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THE 1987 CONSTITUTION AND resources proceeds from the concept

TECHNICAL of jura regalia, as well as the recognition


of the importance of the countrys natural
OR FINANCIAL ASSISTANCE resources, not only for national economic
AGREEMENTS (JANUARY 27, 2004) development, but also for its security and
national defense. Under this provision,
[178]

After the February 1986 Edsa the State assumes a more dynamic role
Revolution, Corazon C. Aquino took the in the exploration, development and
reins of power under a revolutionary utilization of natural resources.
[179]

government. On March 25, 1986,


President Aquino issued Proclamation Conspicuously absent in Section 2 is
No. 3, promulgating the Provisional
[176]
the provision in the 1935 and 1973
Constitution, more popularly referred to Constitutions authorizing the State to
as the Freedom Constitution. By authority grant licenses, concessions, or leases for
of the same Proclamation, the President the exploration, exploitation,
created a Constitutional Commission development, or utilization of natural
(CONCOM) to draft a new constitution, resources. By such omission, the
which took effect on the date of its utilization of inalienable lands of public
ratification on February 2, 1987. [177]
domain through license, concession or
lease is no longer allowed under the 1987
The 1987 Constitution retained the Constitution. [180]

Regalian doctrine. The first sentence of


Section 2, Article XII states: All lands of Having omitted the provision on the
the public domain, waters, minerals, coal, concession system, Section 2 proceeded
petroleum, and other mineral oils, all to introduce unfamiliar language: [181]

forces of potential energy, fisheries,


forests or timber, wildlife, flora and fauna, The State may directly undertake such
and other natural resources are owned by activities or it may enter into co-
the State. production, joint venture, or production-
sharing agreements with Filipino citizens,
Like the 1935 and 1973 Constitutions or corporations or associations at least
before it, the 1987 Constitution, in the sixty per centum of whose capital is
second sentence of the same provision, owned by such citizens.
prohibits the alienation of natural
resources, except agricultural lands. Consonant with the States full
supervision and control over natural
The third sentence of the same resources, Section 2 offers the State two
paragraph is new: The exploration, options. One, the State may directly
[182]

development and utilization of natural undertake these activities itself; or two, it


resources shall be under the full control may enter into co-production, joint
and supervision of the State. The venture, or production-sharing
constitutional policy of the States full agreements with Filipino citizens, or
control and supervision over natural
entities at least 60% of whose capital is development, and utilization of natural
owned by such citizens. resources, it imposes certain limitations or
conditions to agreements with such
A third option is found in the third corporations.
paragraph of the same section:
First, the parties to FTAAs. Only
The Congress may, by law, allow small- the President, in behalf of the State, may
scale utilization of natural resources by enter into these agreements, and only
Filipino citizens, as well as cooperative with corporations. By contrast, under the
fish farming, with priority to subsistence 1973 Constitution, a Filipino citizen,
fishermen and fish-workers in rivers, corporation or association may enter into
lakes, bays, and lagoons. a service contract with a foreign person or
entity.
While the second and third options are
limited only to Filipino citizens or, in the Second, the size of the activities:
case of the former, to corporations or only large-scale exploration,
associations at least 60% of the capital of development, and utilization is allowed.
which is owned by Filipinos, a fourth The term large-scale usually refers to
allows the participation of foreign-owned very capital-intensive activities.
[183]

corporations. The fourth and fifth


paragraphs of Section 2 provide: Third, the natural resources subject
of the activities is restricted to minerals,
The President may enter into agreements petroleum and other mineral oils, the
with foreign-owned corporations involving intent being to limit service contracts to
either technical or financial assistance for those areas where Filipino capital may
large-scale exploration, development, and not be sufficient.
[184]

utilization of minerals, petroleum, and


other mineral oils according to the general Fourth, consistency with the
terms and conditions provided by law, provisions of statute. The agreements
based on real contributions to the must be in accordance with the terms and
economic growth and general welfare of conditions provided by law.
the country. In such agreements, the
State shall promote the development and Fifth, Section 2 prescribes
use of local scientific and technical certain standards for entering into such
resources. agreements. The agreements must
be based on real contributions to
The President shall notify the Congress of economic growth and general welfare of
every contract entered into in accordance the country.
with this provision, within thirty days from
its execution. Sixth, the agreements must
contain rudimentary stipulations for
Although Section 2 sanctions the the promotion of the development and
participation of foreign-owned use of local scientific and technical
corporations in the exploration, resources.
Seventh, operating agreements and service
the notification requirement. The contracts . . . shall be governed by
President shall notify Congress of every Presidential Decree No. 463, as
financial or technical assistance amended, other existing mining laws, and
agreement entered into within thirty days their implementing rules and regulations. .
from its execution. ..

Finally, the scope of the As earlier stated, on the 25th also of


agreements. While the 1973 Constitution July 1987, the President issued E.O. No.
referred to service contracts for financial, 279 by authority of which the subject
technical, management, or other forms of WMCP FTAA was executed on March 30,
assistance the 1987 Constitution provides 1995.
for agreements. . . involving either
financial or technical assistance. It bears On March 3, 1995, President Ramos
noting that the phrases service contracts signed into law R.A. No. 7942. Section 15
and management or other forms of thereof declares that the Act shall govern
assistance in the earlier constitution have the exploration, development, utilization,
been omitted. and processing of all mineral
resources. Such declaration
By virtue of her legislative powers notwithstanding, R.A. No. 7942 does not
under the Provisional Constitution, actually cover all the modes through
President Aquino, on July 10, 1987,
[185]
which the State may undertake the
signed into law E.O. No. 211 prescribing exploration, development, and utilization
the interim procedures in the processing of natural resources.
and approval of applications for the
exploration, development and utilization The State, being the owner of the
of minerals. The omission in the 1987 natural resources, is accorded the
Constitution of the term service contracts primary power and responsibility in the
notwithstanding, the said E.O. still exploration, development and utilization
referred to them in Section 2 thereof: thereof. As such, it may undertake these
activities through four modes:
SEC. 2. Applications for the exploration,
development and utilization of mineral The State may directly undertake such
resources, including renewal applications activities.
and applications for approval of operating
agreements and mining service (2) The State may enter into co-
contracts, shall be accepted and production, joint venture or production-
processed and may be approved x x sharing agreements with Filipino citizens
x. [Emphasis supplied.] or qualified corporations.

The same law provided in its Section (3) Congress may, by law, allow small-
3 that the processing, evaluation and scale utilization of natural resources by
approval of all mining applications . . . Filipino citizens.
(4) For the large-scale exploration, mining operations other than the mineral
development and utilization of minerals, resource, while in a joint venture
[199]

petroleum and other mineral oils, the agreement (JVA), where the Government
President may enter into agreements with enjoys the greatest participation, the
foreign-owned corporations involving Government and the JVA contractor
technical or financial assistance. [186]
organize a company with both parties
having equity shares. Aside from [200]

Except to charge the Mines and earnings in equity, the Government in a


Geosciences Bureau of the DENR with JVA is also entitled to a share in the gross
performing researches and surveys, and [187]
output. The Government may enter into
[201]

a passing mention of government-owned a CA or JVA with one or more


[202] [203]

or controlled corporations, R.A. No. [188]


contractors. The Governments share in a
7942 does not specify how the State CA or JVA is set out in Section 81 of the
should go about the first mode. The third law:
mode, on the other hand, is governed by
Republic Act No. 7076 (the Peoples [189]
The share of the Government in co-
Small-Scale Mining Act of 1991) and production and joint venture agreements
other pertinent laws. R.A. No. 7942 [190]
shall be negotiated by the Government
primarily concerns itself with the second and the contractor taking into
and fourth modes. consideration the: (a) capital investment
of the project, (b) the risks involved, (c)
Mineral production sharing, co- contribution of the project to the economy,
production and joint venture agreements and (d) other factors that will provide for a
are collectively classified by R.A. No. fair and equitable sharing between the
7942 as mineral agreements. The [191]
Government and the contractor. The
Government participates the least in a Government shall also be entitled to
mineral production sharing agreement compensations for its other contributions
(MPSA). In an MPSA, the Government which shall be agreed upon by the
grants the contractor the exclusive right
[192]
parties, and shall consist, among other
to conduct mining operations within a things, the contractors income tax, excise
contract area and shares in the gross
[193]
tax, special allowance, withholding tax
output. The MPSA contractor provides
[194]
due from the contractors foreign
the financing, technology, management stockholders arising from dividend or
and personnel necessary for the interest payments to the said foreign
agreements implementation. The total [195]
stockholders, in case of a foreign national
government share in an MPSA is the and all such other taxes, duties and fees
excise tax on mineral products under as provided for under existing laws.
Republic Act No. 7729, amending [196]

Section 151(a) of the National Internal All mineral agreements grant the
Revenue Code, as amended. [197]
respective contractors the exclusive right
to conduct mining operations and to
In a co-production agreement (CA), extract all mineral resources found in the
[198]
the Government provides inputs to the contract area. A qualified person may
[204]
enter into any of the mineral agreements 7942 is determined by the size of the
with the Government. A qualified person
[205]
contract area, as opposed to the amount
is invested (US $50,000,000.00), which was
the standard under E.O. 279.
any citizen of the Philippines with capacity
to contract, or a corporation, partnership, Like a CA or a JVA, an FTAA is
association, or cooperative organized or subject to negotiation. The
[212]

authorized for the purpose of engaging in Governments contributions, in the form of


mining, with technical and financial taxes, in an FTAA is identical to its
capability to undertake mineral resources contributions in the two mineral
development and duly registered in agreements, save that in an FTAA:
accordance with law at least sixty per
centum (60%) of the capital of which is The collection of Government share in
owned by citizens of the Philippines x x x. financial or technical assistance
[206]
agreement shall commence after the
financial or technical assistance
The fourth mode involves financial or
agreement contractor has fully recovered
technical assistance agreements. An
its pre-operating expenses, exploration,
FTAA is defined as a contract involving
and development expenditures, inclusive.
financial or technical assistance for large- [213]

scale exploration, development, and


utilization of natural resources. Any [207] THE CONSTITUTIONALITY OF THE
qualified person with technical and WMCP FTAA
financial capability to undertake large-
scale exploration, development, and Petitioners submit that, in accordance
utilization of natural resources in the with the text of Section 2, Article XII of the
Philippines may enter into such Constitution, FTAAs should be limited to
agreement directly with the Government technical or financial assistance only.
through the DENR. For the purpose of
[208]
They observe, however, that, contrary to
granting an FTAA, a legally organized the language of the Constitution, the
foreign-owned corporation (any WMCP FTAA allows WMCP, a fully
corporation, partnership, association, or foreign-owned mining corporation, to
cooperative duly registered in accordance extend more than mere financial or
with law in which less than 50% of the technical assistance to the State, for it
capital is owned by Filipino citizens) is [209]
permits WMCP to manage and operate
deemed a qualified person. [210] every aspect of the mining activity. [222]

Other than the difference in


contractors qualifications, the principal
Petitioners submission is well-taken. It is
distinction between mineral agreements
a cardinal rule in the interpretation of
and FTAAs is the maximum contract area
constitutions that the instrument must
to which a qualified person may hold or
be so construed as to give effect to the
be granted. Large-scale under R.A. No.
[211]

intention of the people who adopted it.


