The Philippine government must realize that policy uncertainty can be extremely damaging to both investors and the host country and can hamper the successful exploitation of mineral endowments.

1. The
Threat
of
Resource
Nationalism
to
the
Philippine
Mining
Industry
Resource
nationalism
has
been
hounding
the
mining
industry
worldwide
as
governments
initiate
regulations
to
intervene
in
the
contractual
provisions
of
resource
development
agreements.
Resource
nationalism
ranges
from
outright
nationalization
of
resources
to
regulatory
and
fiscal
measures,
which
deprive
an
investor
of
the
value
of
the
resources
it
is
exploiting
thereby
increasing
the
host
government’s
“take”
(“regulatory
expropriation”).
While
resource
nationalism
is
largely
perceived
to
be
widely
practiced
in
developing
resource-­‐rich
countries
in
Africa
and
South
America,
developed
economies
like
the
United
States,
Australia
and
Canada
have
also
joined
the
fray
in
adopting
resource
nationalist
policies.
According
to
Ernst
&
Young’s
report,
“Business
Risks
Facing
Mining
and
Metals
2011-­‐2012,”
resource
nationalism
is
the
highest
ranking
risk
faced
by
resources
companies
with
many
governments
going
beyond
taxation
in
seeking
a
greater
take
from
the
sector
with
a
range
of
requirements
introduced
like
mandated
beneficiation,
export
levies
and
limits
on
foreign
ownership.
Resource
nationalism
can
also
manifests
itself
in
subtle
forms
like
special
treatment
for
domestic
companies
or
forcing
foreign
companies
to
use
favored
entities
for
transporting
or
processing
commodities.
Dr.
Oladiran
Bello,
Head
of
the
South
African
Institute
of
International
Affairs’
Governance
of
Africa’s
Resources
Programme
said
that
resource
nationalism
has
been
applied
to
all
kinds
of
efforts
by
governments
of
resource-­‐producing
countries
to
gain
a
greater
degree
of
control
over
the
way
in
which
mining
activities
are
carried
out
within
their
jurisdictions.
On
the
other
hand,
Sir
Mark
Moody-­‐Stuart,
former
Chair
of
Anglo
American
and
Shell,
said
that
resource
nationalism
concerns
become
even
more
serious
when
prices
are
high,
as
resource-­‐producing
countries
seek
to
take
a
larger
share
of
the
windfall.
David
Humphreys,
who
has
served
as
an
analyst
for
Rio
Tinto
and
Russia's
top
mining
company,
Norilsk
Nickel,
said
that
there
is
a
growing
perception
from
producer
countries’
governments
that
they
were
losing
out
to
resource
companies
although
he
argued
that
this
perception
was
not
borne
out
by
any
research.
Fitch
Ratings'
Report:
Resource
Nationalism
indicated
that
while
greater
state
participation
in
large
commodity
windfalls
can
provide
additional
revenues
to
improve
government
finances
and
accelerate
economic
development,
the
long-­‐
term
effect,
however,
is
that
it
may
curb
the
revenue-­‐generating
capacity
of
the
mining
sector.
Excessive
taxation
and/or
regulatory
uncertainty
can
undermine
the
potential
of
the
sector
to
attract
new
investments
and
place
marginal
assets
into
early
retirement.
The
Philippines
joins
the
bandwagon
Resource
nationalism
has
become
highly
contagious,
as
there
is
now
a
faster
transmission
and
exchange
of
ideas
and
experience
across
some
resource-­‐rich
countries.
The
Philippines
has
been
no
exception.
Executive
Order
No.
79,
which
seeks
to
set
the
policy
framework
to
guide
the
government
and
other
stakeholders
in
the
implementation
and
operationalization
of
mining
legislations

