The Wall Street Journal: Curbing Foreign Investment: “decision… could adversely affect other exploration and production contracts: “A Shell official declined to comment”

By JAMES HOOKWAY

Staff Reporter of THE WALL STREET JOURNAL

July 19, 2004; Page A9

TAMPAKAN, Philippines -- A team of Filipino and Australian miners struck gold several years ago near this drowsy village high in the mountains of the southern Philippines. Better yet, they also found so much copper that the site someday could become one of the largest copper mines in Asia.

But in January -- just days after President Gloria Macapagal Arroyo approved a plan to hasten development of the country's mining industry -- Tampakan mine developer Sagittarius Mining Inc. was dealt an unexpected blow: The Supreme Court said the project was illegal because it contravened the Philippines' constitution.

"We were shocked and stunned," says Tony Robbins, acting managing director of Sagittarius's Australian partner, Indophil Resources NL. "Nobody knew what had happened."

What happened was that Indophil and its local partners discovered the hurdles to doing business in developing countries that are shackled to revanchist economic regulation. In Latin America, for instance, incoming governments frequently rewrite constitutions to micromanage economic and social policy. The Philippines, meanwhile, is tied to a 1987 constitution written mainly by nationalist foes of former dictator Ferdinand Marcos.

The charter explicitly excludes foreign investment from many sectors, while limiting foreign participation in others. Over the years, that has enabled courts to intervene repeatedly for reasons the investors hardly could have foreseen. In the 1990s, for example, Malaysian investors were prevented from redeveloping the Manila Hotel -- World War II hotel headquarters of Gen. Douglas MacArthur -- because the Supreme Court ruled it was part of the Philippines' national heritage; only Filipinos could manage and own the hotel.

Mining, in particular, has been curtailed. By some estimates, this chain of islands contains the world's fifth-largest deposits of minerals. The government hoped to attract foreign investment in mining when a new law passed in 1995, letting foreign companies own as much as 100% of Philippine mining ventures. But legal challenges to the constitutionality of the 1995 law have stalled liberalization. And without foreign capital, many potential sites remain untouched.

Philippine environmental campaigners have used the constitution to challenge the few mining projects that get off the drawing board. Indeed, in 1996, after a toxic chemical spill at a separate majority Philippine-owned mining venture, environmental lobbyists filed the Supreme Court suit that ultimately derailed the Tampakan project.

The court's decision dismayed Philippine officials eager to attract foreign capital to stimulate the country's wobbly economy. The country's central bank said foreign direct investment fell to $319 million in 2003 from $1.8 billion a year earlier, as international investors began shunning the Philippines, partly because of its unpredictable court decisions.

The government has formally appealed to the Supreme Court to reconsider its Tampakan decision. Lawyers say Indophil holds 40% of Sagittarius's equity, which is in line with the constitutional limit for foreign stakes in mining ventures. They also note that the constitution allows foreign financial or technical assistance in developing mineral sites.

If the court changes its mind, Horacio Ramos, Philippines' Mines and Geosciences Bureau director, expects a surge of new investment to expand annual mineral production to $4 billion within several years. That would trail Indonesia; mining contributed about $18 billion to its economy in 2002. The Philippines annually mines about $500 million of minerals -- mainly copper, nickel and chromium.

Ms. Arroyo, elected to a fresh six-year term in May, recognizes sluggish mining development is a drag on the economy. She recently promised to try to amend the constitution to allow greater foreign participation in capital-intensive industries. But the last president who tried to amend the constitution, Joseph Estrada, faced huge street protests when he tried to roll back legal curbs on foreign investment in 2000.

Framed after Mr. Marcos's fall in 1986, the current constitution was designed to prevent a rise of future dictators. But the constitutional drafting committee also wrote in protectionist economic restrictions. Among them: Foreign-owned factories can't own the land they are built on, and foreign investors can't own shares in media businesses. In many industries, including mining, foreigners are limited to a 40% equity share.

Ms. Arroyo hasn't set a clear timetable for constitutional change. Some opposition politicians may choose to support her. "There are so many things we can make easier for foreign investors, and amending aspects of the constitution is one of them," says Sen. Edgardo Angara, a leading opposition lawmaker.

Investors, too, are concerned. "Banks can't fund projects with uncertain ownership, so investors can't get past first base," says Robin Widdup, managing director of Lion Selection Group, based in Melbourne, Australia, which has invested in mines around the world, including ventures in the Philippines.

Not all foreign-funded mining activity has halted in the Philippines. Australia's Lafayette Mining said last week it had signed a contract to begin work at a combined gold-, copper-, zinc- and silver-mining site. It would be the first foreign-funded mine to begin operations in the Philippines since 1968.

The biggest headache from the mining impasse may belong to the government and its hard-pressed economic managers. Manila already has promised compensation to investors affected by the Supreme Court's decision -- something the country's stretched coffers can ill-afford.

Mr. Ramos says that if the court upholds its Tampakan decision, it could adversely affect other exploration and production contracts the government has signed. Chief among them, he says, is the Malampaya natural-gas project in the South China Sea, developed and operated by the Royal Dutch/Shell Group and ChevronTexaco Corp., which each own 45% stakes in the venture. The project provides one-third of the fuel requirement for the Philippines' electric-power generators. A Shell official declined to comment on the issue.

"I was going to retire this year," says Mr. Ramos, a veteran in the Philippines' mineral industry. "But now it looks like I will have to postpone my plans."

Write to James Hookway at james.hookway@awsj.com