[223] This intention is to be sought in [228] As will be shown later, the
the constitution itself, and the management or operation of mining
apparent meaning of the words is to be activities by foreign contractors, which is
taken as expressing it, except in cases the primary feature of service contracts,
where that assumption would lead to was precisely the evil that the drafters of
absurdity, ambiguity, or contradiction. the 1987 Constitution sought to eradicate.
[224] What the Constitution says
according to the text of the provision, Respondents insist that agreements
therefore, compels acceptance and involving technical or financial assistance
negates the power of the courts to alter it, is just another term for service contracts.
based on the postulate that the framers They contend that the proceedings of the
and the people mean what they say.[225] CONCOM indicate that although the
terminology service contract was avoided
Accordingly, following the literal text of the [by the Constitution], the concept it
Constitution, assistance accorded by represented was not. They add that [t]he
foreign-owned corporations in the concept is embodied in the phrase
large-scale exploration, development, agreements involving financial or
and utilization of petroleum, minerals technical assistance.[229] And point out
and mineral oils should be limited to how members of the CONCOM referred
technical or financial assistance only. to these agreements as service contracts.
For instance:
WMCP nevertheless submits that the
word technical in the fourth paragraph of SR. TAN. Am I correct in thinking that the
Section 2 of E.O. No. 279 encompasses a only difference between these future
broad number of possible services, service contracts and the past service
perhaps, scientific and/or technological in contracts under Mr. Marcos is the general
basis.[226] It thus posits that it may also law to be enacted by the legislature and
well include the area of management or the notification of Congress by the
operations . . . so long as such assistance President? That is the only difference, is it
requires specialized knowledge or skills, not?
and are related to the exploration,
development and utilization of mineral MR. VILLEGAS. That is right.
resources.[227]
SR. TAN. So those are the safeguards[?]
This Court is not persuaded. As priorly
pointed out, the phrase management or MR. VILLEGAS. Yes. There was no law at
other forms of assistance in the 1973 all governing service contracts before.
Constitution was deleted in the 1987
SR. TAN. Thank you, Madam President.
Constitution, which allows only technical
[230] [Emphasis supplied.]
or financial assistance. Casus omisus pro
omisso habendus est. A person, object or
thing omitted from an enumeration must
be held to have been omitted intentionally.
WMCP also cites the following statements reveal that the article contains a balanced
of Commissioners Gascon, Garcia, set of provisions. I hope the forthcoming
Nolledo and Tadeo who alluded to service Congress will implement such provisions
contracts as they explained their taking into account that Filipinos should
respective votes in the approval of the have real control over our economy and
draft Article: patrimony, and if foreign equity is
permitted, the same must be
MR. GASCON. Mr. Presiding Officer, I subordinated to the imperative demands
vote no primarily because of two reasons: of the national interest.
One, the provision on service contracts. I
felt that if we would constitutionalize any x x x.
provision on service contracts, this should
always be with the concurrence of It is also my understanding that service
Congress and not guided only by a contracts involving foreign corporations or
general law to be promulgated by entities are resorted to only when no
Congress. x x x.[231] [Emphasis Filipino enterprise or Filipino-controlled
supplied.] enterprise could possibly undertake the
exploration or exploitation of our natural
x x x. resources and that compensation under
such contracts cannot and should not
MR. GARCIA. Thank you. equal what should pertain to ownership of
capital. In other words, the service
I vote no. x x x. contract should not be an instrument to
circumvent the basic provision, that the
Service contracts are given constitutional
exploration and exploitation of natural
legitimization in Section 3, even when
resources should be truly for the benefit
they have been proven to be inimical to
of Filipinos
the interests of the nation, providing as
they do the legal loophole for the Thank you, and I vote yes.[233]
exploitation of our natural resources for [Emphasis supplied.]
the benefit of foreign interests. They
constitute a serious negation of Filipino x x x.
control on the use and disposition of the
nations natural resources, especially with MR. TADEO. Nais ko lamang ipaliwanag
regard to those which are nonrenewable. ang aking boto.
[232] [Emphasis supplied.]
Matapos suriin ang kalagayan ng
xxx Pilipinas, ang saligang suliranin,
pangunahin ang salitang imperyalismo.
MR. NOLLEDO. While there are Ang ibig sabihin nito ay ang sistema ng
objectionable provisions in the Article on lipunang pinaghaharian ng iilang
National Economy and Patrimony, going monopolyong kapitalista at ang salitang
over said provisions meticulously, setting imperyalismo ay buhay na buhay sa
aside prejudice and personalities will National Economy and Patrimony na
nating ginawa. Sa pamamagitan ng revised constitution and that of a similar
salitang based on, naroroon na ang free provision in the preceding constitution is
trade sapagkat tayo ay mananatiling viewed as indicative of a difference in
tagapagluwas ng hilaw na sangkap at purpose.[235] If, as respondents suggest,
tagaangkat ng yaring produkto. the concept of technical or financial
Pangalawa, naroroon pa rin ang parity assistance agreements is identical to that
rights, ang service contract, ang 60-40 of service contracts, the CONCOM would
equity sa natural resources. Habang not have bothered to fit the same dog with
naghihirap ang sambayanang Pilipino, a new collar. To uphold respondents
ginagalugad naman ng mga dayuhan ang theory would reduce the first to a mere
ating likas na yaman. Kailan man ang euphemism for the second and render the
Article on National Economy and change in phraseology meaningless.
Patrimony ay hindi nagpaalis sa
pagkaalipin ng ating ekonomiya sa kamay An examination of the reason behind the
ng mga dayuhan. Ang solusyon sa change confirms that technical or financial
suliranin ng bansa ay dalawa lamang: assistance agreements are not
ang pagpapatupad ng tunay na reporma synonymous to service contracts.
sa lupa at ang national industrialization.
Ito ang tinatawag naming pagsikat ng [T]he Court in construing a Constitution
araw sa Silangan. Ngunit ang mga should bear in mind the object sought to
landlords and big businessmen at ang be accomplished by its adoption, and the
mga komprador ay nagsasabi na ang free evils, if any, sought to be prevented or
trade na ito, ang kahulugan para sa amin, remedied. A doubtful provision will be
ay ipinipilit sa ating sambayanan na ang examined in light of the history of the
araw ay sisikat sa Kanluran. Kailan man times, and the condition and
hindi puwedeng sumikat ang araw sa circumstances under which the
Kanluran. I vote no.[234] [Emphasis Constitution was framed. The object is to
supplied.] ascertain the reason which induced the
framers of the Constitution to enact the
This Court is likewise not persuaded. particular provision and the purpose
sought to be accomplished thereby, in
As earlier noted, the phrase service order to construe the whole as to make
contracts has been deleted in the 1987 the words consonant to that reason and
Constitutions Article on National Economy calculated to effect that purpose.[236]
and Patrimony. If the CONCOM intended
to retain the concept of service contracts As the following question of
under the 1973 Constitution, it could have Commissioner Quesada and
simply adopted the old terminology Commissioner Villegas answer shows the
(service contracts) instead of employing drafters intended to do away with service
new and unfamiliar terms contracts which were used to circumvent
(agreements . . . involving either technical the capitalization (60%-40%) requirement:
or financial assistance). Such a difference
between the language of a provision in a
MS. QUESADA. The 1973 Constitution full control and supervision of the State;
used the words service contracts. In this meaning, noncitizens would have access
particular Section 3, is there a safeguard to these natural resources? Is that the
against the possible control of foreign understanding?
interests if the Filipinos go into
coproduction with them? MR. VILLEGAS. No, Mr. Vice-President, if
the Commissioner reads the next
MR. VILLEGAS. Yes. In fact, the deletion sentence, it states:
of the phrase service contracts was our
first attempt to avoid some of the abuses Such activities may be directly
in the past regime in the use of service undertaken by the State, or it may enter
contracts to go around the 60-40 into co-production, joint venture,
arrangement. The safeguard that has production-sharing agreements with
been introduced and this, of course can Filipino citizens.
be refined is found in Section 3, lines 25
to 30, where Congress will have to concur So we are still limiting it only to Filipino
with the President on any agreement citizens.
entered into between a foreign-owned
x x x.
corporation and the government involving
technical or financial assistance for large-
scale exploration, development and
utilization of natural resources.[237] MS. QUESADA. Going back to Section 3,
[Emphasis supplied.] the section suggests that:

In a subsequent discussion, The exploration, development, and


Commissioner Villegas allayed the fears utilization of natural resources may be
of Commissioner Quesada regarding the directly undertaken by the State, or it may
participation of foreign interests in enter into co-production, joint venture or
Philippine natural resources, which was production-sharing agreement with . . .
supposed to be restricted to Filipinos. corporations or associations at least sixty
per cent of whose voting stock or
MS. QUESADA. Another point of controlling interest is owned by such
clarification is the phrase and utilization of citizens.
natural resources shall be under the full
control and supervision of the State. In Lines 25 to 30, on the other hand,
the 1973 Constitution, this was limited to suggest that in the large-scale
citizens of the Philippines; but it was exploration, development and utilization
removed and substituted by shall be of natural resources, the President with
under the full control and supervision of the concurrence of Congress may enter
the State. Was the concept changed so into agreements with foreign-owned
that these particular resources would be corporations even for technical or
limited to citizens of the Philippines? Or financial assistance.
would these resources only be under the
I wonder if this part of Section 3 MR. MAAMBONG. Subject to the three-
contradicts the second part. I am raising minute rule, Madam President.
this point for fear that foreign investors
will use their enormous capital resources MR. DAVIDE. It will not take three
to facilitate the actual exploitation or minutes.
exploration, development and effective
disposition of our natural resources to the The Commission had just approved the
detriment of Filipino investors. I am not Preamble. In the Preamble we clearly
saying that we should not consider stated that the Filipino people are
borrowing money from foreign sources. sovereign and that one of the objectives
What I refer to is that foreign interest for the creation or establishment of a
should be allowed to participate only to government is to conserve and develop
the extent that they lend us money and the national patrimony. The implication is
give us technical assistance with the that the national patrimony or our natural
appropriate government permit. In this resources are exclusively reserved for the
way, we can insure the enjoyment of our Filipino people. No alien must be allowed
natural resources by our own people. to enjoy, exploit and develop our natural
resources. As a matter of fact, that
principle proceeds from the fact that our
natural resources are gifts from God to
MR. VILLEGAS. Actually, the second the Filipino people and it would be a
provision about the President does not breach of that special blessing from God
permit foreign investors to participate. It is if we will allow aliens to exploit our natural
only technical or financial assistance they resources.
do not own anything but on conditions
that have to be determined by law with I voted in favor of the Jamir proposal
the concurrence of Congress. So, it is because it is not really exploitation that
very restrictive. we granted to the alien corporations but
only for them to render financial or
If the Commissioner will remember, this technical assistance. It is not for them to
removes the possibility for service enjoy our natural resources. Madam
contracts which we said yesterday were President, our natural resources are
avenues used in the previous regime to depleting; our population is increasing by
go around the 60-40 requirement.[238] leaps and bounds. Fifty years from now, if
[Emphasis supplied.] we will allow these aliens to exploit our
natural resources, there will be no more
The present Chief Justice, then a member natural resources for the next generations
of the CONCOM, also referred to this of Filipinos. It may last long if we will
limitation in scope in proposing an begin now. Since 1935 the aliens have
amendment to the 60-40 requirement: been allowed to enjoy to a certain extent
the exploitation of our natural resources,
MR. DAVIDE. May I be allowed to explain and we became victims of foreign
the proposal? dominance and control. The aliens are
interested in coming to the Philippines Technical Assistance for highly technical
because they would like to enjoy the enterprises; and (2) Financial Assistance
bounty of nature exclusively intended for for large-scale enterprises.
Filipinos by God.
The intent of this provision, as well as
And so I appeal to all, for the sake of the other provisions on foreign investments,
future generations, that if we have to pray is to prevent the practice (prevalent in the
in the Preamble to preserve and develop Marcos government) of skirting the 60/40
the national patrimony for the sovereign equation using the cover of service
Filipino people and for the generations to contracts.[241] [Emphasis supplied.]
come, we must at this time decide once
and for all that our natural resources must Furthermore, it appears that Proposed
be reserved only to Filipino citizens. Resolution No. 496,[242] which was the
draft Article on National Economy and
Thank you.[239] [Emphasis supplied.] Patrimony, adopted the concept of
agreements . . . involving either technical
The opinion of another member of the or financial assistance contained in the
CONCOM is persuasive[240] and leaves Draft of the 1986 U.P. Law Constitution
no doubt as to the intention of the framers Project (U.P. Law draft) which was taken
to eliminate service contracts altogether. into consideration during the deliberation
He writes: of the CONCOM.[243]

Paragraph 4 of Section 2 specifies large- The insights of the proponents of the


scale, capital-intensive, highly U.P. Law draft are, therefore, instructive in
technological undertakings for which the interpreting the phrase technical or
President may enter into contracts with financial assistance.
foreign-owned corporations, and
enunciates strict conditions that should In his position paper entitled Service
govern such contracts. x x x Contracts: Old Wine in New Bottles?,
Professor Pacifico A. Agabin, who was a
This provision balances the need for member of the working group that
foreign capital and technology with the prepared the U.P. Law draft, criticized
need to maintain the national sovereignty. service contracts for they lodge exclusive
It recognizes the fact that as long as management and control of the enterprise
Filipinos can formulate their own terms in to the service contractor, which is
their own territory, there is no danger of reminiscent of the old concession
relinquishing sovereignty to foreign regime.Thus, notwithstanding the
interests. provision of the Constitution that natural
resources belong to the State, and that
Are service contracts allowed under the these shall not be alienated, the service
new Constitution? No. Under the new contract system renders nugatory the
Constitution, foreign investors (fully alien- constitutional provisions cited. He
[244]

owned) can NOT participate in Filipino elaborates:


enterprises except to provide: (1)
Looking at the Philippine model, we can The service contract as we know it here is
discern the following vestiges of the antithetical to the principle of sovereignty
concession regime, thus: over our natural resources restated in the
same article of the [1973] Constitution
1. Bidding of a selected area, or leasing the containing the provision for service
choice of the area to the interested party and contracts. If the service contractor happens
then negotiating the terms and conditions of to be a foreign corporation, the contract
the contract; (Sec. 5, P.D. 87) would also run counter to the constitutional
provision on nationalization or
2. Management of the enterprise vested on Filipinization, of the exploitation of our
the contractor, including operation of the natural resources. [Emphasis
[245]

field if petroleum is discovered; (Sec. 8, P.D. supplied.Underscoring in the original.]


