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Fair Compensation and other Prerequisites to Mining for Development

31 Aug 2015

  • Author(s): Cielo Magno

Fair Compensation and other Prerequisites to Mining for Development
This contribution is published as part of the Think Piece Series The Road To Addis and Beyond, launched to coincide with the third and final drafting session of the outcome document of this summer's Third International Conference on Financing for Development. In this Series, global experts discuss a range of topics complementary to the UNRISD research project on the Politics of Domestic Resource Mobilization on how to fund social development and raise provocative or alternative perspectives that can generate further ideas and debates. Please share your thoughts on this article in the comments space below.

This piece challenges conventional approaches to a country’s economic development by suggesting a departure from the mainstream “mining for development” approach. It suggests that mining ventures should follow a set of preconditions that take into account other significant factors such as fair taxing schemes that benefit the state, clear transparency and accountability mechanisms, and an expanded monitoring scheme that covers environmental and social impacts of extractive activities.

Cielo Magno is Assistant Professor at the University of the Philippines’ School of Economics and the National Coordinator of Bantay Kita, the Publish What You Pay Coalition in the Philippines.

Introduction


States engage in the extraction of natural resources to generate capital to finance development. Many nations have benefited from doing this. The temptation to cash in on these resources is difficult to resist. Ironically, there are also many mineral-rich countries that have extracted their minerals and yet are still lagging behind in economic development despite their natural endowments. Apparently, extraction of these minerals does not automatically guarantee development.

Mineral resources are finite and non-renewable and should serve the interests of present and future generations. Using these resources now deprives future generations of these minerals. The challenge of mineral-based development is ensuring that the returns from extraction are invested in human capital and infrastructure to support development and ensure long-term benefit from the activities. Strong government regulations should also be in place to reduce damage to the environment.

The limits to the mainstream approach to mining


The mainstream approach suggests that mining contributes to development by allowing companies to extract minerals in remote and economically depressed areas. It argues that this will trigger economic activities by transferring skills and technology, creating employment, increasing the demand for consumer goods and encouraging the proliferation of small and medium enterprises (Remy 2003). This thinking assumes that extractive companies can lead the development of poor communities which are richly endowed with minerals. The main role of government in this framework is to attract investments by offering competitive fiscal packages.

If this were true, why then do we have countries with huge mining investments but with a low ranking in the Human Development Index? Angola, Equatorial Guinea, Nigeria and Sudan were among the top five sub-Saharan African host countries of inward FDI flow in 2005. They were also the top four sub-Saharan oil exporters. However, these countries ranked very low in the United Nations Human Development Index (see UNCTAD, 2007 for a summary). Contrary to achieving development, the mainstream approach makes countries race to the bottom by continuously reducing their tax rates and providing other fiscal incentives to attract mining investors. This has left countries with very little tax income to finance their development agenda.

This experience is too familiar in the Philippines. The Philippines offers a very competitive fiscal package for mining companies. But the sector contributes very little to national development. The total mining contribution to the country’s GDP was on average 0.7% in 2012-2014 (MGB (Mines and Geosciences Bureau), 2015). At the same time, mining companies do not significantly contribute to poverty alleviation in the host communities. The following table shows the data on poverty incidence at the national level and in those provinces which host large scale mining activities (NSCB (National Statistical Coordination Board), 2012). While poverty incidence in these provinces may have declined from 2006 to 2012, at 30-60 percent it is still higher than the national average of 25-26 percent (except in Benguet and Zambales which host major and critical hubs of urban economic activity).

