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INEQUITABLE SHARE by Anton Ragos

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Introduction Coal is an important resource and serves as one of the most significant energy sources of the Philippines. With the country possessing a vast amount of untapped coal reserves, coal can help address the increasing demand for electricity in the country. As an industry, coal production also can also contribute to the growth of the national economy and expedite the development of local host communities. The use and production of coal, however, has generated concerns, especially and most commonly those relating to the environment and to public health. Harnessing coal’s potential therefore requires achieving a careful balance between the possible costs and benefits of coal production. The coal mining operators, the Philippine government, and the civil society play key roles in attaining the said goal. Nevertheless, these players and stakeholders are limited by the regulatory framework defined by the existing policies governing the industry. In order for each stakeholder to act towards an optimal and equitable outcome, the regulatory environment must be shaped and re-shaped to be made conducive in the attainment of the said objective. This paper analyses the Philippine coal industry, focusing on the coal mining operations in the country. It provides an overview of the Philippine coal market, as well as the regulatory framework in which the industry operates. The paper offers general analysis and broad discussion of several regulatory concerns (e.g. revenue-sharing, environmental regulation, and social development) which call for further scrutiny and public attention. The paper does, however, have several limitations. First, its description of the regulatory framework was based on the provisions of the related policies; de facto regulation and responses to these policies are discussed at a minimum. Second, lack of available data limited the discussions and analyses on other issues linked to coal mining operation (e.g. health, employment condition). Other data limitations (e.g. employment, coal prices, profile of individual coal mining companies, compliance to government rules and regulation, etc.) have similarly prevented further analysis of other matters concerning the industry.

Philippine Coal Resource Different estimates of the Philippine’s coal resource potential are wide-ranging and contradictory.1 According to Philippine government data, the country potentially holds an estimated 2,386.70 million metric tons (mmmt) of coal, located in different regions.2 As of 2012, the evaluated volumes of Philippine coal reserves, by different classifications, are as follows: 290.80 mmmt of positive reserves; 195.41 mmmt of probable reserves; 421.07 mmmt of in-situ reserves; and 311.212 mmmt of mineable reserves.3 Semirara Island in Caluya, Antique, despite an area equivalent to 0.02 percent of the country’s total land area, is where most of the Philippine’s coal reserves is located: 24 percent of the total resource potential, 31 percent of the positive reserves, 28 percent of the in-situ reserves, and 33 percent of the mineable reserves. Significant portions of coal reserves are also located in Cagayan Valley, South Cotabato, Zamboanga, and Surigao. In sum, these regions host 34% of the country’s total resource potential, 61 percent of positive reserves, 71 percent of probable reserves, 64 percent of 1 2 3

Kessels, J. and Baruya, P. (2013). Prospects for coal and clean technology in the Philippines. Conducted by Robertson Research International Ltd in 1977 Positive Reserves are those sufficiently explored to warrant inclusion in a company’s five-year development and production program; Probable Reserves are those that need further exploration to confirm existence. The volume of In-situ Reserves is calculated by adding the total positive reserves to two-thirds of the probable reserves; and the volume of Mineable Reserves is computed by multiplying the total in-situ reserves by a mining recovery factor of 60% for underground areas and 85% for open pit areas (DOE, n.d.).


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in-situ reserves, and 61 percent of mineable reserves (see Table 1) Coal is classified into different types and is graded as follows, in increasing rank depending on hardness, purity, and heating value: “Lignite”, “sub-bituminous,” “bituminous,” and “anthracite”—considered hardest, purest and has highest heating value. Types of coal found in the country range from lignite to bituminous, with sub-bituminous coal constituting 56 percent of the mineable reserves. Sub-bituminous4 coal reserves are located in Semirara, Surigao, Samar, Cebu, islands of Polilio, Batan and Catanduanes, Negros Occidental, Mindoro, Davao, and Masbate. Lignite coal comprise 37 percent of the mineable reserves and are located in Cagayan Valley, Cotabato and Saranggani. The remaining seven percent of the mineable reserves are classified as bituminous coal, and are located in Zamboanga region5. Coal areas in Semirara, Cagayan Valley, and parts of Samar and Surigao are treated as open pit areas, while all other locations are treated as underground areas. Table 1: Philippine regional distribution of coal reserves, by classification, as of December 2012 Resource Potential

