MAC: Mines and Communities

High Court rules vs. full foreign ownership of mining operations

Published by MAC on 2004-01-30

High Court rules vs. full foreign ownership of mining operations

BusinessWorld Internet Edition

Friday, January 30, 2004

By Bernadette S. Sto. Domingo, Reporter

Despite businessmen's criticism of "judicial intervention" in matters impinging on much-needed investments, the Supreme Court yesterday issued another decision with far-reaching impact on their sector.

Yesterday, it declared as unconstitutional provisions of the country's mining law that would have allowed big foreign mining firms to do business in the country.

In particular, the highest court in the land struck down as illegal the provisions of Republic Act 7942 or the Philippine Mining Act of 1995 that would have allowed the execution of service contracts with foreign-owned corporations for the exploration, development, exploitation, and use of the country's resources.

And as expected, those in the mining business expressed disappointment with the decision, which the government said it would appeal soonest. Mining companies said the court ruling put into question the revival of their industry, especially now that world metal prices are at new highs.

Much-awaited Decision

In its decision, the Court also declared as null and void the Implementing Rules and Regulations of RA7942, contained in Department of Environment and Natural Resources (DENR) Administrative Order 96-40.

"The Court hereby declares unconstitutional and void provisions of RA7942, AO 96-40, and the Financial and Technical Assistance Agreement (FTAA) between the government and WMC Philippines, Inc.," the court said in a 95-page decision written by Associate Justice Conchita Carpio-Morales.

Under the Constitution, foreign companies are limited to providing technical and financial assistance to the government in the large-scale exploration, development, and utilization of the country's minerals, petroleum, and mineral oils, the court said. It also said that, at the time the government entered into an FTAA with WMC Philippines, the company was owned by WMC Resources International Pty., Ltd. - a wholly owned subsidiary of Western Mining Corporation Holdings, Ltd., which is a publicly listed Australian mining and exploration company.

In petitioning against RA7942, farmers and indigenous peoples' cooperative La Bugal B'laan Tribal Association, Inc., and residents of areas affected by mining activities of WMC Philippines said under Section 2, Article XII of the Constitution, FTAAs should be limited to technical or financial assistance only. But contrary to the law, WMC's FTAA allowed the foreign-owned corporation to manage and operate every aspect of the mining activity.

"Petitioners' submission is well-taken. Accordingly, following the literal text of the Constitution, assistance accorded by foreign-owned corporations [in the large-scale use of resources] should be limited to technical or financial assistance only," the court said.

It stressed the 1987 Constitution retained the Regalian doctrine, which declared that, "all lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the state." The court also said "exploration, development and utilization of natural resources shall be under the full control and supervision of the state."

And in relation to this "full supervision and control" over natural resources, the State may directly undertake utilization or it may enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or entities at least 60% of whose capital is Filipino-owned.

WMC told the court earlier it sold all its shares in its local unit to Sagittarius Mines Inc., a corporation organized under Philippine laws, on January 23, 2001.

WMC Philippines was subsequently renamed Tampakan Mineral Resources Corporation, which claimed at least 60% of its was owned by Filipinos or Filipino-owned corporations, and about 40% by Indophil Resources NL , an Australian company. The company also said by such sale and transfer of shares, "WMC Philippines has ceased to be connected in any way with WMC."

But the court said the transfer did not render the case moot since the validity of the transaction had yet to be decided.

The tribal cooperative also said the FTAA was a service contract that allowed WMC Philippines -- or Tampakan -- to manage and operate every aspect of the mining activity, in effect, "granting [it] beneficial ownership over natural resources that properly belong to the State and are intended for the benefit of its citizens."

The management and operation of mining activities by foreign contractors, the primary feature of service contracts, was precisely "the evil that the drafters of the 1987 Constitution sought to eradicate," it added.

In ruling on the matter, the court said a service contract was a contractual arrangement for engaging in the exploitation and development of petroleum, mineral, energy, land, and other natural resources.

It allows a government or its agency, or a private person granted a right or privilege by the government, to authorize the a service contractor to engage or participate in the exercise of that right or the enjoyment of that privilege.

The service contractor provides financial or technical resources, undertakes the exploitation or production of a given resource, or directly manages the productive enterprise, operations of the exploration and exploitation of the resources, or the disposition of marketing resources.

"This Court finds that RA7942 is invalid insofar as said Act authorizes service contracts. Although the statute employs the phrase 'financial and technical agreements' in accordance with the 1987 Constitution, it actually treats these agreements as service contracts that grant beneficial ownership to foreign contractors contrary to the fundamental law," the court said.

It thus nullified the provision that a legally organized foreign-owned corporation would be deemed a qualified person for purposes of granting an exploration permit, FTAA or mineral processing permit.

"By allowing foreign contractors to manage or operate all the aspects of the mining operation, the above-cited provisions of RA 7942 have in effect conveyed beneficial ownership over the nation's mineral resources to these contractors, leaving the state with nothing but bare title thereto," the court said.

Concurring with Ms. Morales's decision were Chief Justice Hilario G. Davide, Jr. and associate justices Reynato S. Puno, Leonardo A. Quisumbing, Antonio T. Carpio, Renato C. Corona, Romeo J. Calljeo, Sr., and Dante O. Tinga.

Associate Justices Jose C. Vitug, Artemio V. Panganiban, Consuelo Ynares-Santiago, Angelina Sandoval-Gutierrez, and Alicia Austria-Martinez dissented.

They said the Constitution did not prohibit service contracts between the government and foreign-owned corporations in the large-scale exploration, development, and utilization of the country's resources.

