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Assessment of the Governance Performance of the Regulatory Regime Governing Foreign Mining Investment in the Philippines

This paper assesses the performance of the regulatory regime for foreign mining investment in the Philippines. Based on this, it outlines policy recommendations for the Philippine government, which, if implemented, are likely to improve the
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   PLEASE SCROLL DOWN FOR ARTICLE This article was downloaded by: [Vivoda, Vlado]  On: 14 May 2009  Access details: Access Details: [subscription number 911175319]  Publisher Routledge  Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House,37-41 Mortimer Street, London W1T 3JH, UK Minerals & Energy - Raw Materials Report Publication details, including instructions for authors and subscription information: Assessment of the Governance Performance of the Regulatory RegimeGoverning Foreign Mining Investment in the Philippines Vlado Vivoda aa Centre for International Risk, University of South Australia, Adelaide, AustraliaOnline Publication Date: 01 September 2008 To cite this Article Vivoda, Vlado(2008)'Assessment of the Governance Performance of the Regulatory Regime Governing ForeignMining Investment in the Philippines',Minerals & Energy - Raw Materials Report,23:3,127 — 143 To link to this Article: DOI: 10.1080/14041040902805165 URL: Full terms and conditions of use: article may be used for research, teaching and private study purposes. Any substantial orsystematic reproduction, re-distribution, re-selling, loan or sub-licensing, systematic supply ordistribution in any form to anyone is expressly forbidden.The publisher does not give any warranty express or implied or make any representation that the contentswill be complete or accurate or up to date. The accuracy of any instructions, formulae and drug dosesshould be independently verified with primary sources. The publisher shall not be liable for any loss,actions, claims, proceedings, demand or costs or damages whatsoever or howsoever caused arising directlyor indirectly in connection with or arising out of the use of this material.   Assessment of the GovernancePerformance of the Regulatory Regime Governing Foreign Mining Investment in the Philippines by  VLADO VIVODA  Centre for International Risk, University of South Australia, Adelaide, Australia INTRODUCTION: REGULATORY REGIMES,GOVERNANCE INFRASTRUCTURE AND FOREIGNDIRECT INVESTMENT  The term regulatory regime refers to ‘a historically specific configuration of policies and institutions which structures the relationship between socialinterests, the state and economic actors in aneconomy’ (Eisner 2000). Regulatory regimes con-sist of policies (formal procedures and informalprocesses/influences) and institutions (rule-makers and regulators) governing a particular industry sector. A regulatory regime, or environ-ment, governing a particular industry is a part of the overall political, institutional and legal envir-onment or, in other words, of governance infra-structure of a country. Governance infrastructureconsists of ‘public institutions and policies createdby governments as a framework for economic,legal and social relations’ (Globerman andShapiro 2003). Governance infrastructure affectsthe investment decisions of multinational cor-porations (MNCs). As a result, inflows of foreigndirect investment (FDI) depend on the quality of acountry’s governance infrastructure (OECD 2001;Globerman and Shapiro 2002) and, thus, of regulatory regimes governing various industriesin a given country. The characteristics of regulatory regimes govern-ing a particular industry are of pivotal concern toMNCs investing in developing countries.Logically, regulatory environments exhibiting cer-tain characteristics that reduce risks for foreigninvestors are more likely to attract foreign invest-ment than those with characteristics that increaserisks. The central question then becomes – what characteristics/features of a regulatory regime  Abstract   This paper assesses the performance of the regulatory regime for foreignmining investment in the Philippines.Based on this, it outlines policy recommendations for the Philippinegovernment, which, if implemented,are likely to improve the governanceinfrastructure in the sector and, inturn, reduce regulatory risk for foreignmining investors and attract moreforeign investment. The main argu-ment is that the poor performance of the governance structures in thePhilippine mining sector is behindthe high level of regulatory risk for foreign mining investment, and thelow levels of foreign investment. After outlining the relevant theoretical fra-meworks essential for the assessment of the performance of the regime, thearticle maps the regulatory regimegoverning foreign mining investment in the Philippines by summarizing themajor rules and regulations, institu-tions (rule-makers and regulators) andstakeholders in the Philippine mining industry. This is followed by theassessment of the performance of theregulatory regime for foreign mining investment. Finally, policy recommen-dations for improving governanceinfrastructure in the sector are out-lined. This paper, unique in its subject area, may assist the Philippine govern-ment and possibly governments of other developing countries in improv-ing governance infrastructure in their mining sectors and, thus, reduce thelevel of regulatory risk and increasethe amount of foreign investment inthe sector.2008; 3:127–1432008 Taylor & Francis ISSN 1404–1049DOI 10.1080/14041040902805165 MINERALS & ENERGY VOL 23 NO 3 2008 127  D o w nl o ad ed  B y : [ Vi v od a ,  Vl ad o]  A t : 00 :59 14  M a y 2009  reduce risk for MNCs/increase foreign investment inflows? Based on the survey of extant literature(see Brown and De Paula 2002; Gutie´rrez 2003;Cubbin and Stern 2004; Kaufmann et al. 2004;Kurtzman et al. 2004; Jamison et al. 2005; WorldResources Institute 2005), six major regulatory risk  variables inherent in regulatory regimes governing foreign investment in a particular industry areidentified (Table 1). Formal Procedures and Informal Influences Regulatory regimes are made up of both formalrules and procedures, and informal influences andprocesses, such as conventions and codes of behaviour (North 1990). While regulatory regimesare designed to function according to formalprocedures, in practice they do not, and there isalways a degree of informal influence on their operations. The best way to understand thedifference between formal procedures and informalprocesses in the operations of regulatory regimes isto describe formal procedures in terms of how they are supposed to function and informal processes asan incongruity between how they are supposed tofunction and how they operate in practice. 