Positive Reserves

Probable Reserves

In-Situ Reserves

Mineable Reserves

mmmt

%

mmmt

%

mmmt

%

mmmt

%

mmmt

%

336.00

14.08

80.11

27.55

3.70

1.89

82.57

19.61

70.18

22.55

Central Cebu

40.0

1.68

3.35

1.15

4.76

2.44

6.53

1.55

3.92

1.26

Northern Cebu

75.00

3.14

2.23

0.77

0.66

0.34

2.67

0.63

1.60

0.51

Southern Cebu

50.0

2.09

1.16

0.40

1.87

0.96

2.41

0.57

1.45

0.46

100.00

4.19

0.21

0.07

-

-

0.21

0.05

0.12

0.04

Masbate

2.50

0.10

0.08

0.03

-

-

0.08

0.02

0.05

0.01

Mindoro

100.00

4.19

1.31

0.45

0.20

0.10

1.44

0.34

0.87

0.28

Negros

4.50

0.19

1.21

0.41

1.21

0.62

2.01

0.48

1.21

0.39

Polillo, Batan, & Catanduanes

17.00

0.71

4.95

1.70

1.61

0.82

6.02

1.43

3.61

1.16

Quezon

2.00

0.08

0.09

0.03

-

-

0.09

0.02

0.06

0.02

Samar

27.00

1.13

7.48

2.57

1.67

0.85

8.59

2.04

7.28

2.34

Semirara

570.00

23.88

90.67

31.18

43.82

22.42

119.89

28.47

101.91

32.74

Surigao

209.00

8.76

28.87

9.93

60.98

31.21

69.53

16.51

47.55

15.28

Zamboanga

45.00

1.89

33.99

11.69

5.99

3.06

37.98

9.02

22.79

7.32

Bukidnon

50.00

2.09

-

-

-

-

-

-

-

-

Maguindanao

108.00

4.53

-

-

-

-

-

-

-

-

Sarangani

120.00

5.03

-

-

-

-

-

-

-

-

South Cotabato

230.40

9.65

35.09

12.07

68.96

35.29

81.07

19.25

48.64

15.63

Sultan Kudarat

300.30

12.58

-

-

-

-

-

-

-

-

2,386.70

100.00

290.80

100.00

195.41

100.00

421.072

100.00

311.212

100.00

Cagayan Valley

Davao

TOTAL

Source of basic data: Energy Resource Development Bureau, Department of Energy

4 5

Department of Energy (2012) The given classification by the DOE possibly pertains to the coal grade predominant in a given location as other references show that a mixture of coal with different grades is found in a given region.


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Philippine Coal Resource Coal Supply An upward trend in local coal production has been observed in the past year three decades. Production in the 1980s was expanding yearly by an average growth rate of 17 percent. By the end of the decade, the annual production increased by four-folds from the extraction volume in 1980 (from 0.329 mmmt to 1.236 mmmt). Production was slower in the 1990s when several contractions occurred; the decade nevertheless registered a positive average annual growth rate of 1.5 percent, and volume of production was two percent higher at the end of the decade (1.353 mmmt). Production picked up in the 2000s as annual growth rate rose to 20 percent. From 1.230 mmmt in 2001, the supply of indigenous coal amounted to 7.337 mmmt by 2010 (See Figure 1). Contributory to the rapid growth of coal production in the 2000s is the establishment of government mechanism to further accelerate local production, as well as the expansion of the market to other countries as the Philippines started to export local coal in 2007. From the production level of 8.153 mmmt in 2012, the government outlook for coal production shows an expected increase to 11.12 mmmt by 2015, 12.59 mmmt by 2020, 13.03 mmmt by 2025, and 13.31 mmmt by 2030.6 Semirara Mining Corporation dominates local coal production in the country. In 2011, 94 percent of the total indigenous coal was extracted by the company. Other contractors7 operating in different locations of the country accounted for four percent of the total production in the same year, while small-scale coal mining permit holders8 contributed for the remaining 1.6 percent. Though a near-monopoly in local production, Semirara Mining Corporation still faces competition from coal importers. Indigenous coal is predominantly of sub-bituminous grade which has a relatively lower heating value, and hence lower energy-generating capacity. Since most of the coal-fired plants in the country are designed for higher-quality coal9, higher-grade coal, such as steam coal and anthracite, are imported and blended with the locally-produced lower-grade coal to suit the needs of the local power plants (and other coal end-users). Over the years, foreign-sourced coal has taken a significant portion in the country’s total coal supply (i.e. sum of indigenous production and total importation) as the country resorted to importation to meet the demand for higher-grade coal. The earliest data on coal importation shows that the country began to outsource coal in 1988 when importation contributed to almost half (49 percent) of total coal supply. However, several years prior to 198810, the levels of coal consumption already exceeded the corresponding volumes of local production, suggesting that the Philippines began its importation prior to the said year. In the 1990s, average annual growth rate in the volume of imported coal stood at 21 percent, and volume grew from 1.435 mmmt in 1991 to 6.814 mmmt in 2000. In the same period, foreign-sourced coal accounted for an average of 63 percent of the country’s coal supply. In the 2000s, the growth of coal importation fell to an average annual rate of Philippine Energy Plan 2012-2030 As of 2012, 60 development and production contracts awarded in 2010 and earlier were held by 23 operators (excluding Semirara Mining Corp.). This suggests that, apart from Semirara Mining Corp., 23 additional operators were possibly involved in coal production since 2011. However, of the said operators, only 13 contract holders have remitted government shares in the coal proceeds to the DOE, thus implying that 13 contract holders were actually involved in coal production in the same year. 8 Data on government share remittance suggest that 38 small-scale coal mining permit holders were involved in coal operations in 2011 9 Energy Resource Development Bureau 10 For example, the amount of coal consumed in 1985 (2.393 mmmt) was more than double the registered volume of coal produced (1.262 mmmt) in the same year. 8 7


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six percent (Note that the average annual growth rate in indigenous production similarly declined in the same period), yet import dependency was higher in the same period when the average share of imported coal rose to 71 percent. The contribution of imported coal to the total supply amounted to a historical high of 86 percent in 2001. Although a downward trend in the portion of imported coal has been observed in the following years, most of the country’s coal supply continues to be sourced from other countries. By 2012, the volume of imported coal amounted to 11.895 mmmt, and is equivalent to 59 percent of the total coal supply in the same year. Country sources of imported coal include Indonesia, China, Australia, Vietnam, Russia, and South Africa11. Indonesia serves as the largest source of the imported coal (primarily steam coal) since 2005, accounting for 75 percent (2003 to 2012 average) of the country’s foreign-sourced coal12(see Figure 1).