Associate Justice Adolfo S. Azcuna abstained. And as expected, mining investors said the decision was inconsistent with the government's program to promote the mining sector as well as endangered other government contracts with foreign companies.

The Australian-New Zealand Chamber of Commerce in the Philippines, Inc. (AnzCham), which has been lobbying for the liberalization of the mining sector, said the country could lose $2 billion to $3 billion in investments annually because of the court decision. Peter Wallace, chamber director, said the decision was very disappointing because it was contrary to the government program to promote the mining sector.

President Gloria Macapagal Arroyo issued early this month Executive Order 270, or the former National Minerals Policy now known as the National Policy Agenda on Revitilizing Mining in the Philippines, which meant to revive the ailing industry. Mr. Wallace said even Congress has expressed support for reviving the mining industry.

"President Gloria Macapagal-Arroyo has recognized that all things weighed up, mining is overall beneficial. It [Judiciary] is only the third branch of government that does not agree," Mr. Wallace told BusinessWorld.

He said the Philippines has already lost a lot of investments, including those of many Australian firms, because of the issue raised against the Mining Act.

Instead of appeasing investors, Mr. Wallace said the court decision would only concern the international community, hinting that foreign mining firms could abandon investment plans for the Philippines.

The Chamber of Mines of the Philippines said that the decision would most likely have far-reaching consequences beyond the mining industry.

"It may open questions on other government projects, including oil and gas investments. It may also put the Malampaya [natural gas] project into question," chamber president Benjamin Philip G. Romualdez told BusinessWorld.

Mr. Romualdez said the decision declared null and void contracts dating back to 1995, and thus raised questions even on old contracts involving natural resources.

"Government could be subject to suits," Mr. Romualdez warned. He said the chamber has urged the Department of Environment and Natural Resources to file a motion for reconsideration. But at the same time, the decision has ended the uncertainty in the mining sector, and paved the way for investors to take concrete steps, he said.

"At least we now have an idea of what would be possible and what would not be available. And we can look at our options. We will work within the legal framework the government has provided," Mr. Romualdez said.

Environment Secretary Elisea G. Gozun said DENR would file a motion for reconsideration next week.

"We will be coordinating with the Office of the Solicitor General in filing the motion since they represent us in the case. Our legal department will also be reviewing the decision so we could plan our next moves," she said.

The court decision affects the FTAAs with Climax-Arimco Mining involving 21,465 hectares of land in Nueva Vizcaya and Quirino for the exploration of gold and copper, and with Sagittarius Mines Inc. for 30,490 hectares of land in North and South Cotabato, Sultan Kudarat and Davao del Sur for the exploration of gold and copper.

Under RA7942, for a minimum investment of $50 million (or its equivalent in pesos for a Filipino corporation), a mining firm can get a maximum of 81,000 hectares of land for mineral exploration for a period of 25 years per contract, which is renewable for a maximum of another 25 years.

The FTAA provision practically allows foreign companies to have full equity and control of mining projects.

Troubled from the Start

Republic Act 7942 or The Philippine Mining Act of 1995 was signed into law on March 6, 1995 by President Fidel V. Ramos. On August that year, the Department of Environment and Natural Resources (DENR) issued the law's implementing rules and regulations (IRR).

After years of persistent lobby in Congress, a legal framework was made concerning the management, controllership, and supervision of exploration, development and utilization of mineral resources. With these tasks given to the State, it followed that only the government could grant mining rights to qualified individuals and corporations.

Under RA7942, the government may grant three major kinds of mining rights: exploration permits, which grant rights to undertake purely mineral exploration activities; mineral agreements, which grant the right to explore, develop and utilize the minerals within a contract area and allows 40% foreign equity. It provides for mandatory area relinquishment and is subject to an environmental work program (EWP) during the exploration period, and an environmental compliance certificate (ECC) and environmental protection and enhancement program (EPEP) during the development and operation period. This agreement has three types: mineral production sharing agreement (MPSA), co-production agreement, and joint-venture agreement. financial or technical assistance agreement (FTAA), which is a mining contract for large-scale mining operations with an investment of not less than $50 million.

This agreement allows up to 100% foreign equity participation or ownership and, similar to the other agreements, has provisions for mandatory relinquishment and is subject to EWP, ECC and EPEP.

Mining contractors of MPSA and FTAA can avail of various fiscal and non-fiscal incentives. These include those granted under the Omnibus Investment Code of 1987 such as income tax holiday, incentive for pollution control devices, income tax carryforward for losses, income tax-accelerated depreciation, investment guarantees, repatriation of investments, and remittance of earnings. In February 1997, a group of nongovernment organizations challenged the Mining Act by filing a case in the Supreme Court that questioned its constitutionality. Following a series of environmental disasters brought about by mining operations that heightened public concerns, environmentalists, social activists and indigenous peoples organizations criticized the law, particularly its FTAA provisions.

Their major contention was that the 1987 Constitution classified the FTAA as an agreement for financial or technical support from foreign entities in the development of mineral resources but that the Mining Act allowed them to have full control of the mining operation.

And by allowing 100% foreign control over large-scale mineral exploration, development and utilization, the law supposedly jeopardized the lawful claim especially of indigenous people over mineral lands.

In 1998, the State implemented a 100-day moratorium on the signing of FTAAs on mining areas. This was in response to the continued confusion in the ownership of mineral resources. Even after the moratorium expired, low level of investments in mineral exploration and mine development persisted, given the lack of clarity on the issue. -- with reports from Iris Cecilia C. Gonzales, Jennifer A. Ng and Rizzarene S. Manrique

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