Figure 1: Poverty Incidence in the Philippines

Province
Poverty Incidence among the Population (%)
Estimate (%)
2006
2009
2012
PHILIPPINES
26.6
26.3
25.2
Benguet
5.8
6.1
3.7
Zambales
23.6
17.3
16
Palawan
35.2
30.9
26.4
Albay
36.4
36.7
41
Masbate
53.6
56.3
51.3
Cebu
30.4
26.8
22.7
Eastern Samar
51.3
56.4
63.7
Leyte
38.4
36.3
39.2
Zamboanga del Norte
65.5
68.5
54.4
Compostela Valley
37.7
36.6
36.7
Agusan Del Norte
44.1
45.9
34.7
Suriago Del Norte
52.7
57.9
41.8
Suriage Del Sur
46.5
53.7
36

Source: National Statistical Coordination Board, 2012


Figure 2:

NOTE: *Star markers to indicate mining provinces added by the author

Source: National Statistical Coordination Board, 2013


From the Race to the Bottom to Fair Compensation


Mining companies invest in a country because of the mineral deposits in a country. It is location-specific unlike other sectors like manufacturing where investors are more mobile, so it is legitimate to ask to what extent incentives are necessary at all. Competitive taxation combined with fiscal incentives basically makes these countries give away their minerals to companies for almost nothing. Worse, these competitive fiscal packages make extracting raw minerals cheaper than recycling what is already out there. It encourages consumerism and wastage of non-renewable resources. Taxing mines heavily allows governments to optimize the rate of extraction of their non-renewable resources. Having a few mines that are heavily taxed will likely reduce extraction in these areas, allowing governments to preserve some resources for future generations.

What the governments of mineral-rich developing countries should do is formulate fiscal policies that will ensure they get a fair share from the extraction of resources so they can in turn use these to finance the country’s development goals. A fair share should reflect payment for the actual value of the minerals as well as compensation or measures to prevent social, cultural and environmental damage caused by mining. Furthermore, governments should ensure that there is a transparent and accountable mechanism for spending and investing the returns from extraction. Spending and investment and even the social development programmes of companies should be linked to the sustainable development frameworks of national and local governments.

Governments could do more and follow Indonesia’s lead in developing a comprehensive policy that links taxation and incentive policies with the development of a downstream industry in the country. Indonesia is proposing an export tax on raw ore to reduce the over-exploitation of resources and encourage downstream processing of ore. In the mean time, mining companies are required to process raw ore in Indonesia under Mining Law No. 4/2009 and Regulation No. 7/20012 issued on February 6, 2012. The regulation specifies an export duty of 20% of the export price of certain ores and minerals. The country is also divesting foreign ownership of mining activities to varying degrees, depending on the level of mineral processing done by the company (PricewaterhouseCoopers, 2014). This is a radical but welcome policy framework for the mineral sector as taxation and incentives given to companies and even the right to mine becomes conditional on the setting up of downstream industries in the country. The extraction of mineral resources is now premised on the industrial policy framework of the country.

Indonesia is currently experiencing a lot of pressure from different stakeholders to relax the current policies because of losses in income in the short term, which are resulting in gains for companies operating in other countries in the region. The ban on the export of raw ore in Indonesia, for example, is resulting in windfall income for nickel mining companies in the Philippines. However, Indonesia’s losses in the short run will result in bigger gains in the longer term when downstream processing of minerals is fully established in the country. What the other countries in the region like the Philippines should do is follow suit.

Biodiversity and climate change


With this in mind, we should be careful of recommending “mining for development” to all mineral-rich developing states. In some cases, this can be seen as nothing short of reckless. There are times when mining should not be considered at all. There are other things that are more valuable than the minerals underground. One of these is the country’s biodiversity which should be protected.

The Philippines, for example, sits on an estimated subterranean trove worth close to $840 billion (Minerals Development Council, 2007). But the country is also one of the few nations that is, in its entirety, both a biodiversity hotspot and a megadiverse country, placing it among the top priority areas for global conservation. A biodiversity hotspot is a biogeographic region that is both a significant reservoir of biodiversity and is threatened with destruction. According to Conservation International, the remaining natural habitat in these biodiversity hotspots amounts to just 1.4 percent of the land surface of the planet, yet supports nearly 60 percent of the world’s plant, bird, mammal, reptile, and amphibian species. Some key biodiversity areas that are directly impacted by mining in the Philippines are Palawan, Samar, South Cotabato, Mindoro, Romblon, Agusan del Norte and Dinagat Island.

The Philippines has many endemic species of plants, birds, mammals, reptiles, amphibians, freshwater fish and invertebrates. In recent decades, natural and anthropogenic causes have cost the country a considerable number of species. Extraction of minerals is one of the most notable threats of the country’s biodiversity.