Coal Demand Rapid expansion in coal usage was recorded in the 1980s when consumption grew annually by an average rate of 34 percent. By the end of the 1980s, coal consumption was eight-folds higher compared to volume at the onset of the decade (from 0.27 mmmt in 1981 to 2.234 mmmt in 1990). The expansion continued in the 1990s albeit at a slower average annual growth rate of 15 percent. Within the said period, coal consumption increased by almost three-folds from 2.833 mmmt in 1991 to 8.762 mmmt in 2000. The average annual growth rate further slipped to five percent in the following decade. By 2012, the volume of consumption stood at 16.163 mmmt (see Figure 1). Despite the continuing importation of coal, the Philippines is currently exporting its indigenous coal to neighboring countries. Exportation began in 2007 and foreign demand has since then taken a significant portion of the country’s annual coal production. In 2009, for example, more than half (57 percent) of the total indigenous coal produced was marketed to other countries. On the average, foreign demand for Philippine coal constituted 38 percent of the local production from 2007 to 2012. Export destinations include India, Thailand, China, Hong Kong, Taiwan, and Japan. According to the DOE, export of local coal is allowed only after ensuring that applicable local demand is addressed13.

25

Figure 1: Annual volume of coal production, importation, and consumption, in mmmt, 1977-2012

20 15 10

0

19 77 19 78 19 79 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12

5

Production

11 12

13

Importation

Consumption

Energy Resource Development Bureau Calculated using coal import data from DOE. When estimated using the coal exportation data from the government of Indonesia (http://www.minerba.esdm.go.id/public/38477/produksi-batubara/.ekspor-negara/), the share of Indonesian coal to the total volume of imported coal shows a lower ratio of 46.59%. Energy Resource Development Bureau


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Contribution to Power Production Both indigenous and imported coal is consumed locally for power generation, cement production, and other industrial processes.14 Power generation accounts for the largest share in coal usage, constituting 75 percent to the total volume of consumption (2009 to 2012 average) while cement production and other industrial processes accounted for 21 percent and four percent, respectively, of the total consumption in the same period. The share of coal to overall power generation has increased rapidly over the years as coal consumption grew over the last three decades. At the onset of the 1980s, power sourced from coal constituted less than one percent (0.7) of the country’s overall energy mix but rose sharply in subsequent years and stood at seven percent by the end of the decade. By the end of the 1990s, the share of coal amounted to 37 percent. The year 2000 marked the first instance when the coal contributed more than oil in terms of power generation. The share of coal-sourced energy reached a historical high of 40 percent in 2001, but slipped in thereafter possibly due to the erratic behaviour of coal energy production from 2001 to 2010, as well as the continuously increasing share of natural gas to the overall energy mix in the same period.15 In the 2000s, the coal-sourced energy accounted for an average of 30 percent of the overall power generation. Currently, coal serves as the highest source of energy in the Philippines, highlighting the increasing significance in the contribution of coal to the country.

Figure 2: Coal consumption, by sector, 2009-2010

18 16 14 12 10 8 6 4 2 0

2009

2010

2011 Power Generation

Cement Production

2012 Other Industrial Process

Source: Ocampo, I. (2012), Kessels, J. (no date), Reyes, A. (2010), Energy Resource Development Bureau

14 15

Industrial processes include alcohol, sinter, rubber boots, paper and chemicals manufacturing, fertilizer production, and smelting processes From 2001 to 2010, the share of energy sourced from natural gas increased ten-fold from 1.8% to 18%. The contribution of natural gas to the total generation mix continued to increase thereafter.


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Figure 3: Philippine energy generation mix, 1980-2010

100% 80% 60% 40% 20%

19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10

0 Coal

Hydroelectric

Natural Gas

Oil

Renewable Energy

Source: World Bank

Energy Efficiency To better understand how coal trade affects power generation, the paper provides a simple assessment of coal energy efficiency over the years. Figure 4 illustrates coal energy efficiency (calculated by taking the ratio of energy sourced from coal and the volume of coal consumption in a year16) from 1980 to 2010, indicating fluctuations in the amount of energy produced per unit of coal over the last three decades, ranging from historical low of 465 GwH/mmmt in 1994 to 2,296 GwH/mmmt in 2001 (see Figure 4). While the historical pattern of energy-to-consumption ratio, given its lack of discernible consistency, gives no definite conclusion regarding the overall efficiency performance of coal-power industry, the annual volume of importation (in proportion to the total consumption) appears to provide a better explanation regarding the efficiency level of coal power generation in a given year. As Figure 5 shows, energy-to-consumption ratio is higher during the years when the portion of imported coal is greater; suggesting that more electricity can be generated per unit of coal if more of the imported resource is used. The result is not surprising, considering that imported coal is predominantly of higher grade which has higher heating value and greater energy-generating capacity. Nevertheless, the result implies that, if reliance on imported coal is to be reduced in the future, confirmation of the country’s greater resource potential for utilizable indigenous higher-grade coal is necessary in order to at least maintain the current level of energy efficiency.