87)
Professor Merlin M. Magallona, also a
3. Control of production and other matters member of the working group, was
such as expansion and development; (Sec. harsher in his reproach of the system:
8)
x x x the nationalistic phraseology of the 1935
4. Responsibility for downstream [Constitution] was retained by the [1973]
operations marketing, distribution, and Charter, but the essence of nationalism was
processing may be with the contractor (Sec. reduced to hollow rhetoric. The 1973 Charter
8); still provided that the exploitation or
development of the countrys natural resources
5. Ownership of equipment, machinery, fixed
be limited to Filipino citizens or corporations
assets, and other properties remain with
owned or controlled by them. However, the
contractor (Sec. 12, P.D. 87);
martial-law Constitution allowed them, once
6. Repatriation of capital and retention of these resources are in their name, to enter into
profits abroad guaranteed to the contractor service contracts with foreign investors for
(Sec. 13, P.D. 87); and financial, technical, management, or other
forms of assistance. Since foreign investors
7. While title to the petroleum discovered have the capital resources, the actual
may nominally be in the name of the exploitation and development, as well as the
government, the contractor has almost effective disposition, of the countrys natural
unfettered control over its disposition and resources, would be under their direction, and
sale, and even the domestic requirements of control, relegating the Filipino investors to the
the country is relegated to a pro rata basis role of second-rate partners in joint ventures.
(Sec. 8).
Through the instrumentality of the service
In short, our version of the service contract is contract, the 1973 Constitution had
just a rehash of the old concession regime x x legitimized at the highest level of state
x.Some people have pulled an old rabbit out policy that which was prohibited under the
of a magicians hat, and foisted it upon us as a 1973 Constitution, namely: the exploitation
new and different animal. of the countrys natural resources by foreign
nationals. The drastic impact of [this] 2. Service contracts as practiced under the
constitutional change becomes more 1973 Constitution should be discouraged,
pronounced when it is considered that the instead the government may be allowed,
active party to any service contract may be subject to authorization by special law
a corporation wholly owned by foreign passed by an extraordinary majority to
interests. In such a case, the citizenship enter into either technical or financial
requirement is completely set aside, assistance. This is justified by the fact that as
permitting foreign corporations to obtain presently worded in the 1973 Constitution, a
actual possession, control, and [enjoyment] service contract gives full control over the
of the countrys natural resources. contract area to the service contractor, for him
[Emphasis supplied.]
[246]
to work, manage and dispose of the proceeds
or production. It was a subterfuge to get
Accordingly, Professor Agabin around the nationality requirement of the
recommends that: constitution. [Emphasis supplied.]
[248]

Recognizing the service contract for what it In the annotations on the proposed
is, we have to expunge it from the Article on National Economy and
Constitution and reaffirm ownership over Patrimony, the U.P. Law draft summarized
our natural resources. That is the only way the rationale therefor, thus:
we can exercise effective control over our
natural resources. 5. The last paragraph is a modification of the
service contract provision found in Section 9,
This should not mean complete isolation of Article XIV of the 1973 Constitution as
the countrys natural resources from foreign amended. This 1973 provision shattered the
investment.Other contract forms which are framework of nationalism in our fundamental
less derogatory to our sovereignty and law (see Magallona, Nationalism and its
control over natural resources like Subversion in the Constitution). Through the
technical assistance agreements, financial service contract, the 1973 Constitution had
assistance [agreements], co-production legitimized that which was prohibited under
agreements, joint ventures, production- the 1935 constitutionthe exploitation of the
sharing could still be utilized and adopted countrys natural resources by foreign
without violating constitutional nationals. Through the service contract, acts
provisions. In other words, we can adopt prohibited by the Anti-Dummy Law were
contract forms which recognize and assert recognized as legitimate
our sovereignty and ownership over arrangements. Service contracts lodge
natural resources, and where the foreign exclusive management and control of the
entity is just a pure contractor instead of enterprise to the service contractor, not
the beneficial owner of our economic unlike the old concession regime where the
resources. [Emphasis supplied.]
[247]
concessionaire had complete control over
the countrys natural resources, having been
Still another member of the working given exclusive and plenary rights to
group, Professor Eduardo Labitag, exploit a particular resource and, in effect,
proposed that: having been assured of ownership of that
resource at the point of extraction (see arrangement is clearly incompatible with
Agabin, Service Contracts: Old Wine in New the constitutional ideal of nationalization
Bottles). Service contracts, hence, are of natural resources, with the Regalian
antithetical to the principle of sovereignty doctrine, and on a broader perspective,
over our natural resources, as well as the with Philippine sovereignty.
constitutional provision on nationalization or
Filipinization of the exploitation of our natural The proponents nevertheless
resources. acknowledged the need for capital and
technical know-how in the large-scale
Under the proposed provision, only exploitation, development and utilization
technical assistance or financial assistance of natural resources the second
agreements may be entered into, and only paragraph of the proposed draft itself
for large-scale activities. These are contract being an admission of such
forms which recognize and assert our scarcity. Hence, they recommended a
sovereignty and ownership over natural compromise to reconcile the nationalistic
resources since the foreign entity is just a provisions dating back to the 1935
pure contractor and not a beneficial owner Constitution, which reserved all natural
of our economic resources. The proposal resources exclusively to Filipinos, and the
recognizes the need for capital and more liberal 1973 Constitution, which
technology to develop our natural resources allowed foreigners to participate in these
without sacrificing our sovereignty and resources through service
control over such resources by the contracts. Such a compromise called for
safeguard of a special law which requires the adoption of a new system in the
two-thirds vote of all the members of the exploration, development, and utilization
Legislature. This will ensure that such of natural resources in the form of
agreements will be debated upon exhaustively technical agreements or financial
and thoroughly in the National Assembly to agreements which, necessarily, are
avert prejudice to the nation. [Emphasis
[249]
distinct concepts from service contracts.
supplied.]
The replacement of service contracts
The U.P. Law draft proponents viewed with agreements involving either technical
service contracts under the 1973 or financial assistance, as well as the
Constitution as grants of beneficial deletion of the phrase management or
ownership of the countrys natural other forms of assistance, assumes
resources to foreign owned greater significance when note is taken
corporations. While, in theory, the State that the U.P. Law draft proposed other
owns these natural resources and Filipino equally crucial changes that were
citizens, their beneficiaries service obviously heeded by the
contracts actually vested foreigners with CONCOM.These include the abrogation
the right to dispose, explore for, develop, of the concession system and the
exploit, and utilize the same. Foreigners, adoption of new options for the State in
not Filipinos, became the beneficiaries of the exploration, development, and
Philippine natural resources. This utilization of natural resources. The
proponents deemed these changes to be resources and engage in developmental
more consistent with the States programs that will be beneficial to them.
ownership of, and its full control and
supervision (a phrase also employed by 4. Aside from the three major schemes for the
the framers) over, such resources. The exploration, development, and utilization of
Project explained: our natural resources, the State may, by law,
allow Filipino citizens to explore, develop,
3. In line with the State ownership of natural utilize natural resources in small-scale. This is
resources, the State should take a more active in recognition of the plight of marginal
role in the exploration, development, and fishermen, forest dwellers, gold panners, and
utilization of natural resources, than the others similarly situated who exploit our
present practice of granting licenses, natural resources for their daily sustenance
concessions, or leases hence the provision that and survival.[250]

said activities shall be under the full control


and supervision of the State. There are three Professor Agabin, in particular, after
major schemes by which the State could taking pains to illustrate the similarities
undertake these activities: first, directly by between the two systems, concluded that
itself; second, by virtue of co-production, joint the service contract regime was but a
venture, production sharing agreements with rehash of the concession system. Old
Filipino citizens or corporations or wine in new bottles, as he put it. The
associations sixty per cent (60%) of the voting rejection of the service contract
stock or controlling interests of which are regime, therefore, is in consonance
owned by such citizens; or third, with a with the abolition of the concession
foreign-owned corporation, in cases of large- system.
scale exploration, development, or utilization
of natural resources through agreements In light of the deliberations of the
involving either technical or financial CONCOM, the text of the Constitution,
assistance only. x x x. and the adoption of other proposed
changes, there is no doubt that the
At present, under the licensing concession or framers considered and shared the intent
lease schemes, the government benefits from of the U.P. Law proponents in employing
such benefits only through fees, charges, ad the phrase agreements . . . involving
valorem taxes and income taxes of the either technical or financial assistance.
exploiters of our natural resources. Such
benefits are very minimal compared with the While certain commissioners may
enormous profits reaped by theses licensees, have mentioned the term service
grantees, concessionaires. Moreover, some of contracts during the CONCOM
them disregard the conservation of natural deliberations, they may not have been
resources and do not protect the environment necessarily referring to the concept of
from degradation. The proposed role of the service contracts under the 1973
State will enable it to a greater share in the Constitution. As noted earlier, service
profits it can also actively husband its natural contracts is a term that assumes different
meanings to different people. The [251]
commissioners may have been using the against any foreign participation in our
term loosely, and not in its technical and natural resources whatsoever.
legal sense, to refer, in general, to
agreements concerning natural resources WMCP cites Opinion No. 75, s. 1987,
entered into by the Government with and Opinion No. 175, s. 1990 of the
[256] [257]

foreign corporations. These loose Secretary of Justice, expressing the view


statements do not necessarily translate to that a financial or technical assistance
the adoption of the 1973 Constitution agreement is no different in concept from
provision allowing service contracts. the service contract allowed under the
1973 Constitution. This Court is not,
It is true that, as shown in the earlier however, bound by this
quoted portions of the proceedings in interpretation. When an administrative or
CONCOM, in response to Sr. Tans executive agency renders an opinion or
question, Commissioner Villegas issues a statement of policy, it merely
commented that, other than interprets a pre-existing law; and the
congressional notification, the only administrative interpretation of the law is
difference between future and past at best advisory, for it is the courts that
service contracts is the requirement of a finally determine what the law means. [258]

general law as there were no laws


previously authorizing the same. In any case, the constitutional
However,
[252]
such remark is far provision allowing the President to enter
outweighed by his more categorical into FTAAs with foreign-owned
statement in his exchange with corporations is an exception to the rule
Commissioner Quesada that the draft that participation in the nations natural
article does not permit foreign investors to resources is reserved exclusively to
participate in the nations natural Filipinos. Accordingly, such provision must
resources which was exactly what service be construed strictly against their
contracts did except to provide technical enjoyment by non-Filipinos. As
or financial assistance.[253] Commissioner Villegas emphasized, the
provision is very restrictive.
In the case of the other Commissioner Nolledo also remarked
[259]

commissioners, Commissioner Nolledo that entering into service contracts is an


himself clarified in his work that the exception to the rule on protection of
present charter prohibits service natural resources for the interest of the
contracts. Commissioner Gascon was
[254]
nation and, therefore, being an exception,
not totally averse to foreign participation, it should be subject, whenever possible,
but favored stricter restrictions in the form to stringent rules. Indeed, exceptions
[260]

of majority congressional concurrence. should be strictly but reasonably


On the other hand, Commissioners
[255]
construed; they extend only so far as their
Garcia and Tadeo may have veered to the language fairly warrants and all doubts
extreme side of the spectrum and their should be resolved in favor of the general
objections may be interpreted as votes provision rather than the exception. [261]
With the foregoing discussion in mind, Eventually,
[265]
the foreign-owned
this Court finds that R.A. No. 7942 is corporation, as such permittee, may apply
invalid insofar as said Act authorizes for a financial and technical assistance
service contracts. Although the statute agreement. [266]

employs the phrase financial and


technical agreements in accordance with Development is
the 1987 Constitution, it actually treats
these agreements as service contracts the work undertaken to explore and prepare an
that grant beneficial ownership to foreign ore body or a mineral deposit for mining,
contractors contrary to the fundamental including the construction of necessary
law. infrastructure and related facilities. [267]

Section 33, which is found under Chapter VI Utilization means the extraction or
(Financial or Technical Assistance disposition of minerals. A stipulation that
[268]

Agreement) of R.A. No. 7942 states: the proponent shall dispose of the
minerals and byproducts produced at the
SEC. 33. Eligibility.Any qualified person with highest price and more advantageous
technical and financial capability to terms and conditions as provided for
undertakelarge-scale exploration, under the implementing rules and
development, and utilization of mineral regulations is required to be incorporated
resources in the Philippines may enter into a in every FTAA. [269]

financial or technical assistance agreement


directly with the Government through the A foreign-owned/-controlled
Department. [Emphasis supplied.] corporation may likewise be granted a
mineral processing permit. Mineral [270]

Exploration, as defined by R.A. No. processing is the milling, beneficiation or


7942, upgrading of ores or minerals and rocks
or by similar means to convert the same
means the searching or prospecting for into marketable products. [271]

mineral resources by geological, geochemical


or geophysical surveys, remote sensing, test An FTAA contractor makes a warranty
pitting, trending, drilling, shaft sinking, that the mining operations shall be
tunneling or any other means for the purpose conducted in accordance with the
of determining the existence, extent, quantity provisions of R.A. No. 7942 and its
and quality thereof and the feasibility of implementing rules and for work
[272]

mining them for profit. [262] programs and minimum expenditures and
commitments. And it obliges itself to
[273]