Aside from its biodiversity, another consideration is climate change. The Philippines is the third most vulnerable country in the world to weather-related extreme events, earthquakes and sea level rise (Kreft, Eckstein, Junghans, Kerestan, & Hagen, 2014). The country is exposed to typhoons, floods, landslides and droughts (World Bank, 2013). Mining activities can increase the risk of exposure to these extreme events.

Mining Preconditions


In developing countries like the Philippines—a country that has billions of dollars’ worth of minerals and a rich and complex biodiversity—it is difficult to simply pursue mining for development. If we are to do this, mining companies must be taxed heavily to get a fair share from the extraction of minerals. Countries should have mining industrial policy plans to anchor the mining activities and maximize the returns from extraction. Governments have to establish transparency and accountability mechanisms to ensure that proceeds from mining contribute to sustainable development. International voluntary mechanisms like the Extractive Industry Transparency Initiative (EITI) are a good place to start but are insufficient to address governance problems in mining given the current state of play. National governments should enact mechanisms like EITI to impose penalties on companies for non-compliance.

Yet EITI should also go beyond finances. A very important consideration in mining is the impact of extractive industries on countries’ biodiversity and their fragile environmental state. EITI should also monitor how companies are complying with environmental standards and how governments are implementing these standards. Environmental and social impact assessments of companies should be commissioned by multi-stakeholder groups like EITI, rather than by the companies themselves to add credibility to the process. Mining projects must be subjected to more rigorous tests and impact assessments that clearly establish that they are not exacerbating the impacts of climate change on and beyond mining-affected communities.

Mining in ecologically fragile and poverty-ridden states cannot be conducted without taking the social and environmental impacts of extraction into consideration. To attain development, we must apply these preconditions to our drive to mine our mineral treasure troves. Otherwise, we delude ourselves into believing that mining is helping us achieve sustainable development when it may actually be having the opposite effect.

REFERENCES
Kreft, S., D. Eckstein, L. Junghans, C. Kerestan, and U. Hagen. 2014. GLOBAL CLIMATE RISK INDEX 2015: Who Suffers Most From Extreme Weather Events? Weather-related Loss Events in 2013 and 1994 to 2013. Berlin: Germanwatch.

MGB (Mines and Geosciences Bureau). 2015. Mining Industry Statistics (D. o. E. a. N. Resources, Trans.).

Minerals Development Council. 2007. Investor's Prospectus on Philippine Mining. Republic of the Philippines.

National Statistical Coordination Board. 2013. Philippine Poverty Statistics Portal. Retrieved October 5, 2013, from http://www.nscb.gov.ph/poverty/portal_/

NSCB (National Statistical Coordination Board). (2012). 2012 Philippine Poverty Statistics for Basic Sectors. Retrieved April 15, 2015, from http://www.nscb.gov.ph/poverty/dataCharts.asp

PricewaterhouseCoopers. 2014. Mining in Indonesia: Investment and Taxation Guide.

Remy, F. 2003. Mining Reform and the World Bank: Providing a Policy Framework for Development. Washington, D.C.: World Bank.

UNCTAD. 2007. World Investment Report 2007: Transnational Corporations, Extractive Industries and Development: Geneva and New York: United Nations.

World Bank. 2013. Getting a Grip… on Climate Change in the Philippines. Washington, DC: World Bank.

ABOUT THE AUTHOR
    Cielo Magno is Assistant Professor at the University of the Philippines’ School of Economics and the National Coordinator of Bantay Kita, the Publish What You Pay Coalition in the Philippines. She represents civil society in the multi-stakeholder group of the Philippine Extractive Industries Transparency Initiative (EITI) and a member of the Global Council of Publish What You Pay (PWYP). She is a fellow of Action for Economic Reforms and Social Watch-Philippines. She earned her Bachelor’s and Master’s degrees in economics from the University of the Philippines. As a Fulbright scholar, she earned her PhD in Law and Public Policy at Northeastern University in Boston.

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This article reflects the views of the author(s) and does not necessarily represent those of the United Nations Research Institute for Social Development.