16

This analysis is limited by the lack of data on time-series distribution of coal consumption among different sectors; the volume of coal consumption in a given year is inclusive of the amount consumed by other industries apart from power generation (i.e. cement production and other industrial processes).


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Figure 4: Ratio of coal energy generation to volume of consumption, in GwH/mmmt, 1980-2010

2500 2000 1500 1000 500

19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10

0 Source: Calculated using World Bank and Department of Energy data

Figure 5: Scatterplot of energy-to-consumption ratio and volume of importation, 1988-2010 100 90 80 70 60 50 40 30 20 10 0

0

500

1000

Source of basic data: World Bank and Department of Energy data

1500

2000

2500


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Social Impact Health Impact Apart from the occupational health hazard on coal mining workers, other negative health impacts have been associated with coal mining, particularly among residents in proximity to coal mining operations. In the US, reports of respiratory conditions among children near open-pit coal mining site were found to be higher compared to children away from mining sites.17 Similar results were found in UK where higher respiratory cases were found among primary schoolchildren residing in areas exposed to steam coal dust.18

Carbon Emission Criticisms against the use of coal include the detrimental effects it poses to the environment. Among others, coal combustion is associated with high levels of carbon dioxide (CO2) emission, a known greenhouse gases linked to increasing the rate of global warning.

60000

Figure 6: Total CO2 emission, by fuel source, 1980-2010

50000 40000 30000 20000 10000

19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09

0

Petrolium/Oil

Coal

Natural Gas

Source: Calculated using World Bank and Department of Energy data

In the Philippines, CO2 emission from coal use has been rising in the past years, increasing by 483.41 kilotons (kt) annually from 1981 to 2009. In the 1990s, coal use contributed an average of 11 percent to the total CO2 emission from consumption of major carbon fuels (i.e. petroleum, coal, and natural gas). As the consumption of petroleum fuel dropped in the following decade, the share of CO2 emission from coal use rose significantly. On the average, 21 percent of the total CO2 emission from 2001 to 2009 was attributed to coal usage.

17 18

Pless-Mulloli, T. et. al. (2000). Living near opencast coal mining cites and children’s respiratory health Brabin, B. et. al. (1994). Respiratory morbidity in Merseyside schoolchildren exposed to coal dust and air pollution


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Nonetheless, on a per-unit level, the amount of CO2 of coal used has in fact decreased over the years. From 1982 to 1983, the ratio decreased by half (57 percent) as the volume of CO2 emissions per unit of coal plummeted from 4,849 kt/mmmt to 2,082 kt/mmm. The ratio declined steadily thereafter and stood at 1,221 kt/mmmt by 1998 and stagnated throughout the following decade. Similarly, the volume of CO2 emission from coal consumption per unit of electricity produced in a given year has declined in the past years. From its historical peak of 10.11 GwH/mmmt in 1981, the ratio fell to 3.72 in 1982 and continued to slip thereafter. An upward trend in the period of 1985 to 1994 was registered, although the ratio never exceeded the 1984 level of 3.29 GwH/mmmt. The ratio remained below one gigawatt hour per million metric tons of coal throughout the rest of succeeding decade. Though enhancement in efficiency of coal use through the years is apparent, such should not warrant the absence of regulation(s) on coal consumption and on the harmful effects associated with it. In total, coal use remains a significant contributor to the country’s CO2 emission. In light of the expected further expansion of coal power, complementary policies that will reduce such unwanted spill-over effects of coal use must be in place (e.g. corrective taxes) to deter unnecessary/excessive consumption and encourage further efficiency in coal use. 6000

Figure 7: Coal CO2 emission per unit of consumption, 1980-2010

5000 4000 3000 2000 1000

19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09

0 Source: Calculated using World Bank data

2500

Figure 8: CO2 emission from coal per unit energy produced, 1980-2009

2000 1500 1000 500

19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09

0 Source: Calculated using World Bank data


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Impact on Local Areas In 2010 and 2011, the total share of the government in the coal proceeds amounted PhP545.21 million and Php1,633.61 million, respectively. Of the said amount, PhP216.80 million and PhP654.79 million were to be remitted to concerned LGUs in the corresponding years.19 The potential for increasing the financial resources of LGUs is among the arguments that favor coal mining in a given locality. In addition, it is argued that coal mining could also provide greater employment opportunities among the locals, and contribute to raising the over-all income levels in their respective areas. However, analysis of the poverty levels in host municipalities/cities shows that such areas had remained poor despite the presence of coal mining operations.20 As the 2009 data on local poverty incidence shows, of the 22 municipal/city locations for 33 coal operations, 19 are above the national poverty rate of 22.9 percent in the same year.21 In several of these municipalities/cities, poverty incidences are higher compared to the provinces in which they are located. Furthermore, in the three poorest areas among the 22 locations—Dalaguete (55.8 percent), Rapu-Rapu (58.6 percent), and Payao (63.3 percent)—high levels of poverty have persisted despite the presence of two or more coal mining operations over the past years.