A legally organized foreign-owned furnish the Government records of


corporation may be granted an geologic, accounting, and other relevant
exploration permit, which vests it with the
[263]
data for its mining operation. [274]

right to conduct exploration for all


minerals in specified areas, i.e., to enter,
[264] Mining operation, as the law defines
occupy and explore the same. it, means mining
activities involving exploration,
feasibility, development, utilization, nations mineral resources to these
and processing. [275]
contractors, leaving the State with nothing
but bare title thereto.
The underlying assumption in all these
provisions is that the foreign contractor Moreover, the same provisions,
manages the mineral resources, just like whether by design or inadvertence, permit
the foreign contractor in a service a circumvention of the constitutionally
contract. ordained 60%-40% capitalization
requirement for corporations or
Furthermore, Chapter XII of the Act associations engaged in the exploitation,
grants foreign contractors in FTAAs the development and utilization of Philippine
same auxiliary mining rights that it grants natural resources.
contractors in mineral agreements
(MPSA, CA and JV). Parenthetically,
[276]
All materials, equipment, plant and
Sections 72 to 75 use the term contractor, other installations erected or placed on
without distinguishing between FTAA and the Contract Area remain the property of
mineral agreement contractors. And so WMCP, which has the right to deal with
does holders of mining rights in Section and remove such items within twelve
76. A foreign contractor may even convert months from the termination of the FTAA.
[296]
its FTAA into a mineral agreement if the
economic viability of the contract area is Pursuant to Section 1.2 of the FTAA,
found to be inadequate to justify large- WMCP shall provide [all] financing,
scale mining operations, provided that it
[277]

technology, management and personnel


reduces its equity in the corporation, necessary for the Mining Operations. The
partnership, association or cooperative to mining company binds itself to perform all
forty percent (40%). [278]

Mining Operations . . . providing all


necessary services, technology and
Finally, under the Act, an FTAA
financing in connection therewith, and to
[297]

contractor warrants that it has or has


furnish all materials, labour, equipment
access to all the financing, managerial,
and other installations that may be
and technical expertise. . . . This [279]

required for carrying on all Mining


suggests that an FTAA contractor is
Operations. WMCP
[298]
may make
bound to provide
expansions, improvements and
some management assistance a form of
replacements of the mining facilities and
assistance that has been eliminated and,
may add such new facilities as it
therefore, proscribed by the present
considers necessary for the mining
Charter.
operations.[299]

By allowing foreign contractors to


These contractual stipulations, taken
manage or operate all the aspects of the
together, grant WMCP beneficial
mining operation, the above-cited
ownership over natural resources that
provisions of R.A. No. 7942 have in effect
properly belong to the State and are
conveyed beneficial ownership over the
intended for the benefit of its
citizens. These stipulations are abhorrent invalidating [WMCPs] FTAA without
to the 1987 Constitution. They are likewise nullifying the service contracts
precisely the vices that the fundamental entered into before the enactment of RA 7942
law seeks to avoid, the evils that it aims to such as those mentioned in PD 87 or EO 279.
suppress. Consequently, the contract
from which they spring must be struck This becomes more significant in the light of
down. the fact that [WMCPs] FTAA was executed
not by a mere Filipino citizen, but by the
In arguing against the annulment of Philippine Government itself, through its
the FTAA, WMCP invokes the Agreement President no less, which, in entering into said
on the Promotion and Protection of treaty is assumed to be aware of the existing
Investments between the Philippine and Philippine laws on service contracts over the
Australian Governments, which was exploration, development and utilization of
signed in Manila on January 25, 1995 and natural resources. The execution of the FTAA
which entered into force on December 8, by the Philippine Government assures the
1995. Australian Government that the FTAA is in
accordance with existing Philippine laws.
x x x. Article 2 (1) of said treaty states that it [Emphasis and italics by private
[300]

applies to investments whenever made and respondents.]


thus the fact that [WMCPs] FTAA was
entered into prior to the entry into force of the The invalidation of the subject FTAA, it
treaty does not preclude the Philippine is argued, would constitute a breach of
Government from protecting [WMCPs] said treaty which, in turn, would amount
investment in [that] FTAA.Likewise, Article 3 to a violation of Section 3, Article II of the
(1) of the treaty provides that Each Party Constitution adopting the generally
shall encourage and promote investments in accepted principles of international law as
its area by investors of the other Party and part of the law of the land. One of these
shall [admit] such investments in generally accepted principles is pacta
accordance with its Constitution, Laws, sunt servanda, which requires the
regulations and investment policies and in performance in good faith of treaty
Article 3 (2), it states that Each Party shall obligations.
ensure that investments are accorded fair
and equitable treatment.The latter stipulation Even assuming arguendo that WMCP
indicates that it was intended to impose an is correct in its interpretation of the treaty
obligation upon a Party to afford fair and and its assertion that the Philippines
equitable treatment to the investments of the could not . . . deprive an Australian
other Party and that a failure to provide such investor (like [WMCP]) of fair and
treatment by or under the laws of the Party equitable treatment by invalidating
may constitute a breach of the treaty. Simply [WMCPs] FTAA without likewise nullifying
stated, the Philippines could not, under said the service contracts entered into before
treaty, rely upon the inadequacies of its own the enactment of RA 7942 . . ., the
laws to deprive an Australian investor (like annulment of the FTAA would not
[WMCP]) of fair and equitable treatment by constitute a breach of the treaty
invoked. For this decision herein Surely, the framers of the 1987
invalidating the subject FTAA forms part Charter did not contemplate such an
of the legal system of the Philippines. absurd result from their use of either/or. A
The
[301]
equal protection constitution is not to be interpreted as
clause guarantees that such decision
[302]
demanding the impossible or the
shall apply to all contracts belonging to impracticable; and unreasonable or
the same class, hence, upholding rather absurd consequences, if possible, should
than violating, the fair and equitable be avoided. Courts are not to give
[305]

treatment stipulation in said treaty. words a meaning that would lead to


absurd or unreasonable consequences
One other matter requires and a literal interpretation is to be rejected
clarification. Petitioners contend that, if it would be unjust or lead to absurd
consistent with the provisions of Section results. That is a strong argument
[306]

2, Article XII of the Constitution, the against its adoption. Accordingly,


[307]

President may enter into agreements petitioners interpretation must be


involving either technical or financial rejected.
assistance only. The agreement in
question, however, is a The foregoing discussion has
technical and financial assistance rendered unnecessary the resolution of
agreement. the other issues raised by the petition.

Petitioners contention does not lie. To WHEREFORE, the petition


adhere to the literal language of the is GRANTED.
Constitution would lead to absurd
consequences. As WMCP correctly put
[303]

it:

x x x such a theory of petitioners would Third Issue:


compel the government (through the The Proper Interpretation of the
Constitutional Phrase
President) to enter into contract with two (2)
Agreements Involving Either Technical or
foreign-owned corporations, one for financial
Financial Assistance
assistance agreement and with the other, for
technical assistance over one and the same
mining area or land; or to execute two (2) The constitutional provision at the
nucleus of the controversy is paragraph 4
contracts with only one foreign-owned
of Section 2 of Article XII of the 1987
corporation which has the capability to
Constitution. In order to appreciate its
provide both financial and technical context, Section 2 is reproduced in full:
assistance, one for financial assistance and
another for technical assistance, over the same Sec. 2. All lands of the public domain, waters,
mining area. Such an absurd result is minerals, coal, petroleum, and other mineral
definitely not sanctioned under the canons of oils, all forces of potential energy, fisheries,
constitutional construction. [Underscoring
[304] forests or timber, wildlife, flora and fauna,
in the original.] and other natural resources are owned by the
State. With the exception of agricultural The President shall notify the Congress of
lands, all other natural resources shall not be every contract entered into in accordance
alienated. The exploration, development and with this provision, within thirty days from its
utilization of natural resources shall be under execution.[31]
the full control and supervision of the State.
The State may directly undertake such
activities, or it may enter into co-production, No Restriction of Meaning by
joint venture or production-sharing a Verba Legis Interpretation
agreements with Filipino citizens or
corporations or associations at least sixty per To interpret the foregoing provision,
centum of whose capital is owned by such petitioners adamantly assert that the
citizens. Such agreements may be for a period language of the Constitution should
not exceeding twenty-five years, renewable prevail; that the primary method of
for not more than twenty-five years, and interpreting it is to seek the ordinary
under such terms and conditions as may be meaning of the words used in its
provided by law. In cases of water rights for provisions. They rely on rulings of this
irrigation, water supply, fisheries, or Court, such as the following:
industrial uses other than the development of
water power, beneficial use may be the The fundamental principle in constitutional
measure and limit of the grant. construction however is that the primary
source from which to ascertain constitutional
The State shall protect the nations marine intent or purpose is the language of the
wealth in its archipelagic waters, territorial provision itself. The presumption is that the
sea, and exclusive economic zone, and reserve words in which the constitutional provisions
its use and enjoyment exclusively to Filipino are couched express the objective sought to be
citizens. attained. In other words, verba legis prevails.
Only when the meaning of the words used is
The Congress may, by law, allow small-scale unclear and equivocal should resort be made
utilization of natural resources by Filipino to extraneous aids of construction and
citizens, as well as cooperative fish farming, interpretation, such as the proceedings of the
with priority to subsistence fishermen and Constitutional Commission or Convention to
fish-workers in rivers, lakes, bays and shed light on and ascertain the true intent or
lagoons. purpose of the provision being construed.[32]
The President may enter into agreements with Very recently, in Francisco v. The
foreign-owned corporations involving either House of Representatives,[33] this Court
technical or financial assistance for large- indeed had the occasion to reiterate the
scale exploration, development, and well-settled principles of constitutional
utilization of minerals, petroleum, and other construction:
mineral oils according to the general terms
and conditions provided by law, based on real First, verba legis, that is, wherever possible,
contributions to the economic growth and the words used in the Constitution must be
general welfare of the country. In such given their ordinary meaning except where
agreements, the State shall promote the technical terms are employed. x x x.
development and use of local scientific and
technical resources. xxxxxxxxx
Second, where there is ambiguity, ratio legis Note that in all the three foregoing
est anima. The words of the Constitution mining activities -- exploration,
should be interpreted in accordance with the development and utilization -- the State
intent of its framers. x x x. may undertake such EDU activities by
itself or in tandem with Filipinos or Filipino
xxxxxxxxx corporations, except in two
instances: first, in small-scale utilization of
Finally, ut magis valeat quam pereat. The natural resources, which Filipinos may be
Constitution is to be interpreted as a whole. [34] allowed by law to undertake; and second,
in large-scale EDU of minerals, petroleum
For ease of reference and in and mineral oils, which may be
consonance with verba legis, we undertaken by the State
reconstruct and stratify the aforequoted via agreements with foreign-owned
Section 2 as follows: corporations involving either technical or
financial assistance as provided by law.
1. All natural resources are owned by the
State. Except for agricultural lands, natural Petitioners claim that the
resources cannot be alienated by the State. phrase agreements x x x involving either
technical or financial assistance simply
2. The exploration, development and means technical assistance or financial
utilization (EDU) of natural resources shall be assistance agreements, nothing more and
under the full control and supervision of the nothing else. They insist that there is no
State. ambiguity in the phrase, and that a plain
reading of paragraph 4 quoted above
3. The State may undertake these EDU leads to the inescapable conclusion that
activities through either of the following: what a foreign-owned corporation may
enter into with the government is merely
(a) By itself directly and solely an agreement
for either financial or technical
(b) By (i) co-production; (ii) joint venture; or assistance only, for the large-scale
(iii) production sharing agreements with exploration, development and utilization
Filipino citizens or corporations, at least 60 of minerals, petroleum and other mineral
percent of the capital of which is owned by oils; such a limitation, they argue,
such citizens excludes foreign management and
operation of a mining enterprise.[35]
4. Small-scale utilization of natural resources
may be allowed by law in favor of Filipino This restrictive interpretation,
citizens. petitioners believe, is in line with the
general policy enunciated by the
5. For large-scale EDU of minerals, Constitution reserving to Filipino citizens
petroleum and other mineral oils, the and corporations the use and enjoyment
President may enter into agreements with of the countrys natural resources. They
foreign-owned corporations involving either maintain that this Courts Decision[36]of
technical or financial assistance according to January 27, 2004 correctly declared the
the general terms and conditions provided by WMCP FTAA, along with pertinent
law x x x. provisions of RA 7942, void for allowing a
foreign contractor to have direct and
exclusive management of a mining technical or financial assistance -- does
enterprise. Allowing such a privilege not not indicate the intent to exclude other
only runs counter to the full control and modes of assistance. The drafters opted
supervision that the State is to use involving when they could have
constitutionally mandated to exercise over simply said agreements forfinancial or
the exploration, development and technical assistance, if that was their
utilization of the countrys natural intention to begin with. In this case, the
resources; doing so also vests in the limitation would be very clear and no
foreign company beneficial ownership of further debate would ensue.
our mineral resources. It will be recalled
In contrast, the use of the word
that the Decision of January 27, 2004
involving signifies the possibility of the
zeroed in on management or other forms
inclusion of other forms of assistance
of assistance or other activities
or activities having to do with, otherwise
associated with the service contracts of
related to or compatible with financial or
the martial law regime, since the
technical assistance. The word involving
management or operation of mining
as used in this context has three
activities by foreign contractors, which is
connotations that can be differentiated
the primary feature of service contracts,
thus: one, the sense of concerning,
was precisely the evil that the drafters of
having to do with, or affecting; two,
the 1987 Constitution sought to eradicate.
entailing, requiring, implying or
On the other hand, the necessitating; and three, including,
intervenor and
[37]
public respondents containing or comprising. [38]