2. aims
among
others,
to
increase
revenues
to
promote
sustainable
economic
development
and
social
growth.
To
this
end,
EO
79
mandates
the
establishment
of
mineral
reservations
for
strategic
mineral
reserves
to
be
able
to
collect
5%
additional
royalties
and
the
creation
of
a
national
plan
and
road
map
for
the
development
of
value-­‐adding
activities
and
downstream
industries
for
strategic
metallic
ores.
The
Mining
Industry
Coordinating
Council
(“MICC”),
a
body
created
under
EO
79,
is
further
directed
to
conduct
a
study
on
existing
mechanisms
for
benefit
sharing
and
review
of
existing
taxes,
fees
and
incentives
receive
by
mining
companies.
The
MICC
is
also
tasked
to
consider
the
imposition
of
higher
export
fees
for
metallic
and
non-­‐metallic
minerals
in
the
country,
rationalize
revenue-­‐sharing
schemes,
mechanisms
and
incentives
given
to
mining
companies,
and
implement
resource
accounting
or
full-­‐cost
benefit
analysis.
In
addition,
the
Department
of
Environment
and
Natural
Resources
is
also
directed
to
increase
mine
wastes
and
tailings
and
occupation
fees
and
impose
processing
fees
for
all
mining
applications.
The
Department
of
Finance
has
also
been
pushing
for
the
passing
of
a
mining
revenue
bill
that
will
rationalize
the
mining
fiscal
regime
to
raise
more
revenues
for
the
government.
More
alarming
is
the
proposed
People’s
Mineral
Resources
Act,
which
seeks,
among
others,
the
removal
or
prohibition
of
full
foreign
participation
in
mining
and
an
increase
of
the
government’s
share
in
mining
agreements
from
2%
to
10%.
On
the
judicial
front,
the
Supreme
Court
is
once
again
reviewing
petitions
assailing
the
constitutionality
of
the
Philippine
Mining
Act
of
1995
particularly
the
validity
of
sections
80
and
81.
According
to
the
petitioners,
the
questioned
provisions
foster
inequitable
sharing
of
wealth
by
limiting
the
share
of
the
government
in
Mineral
Production
Sharing
Agreements
to
excise
taxes
and
confining
government's
share
to
taxes,
fees
and
royalties
instead
of
letting
it
have
full
control
over
the
exploration,
development
and
utilization
of
mineral
resources.
These
developments
have
clearly
manifested
that
the
Philippine
mining
industry
is
under
threat
from
resource
nationalism
with
the
recent
regulatory,
legislative
and
judicial
initiatives
to
revise
and
amend
fiscal
and
contractual
regimes.
Non-­‐impairment
Clause
The
question
remains
whether
the
Philippine
government
can
justify
changing
the
rules
in
the
middle
of
the
ballgame.
Art.
III,
Sec.
10
of
the
Constitution
provides
that:
“No
law
impairing
the
obligation
of
contracts
shall
be
passed.”
Law
includes
statutes
enacted
by
the
national
legislature,
executive
orders
and
administrative
regulations
promulgated
under
a
valid
delegation
of
power,
and
municipal
ordinances
passed
by
the
local
legislative
bodies.
The
purpose
of
the
non-­‐impairment
clause
is
to
safeguard
the
integrity
of
valid
contractual
agreements
against
unwarranted
interference
by
the
State.
To
impair,
the
law
must
apply
retroactively
so
as
to
affect
existing
contracts
concluded
before
its
enactment.

3. While
non-­‐impairment
of
contracts
is
constitutionally
guaranteed,
the
rule
is
not
absolute,
since
it
has
to
be
reconciled
with
the
legitimate
exercise
by
the
State
of
police
power.
A
contract
cannot
be
raised
as
a
deterrent
to
police
power,
designed
precisely
to
promote
health,
safety,
peace,
and
enhance
the
common
good,
at
the
expense
of
contractual
rights.
Resource
companies
operating
in
the
country
face
the
risk
that
the
government
to
assert
control
over
natural
resources
for
strategic
and
economic
reasons
will
invoke
its
police
powers
to
modify,
amend
or
repeal
resource
development
contracts.
Minimizing
Risks
In
response
to
the
risks
of
resource
nationalism,
mining
companies
have
employed
both
contractual
safeguards
and
socio-­‐economic
considerations
to
minimize
the
impact
on
their
investments.
Contractual
safeguards
include
meticulous
provisions
on
the
choice
of
law,
the
forum
and
method
for
resolving
disputes,
and
instituting
stabilisation
and
adaptation
clauses.
Foreign
investors
have
also
utilized
an
increasingly
robust
international
legal
framework
that
included
bilateral
investment
treaties
and
options
for
direct
investor-­‐state
arbitration
under
the
auspices
of
arbitral
authorities
such
as
the
International
Centre
for
Settlement
of
Investment
Disputes
and
the
International
Chamber
of
Commerce.
Political
risk
insurance
taken
by
developers
also
provides
cover
against
expropriation
and
breach
of
contract
by
host
governments.
Nevertheless,
the
industry
is
now
beginning
to
realize
that
the
traditional
legal
boilerplate
provisions
to
address
resource
nationalism
are
outdated
and
inadequate.
The
disturbing
trend
is
that
governments
in
emerging
markets
are
forming
state-­‐controlled
companies
or
mandating
local
equity
through
the
support
of
judicial
and
regulatory
environments,
which
directly
competes
with
foreign
investors
sometimes
using
aggressive
but
often
controversial
legal
measures.
Economic
liberalism
once
employed
by
government
to
attract
private
risk
capital
to
resource
development
projects
is
now
giving
way
to
mandated
local
participation
in
favor
of
larger
state-­‐
or
domestically-­‐owned
companies.
While
contractual
provisions
contribute
to
minimizing
the
risks
associated
with
the
various
expressions
of
resource
nationalism,
the
mining
industry
have
resorted
to
engagements
with
governments
to
foster
a
greater
understanding
of
the
value
a
project
brings
to
the
host
country.
By
communicating
the
benefits
of
the
project,
the
industry
hopes
to
encourage
governments
to
take
a
broader
view
of
the
return
from
natural
resource
development.
Using
this
approach,
the
industry
hopes
to
be
better
able
to
negotiate
appropriate
trade-­‐offs
that
preserve
the
value
to
both
mining
companies
and
governments
through
tax
incentives
and
offsets.
At
the
same
time,
mining
companies
are
developing
corporate
social
responsibility
initiatives
by
supporting
local
entrepreneurship
and
investing
in
public
services
and
infrastructure.
Foreign
companies
are
collaborating
with
local
companies,
as
the
rise
of
resource
nationalism
has
brought
with
it
a
requirement
imposed
by
host
governments
for
greater
local
content
and
participation
in
resource
development.