Figure 9: Poverty incidence in areas of coal operation, 2009

70 60 50 40 30 20 10

Municipal/City Poverty Incidence

M ar ih at ag Sa n M ig ue l Bu la la ca o La ke Se bu D al ag ue te Ra pu -R ap u Pa ya o

D ip la ha n Ca lu ya

M al an ga s Im el da

Ba la m ba n Ca la tra va Bu ug

La in ga

Co m po ste la D an ao Ci ty Bi sli g

Ta nd ag

Ca ua ya n Ci G ty at ta ra n Ig ui g

0

Provincial Poverty Incidence

Column 2

Source: Calculated using World Bank data

Energy Resource Development Bureau This is not to discount other factors which could have counteracted the possible positive effects of coal mining. Data limitations hinder the analysis from quantifying the relationships of different variables— particularly of the isolated effect of higher receipts from coal remittances—to the development of the locality. 21 Excludes localities where coal development/production commenced from 2009 and beyond. 19 20


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Policy Framework Overview The Philippine government’s inherent ownership of coal and other natural resources in the country is set out in the Constitution.22 The Constitution likewise spells out the responsibility of the state in fully controlling and supervising the exploration, development, and utilization of coal resources. It allows the private sector to be involved in said activities under terms and conditions defined by law. The country’s coal mining operation, in particular, is governed by numerous legislative and administrative issuances, the most significant of which is the “Coal Development Act of 1976” or Presidential Decree No. 972 as amended by Presidential Decree No. 1174 (PD 972 as amended). PD 972 as amended defines the overall policy framework Philippine coal operations and aims to promote the accelerated exploration, development, exploitation, production, and utilization of the country’s coal resource. One of salient features of the said law is the introduction of the service contract system for coal, known as the “Coal Operating Contract” (COC) system. Under the COC system, private parties are assigned to undertake coal operations on behalf of the government, as governed by a set of guidelines and terms of agreement defined in the Contract. The law also specifies the obligations of both parties, as well as the incentives and privileges granted to contractors and coal end-users. Under PD 972, the country is divided into coal regions determined by the government and specified in the law.23 The law allows the Department of Energy (DOE) to establish additional coal regions, provided that “attendant circumstances justify and warrant” the said establishment. Using a blocking system specified in the implementing rules and regulations of PD 972, coal regions are subsequently divided into “coal blocks,” each covering an area of around one thousand hectares. The coal blocks constitute the contract areas that will be offered to the public for exploration or development/production. An individual is limited by the law to a maximum of fifteen (15) coal blocks per coal region.

Coal Contracting Round In 2003, the DOE launched the Philippine Energy Contracting Round (PECR), a government mechanism by which areas with energy resource potential are opened to the public for exploration and development. For coal, prospective contract areas—as identified by a Review and Evaluation Committee (REC) of the DOE—are opened for application to interested contractors and made available for public bidding upon the approval of the Energy Secretary.24 Interested contractors are required to undergo and pass the pre-qualification review conducted by the REC. Pre-qualified proponents will then submit contract proposals upon submission of application for the PECR. The submitted proposals are then evaluated by the REC using the following criteria: Legal Qualification (10 percent),

22 23

24

Section 2. Article XII, 1987 Constitution The coal regions in the Philippines, as identified by PD 972 as amended, are as follows: Cagayan, Ilocos, Central Luzon, Bondoc Peninsula, Bicol, Catanduanes, Samar-Leyte, Cebu, Negros, Panay (including Semirara Island), Mindoro, Agusan-Davao, Surigao, Cotabato, and Zamboanga Region. Department Circular No. 2011-12-0010


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Technical Qualification (30 percent), Financial Qualification (30 percent), and Work Program (30 percent). Proponents ranked highest in the said evaluation, as determined by the REC and as approved by the Energy Secretary, shall be awarded the contract to operate in the offered areas.25 Application or proposals for COC are not to be accepted except during the contracting round. For small-scale coal mining, permit applications for offered areas are entertained only after operating contracts are awarded.26 In the PECR 4 conducted in 2011, 69 proposals were submitted for the 38 coal contract areas offered. Eleven COCs were awarded in the said contracting round27.

Coal Operating Contract The COC defines the specific terms and conditions of coal operations. The COC gives the contractors a period of two years plus a maximum of two additional years of allowable extension to conduct the examination or investigation of the coal contract area. This stage of operation is known as the Exploration Phase. Once the presence of coal reserves in commercial quantity is proven, contractors are given a period of ten years plus an allowable extension of ten years and additional series of three-year allowable extension not exceeding a total of twelve years to undertake the necessary procedures (in accordance with the submitted work plan and as approved by the DOE) for the extraction of coal (also known as the Development and Production Phase).28 . In addition, the Contract also specifies the different incentives and privileges granted to operators.29 Among these incentives include exemption from payment of all national taxes (except income tax), tariff duties and compensating tax on importation of machineries and equipment (and/or spare parts) to be used for the coal operations. Operators are also granted the privilege to afford the entry of alien technical and specialized personnel, subject to approval of the DOE. Other privileges granted to the operator not provided in the Contract but are specified in PD 972 as amended include accelerated depreciation of fixed assets and priority status in applications for financial assistance from government-owned financial institutions30.

