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Mining for inclusive growth

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Mining for inclusive growth

/ 12:04 AM October 16, 2014

Mining has become a divisive issue, yet it need not be. Efforts to clarify and sharpen the Philippines’ mining policy have generated intense debate among stakeholders, spanning the business community, civil society and the central and local governments. The debate largely centers on increasing the government’s share of the total mining revenues. The government’s proposed revenue-sharing scheme for large-scale metallic mines imposes either a 10-percent tax on gross revenue or a 55-percent tax on the adjusted net mining revenue. As envisioned, this will replace all existing income and sales taxes and royalties paid by mining firms.

Yet the narrow focus on revenues runs the risk of keeping other important aspects of mining policy unaddressed, resulting in failure to generate cohesive support from all sectors. It’s not too late to take the following steps, to produce a balanced mining policy that will help harness and transform our mineral wealth into truly inclusive development:

Underpin the reforms on strong evidence. Very little evidence has been shared by the government on the possible impact of the new tax regime on existing and future mining investments (which would, in turn, impact on future revenues). Nevertheless, a study by Prof. Ramon Clarete and Karlo Adriano of the UP School of Economics finds evidence that the proposed new mining tax regime will dramatically raise the average effective tax rate on copper, gold and nickel (all taken together and weighted) from 16 percent to 81 percent.

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This translates to a projected decrease in mining investments in the Philippines (both domestic and foreign) of anywhere from 13 percent to 67 percent. If investments drop, so, too, will revenues. If the government has alternative estimates, it should communicate these to the industry and the public at once, in order to prevent more uncertainty. Otherwise, this recent evidence demonstrates that even by the narrowly focused standard of attempting to boost tax revenues, the new mining tax regime might be myopic.

Focus also on investments, not just revenues. International best practice also emphasizes that mining policies should explicitly state how mining wealth will be managed and invested. Successful countries invest their mining revenues in areas that will continue to generate returns for future generations, such as investments in children and youth. The trick is to convert natural-resource wealth into drivers of inclusive national economic development, including strong human capital investments and industrial diversification.

For the Philippines, the creation of an “inclusive growth trust fund” can be critically important, ensuring that mining wealth is invested transparently and consistently over time, and in areas that boost inclusive and sustained growth and development. High-yielding investments here may include those that focus on the education and health of children and youth (human capital) as well as the necessary infrastructure to boost connectivity (physical capital), with a bias toward oft-forgotten and marginalized regions in our economy. Such a fund can help unify stakeholders around a strategy ensuring that mining does indeed benefit the vast majority of the population, and in a very transparent and palpable way. This will be critical in sustaining reforms and the industry’s future growth.

Consolidate public support for the mining policy by promoting stronger transparency and accountability among all stakeholders. Transparency and accountability will be critical in rehabilitating the image and actual impact of mining. The Extractive Industries Transparency Initiative (EITI), which the Philippines has just signed on to, can help limit corruption and make policy implementation clearer and easier to monitor. These changes can, in turn, shore up public support for reforms. Ideally, all stakeholders (mining companies as well as those receiving resources from mining, such as the central and local governments and indigenous communities) should be part of the EITI.

Dealing with illegal mining is crucial, as it does not generate revenues for the government and perpetuates unfair competition for legal, tax-paying and policy-compliant mining firms. Illegal mining breeds corruption and undermines the country’s chances to make long-term investments out of nonrenewable resources.

Improve public-sector governance, and increase coherence across national and local policies on mining. Revenue-sharing in the central and local governments should be well-defined. The same goes for their respective responsibilities on revenue management and investment, which are ultimately intended to promote the development of the local mining community and the nation as a whole. For purposes of sustainability and accountability, the government should take the primary responsibility of ensuring that schools, hospitals, infrastructure, and other public goods are adequately provided during and after a mine’s life. Mining companies’ corporate social responsibility is helpful, but it should not crowd out the government’s role in this area.

Integrate mining more effectively in the industrialization and job-creation strategy. The Philippines’ ability to go beyond extraction into processing mineral products can increase production and employment opportunities by linking mining more strongly to downstream industries that can potentially create high-quality jobs (e.g., jewelry, manufacturing, and construction). Mining itself will not create very many jobs, but the mining industry can enhance the competitiveness of other industries that do. International policy experience suggests that a strategically managed mining industry can help unleash higher productivity in these other industries. Ideally, these are the same industries that will also sustain the economic development of regions hosting mining projects (notably when these projects eventually close down).

All these reforms require greater ambition, not simply to fixate on short-term tax revenues but, more importantly, to connect mining policy to the overall industrialization blueprint, linking mining with stronger investments, job creation and sustainable growth.

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Ronald U. Mendoza, PhD, is an economist and the executive director of the AIM Policy Center.

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TAGS: Construction, EITI, Extractive Industries Transparency Initiative, jewelry, Karlo Adriano, manufacturing, mining, mining tax regime, Prof. Ramon Clarete, UP School of Economics
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