argue that the FTAA allowed by


Plainly, none of the three connotations
paragraph 4 is not merely an agreement
convey a sense of exclusivity. Moreover,
for supplying limited and specific financial
the word involving, when understood in
or technical services to the State. Rather,
the sense of including, as in including
such FTAA is a comprehensive
technical or financial
agreement for the foreign-owned
assistance, necessarily implies that there
corporations integrated exploration,
are activities other than those that are
development and utilization of mineral,
being included. In other words, if an
petroleum or other mineral oils on a large-
agreement includes technical or financial
scale basis. The agreement, therefore,
assistance, there is apart from such
authorizes the foreign contractors
assistance -- something else already in,
rendition of a whole range of integrated
and covered or may be covered by, the
and comprehensive services, ranging
said agreement.
from the discovery to the development,
utilization and production of minerals or In short, it allows for the possibility
petroleum products. that matters, other than those explicitly
mentioned, could be made part of the
We do not see how applying a strictly
agreement. Thus, we are now led to the
literal or verba legis interpretation of
conclusion that the use of the word
paragraph 4 could inexorably lead to the
involving implies that these agreements
conclusions arrived at in
with foreign corporations are not limited to
the ponencia. First, the drafters choice of
mere financial or technical assistance.
words -- their use of the
The difference in sense becomes very
phrase agreements x x x involving either
apparent when we juxtapose to eradicate. Nowhere in the above-
agreements for technical or financial quoted Section can be discerned the
assistance against objective to keep out of foreign hands the
agreements including technical or management or operation of mining
financial assistance. This much is activities or the plan to eradicate service
unalterably clear in a verba contracts as these were understood in the
legis approach. 1973 Constitution. Still, petitioners
maintain that the deletion or omission
Second, if the real intention of the
from the 1987 Constitution of the term
drafters was to confine foreign
service contracts found in the 1973
corporations to financial or technical
Constitution sufficiently proves the
assistance and nothing more, their
drafters intent to exclude foreigners from
language would have certainly been
the management of the affected
so unmistakably restrictive and
enterprises.
stringent as to leave no doubt in
anyones mind about their true intent. For To our mind, however, such
example, they would have used the intent cannot be definitively and
sentence foreign corporations conclusively establishedfrom the mere
are absolutely prohibited from failure to carry the same expression or
involvement in the management or term over to the new Constitution, absent
operation of mining or similar ventures or a more specific, explicit and unequivocal
words of similar import. A search for such statement to that effect. What petitioners
stringent wording yields negative seek (a complete ban on foreign
results. Thus, we come to the inevitable participation in the management of mining
conclusion that there was a conscious operations, as previously allowed by the
and deliberate decision to avoid the earlier Constitutions) is nothing short of
use of restrictive wording that bringing about a momentous sea change
bespeaks an intent not to use the in the economic and developmental
expression agreements x x x involving policies; and the fundamentally capitalist,
either technical or financial assistance free-enterprise philosophy of our
in an exclusionary and limiting government. We cannot imagine such
manner. a radical shift being undertaken by our
government, to the great prejudice of the
mining sector in particular and our
Deletion of Service Contracts to economy in general, merely on the basis
Avoid Pitfalls of Previous of the omission of the terms service
Constitutions, contract from or the failure to carry them
Not to Ban Service Contracts Per Se over to the new Constitution. There has to
be a much more definite and even
Third, we do not see how a verba unarguable basis for such a drastic
legis approach leads to the conclusion reversal of policies.
that the management or operation of Fourth, a literal and restrictive
mining activities by foreign contractors, interpretation of paragraph 4, such as that
which is the primary feature of service proposed by petitioners, suffers from
contracts, was precisely the evil that the certain internal logical inconsistencies
drafters of the 1987 Constitution sought that generate ambiguities in the
understanding of the provision. As the agreements other than those for mere
intervenor pointed out, there has never financial or technical assistance.
been any constitutional or statutory
In like manner, there would be no
provision that reserved to Filipino citizens
need to require the President of the
or corporations, at least 60 percent of
Republic to report to Congress, if only
which is Filipino-owned, the rendition of
financial or technical assistance
financial or technical assistance to
agreements are involved. Such
companies engaged in mining or the
agreements are in the nature of foreign
development of any other natural
loans that -- pursuant to Section 20 of
resource. The taking out of foreign-
Article VII[39] of the 1987 Constitution -- the
currency or peso-denominated loans or
President may contract or guarantee,
any other kind of financial assistance, as
merely with the prior concurrence of the
well as the rendition of technical
Monetary Board. In turn, the Board is
assistance -- whether to the State or to
required to report to Congress within
any other entity in the Philippines -- has
thirty days from the end of every quarter
never been restricted in favor of Filipino
of the calendar year, not thirty days after
citizens or corporations having a certain
the agreement is entered into.
minimum percentage of Filipino equity.
Such a restriction would certainly be And if paragraph 4 permits only
preposterous and unnecessary. As a agreements for loans and other forms of
matter of fact, financial, and even financial, or technical assistance, what is
technical assistance, regardless of the the point of requiring that they be based
nationality of its source, would be on real contributions to the economic
welcomed in the mining industry anytime growth and general welfare of the
with open arms, on account of the dearth country? For instance, how is one to
of local capital and the need to continually measure and assess the real
update technological know-how and contributions to the economic growth and
improve technical skills. general welfare of the country that may
ensue from a foreign-currency loan
There was therefore no need for a
agreement or a technical-assistance
constitutional provision specifically
agreement for, say, the refurbishing of an
allowing foreign-owned corporations to
existing power generating plant for a
render financial or technical assistance,
mining operation somewhere in
whether in respect of mining or some
Mindanao? Such a criterion would make
other resource development or
more sense when applied to a major
commercial activity in the Philippines. The
business investment in a principal sector
last point needs to be emphasized: if
of the industry.
merely financial or technical
assistance agreements are allowed, The conclusion is clear and
there would be no need to limit them inescapable -- a verba legis construction
to large-scale mining operations, as shows that paragraph 4 is not to be
there would be far greater need for understood as one limited only to foreign
them in the smaller-scale mining loans (or other forms of financial support)
activities (and even in non-mining and to technical assistance. There is
areas). Obviously, the provision in definitely more to it than that. These are
question was intended to refer to provisions permitting participation by
foreign companies; requiring the The very recent brouhaha over the
Presidents report to Congress; and gargantuan fiscal crisis or budget deficit
using, as yardstick, contributions merely confirms what the ordinary citizen
based on economic growth and has suspected all along. After the reality
general welfare. These were neither check, one will have to admit the
accidentally inserted into the implausibility of a direct undertaking -- by
Constitution nor carelessly cobbled the State itself -- of large-
together by the drafters in lip service scaleexploration, development and
to shallow nationalism. The provisions utilization of minerals, petroleum and
patently have significance and usefulness other mineral oils. Such an undertaking
in a context that allows agreements with entails not only humongous capital
foreign companies to include more than requirements, but also the attendant risk
mere financial or technical assistance. of never finding and developing
economically viable quantities of
Fifth, it is argued that Section 2 of
minerals, petroleum and other mineral
Article XII authorizes nothing more than a
oils.[40]
rendition of specific and limited financial
service or technical assistance by a It is equally difficult to imagine that
foreign company. This argument begs the such a provision restricting foreign
question To whom or for whom would it be companies to the rendition of only
rendered? or Who is being assisted? If financial or technical assistance to the
the answer is The State, then it government was deliberately crafted by
necessarily implies that the State itself is the drafters of the Constitution, who were
the one directly and solely undertaking all well aware of the capital-intensive and
the large-scale exploration, development technology-oriented nature of large-scale
and utilization of a mineral resource, so it mineral or petroleum extraction and the
follows that the State must itself bear the countrys deficiency in precisely those
liability and cost of repaying the financing areas.[41] To say so would be tantamount
sourced from the foreign lender and/or of to asserting that the provision was
paying compensation to the foreign entity purposely designed to ladle the large-
rendering technical assistance. scale development and utilization of
mineral, petroleum and related resources
However, it is of common knowledge,
with impossible conditions; and to remain
and of judicial notice as well, that the
forever and permanently reserved for
government is and has for many many
future generations of Filipinos.
years been financially strapped, to the
point that even the most essential
services have suffered serious A More Reasonable Look
curtailments -- education and health care, at the Charters Plain Language
for instance, not to mention judicial
services -- have had to make do with
inadequate budgetary allocations. Thus, Sixth, we shall now look closer at the
government has had to resort to build- plain language of the Charter and
operate-transfer and similar examining the logical inferences. The
arrangements with the private sector, in drafters chose to emphasize and
order to get vital infrastructure projects highlight agreements x x x involving either
built without any governmental outlay. technical or financial assistance in
relation to foreign corporations In short, the drafters will have to be
participation in large-scale EDU. The credited with enough pragmatism and
inclusion of this clause on technical or savvy to know that these foreign entities
financial assistance recognizes the fact will not enter into such agreements
that foreign business entities and involving assistance without requiring
multinational corporations are the ones arrangements for the protection of their
with the resources and know-how to investments, gains and benefits.
provide technical and/or financial
Thus, by specifying such agreements
assistance of the magnitude and type
involving assistance, the drafters
required for large-scale exploration,
necessarily gave implied assent to
development and utilization of these
everything that these agreements
resources.
necessarily entailed; or that could
The drafters -- whose ranks included reasonably be deemed necessary to
many academicians, economists, make them tenable and effective,
businessmen, lawyers, politicians and including management authority with
government officials -- were not unfamiliar respect to the day-to-day operations of
with the practices of foreign corporations the enterprise and measures for the
and multinationals. protection of the interests of the foreign
corporation, PROVIDED THAT Philippine
Neither were they so nave as to
sovereignty over natural resources and
believe that these entities would provide
full control over the enterprise
assistance without conditionalities or
undertaking the EDU activities remain
some quid pro quo. Definitely, as
firmly in the State.
business persons well know and as a
matter of judicial notice, this matter is not
just a question of signing a promissory Petitioners Theory Deflated by the
note or executing a technology transfer Absence of Closing-Out Rules or
agreement. Foreign corporations usually Guidelines
require that they be given a say in the
management, for instance, of day-to-day
operations of the joint venture. They Seventh and final point regarding the
would demand the appointment of their plain-language approach, one of the
own men as, for example, operations practical difficulties that results from it is
managers, technical experts, quality the fact that there is nothing by way of
control heads, internal auditors or transitory provisions that would serve to
comptrollers. Furthermore, they would confirm the theory that the omission of the
probably require seats on the Board of term service contract from the 1987
Directors -- all these to ensure the Constitution signaled the demise of
success of the enterprise and the service contracts.
repayment of the loans and other financial The framers knew at the time they
assistance and to make certain that the were deliberating that there were various
funding and the technology they supply service contracts extant and in force and
would not go to waste. Ultimately, they effect, including those in the petroleum
would also want to protect their business industry. Many of these service contracts
reputation and bottom lines.[42] were long-term (25 years) and had
several more years to run. If they had
meant to ban service contracts altogether, Section 26. The authority to issue
they would have had to provide for the sequestration or freeze orders under
termination or pretermination of the Proclamation No. 3 dated March 25, 1986 in
existing contracts. Accordingly, they relation to the recovery of ill-gotten wealth
would have supplied the specifics and shall remain operative for not more than
the when and how of effecting the eighteen months after the ratification of this
extinguishment of these existing contracts Constitution. However, in the national
(or at least the mechanics for determining interest, as certified by the President, the
them); and of putting in place the means Congress may extend such period.
to address the just claims of the
contractors for compensation for their A sequestration or freeze order shall be issued
investments, lost opportunities, and so only upon showing of a prima facie case. The
on, if not for the recovery thereof. order and the list of the sequestered or frozen
properties shall forthwith be registered with
If the framers had intended to put an the proper court. For orders issued before the
end to service contracts, they would have ratification of this Constitution, the
at least left specific instructions to corresponding judicial action or proceeding
Congress to deal with these closing-out shall be filed within six months from its
issues, perhaps by way of general ratification. For those issued after such
guidelines and a timeline within which to ratification, the judicial action or proceeding
carry them out. The following are some shall be commenced within six months from
extant examples of such transitory the issuance thereof.
guidelines set forth in Article XVIII of our
Constitution: The sequestration or freeze order is deemed
automatically lifted if no judicial action or
Section 23. Advertising entities affected by proceeding is commenced as herein
paragraph (2), Section 11 of Article XVI of provided. [43]
this Constitution shall have five years from its
ratification to comply on a graduated and It is inconceivable that the drafters of
proportionate basis with the minimum the Constitution would leave such an
Filipino ownership requirement therein. important matter -- an expression of
sovereignty as it were -- indefinitely
xxxxxxxxx hanging in the air in a formless and
ineffective state. Indeed, the complete
Section 25. After the expiration in 1991 of the
absence of even a general framework
Agreement between the Republic of the
only serves to further deflate petitioners
Philippines and the United States of America
theory, like a childs balloon losing its air.
concerning military bases, foreign military
bases, troops, or facilities shall not be Under the circumstances, the logical
allowed in the Philippines except under a inconsistencies resulting from petitioners
treaty duly concurred in by the Senate and, literal and purely verba legis approach to
when the Congress so requires, ratified by a paragraph 4 of Section 2 of Article XII
majority of the votes cast by the people in a compel a resort to other aids to
national referendum held for that purpose, interpretation.
and recognized as a treaty by the other
contracting State.
Petitioners Posture Also Negated
by Ratio Legis Et Anima MR. JAMIR. Thank you.
THE PRESIDENT. Commissioner Suarez
is recognized.
Thus, in order to resolve the
inconsistencies, incongruities and MR. SUAREZ. Thank you, Madam
President.
ambiguities encountered and to supply
the deficiencies of the plain-language Will Commissioner Jamir answer a few
approach, there is a need for recourse to clarificatory questions?
the proceedings of the 1986 MR. JAMIR. Yes, Madam President.
Constitutional Commission. There is a MR. SUAREZ. This particular portion of
need for ratio legis et anima. the section has reference to what
was popularly known before as
service contracts, among other
Service Contracts Not things, is that correct?
Deconstitutionalized MR. JAMIR. Yes, Madam President.
MR. SUAREZ. As it is formulated, the
Pertinent portions of the deliberations President may enter into service
contracts but subject to the
of the members of the Constitutional guidelines that may be promulgated
Commission (ConCom) conclusively by Congress?
show that they discussed agreements MR. JAMIR. That is correct.
involving either technical or financial
assistance in the same breadth MR. SUAREZ. Therefore, that aspect of
negotiation and consummation will fall
as service contracts and used the terms on the President, not upon Congress?
interchangeably. The following exchange
MR. JAMIR. That is also correct, Madam
between Commissioner Jamir (sponsor of President.
the provision) and Commissioner Suarez
MR. SUAREZ. Except that all of these
irrefutably proves that the agreements
contracts, service or otherwise,
involving technical or financial assistance must be made strictly in accordance
were none other than service contracts. with guidelines prescribed by
Congress?
THE PRESIDENT. Commissioner Jamir is
recognized. We are still on Section 3. MR. JAMIR. That is also correct.
MR. JAMIR. Yes, Madam President. With MR. SUAREZ. And the Gentleman is
respect to the second paragraph of thinking in terms of a law that
Section 3, my amendment by uniformly covers situations of the
substitution reads: THE PRESIDENT same nature?
MAY ENTER INTO AGREEMENTS
WITH FOREIGN-OWNED MR. JAMIR. That is 100 percent correct.
CORPORATIONS INVOLVING MR. SUAREZ. I thank the Commissioner.
EITHER TECHNICAL OR FINANCIAL
ASSISTANCE FOR LARGE-SCALE MR. JAMIR. Thank you very much.[44]
EXPLORATION, DEVELOPMENT
AND UTILIZATION OF NATURAL
The following exchange leaves no
RESOURCES ACCORDING TO THE doubt that the commissioners knew
TERMS AND CONDITIONS exactly what they were dealing with:
PROVIDED BY LAW. service contracts.
MR. VILLEGAS. The Committee accepts THE PRESIDENT. Commissioner Gascon
the amendment. Commissioner is recognized.
Suarez will give the background.
MR. GASCON. Commissioner Jamir had So instead of a general law to be passed
proposed an amendment with regard by Congress to serve as a guideline to
to special service contracts which the President when entering
was accepted by the Committee. into service contract agreements, I
Since the Committee has accepted it, propose that every service
I would like to ask some questions. contract entered into by the President
would need the concurrence of
THE PRESIDENT. Commissioner Gascon Congress, so as to assure the
may proceed. Filipinos of their interests with regard
MR. GASCON. As it is proposed now, to the issue in Section 3 on all lands
such service contracts will be of the public domain. My alternative
entered into by the President with the amendment, which we will discuss
guidelines of a general law on service later, reads: THAT THE PRESIDENT
contract to be enacted by Congress. SHALL ENTER INTO SUCH
Is that correct? AGREEMENTS ONLY WITH THE
CONCURRENCE OF TWO-THIRDS
MR. VILLEGAS. The Commissioner is VOTE OF ALL THE MEMBERS OF
right, Madam President. CONGRESS SITTING SEPARATELY.
MR. GASCON. According to the original
proposal, if the President were to xxxxxxxxx
enter into a particular agreement, he
would need the concurrence of MR. BENGZON. The reason we made that
Congress. Now that it has been shift is that we realized the original
changed by the proposal of proposal could breed corruption. By
Commissioner Jamir in that Congress the way, this is not just confined
will set the general law to which the to service contracts but also
President shall comply, the President to financial assistance. If we are
will, therefore, not need the going to make every single contract
concurrence of Congress every time subject to the concurrence of
he enters into service contracts. Is Congress which, according to the
that correct? Commissioners amendment is the
MR. VILLEGAS. That is right. concurrence of two-thirds of Congress
voting separately then (1) there is a
MR. GASCON. The proposed amendment very great chance that each contract
of Commissioner Jamir is in indirect will be different from another; and (2)
contrast to my proposed amendment, there is a great temptation that it
so I would like to object and present would breed corruption because of the
my proposed amendment to the body. great lobbying that is going to happen.
And we do not want to subject our
xxxxxxxxx legislature to that.