Regulatory Issues Revenue-Sharing and Incentive Scheme Review of the framework that defines how gross proceeds from the sale of coal are divided between the operator and the government (under the terms defined by the Contract and other pertinent laws) shows skewed sharing and generous incentive scheme that inequitably favors operators at the expense of the public. As part of their privileges, operators are allowed to recover a portion of the operating expenses not exceeding 90 percent of the gross proceeds.31 The

25 26 27 28 29 30 31

Ibid. Ibid. Energy Resource Development Bureau Section 3.1 and Section 3.2, Model Coal Operating Contract Section 5.2, Model Coal Operating Contract Section 16, PD 972 Initially, the PD 972 provided for a maximum of 70 percent allowable deductions, but the amendment of PD 972 by PD 1174 in 1977 expanded the amount of allowable deductions to up to 90 percent of the operating expenses.


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proportion of recoverable expense for coal contractors is higher than that allowed for oil and gas operators, whose allowable deductions is set at a maximum of 70 percent of the gross proceeds. In addition, contractors are also entitled to basic fees and special allowances amounting to 70 percent32 of the net proceeds, i.e. remaining amount after expenses are deducted. This is equivalent to at least seven percent of the gross proceeds of coal. Following these deductions, the government is left with a share equal to 30 percent of the net proceeds, or equivalent to three percent of the gross proceeds in case contractor maximizes the total amount of allowable deductions. Host local government units, in turn, are entitled to 40 percent of the government share (or equivalent to at least 1.2 percent of the gross proceeds), as provided in the Local Government Code of 1991.33 In the end, the national government will be left with an amount equivalent to least 1.8 percent of the gross proceeds from coal. (The revenue-sharing scheme is summarized in Table 3).

Table 2: Revenue-sharing scheme of the coal proceeds Gross Proceeds Less: Recoverable Cost Net Proceeds Less: Basic Fees Special Allowance Government Share

100.0 90.0 10.0 4.0 3.0 3.0

National Government

1.8

Local Government

1.2

To add to the exorbitant proportion of recoverable expenses from the coal proceeds, the revenue-sharing scheme also allows inclusion of unreasonable expenditure items that enable contractors to jack up the amount of deductions from the gross proceeds and leave the government with a minimal share. The said expenditure items are set out in the Accounting Procedures of the Contract and “Guidelines for Coal Operations in the Philippines.”34 In the said Guidelines, for example, income taxes paid by contract-holders are explicitly stated as a chargeable component of the operating expense. This means that the only national tax contractors are obliged to pay under the contract is included in the total amount of expenses they can recover from the government. In addition, the Contract also provides that “duties, levies, fees and charges imposed by any governmental or taxing authority” are to be charged as a component of the operating expense. If “any governmental or taxing authority” is interpreted to include local government units, operators may also include local fees and taxes to the expenses to be deducted from the coal proceeds. In the case of Semirara Mining Corporation, the company has been found to charge as part of its operating expenses the amount of government share in the coal production,35 thus enabling the company to further maximize the deductions

32 33 34 35

Forty percent for basic fees and thirty percent for special allowances Section 290, Republic Act 7160 Chapter 3, Section III (F), Operating Expenses, Bureau of Energy Development Circular No. 81-11-10 Based on the Semirara Mining Corporation Consolidated Financial Accounts CY 2006-2012. No policy explicitly specifies if the government share can be charged as a component of the recoverable expense.


INEQUITABLE SHARE by Anton Ragos

14

and minimize the government share from the coal revenue. Apart from the aforementioned privileges provided in the contract, operators are also allowed to avail themselves of other incentives from investment-promoting agencies of the government. For example, the Board of Investment (BOI) has granted Semirara Mining Corporation a six-year income tax holiday (ITH) starting September 2008.36 Within this period, the company is substantially relieved of the sole tax liability it is required to pay.

