining industry at the top of his development agenda. It demonstrates the inability of the national government to extend its influence to the provinces and it is particularly ominous for the extractive mineral industries, which have the potential to provide a major shot in the arm for gross domestic product.

From 1971 to 1981, mining contributed as much as 20 percent of total export earnings. Today, however, mining has ceased to be a major contributor to the country's coffers despite the fact that global commodity prices, particularly for minerals, are approaching their all-time highs. The Philippines is also the only major country in Southeast Asia with no substantial oil and gas operations despite data showing the country has petroleum reserves of roughly 460 million barrels of oil and despite the fact that it shares sedimentary basins with proven reserves with Indonesia and Malaysia, both of which have been major energy exporters for decades.

"Unsurprisingly," said a recent report by the Manila-based country risk consultancy Pacific Strategies and Assessments, "the majority of these reserves remain untapped, leaving many to ask why a country desperately trying to attract foreign direct investment and struggling with major domestic energy problems is so incapable of harnessing arguably the world's most valuable resource that sits within its own borders."

It is estimated that as much as US$840 billion in mineral wealth lies below the country's soil, including the world's fifth largest reserves of gold and copper. But certainly it is also undeniable that mining, particularly open pit mining, has the potential to be environmentally devastating. In countries like the Philippines, where regulatory agencies are inept at best and corrupt at worst, extractive industries can do major damage. Critics of the industry, in addition to the Catholic Church, include the political left, Islamic rebel groups such as Abu Sayyaf and local governors such as Daisy Avance-Fuentes, who signed the law into effect earlier in 2010 at the behest of the Catholic Church, and Pingoy, her successor.

The Mining Act, which deregulated the sector and is widely regarded as one of the world's most liberal mining codes, allows for 100 percent foreign equity participation through financial and technical assistance agreements with local miners. Also, 300-odd Mineral Production Sharing Agreements between the national government and investors that allow for a 40/60 percent split between foreign and local owners respectively have been approved since 1990. Only four contracts have been granted under the agreements however, for a variety of reasons including the non-performance or corruption of local partners. In addition, the Philippine Supreme Court held up the constitutionality of the mining act for eight years before finally reaffirming the 100 percent foreign ownership provision.

In an 88-page study on foreign investment, Improving the Investment Climate in the Philippines, the Asian Development Bank outlined a long series of drawbacks for multinationals including "Corruption in the government bureaucracy...which has become prevalent to fast-track business procedures and licensing requirements. The relative ease of clearing and bringing goods and supplies in and out of the country is highly associated with informal payments or bribes. Equally dominant in the tax system, the more painful costs of corruption include losses in government revenues, and as a result, cutbacks in social services."

In 2008, Japan Petroleum Exploration Co's subsidiary JapEx Philippines abandoned a service contract on a tract between Negros and Cebu islands in the Visayas after drilling one exploration well. The Malaysian firm Petronas also pulled out.

"Similar to the mining industry, oil and gas companies have also faced civic opposition from environmentalists and fisher folk," according to a report by PSA. "Both JapEx and Norasian Energy Ltd met strong opposition from fishing groups who claimed that their drilling activities might scare away the fish and destroy marine life. While the Philippines can certainly claim a vigorous and coordinated civil society that has the potential to disrupt exploration and extraction activities, the oil and gas industry has consistently found ways to meet these challenges in other countries. With adequate support from the national and local government, this should also be the case in the Philippines."

If anything, multinationals, particularly in the extractive industries, can only expect things to get worse. In April 2010, at the behest of then-Chief Justice Reynato Puno, the Supreme Court pushed through a statute called the Writ of Kalikasan, which allows for the individuals or groups claiming their "right to a balanced and healthful ecology" the right to petition special environmental courts to issue desist orders against companies or individuals in construction or extraction, whether or not the companies have obtained the required permits and licenses for operation. The writ exempts poor plaintiffs from paying court fees as well.

While such an order would ordinarily be welcomed in many countries, the Philippine court system is so open to manipulation that the Writ of Kalikasan can be expected to cause chaos, not so much by environmentalists bringing suit but by competing interests or dishonest parties seeking to stop projects of all kinds or to hold them for ransom.

"As many business groups have pointed out, legal conflicts will likely arise if environmental courts are allowed to impose protection orders against natural resources investors that have been duly authorized by the Philippine government to operate in designated areas," PSA warned, leading to the possibility that infrastructure, natural resources and other investors could be shut down completely.