MR. GASCON. Yes, it will be up to the Now, to answer the Commissioners


body. apprehension, by general law, we do not mean
I feel that the general law to be set by statements of motherhood. Congress can build
Congress as regard service contract all the restrictions that it wishes into that
agreementswhich the President will general law so that every contract entered into
enter into might be too general or by the President under that specific area will
since we do not know the content yet
of such a law, it might be that certain have to be uniform. The President has no
agreements will be detrimental to the choice but to follow all the guidelines that will
interest of the Filipinos. This is in be provided by law.
direct contrast to my proposal which
provides that there be effective MR. GASCON. But my basic problem is
constraints in the implementation that we do not know as of yet the
of service contracts. contents of such a general law as to
how much constraints there will be in amendment seeks is the reporting
it. And to my mind, although the requirement from the Office of the
Committees contention that the President. Will Commissioner Jamir
regular concurrence from Congress entertain that?
would subject Congress to extensive
MR. JAMIR. I will gladly do so, if it is still
lobbying, I think that is a risk we will
have to take since Congress is a body within my power.
of representatives of the people MR. VILLEGAS. Yes, the Committee
whose membership will be changing accepts the amendment.
regularly as there will be changing
circumstances every time certain xxxxxxxxx
agreements are made. It would be
best then to keep in tab and attuned
to the interest of the Filipino people, SR. TAN. Madam President, may I ask a
whenever the President enters into question?
any agreement with regard to such an THE PRESIDENT. Commissioner Tan is
important matter as technical or recognized.
financial assistance for large-scale
exploration, development and SR. TAN. Am I correct in thinking that the
utilization of natural resources or only difference between these
service contracts, the peoples future service contracts and the
elected representatives should be on past service contracts under Mr.
top of it. Marcos is the general law to be
enacted by the legislature and the
notification of Congress by the
xxxxxxxxx President? That is the only difference,
is it not?
MR. OPLE. Madam President, we do not
need to suspend the session. If MR. VILLEGAS. That is right.
Commissioner Gascon needs a few SR. TAN. So those are the safeguards.
minutes, I can fill up the remaining
time while he completes his proposed MR. VILLEGAS. Yes. There was no law at
amendment. I just wanted to ask all governing service
Commissioner Jamir whether he contracts before.
would entertain a minor amendment
SR. TAN. Thank you, Madam President.[45]
to his amendment, and it reads as
follows: THE PRESIDENT SHALL
SUBSEQUENTLY NOTIFY
CONGRESS OF EVERY SERVICE More Than Mere Financial
CONTRACT ENTERED INTO IN and Technical Assistance
ACCORDANCE WITH THE
GENERAL LAW. I think the reason is,
Entailed by the Agreements
if I may state it briefly, as
Commissioner Bengzon said, The clear words of Commissioner
Congress can always change the
general law later on to conform to new Jose N. Nolledo quoted below explicitly
perceptions of standards that should and eloquently demonstrate that the
be built into service contracts. But drafters knew that the agreements with
the only way Congress can do this is if foreign corporations were going to entail
there were a notification requirement
from the Office of the President that not mere technical or financial assistance
such service contracts had been but, rather, foreign investment in and
entered into, subject then to the management of an enterprise involved in
scrutiny of the Members of Congress. large-scale exploration, development and
This pertains to a situation where
the service contracts are already
utilization of minerals, petroleum, and
entered into, and all that this other mineral oils.
THE PRESIDENT. Commissioner Nolledo As far as I am concerned, if I should have my
is recognized. own way, I am for the complete deletion of
MR. NOLLEDO. Madam President, I have this provision. However, we are presenting a
the permission of the Acting Floor compromise in the sense that we are
Leader to speak for only two minutes
in favor of the amendment of
requiring a two-thirds vote of all the Members
Commissioner Gascon. of Congress as a safeguard. I think we should
not mistrust the future Members of Congress
THE PRESIDENT. Commissioner Nolledo
may proceed. by saying that the purpose of this provision is
to avoid corruption. We cannot claim that they
MR. NOLLEDO. With due respect to the
members of the Committee and
are less patriotic than we are. I think the
Commissioner Jamir, I am in favor of Members of this Commission should know
the objection of Commissioner that entering into service contracts is an
Gascon. exception to the rule on protection of natural
resources for the interest of the nation, and
Madam President, I was one of those who therefore, being an exception it should be
refused to sign the 1973 Constitution, and one subject, whenever possible, to stringent rules.
of the reasons is that there were many It seems to me that we are liberalizing the
provisions in the Transitory Provisions therein rules in favor of aliens.
that favored aliens. I was shocked when I read
a provision authorizing service I say these things with a heavy heart, Madam
contracts while we, in this Constitutional President. I do not claim to be a nationalist,
Commission, provided for Filipino control of but I love my country. Although we need
the economy. We are, therefore, providing for investments, we must adopt safeguards that
exceptional instances where aliens may are truly reflective of the sentiments of the
circumvent Filipino control of our economy. people and not mere cosmetic safeguards as
And one way of circumventing the rule in they now appear in the Jamir amendment.
favor of Filipino control of the economy is to (Applause)
recognize service contracts.
Thank you, Madam President.[46]

