Resource Nationalism is a Cover For Crony Capitalism: Philippine Edition

Booming commodity prices are seen as opportunities by politicians to seize more money from private sector specifically, from mining companies, via higher taxes or increased equities to finance insatiable public spending.

Resource nationalism or the "tendency of people and governments to assert control over natural resources located on their territory" (Wikipedia.org) has been an affliction common with Latin America nations. Lately politicians from Indonesia and the Philippines seem to have been contaminated by the allure of MONEY. [Indonesia reportedly wants 51% ownership of mining companies]

Writes the Inquirer.net

The government wants a bigger share, possibly as high as 50 percent, in revenues generated by mining firms operating in the country, Finance Secretary Cesar Purisima said Tuesday.

Speaking at the Philippine Economic Forum held at the Philippine International Convention Center in Pasay City, Purisima described what the government was currently getting from mining firms as “measly” and that increasing its share in mining revenues would allow the public to benefit more from the use of the country’s natural resources.

He said the government was studying revenue-sharing schemes observed by governments and mining firms in other countries to determine what can be best implemented in the Philippines. So far, the 50-50 sharing scheme is preferable, he said.

Changing the rules in the middle of the game represents signs of political immaturity. Governments like Indonesia and the Aquino administration of the Philippines cannot live by the rules they established and change them as capriciously when so deemed expedient by the political class.

So not only do they trash upon property rights of investors and the rest of citizenry (by depriving them of legal and respectable jobs and economic opportunities), they invalidate contracts by force which will turn off prospective investors. This is yet another example of arbitrary regulations.

The response has been captured by the same article.

The plan to increase taxes or to require mining firms to pay royalties has elicited complaints from some members of the mining sector. They said such a plan would be a turnoff to investors as it constituted inconsistency of policies.

The sad part is that these feel good policies will have nasty side effects.

As I previously wrote,

Resource nationalism only adds to the supply imbalances which should mean lesser supplies and subsequently further upward price pressures.

Such actions are being prompted by expectations of governments to generate more revenues with the ultimate end of having more money to spend on political projects. They are doing this in the name of nationalism.

Yet because of the higher costs of doing business or a higher hurdle rate, aside from questions of security of ownership (property rights), investors naturally would back out or become reluctant to invest. This essentially defeats government’s agenda.

In addition, the lack of investments extrapolates to the promotion of unemployment and lost opportunity to grow.

Any local investments will not be sufficient. That’s why they have not been accessed.

Besides, local investments are likely to be “politicized” which means that only the political class and their economic patrons would become the beneficiaries.

And because the resources are there, illegal extraction would occur and proliferate. Subsequently, black markets will blossom.

And illegal activities will lead to more violence, more corruption and more environmental degradation.

Yet most people don’t see that resource nationalism is a front for crony capitalism. Since economic opportunities will be politicized the beneficiaries will be the political class and their allies.

The article again captures such potentials,

On the contrary, Pangilinan expressed willingness to agree to the government’s plan.

He was quoted in an earlier Inquirer report that mining firms might give a 50-percent revenue share to the government, but that it must be based on net revenues rather than gross revenues.

First an explanation of Net revenue. According to the Economic Glossary this means,

A common term for profit, as the difference between total revenue and total cost. When used in the real world of business wheeling and dealing, this notion of net revenue general refers to accounting profit rather than economic profit. The "net" aspect of net revenue indicates that some (that something being cost) is deducted from total or "gross" revenue. Other common terms used in this same context are net income and net earnings.

I read the Inquirer excerpt covering net revenue in the following context: The company’s expenses can bloated—through ‘subsidized’ pricing to friendly suppliers of the firm, ‘consultancy’ fees for politicians and/or their appointees to the company or through many other ‘accounting means’ of skinning the proverbial cat—to a manageable amount that would be subjected to taxes.

Reducing real profits essentially would represent a transfer of resources from minority shareholders to the managers of the mining companies and to the government. Most of the cost of the new tax will indirectly be borne by the minority shareholders, like me.

In other words, woe to the minority shareholders, as the balance sheets of mining companies will also be politicized thereby depriving us of profits via dividends.

And by increasing the cost of investments in the domestic mining industry, competition will be limited, and thus would entrench the position of the incumbent leaders, that also increases their leverage to negotiate on the copious untapped mining claims and to dominate deals within the industry.

President Aquino’s resource nationalism essentially hands the silver platter to the administration’s favored investors.

I guess political developments have been turning out as I predicted.