Environmental Regulation Coal mining operations have considerable effects to the environment, and effective regulation is therefore necessary to minimize such inimical impact to the society. As a component of the overall environmental regulation of the industry, the COC subjects coal mining operations to the Environmental Impact System (EIS) of the Department of Environment and Natural Resources (DENR), requiring contract-holders to secure an Environment Compliance Certificate (ECC) prior to the commencement of the Development and Production stage of the operation. The ECC certifies that activities to be undertaken are covered by the EIS—a government mechanism intended to prevent likely environmental consequences of operations or other undertakings though ex ante impact assessment and formulation of appropriate mitigating and enhancement measures. Outside the scope of the EIS, the COC requires operators to rehabilitate all affected sites (at the expense of the operators) immediately after the termination of the operation.37 In addition, the Contract also states that operators are subject to the provisions of all applicable laws relating to labor, health, safety, indigenous people’s rights and ecology/environment. They should avoid hazards to life, health and property and avoid pollution of air, land and water.38 Furthermore, the “Guidelines for Coal Operations in the Philippines” requires operators to render a comprehensive anti-pollution and reclamation plan designed for all phases of the operation. It also sets out the guidelines for mining procedures to minimize environmental damage, waste water control, erosion control, and re-vegetation.39 To better understand the regulatory quality of environment-related coal mining polices, comparison with the regulation of the mineral mining industry is briefly discussed. Relative to environmental regulation of mineral mining operators, as governed by Republic Act 7942 or the Philippine Mining Act of 1995, policies on coal mining industry appears to be lenient in terms of fees and other required expenditures for environmental protection and rehabilitation. While mineral mining operators are required to earmark various funds for the abovementioned purposes, as provided in the Philippine Mining Act of 1995 (See Table 3), coal mining operators are not required to earmark similar funds under the general laws and regulations governing the industry’s operation (i.e. Coal Development Act of 1976 as amended, Coal Operating Contract, and Guidelines for Coal Operation in the Philippines). The absence of such fiscal regulation calls for the need to review the current environmental regulatory framework of coal mining operations. Although a comprehensive study that quantifies the environmental impact of coal mining operations is currently lacking, effective pre-emption necessitates placement of fiscal intervention that will provide the government with adequate resources to address the unintended impact of past and future coal mining operations.

36 37 38 39

Ibid. Section 5.1, Model Coal Operating Contract Ibid. Section VI, Chapter 4, Bureau of Energy Development Circular No. 1, Series of 1978


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15

Table 3: Earmarked Funds for Environmental Protection and Rehabilitation under RA 7942 AMOUNT Environmental Protection and Enhancement Program (EPEP)

10% of total project cost

Annual Environmental Protection and Enhancement Program

3 to 5% of direct mining and milling cost

Contingent Liability and Rehabilitation Fund

(consists of the following)

Monitoring Trust Fund

Minimum of PhP50,000

Rehabilitation Cash Fund

10% of total amount needed to implement EPEP or five million pesos, whichever is lower

Environmental Trust Fund

Minimum of PhP50,000

Mine Waste and Tailings Fees Reserve Fund

PhP0.05per metric ton of mine waste and PhP0.10 per metric ton of mill tailings generated from mining operation

Final Mine Rehabilitation Decommissioning Fund

Estimated amount based on the cost of having the decommissioning and/or rehabilitation works done by third-party contractors

Social Development Apart from requiring the allocation of funds for environmental protection, RA 7942 mandates the earmarking of various funds for the promotion and development of host communities, including: an amount equivalent to 1.125% of the operator’s operating cost to finance the Social Development and Management Program; 0.15% for the advancement of mining technology and geosciences; and 0.225% for the information, education, and communication program for the local communities. In addition, a royalty equivalent to one percent of the gross mineral proceeds is paid to the indigenous peoples or indigenous cultural communities. Coal mining operators, in contrast, are not required to earmark similar funds or pay similar levies.

Regulatory Issues To better understand the synthesis of how these regulations shape the contribution of coal mining to the society, this paper looks at the case of Semirara Mining Corporation, the biggest coal producer in the country. The company’s operating contract, awarded in 1977 and amended in 1981, gives the company the exclusive right to conduct exploration, development, and production in Semirara Island, where 102 mmmt of mineable reserves (equivalent to 33 percent of the country’s total mineable reserves) are located. The said contract allows the company to operate until 2027 after the DOE granted the request for a 15-year extension in 2008. From 2007 thereafter, the company started to export local coal to other countries. In addition, it has also engaged in coal power production starting in 2009 after winning the bid for the 2x300 MW Batangas Coal-Fired Thermal Power Plant in the same year. The company’s revenues from the sale of coal—and the corresponding government share from such—expanded in the recent years (See Table 3). Based on the existing revenue-sharing scheme, the government share from the company’s coal revenues can amount to a minimum of three percent (in the case that operator maximizes the 90 percent deduction). As expected, government share from 2004 to 2008 was roughly three percent (2.94 percent), but the share increased beyond three percent (3.9 percent) in 2009, and further rose above nine percent from 2010 thereafter. 40 Data limitations hinder the analysis to provide concrete explanation for this phenomenon. From 2009 thereafter, since the company ventured in coal power generation, the company’s financial reports indicated total operating expenses (net of the cost of sale of coal and power) which accounts those incurred from both coal mining and power generation. Since disaggregated operational expense is lacking, confirmation if expenses from coal mining decreased in the 2009-2012 period is impossible. Had it been the case, the drop in operating expense entailed possible inability of the company to maximize the 90 percent ceiling of allowable deductions, hence leaving the government with a higher share in the coal revenues.