1  A rangeof rules and regulations outline the particularitiesabout how a regulatory regime should function inpractice, and generally specify the roles andresponsibilities for all actors/agencies involved.Official channels for stakeholder participation inthe regulatory process may be prescribed and, assuch, do not constitute an informal process. Anideal regulatory process, which functions by strictly adhering to formal procedures, will be largely insulated from informal influences.Issues arise, for instance, when formal specifica-tions are broad, ambiguous or contradictory, whichallows for a degree of discretion on the part of decision makers; when decision makers have nocapacity to act according to the formal rules andregulations; and when various decision makers or the process as a whole is captured (Table 2). If thedegree of informality in a particular regulatory  Table 1. Regulatory Regime Variables. Regulatory regime variables Description Clarity of rules and regulations If the rules and regulations are clear and not contradictory, regulators will havean easier job implementing them, which will reduce the possibility for regulatory uncertainty and/or overlap, and thus reduce the risk for foreigninvestorsPolicy and legal uncertainty If the overall government policy towards a particular sector investment is stableand not challenged in the courts, the rules and regulations governing that sector are unlikely to be changed frequently; as a result, guidelines issued to theregulators are unlikely to change frequently, making implementation morestable and foreign investment less risky Regulatory capacity/efficiency If the regulators have sufficient capacity and are efficient in their decision-making processes, the risk for foreign investors is reducedRegulatory transparency/accountability If the regulators are transparent and accountable in their decision-making processes and dealings with the stakeholders, there is less likelihood of legalchallenges by the stakeholders and, thus, less risk for foreign investorsRegulatory capture If the regulators are free of capture by any of the stakeholders, there is less risk for foreign investorsRegulatory overlap/conflict If the regulators are clear about their respective roles there is less likelihood of regulatory overlap and/or conflict; if there is no regulatory overlap and/or conflict over ‘ownership’ of particular rules, there is less risk for foreign investors Table 2. Examples of Descriptors of Formal and Informal Regimes. Formal regime Informal regime Clarity of rules and regulations* High Low Capacity of decision makers to act according to formal procedures High Low Independence of decision makers from informal sectional interests High Low *Alternatively, procedural clarity.  V. Vivoda 128 MINERALS & ENERGY VOL 23 NO 3 2008  D o w nl o ad ed  B y : [ Vi v od a ,  Vl ad o]  A t : 00 :59 14  M a y 2009  regime is high – for instance, if there is high degreeof capture by sectional interests – this increasesregulatory risks for foreign investors and reducesFDI inflows into the sector.Regulatory risk at industry level can be definedas risk arising from the quality of regulatory rulesgoverning a particular industry, and from their application and enforcement (Moran 1999). Thispaper assesses the performance of the Philippineregulatory regime governing foreign mining investment, against the six criteria outlined in Table 1. Given that investments in governanceinfrastructure and in improving the regulatory environment in particular are likely to reduceregulatory risks for foreign investors and, as aresult, are likely to attract foreign capital, thispaper proposes the ways in which the Philippinegovernment can improve the performance of itsregulatory regime governing foreign mining investment. This paper adds to the relevant literature in several ways. Most prominently, it isunique in its subject area, as there have been nosimilar assessments of the performance of govern-ance structures in the Philippine mining sector.Moreover, it proposes the ways in which govern-ance infrastructure in the mining sector in thePhilippines can be improved in order to reduceregulatory risk for foreign investors and attract more foreign investment into the sector. It is likely that the lessons learnt in the Philippines may beuseful in improving governance in other develop-ing countries’ mining sectors. The paper proceeds as follows. In the secondsection, in order to gain a thorough understanding of the Philippine regulatory regime governing foreign mining investment, the formal rules andregulations which form the foundation of theregime, are outlined. This is followed by analysisof the institutions (rule-makers and regulators) andstakeholders involved. In the third section, theperformance of the Philippine regulatory regimegoverning foreign mining investment is assessedagainst the criteria set in Table 1. Finally, in sectionfour, policy recommendations on how to improvetheperformanceofthePhilippineregulatoryregimegoverning mining investment are outlined. MAPPING THE FORMAL REGULATORY REGIMEGOVERNING FOREIGN MINING INVESTMENT IN THEPHILIPPINES  Although there may be a degree of overlap, theregulatory regime that governs the mining industry in the