4.
While
some
mining
companies
appear
confident
that
they
stand
a
better
chance
of
fair
treatment
from
governments
through
their
tangible
investments
in
the
environment
and
host
communities,
the
assumption
that
social
development
spending
assure
them
against
resource
nationalist
policies
is
unrealistic
according
to
Nader
Mousavizadeh
of
Oxford
Analytica.
Resource
projects
with
the
concomitant
infrastructure
improvements
they
bring
to
the
host
country
are
most
of
the
time
held
hostage
to
political
rhetoric
and
strategy
employed
by
populist
governments
vulnerable
to
unrest
over
pollution,
corruption,
and
inequitable
sharing
of
wealth.
Companies
are
now
more
particularly
vulnerable
to
both
the
emotional
and
economic
aspects
of
resource
nationalism
especially
during
times
of
peak
commodity
prices
as
higher
revenue
will
translate
into
greater
public
demands
for
rents
and
governments
will
be
increasingly
wary
of
foreign
control
of
these
commodities.
Mousavizadeh
believes
that
when
government
and
foreign
companies
negotiate,
there
is
no
set
ratio
or
formula
for
arriving
at
the
best
practice
to
channel
resource
nationalist
tendencies
away
from
zero-­‐sum
thinking.
Deals
will
vary
according
to
contract
lifetime,
type
of
mineral,
bargaining
positions,
and
many
other
factors.
So
rather
than
thinking
about
an
optimum
distribution
of
production
or
profits,
the
parties
should
think
about
optimum
deal
structures.
By
recognizing
joint
interests,
the
contracting
parties
can
create
shared
value
instead
of
a
playing
a
zero-­‐sum
game
where
one
has
to
win
at
the
expense
of
the
other.
The
contracting
parties
must
apply
strategies
for
constructive
engagement
instead
of
counter-­‐productive
opposing
positions.
For
foreign
resource
developers,
they
must
realize
that
local
content
development
can
play
a
huge
part
in
mitigating
resource
nationalism
by
addressing
the
issue
of
equitable
distribution
of
economic
benefits
and
the
build
up
local
industries
so
that
they
can
directly
benefit
from
the
exploitation
of
the
resources.
Conclusion
Resource
nationalism
has
become
much
more
sophisticated
and
complex
in
the
forms
it
takes,
being
not
purely
driven
by
nationalistic
policies
but
by
wider
political,
economic,
social
and
environmental
drivers.
Effective
risk-­‐mitigation
strategies
will
involve
not
only
careful
thought
as
to
contractual
protection,
but
also
to
effective
early
engagement
by
the
resource
developer
with
the
host
state
and
its
communities
to
deliver
the
socio-­‐economic
benefits.
The
Philippine
government
must
realize
that
policy
uncertainty
can
be
extremely
damaging
to
both
investors
and
the
host
country
and
can
hamper
the
successful
exploitation
of
mineral
endowments.
It
is
imperative
then
that
any
legislative
and
regulatory
measure
imposed
by
the
government
should
be
properly
vetted
and
go
to
a
proper
consultation
process
with
the
affected
stakeholders
less
regulators
may
be
unwittingly
putting
the
finishing
touches
to
the
demise
of
the
mining
industry.
The
key
challenge
is
the
creation
of
an
investment
climate
that

5. can
assure
appropriate
profit
to
investors,
protect
host
states’
natural
resources
and
provide
other
long-­‐term
benefits
to
the
state
and
its
people.
Fernando
“Ronnie”
Penarroyo
is
the
Managing
Partner
of
Puno
and
Penarroyo
Law
(fspenarroyo@punopenalaw.com).
He
specializes
in
Energy,
Resources
and
Environmental
Law,
Business
Development
and
Project
Finance.