Another excerpt, featuring then


Commissioner (now Chief Justice) Hilario
G. Davide Jr., indicates the limitations of
the scope of such service contracts
-- they are valid only in regard to
minerals, petroleum and other mineral
oils, not to all natural resources.
THE PRESIDENT. Commissioner Davide
is recognized.
MR. DAVIDE. Thank you, Madam
President. This is an amendment to
the Jamir amendment and also to the
Ople amendment. I propose to delete
NATURAL RESOURCES and
substitute it with the following:
MINERALS, PETROLEUM AND
OTHER MINERAL OILS. On the Ople
amendment, I propose to add: THE MR. DAVIDE. I am very glad that
NOTIFICATION TO CONGRESS Commissioner Padilla emphasized
SHALL BE WITHIN THIRTY DAYS minerals, petroleum and mineral oils.
FROM THE EXECUTION OF THE The Commission has just approved
SERVICE CONTRACT. the possible foreign entry into the
development, exploration and
THE PRESIDENT. What does the utilization of these minerals,
Committee say with respect to the first petroleum and other mineral oils by
amendment in lieu of NATURAL virtue of the Jamir amendment. I
RESOURCES? voted in favor of the Jamir
MR. VILLEGAS. Could Commissioner amendment because it will eventually
Davide explain that? give way to vesting in exclusively
Filipino citizens and corporations
MR. DAVIDE. Madam President, with the wholly owned by Filipino citizens the
use of NATURAL RESOURCES here, right to utilize the other natural
it would necessarily include all lands resources. This means that as a
of the public domain, our marine matter of policy, natural resources
resources, forests, parks and so on. should be utilized and exploited only
So we would like to limit the scope of by Filipino citizens or corporations
these service contracts to those wholly owned by such citizens. But by
areas really where these may be virtue of the Jamir amendment, since
needed, the exploitation, development we feel that Filipino capital may not be
and exploration of minerals, petroleum enough for the development and
and other mineral oils. And so, we utilization of minerals, petroleum and
believe that we should really, if we other mineral oils, the President can
want to grant service contracts at all, enter into service contracts with
limit the same to only those foreign corporations precisely for the
particular areas where Filipino development and utilization of such
capital may not be sufficient, and resources. And so, there is nothing to
not to all natural resources. fear that we will stagnate in the
MR. SUAREZ. Just a point of clarification development of minerals, petroleum
again, Madam President. When the and mineral oils because we now
Commissioner made those allow service contracts. x x x. [48]
enumerations and specifications, I
suppose he deliberately did not
The foregoing are mere fragments of
include agricultural land? the framers lengthy discussions of the
provision dealing with agreements x x x
MR. DAVIDE. That is precisely the reason
we have to enumerate what these involving either technical or financial
resources are into which service assistance, which ultimately became
contracts may enter. So, beyond the paragraph 4 of Section 2 of Article XII of
reach of any service contract will be the Constitution. Beyond any doubt, the
lands of the public domain,
timberlands, forests, marine
members of the ConCom were actually
resources, fauna and flora, wildlife debating about the martial-law-
and national parks.[47] era service contracts for which they
were crafting appropriate safeguards.
After the Jamir amendment was voted
upon and approved by a vote of 21 to 10 In the voting that led to the approval of
with 2 abstentions, Commissioner Davide Article XII by the ConCom, the
made the following statement, which is explanations given by Commissioners
very relevant to our quest: Gascon, Garcia and Tadeo indicated that
THE PRESIDENT. Commissioner Davide they had voted to reject this provision on
is recognized. account of their objections to the
constitutionalization of the service referring to agreements x x
contract concept. x involving either technical
or financial assistance.
Mr. Gascon said, I felt that if we would
constitutionalize any provision on service They spoke of service
contracts, this should always be with the contracts as the concept
concurrence of Congress and not guided was understood in the 1973
only by a general law to be promulgated Constitution.
by Congress.[49] Mr. Garcia
It was obvious from their
explained, Service contracts are given
discussions that they were
constitutional legitimization in Sec. 3,
not about to ban or
even when they have been proven to be
eradicate service contracts.
inimical to the interests of the nation,
providing, as they do, the legal loophole Instead, they were plainly
for the exploitation of our natural crafting provisions to put in
resources for the benefit of foreign place safeguards that would
interests.[50]Likewise, Mr. Tadeo cited inter eliminate or minimize the
alia the fact that service contracts abuses prevalent during the
continued to subsist, enabling foreign marital law regime. In brief,
interests to benefit from our natural they were going to permit
resources.[51] It was hardly likely that service contracts with
these gentlemen would have objected foreign corporations as
so strenuously, had the provision contractors, but with safety
called for mere technical or financial measures to prevent
assistance and nothing more. abuses, as an exception to
the general norm
The deliberations of the ConCom and
established in the first
some commissioners explanation of their
paragraph of Section 2 of
votes leave no room for doubt that the
Article XII. This provision
service contract concept precisely
reserves or limits to Filipino
underpinned the commissioners
citizens -- and corporations
understanding of the agreements
at least 60 percent of which
involving either technical or financial
is owned by such citizens --
assistance.
the exploration,
development and utilization
Summation of the of natural resources.
Concom Deliberations This provision was prompted
by the perceived
At this point, we sum up the matters insufficiency of Filipino
established, based on a careful reading of capital and the felt need for
the ConCom deliberations, as follows: foreign investments in the
EDU of minerals and
In their deliberations on what petroleum resources.
was to become paragraph
4, the framers used the The framers for the most part
term service contracts in debated about the sort of
safeguards that would be in fact service contracts. But unlike those
considered adequate and of the 1973 variety, the new ones are
reasonable. But some of between foreign corporations acting as
them, having more radical contractors on the one hand; and on the
leanings, wanted to ban other, the government as principal or
service contracts altogether; owner of the works. In the new service
for them, the provision contracts, the foreign contractors provide
would permit aliens to capital, technology and technical know-
exploit and benefit from the how, and managerial expertise in the
nations natural resources, creation and operation of large-scale
which they felt should be mining/extractive enterprises; and the
reserved only for Filipinos. government, through its agencies (DENR,
MGB), actively exercises control and
In the explanation of their
supervision over the entire operation.
votes, the individual
commissioners were heard Such service contracts may be
by the entire body. They entered into only with respect to minerals,
sounded off their individual petroleum and other mineral oils. The
opinions, openly enunciated grant thereof is subject to several
their philosophies, and safeguards, among which are these
supported or attacked the requirements:
provisions with fervor.
Everyones viewpoint was (1) The service contract shall be crafted in
heard. accordance with a general law that will set
standard or uniform terms, conditions and
In the final voting, the Article requirements, presumably to attain a certain
on the National Economy uniformity in provisions and avoid the
and Patrimony -- including possible insertion of terms disadvantageous to
paragraph 4 allowing the country.
service contracts with
foreign corporations as an (2) The President shall be the signatory for the
exception to the general government because, supposedly before an
norm in paragraph 1 of agreement is presented to the President for
Section 2 of the same article signature, it will have been vetted several
-- was resoundingly times over at different levels to ensure that it
approved by a vote of 32 to conforms to law and can withstand public
7, with 2 abstentions. scrutiny.

(3) Within thirty days of the executed


Agreements Involving Technical agreement, the President shall report it to
or Financial Assistance Are Congress to give that branch of government
Service Contracts With Safeguards an opportunity to look over the agreement and
interpose timely objections, if any.
From the foregoing, we are impelled
to conclude that the phrase agreements
involving either technical or financial Use of the Record of the
assistance, referred to in paragraph 4, are ConCom to Ascertain Intent
At this juncture, we shall address, and to speak their minds on the matter if
rather than gloss over, the use of the they did not see eye to eye with the
framers intent approach, and the criticism proponents of the draft provisions.
hurled by petitioners who quote a ruling of
In any event, each and every one of
this Court:
the commissioners had the opportunity to
While it is permissible in this jurisdiction to speak out and to vote on the matter.
consult the debates and proceedings of the Moreover, the individual explanations of
constitutional convention in order to arrive at votes are on record, and they show where
the reason and purpose of the resulting each delegate stood on the issues. In
Constitution, resort thereto may be had only sum, we cannot completely denigrate
when other guides fail as said proceedings the value or usefulness of the record
are powerless to vary the terms of the of the ConCom, simply because
Constitution when the meaning is clear. certain members chose not to speak
Debates in the constitutional convention are out.
of value as showing the views of the It is contended that the deliberations
individual members, and as indicating the therein did not necessarily reflect the
reason for their votes, but they give us no light thinking of the voting population that
as to the views of the large majority who did participated in the referendum and ratified
not talk, much less the mass of our fellow the Constitution. Verily, whether we like it
citizens whose votes at the polls gave that or not, it is a bit too much to assume that
instrument the force of fundamental law. We every one of those who voted to ratify the
think it safer to construe the constitution from proposed Charter did so only after
what appears upon its face. The proper carefully reading and mulling over it,
interpretation therefore depends more on how provision by provision.
it was understood by the people adopting it
Likewise, it appears rather
than in the framers understanding thereof.[52]
extravagant to assume that every one of
The notion that the deliberations those who did in fact bother to read the
reflect only the views of those members draft Charter actually understood the
who spoke out and not the views of the import of its provisions, much less
majority who remained silent should be analyzed it vis--vis the previous
clarified. We must never forget that those Constitutions. We believe that in reality, a
who spoke out were heard by those who good percentage of those who voted in
remained silent and did not react. If the favor of it did so more out of faith and
latter were silent because they happened trust. For them, it was the product of the
not to be present at the time, they are hard work and careful deliberation of a
presumed to have read the minutes and group of intelligent, dedicated and
kept abreast of the deliberations. By trustworthy men and women of integrity
remaining silent, they are deemed to have and conviction, whose love of country and
signified their assent to and/or conformity fidelity to duty could not be questioned.
with at least some of the views In short, a large proportion of the
propounded or their lack of objections voters voted yes because the drafters, or
thereto. It was incumbent upon them, as a majority of them, endorsed the
representatives of the entire Filipino proposed Constitution. What this fact
people, to follow the deliberations closely translates to is the inescapable
conclusion that many of the voters in the the Constitution allows the continued
referendum did not form their own use of service contracts with foreign
isolated judgment about the draft Charter, corporations -- as contractors who
much less about particular provisions would invest in and operate and
therein. They only relied or fell back and manage extractive enterprises, subject
acted upon the favorable endorsement or to the full control and supervision of
recommendation of the framers as a the State -- sans the abuses of the past
group. In other words, by voting yes, they regime. The purpose is clear: to
may be deemed to have signified develop and utilize our mineral,
their voluntary adoption of the petroleum and other resources on a
understanding and interpretation of the large scale for the immediate and
delegates with respect to the proposed tangible benefit of the Filipino people.
Charter and its particular provisions. If its
In view of the foregoing discussion,
good enough for them, its good enough
we should reverse the Decision of
for me; or, in many instances, If its good
January 27, 2004, and in fact now hold a
enough for President Cory Aquino, its
view different from that of the Decision,
good enough for me.
which had these findings: (a) paragraph 4
And even for those who voted based of Section 2 of Article XII limits foreign
on their own individual assessment of the involvement in the local mining industry to
proposed Charter, there is no evidence agreements strictly for either financial or
available to indicate that their assessment technical assistance only; (b) the same
or understanding of its provisions was in paragraph precludes agreements that
fact different from that of the drafters. This grant to foreign corporations the
unwritten assumption seems to be management of local mining operations,
petitioners as well. For all we know, this as such agreements are purportedly in
segment of voters must have read and the nature of service contracts as these
understood the provisions of the were understood under the 1973
Constitution in the same way the framers Constitution; (c) these service contracts
had, an assumption that would account were supposedly de-constitutionalized
for the favorable votes. and proscribed by the omission of the
term service contracts from the 1987
Fundamentally speaking, in the
Constitution; (d) since the WMCP FTAA
process of rewriting the Charter, the
contains provisions permitting the foreign
members of the ConCom as a group were
contractor to manage the concern, the
supposed to represent the entire Filipino
said FTAA is invalid for being a prohibited
people. Thus, we cannot but regard their
service contract; and (e) provisions of RA
views as being very much indicative of
7942 and DAO 96-40, which likewise
the thinking of the people with respect to
grant managerial authority to the foreign
the matters deliberated upon and to the
contractor, are also invalid and
Charter as a whole.
unconstitutional.
It is therefore reasonable and
unavoidable to make the following
conclusion, based on the above Ultimate Test: States Control
arguments. As written by the framers Determinative of Constitutionality
and ratified and adopted by the people,
But we are not yet at the end of our resources, as mandated in the first
quest. Far from it. It seems that we are paragraph of Section 2 of Article XII.
confronted with a possible collision of
But in the next breadth we have to
constitutional provisions. On the one
point out that full control and supervision
hand, paragraph 1 of Section 2 of Article
cannot be taken literally to mean that the
XII explicitly mandates the State to
State controls and supervises everything
exercise full control and supervision over
involved, down to the minutest details,
the exploration, development and
and makes all decisions required in the
utilization of natural resources. On the
mining operations. This strained concept
other hand, paragraph 4 permits
of control and supervision over the mining
safeguarded service contracts with
enterprise would render impossible the
foreign contractors. Normally, pursuant
legitimate exercise by the contractors of a
thereto, the contractors exercise
reasonable degree of management
management prerogatives over the
prerogative and authority necessary and
mining operations and the enterprise as a
indispensable to their proper functioning.
whole. There is thus a legitimate ground
to be concerned that either the States full For one thing, such an interpretation
control and supervision may rule out any would discourage foreign entry into large-
exercise of management authority by the scale exploration, development and
foreign contractor; or, the other way utilization activities; and result in the
around, allowing the foreign contractor full unmitigated stagnation of this sector, to
management prerogatives may ultimately the detriment of our nations development.
negate the States full control and This scenario renders paragraph 4
supervision. inoperative and useless. And as
respondents have correctly pointed out,
the government does not have to micro-
Ut Magis Valeat manage the mining operations and dip its
Quam Pereat hands into the day-to-day affairs of the
enterprise in order for it to be considered
Under the third principle of as having full control and supervision.
constitutional construction laid down The concept of control adopted in
[53]