Philippines, or any other country,differs from that governing other industries. For example, certain rules and regulations that arerelevant for foreign mining investors interested inestablishing mining operations significantly differ from rules and regulations relevant for foreignhealth or tourism industry investors. While theoverlap is commonly evident in the overall foreigninvestment regulations, specific sector-based reg-ulation is likely to be significantly different.Similarly, although there is a degree of overlapamong the institutions involved in various issueareas, in particular among the rule-makers, theregulators are likely to be exclusively different. The mining potential of the Philippines issubstantial, as the country holds reserves of precious metals (gold, silver, platinum), basemetals (copper, lead, zinc, mercury, cadmium),iron alloys (chromite and nickel), light metals(bauxite and manganese) and iron (Mines andGeosciences Bureau [date unknown]). Based ondensity of deposits per square kilometre of landarea, the country is ranked third in the world ingold deposits, fourth in copper reserves, fifth innickel and sixth in chromite ( Business World 2005). Although there has been a long history of mining in the Philippines, the negative investment climate throughout much of the 1980s resulted inthe under-use of the mining industry in promot-ing socio-economic development (Otto 1992).However, since the 1990s the Philippine govern-ment has encouraged mining and strived to attract foreign investment. For instance, the Philippinesare one of the developing countries that have, inrecent years, made a significant effort to attract foreign investment into their mining sectors(Bridge 2004). In March 1995, President FidelRamos signed into law the Mining Act, the statute which has been sought by the Philippine mining industry through the Philippine Chamber of Mines since ratification of the PhilippineConstitution in 1987 (Otto 1992). There are various documents that form thefoundation of the formal regulatory regimegoverning foreign mining investment in thePhilippines (Table 3), and there is a certain degreeof overlap between various regulations. It isevident from Table 3 that there is a wide array of rules and regulations governing the regulatory regime for foreign mining investment in thePhilippines. These rules are created by numerousrule-makers and enforced by the regulators. While  The Regulatory Regime Governing Foreign Mining Investment in the Philippines MINERALS & ENERGY VOL 23 NO 3 2008 129  D o w nl o ad ed  B y : [ Vi v od a ,  Vl ad o]  A t : 00 :59 14  M a y 2009  Table 3. Regulations Governing Foreign Mining Investment in the Philippines. Name of regulation Relevance for mining investors  The 1987 Philippine Constitution (Section 2, Article XII)Spells out the guiding principles for mining in thePhilippines; although the state owns all mineral resources,it may enter into agreements with private contractors for the exploitation of mineral resources  Mining Act  of 1995 (Republic Act No. 7942) The regulation governing mining; created in order torevive the Philippine mining industry; defines theagreements for mineral exploitation and also provides therequirements for acquiring mining rights; governs theexploration, development, processing and utilization of mineral resources in the Philippines; through Financial or  Technical Assistance Agreements (FTAAs), it allows for 100 per cent foreign ownership of the mining project; it also contains several incentives to encourage mining, suchas a four-year income tax holiday, tax and duty-free capitalequipment imports, value-added tax exemptions, incometax deductions where operations are posting losses, andaccelerated depreciation The Foreign Investment Act  (FIA) of 1991 (R.A.No. 7042) amended by R.A. No. 8179 The general foreign investment regulation. As such, it governs the entry of foreign investment and conducting of business by foreigners without incentives; it also sets intoplace the procedures for the registration and grant of incentives to foreign investors, and specifies the limits onthe extent of allowable foreign ownership The Omnibus Investment Code of 1987 (ExecutiveOrder No. 226) amended by R.A. No. 8756Provides the rules by which foreign investment in thePhilippines may qualify for certain incentives The Special Economic Zone Act  of 1995 (R.A.No. 7916), and the Export Development Act  of 1994 (R.A. No. 7844)Outline further conditions under which fiscal incentivesapply  The Foreign Investment List  (E.O. No. 286) Defines the areas where restrictions on foreign ownershipexist as specified by the Constitution and certain laws The National Internal Revenue Code of the Philippines ,or ‘the Tax Code’ (Presidential Decree No. 1158),amended in 1997 by R.A. No. 8424 (The TaxReform Act  )Provides the general framework for the tax regime The 1991 Local Government Code (LGC) of thePhilippines , or ‘the decentralization code’ (R.A.No. 7160)Specifies the consensual local government requirement for any mining project to proceed, and the share of mining taxes going to the local government; it alsoentrusts the local government units (LGUs) withoverseeing environmental management (Courtney et al.2002) The 1980 Corporation Code of the Philippines (BatasPambasa Bilang 68)Provides for the rules and regulations in the establishment and operation of stock and non-stock corporations in thePhilippines The 2000 Securities Regulation Code (R.A. No. 8799) Governs the regulation of securities and practices in thestock market  The Indigenous Peoples’ Rights Act  (IPRA) of 1997(R.A. No. 8371)Contains important provisions concerning mining activities in ancestral domain and ancestral lands, and warrants that no mineral agreement shall be approvedunless there is ‘free, informed and prior consent’ (FIPC)from indigenous peoples  V. Vivoda 130 MINERALS & ENERGY VOL 23 NO 3 2008  D o w nl o ad ed  B y : [ Vi v od a ,  Vl ad o]  A t : 00 :59 14  M a y 2009
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