INEQUITABLE SHARE by Anton Ragos

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Table 4: Semirara Mining Corporation revenues from coal sale, government share, and percentage of government share, 2004-2012

YEAR

Coal Revenues (in PhP)

Government Share (in PhP)

Percentage of Gov’t Share

2004

5,065,864,642

148,623,317

2.93%

2005

5,552,892,725

158,784,821

2.86%

2006

4,687,694,870

138,272,655

2.95%

2007

6,466,700,620

191,290,056

2.96%

2008

8,490,045,380

253,381,663

2.98%

2009

11,500,192,811

450,151,548

3.91%

2010

14,242,224,629

1,310,029,153

9.20%

2011

16,201,880,411

1,479,972,809

9.13%

2012

14,450,155,334

1,557,950,322

10.78%

Source: Semirara Mining Corporation Consolidated Financial Statements, 2006-2012

From 2004 to 2012, income taxes paid by the company changed following the adjustments in corporate income tax rates approved in November 2005, but a more significant drop was brought about by the grant of ITH effective September 2008.41 Because of these, along with other tax adjustments, the effective income tax rate paid by the company from 2009 to 2012 was reduced to an average of 0.67 percent—a sharp decrease compared to the statutory tax rate of 30 percent imposed on the same period. In 2009, 2010, and 2011, the levels of income tax exemption even exceeded the statutory corporate income tax rates imposed during those years. The estimated foregone revenues from the ITH granted to Semirara Mining Corp. (calculated by multiplying the rate of income tax exemption to the company’s corresponding taxable income in a given year) within the period of 2008 to 2012 accumulated to a total amount of PhP5.7 million. In the same period, the sum of annual foregone revenues from ITH exceeded the sum of annual receipts from the company (annual income tax paid plus annual of government shares remitted). (See Table 4) Table 4: Income tax exemption (in %) and foregone government revenues (in million Php), 2008-2012

YEAR

Statutory Corporate Income Tax Rate (in %)

Income Tax Exemption (in % of taxable income)

Income Tax and Forgone Government Revenue Government Share minus from ITH (in million PhP) Forgone Revenue from ITH (in million PhP)

2008

35.00

11.46

118.430

371.975

2009

30.00

30.62

584.812

-71.366

2010

30.00

31.14

1,219.924

54.943

2011

30.00

30.68

1,834.551

-376.747

2012

30.00

29.97

1,917.400

-319.990

Total

-

-

5,684.118

-341.184

Source: Semirara Mining Corporation Consolidated Financial Statements, 2006-2012

As implemented in November 2005, corporate income tax rate was increased from 32% to 35%, and later reduced to 30% in 2009, as stipulated in Republic Act 9337 entitled, “An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 236, 237, and 288 of the National Internal Revenue Code (NIRC) of 1997, As Amended, And For Other Purposes”,

40


INEQUITABLE SHARE by Anton Ragos

17

Moreover, several inconsistencies have been found with respect to the company’s reports relating to income taxes and government share. The company’s website specifies that “[a]ll expenses, except the DOE share and income tax are allowable deductions”.41 This is contrary to what was previously noted that income tax is a chargeable component of the “Operating Expense”, the term used in the Contract as the expenditure item which contract-holders are allowed to recover. In addition, as abovementioned, the company has been found to charge under the operating expense account the amount of government share in the sale of coal, again contradicting the statement in the company’s website. The confusion could emanate from the possible difference in how the government and the company use the term “Operating Expense”. On one hand, the company’s financial reports indicate that operating expense exclude “Cost of Sale of Coal”, item which on the other hand should be included in the operating expense as stated in the Accounting Procedures of the Contract. Validation of the actual components of the operating expense, or other expenditure items which the operators deduct from the coal proceeds, is currently difficult given the lack of transparency and access to such information.

Contribution to Power Production The current revenue-sharing scheme is inequitable. The large proportion of expenses that can be deducted by coal mining contractors from what is to be shared with government (90 percent of gross proceeds), along with the basic fees and special allowances (seven percent of gross proceeds in sum), leaves the public with a measly share in the total sale of coal (three percent of the gross proceeds). This should be deemed inadequate, especially considering that contractors are not required to earmark funds for environmental protection (apart from those mandated within the ECC framework) and social development so that the burden of addressing the problems related to coal mining (e.g. environmental degradation, health hazard, social) ends up being shouldered by the public sector. In addition, the current framework allowing the inclusion of income taxes (and government share, in the case of Semirara Mining Corp.) to the total amount of recoverable cost must be revised. The grant of several tax exemptions (as both provided by the COC and the BOI) should likewise be repealed. These incentives are ostensibly granted to attract investments in the coal mining sector. However, the abundance and economic viability of mineable coal reserves should be a sufficient incentive for the private sector to make the investment in coal mining. Incentives in the form of tax exemptions and fiscal relief are redundant and wasteful. Environmental regulation should also be strengthened. Earmarking of funds to ensure adequate resources for undertaking the necessary procedures to protect and rehabilitate the environment—as currently required in the mineral mining sector—should be adopted in the coal mining industry. Similarly, the attainment of the social development of host communities should also be enforced. Apart from the current share of local government units in the total government share of coal sales, additional funds should be channelled to the host communities to be used for the expansion of basic social services, among others. Lastly, transparency and public participation in coal mining regulation must be institutionalized. The public should be able to access the information necessary to verify, monitor, and assess critical transactions between the government and the coal mining industry. Moreover, formulation, implementation, and monitoring of governing policies seeking to balance the possible costs and benefits of the coal industry must be undertaken together with public stakeholders and other concerned civil society members to ensure that such regulations reflect the interests and welfare of the public. Thus, inclusion of coal mining in the Extractive Industry Transparency Initiative (EITI) cannot be overemphasized.

41

Semirara Mining Corporation Frequently Asked Questions (http://www.semiraramining.com/Faqs.php)


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