in Francisco -- ut magis valeat quam Section 2 of Article XII must be taken to


pereat -- every part of the Constitution is mean less than dictatorial, all-
to be given effect, and the Constitution is encompassing control; but nevertheless
to be read and understood as a sufficient to give the State the power to
harmonious whole. Thus, full control and direct, restrain, regulate and govern the
supervision by the State must be affairs of the extractive enterprises.
understood as one that does not preclude Control by the State may be on a macro
the legitimate exercise of management level, through the establishment of
prerogatives by the foreign policies, guidelines, regulations, industry
contractor. Before any further discussion, standards and similar measures that
we must stress the primacy and would enable the government to control
supremacy of the principle of sovereignty the conduct of affairs in various
and State control and supervision over all enterprises and restrain activities deemed
aspects of exploration, development and not desirable or beneficial.
utilization of the countrys natural
The end in view is ensuring that these and the WMCP FTAA cede beneficial
enterprises contribute to the economic ownership of the mineral resources to the
development and general welfare of the foreign contractor.
country, conserve the environment, and
A careful scrutiny of the provisions of
uplift the well-being of the affected local
RA 7942 and its Implementing Rules
communities. Such a concept of control
belies petitioners claims. Paraphrasing
would be compatible with permitting the
the Constitution, Section 4 of the statute
foreign contractor sufficient and
clearly affirms the States control thus:
reasonable management authority over
the enterprise it invested in, in order to Sec. 4. Ownership of Mineral Resources.
ensure that it is operating efficiently and Mineral resources are owned by the State and
profitably, to protect its investments and to the exploration, development, utilization and
enable it to succeed. processing thereof shall be under its full
The question to be answered, then, control and supervision. The State may
is whether RA 7942 and its directly undertake such activities or it may
Implementing Rules enable the enter into mineral agreements with
government to exercise that degree of contractors.
control sufficient to direct and regulate
the conduct of affairs of individual The State shall recognize and protect the
enterprises and restrain undesirable rights of the indigenous cultural communities
activities. to their ancestral lands as provided for by the
Constitution.
On the resolution of these questions
will depend the validity and The aforequoted provision is
constitutionality of certain provisions of substantively reiterated in Section 2 of
the Philippine Mining Act of 1995 (RA DAO 96-40 as follows:
7942) and its Implementing Rules and
Regulations (DAO 96-40), as well as the Sec. 2. Declaration of Policy. All mineral
WMCP FTAA. resources in public and private lands within
Indeed, petitioners charge[54] that RA the territory and exclusive economic zone of
7942, as well as its Implementing Rules the Republic of the Philippines are owned by
and Regulations, makes it possible for the State. It shall be the responsibility of the
FTAA contracts to cede full control and State to promote their rational exploration,
management of mining enterprises over development, utilization and conservation
to fully foreign-owned corporations, with through the combined efforts of the
the result that the State is allegedly Government and private sector in order to
reduced to a passive regulator dependent enhance national growth in a way that
on submitted plans and reports, with effectively safeguards the environment and
weak review and audit powers. The State protects the rights of affected communities.
does not supposedly act as the owner of
the natural resources for and on behalf of
Sufficient Control Over Mining
the Filipino people; it practically has little
Operations Vested in the State
effective say in the decisions made by the
by RA 7942 and DAO 96-40
enterprise. Petitioners then conclude that
the law, the implementing regulations,
RA 7942 provides for the States (g) Mining operations shall
control and supervision over mining be conducted in
operations. The following provisions accordance with the
thereof establish the mechanism of provisions of the Act
inspection and visitorial rights over mining and its IRR.
operations and institute reportorial
requirements in this manner: (h) Work programs and
minimum
1. Sec. 8 which provides for the expenditures
DENRs power of over-all commitments.
supervision and periodic review
for the conservation, xxxxxxxxx
management, development and
proper use of the States mineral (k) Requiring proponent to
resources; effectively use
appropriate anti-
2. Sec. 9 which authorizes the Mines pollution technology
and Geosciences Bureau (MGB) and facilities to
under the DENR to exercise protect the
direct charge in the environment and
administration and disposition of restore or rehabilitate
mineral resources, and mined-out areas.
empowers the MGB to monitor
the compliance by the contractor (l) The contractors shall
of the terms and conditions of furnish the
the mineral agreements, Government records
confiscate surety and of geologic,
performance bonds, and deputize accounting and other
whenever necessary any member relevant data for its
or unit of the Phil. National mining operation,
Police, barangay, duly registered and that books of
non-governmental organization accounts and records
(NGO) or any qualified person shall be open for
to police mining activities; inspection by the
government. x x x.
3. Sec. 66 which vests in the Regional
Director exclusive jurisdiction (m) Requiring the
over safety inspections of all proponent to dispose
installations, whether surface or of the minerals at the
underground, utilized in mining highest price and
operations. more advantageous
terms and conditions.
4. Sec. 35, which incorporates into all
FTAAs the following terms, (n) x x x x x x x x x
conditions and warranties:
(o) Such other terms and
conditions consistent
with the Constitution An FTAA contractor has to
and with this Act as dispose of the minerals and by-
the Secretary may products at the highest market
deem to be for the price and register with the MGB
best interest of the a copy of the sales agreement
State and the welfare (Section 56-n, DAO 96-40).
of the Filipino
MGB is mandated to monitor the
people.
contractors compliance with the
The foregoing provisions of Section 35 terms and conditions of the
of RA 7942 are also reflected and FTAA; and to deputize, when
implemented in Section 56 (g), (h), (l), (m) necessary, any member or unit
and (n) of the Implementing Rules, DAO of the Philippine National Police,
96-40. the barangay or a DENR-
accredited nongovernmental
Moreover, RA 7942 and DAO 96-40 organization to police mining
also provide various stipulations activities (Section 7-d and -f,
confirming the governments control over DAO 96-40).
mining enterprises:
An FTAA cannot be transferred
The contractor is to relinquish to or assigned without prior
the government those portions approval by the President
of the contract area not needed (Section 40, RA 7942; Section
for mining operations and not 66, DAO 96-40).
covered by any declaration of
mining feasibility (Section 35-e, A mining project under an FTAA
RA 7942; Section 60, DAO 96- cannot proceed to the
40). construction/development/utiliza
tion stage, unless its Declaration
The contractor must comply with of Mining Project Feasibility has
the provisions pertaining to mine been approved by government
safety, health and environmental (Section 24, RA 7942).
protection (Chapter XI, RA
7942; Chapters XV and XVI, The Declaration of Mining
DAO 96-40). Project Feasibility filed by the
contractor cannot be approved
For violation of any of its terms without submission of the
and conditions, government following documents:
may cancel an FTAA. (Chapter
XVII, RA 7942; Chapter XXIV, 1. Approved mining
DAO 96-40). project feasibility
study (Section 53-
An FTAA contractor is obliged to d, DAO 96-40)
open its books of accounts and 2. Approved three-
records for inspection by the year work
government (Section 56-m, program (Section
DAO 96-40). 53-a-4, DAO 96-
40)
3. Environmental DAO 96-40), pertaining to the
compliance following:
certificate
1. Exploration
(Section 70, RA
2. Drilling
7942)
3. Mineral resources
4. Approved
and reserves
environmental
4. Energy
protection and
consumption
enhancement
5. Production
program (Section
6. Sales and
69, RA 7942)
marketing
5. Approval by the
7. Employment
Sangguniang
8. Payment of taxes,
Panlalawigan/Bay
royalties, fees and
an/Barangay
other Government
(Section 70, RA
Shares
7942; Section 27,
9. Mine safety, health
RA 7160)
and environment
6. Free and prior
10. Land use
informed consent
11. Social
by the indigenous
development
peoples
12. Explosives
concerned,
consumption
including
payment of An FTAA
royalties through pertaining to areas within
a Memorandum of government reservations
Agreement cannot be granted without a
(Section 16, RA written clearance from the
7942; Section 59, government agencies
RA 8371) concerned (Section 19, RA
7942; Section 54, DAO 96-40).
The FTAA
contractor is obliged to assist in An FTAA
the development of its mining contractor is required to post a
community, promotion of the financial guarantee bond in
general welfare of its favor of the government in an
inhabitants, and development of amount equivalent to its
science and mining technology expenditures obligations for
(Section 57, RA 7942). any particular year. This
requirement is apart from the
The FTAA
representations and warranties
contractor is obliged to submit
of the contractor that it has
reports (on quarterly, semi-
access to all the financing,
annual or annual basis as the
managerial and technical
case may be; per Section 270,
expertise and technology
necessary to carry out the each of the exploration, development and
objectives of the FTAA (Section utilization phases of the mining
35-b, -e, and -f, RA 7942). enterprise.
Other reports to Once these plans and reports are
be submitted by the contractor, approved, the contractor is bound to
as required under DAO 96-40, comply with its commitments therein.
are as follows: an Figures for mineral production and sales
environmental report on the are regularly monitored and subjected to
rehabilitation of the mined-out government review, in order to ensure
area and/or mine waste/tailing that the products and by-products are
covered area, and anti- disposed of at the best prices possible;
pollution measures undertaken even copies of sales agreements have to
(Section 35-a-2); annual be submitted to and registered with MGB.
reports of the mining And the contractor is mandated to open
operations and records of its books of accounts and records for
geologic accounting (Section scrutiny, so as to enable the State to
56-m); annual progress reports determine if the government share has
and final report of exploration been fully paid.
activities (Section 56-2).
The State may likewise compel the
Other programs contractors compliance with mandatory
required to be submitted by the requirements on mine safety, health and
contractor, pursuant to DAO environmental protection, and the use of
96-40, are the following: a anti-pollution technology and facilities.
safety and health program Moreover, the contractor is also obligated
(Section 144); an to assist in the development of the mining
environmental work program community and to pay royalties to the
(Section 168); an annual indigenous peoples concerned.
environmental protection and
Cancellation of the FTAA may be the
enhancement program
penalty for violation of any of its terms
(Section 171).
and conditions and/or noncompliance with
The foregoing gamut of requirements, statutes or regulations. This general, all-
regulations, restrictions and limitations around, multipurpose sanction is no
imposed upon the FTAA contractor by the trifling matter, especially to a contractor
statute and regulations easily overturns who may have yet to recover the tens or
petitioners contention. The setup under hundreds of millions of dollars sunk into a
RA 7942 and DAO 96-40 hardly relegates mining project.
the State to the role of a passive regulator
Overall, considering the provisions of
dependent on submitted plans and
the statute and the regulations just
reports. On the contrary, the government
discussed, we believe that the State
agencies concerned are empowered to
definitely possesses the means by which
approve or disapprove -- hence, to
it can have the ultimate word in the
influence, direct and change -- the various
operation of the enterprise, set directions
work programs and the corresponding
and objectives, and detect deviations and
minimum expenditure commitments for
noncompliance by the contractor;
likewise, it has the capability to enforce corporations or contractors holding
compliance and to impose sanctions, exploration permits. The reason is not
should the occasion therefor arise. hard to see.
In other words, the FTAA contractor Pursuant to Section 20 of RA 7942, an
is not free to do whatever it pleases exploration permit merely grants to a
and get away with it; on the contrary, it qualified person the right to conduct
will have to follow the government line exploration for all minerals in specified
if it wants to stay in the enterprise. areas. Such a permit does not amount to
Ineluctably then, RA 7942 and DAO 96- an authorization to extract and carry off
40 vest in the government more than a the mineral resources that may be
sufficient degree of control and discovered. This phase involves nothing
supervision over the conduct of but expenditures for exploring the
mining operations. contract area and locating the mineral
bodies. As no extraction is involved, there
are no revenues or incomes to speak of.
Section 3(aq) of RA 7942 In short, the exploration permit is an
Not Unconstitutional authorization for the grantee to spend its
own funds on exploration programs that
An objection has been expressed that are pre-approved by the government,
Section 3(aq)[55] of RA 7942 -- which without any right to recover anything
allows a foreign contractor to apply for should no minerals in commercial
and hold an exploration permit -- is quantities be discovered. The State risks
unconstitutional. The reasoning is that nothing and loses nothing by granting
Section 2 of Article XII of the Constitution these permits to local or foreign firms; in
does not allow foreign-owned fact, it stands to gain in the form of data
corporations to undertake mining generated by the exploration activities.
operations directly. They may act only as Pursuant to Section 24 of RA 7942, an
contractors of the State under an FTAA; exploration permit grantee who
and the State, as the party directly determines the commercial viability of a
undertaking exploitation of its natural mining area may, within the term of the
resources, must hold through the permit, file with the MGB a declaration of
government all exploration permits and mining project feasibility accompanied by
similar authorizations. Hence, Section a work program for development. The
3(aq), in permitting foreign-owned approval of the mining project feasibility
corporations to hold exploration permits, and compliance with other requirements
is unconstitutional. of RA 7942 vests in the grantee the
The objection, however, is not well- exclusive right to an MPSA or any other
founded. While the Constitution mandates mineral agreement, or to an FTAA.
the State to exercise full control and Thus, the permit grantee may apply
supervision over the exploitation of for an MPSA, a joint venture agreement,
mineral resources, nowhere does it a co-production agreement, or an FTAA
require the government to hold all over the permit area, and the application
exploration permits and similar shall be approved if the permit grantee
authorizations. In fact, there is no meets the necessary qualifications and
prohibition at all against foreign or local
the terms and conditions of any such A perusal of the WMCP FTAA also
agreement. Therefore, the contractor will reveals a slew of stipulations providing for
be in a position to extract minerals and State control and supervision:
earn revenues only when the MPSA or 1. The contractor is obligated to account
another mineral agreement, or an FTAA, for the value of production and sale of
is granted. At that point, the contractors minerals (Clause 1.4).
rights and obligations will be covered by 2. The contractors work program, activities
an FTAA or a mineral agreement. and budgets must be approved by/on
behalf of the State (Clause 2.1).
But prior to the issuance of such FTAA
or mineral agreement, the exploration 3. The DENR secretary has the power to
extend the exploration period (Clause
permit grantee (or prospective contractor) 3.2-a).
cannot yet be deemed to have entered
4. Approval by the State is necessary for
into any contract or agreement with the incorporating lands into the FTAA
State, and the grantee would definitely contract area (Clause 4.3-c).
need to have some document or
5. The Bureau of Forest Development is
instrument as evidence of its right to vested with discretion in regard to
conduct exploration works within the approving the inclusion of forest
specified area. This need is met by the reserves as part of the FTAA contract
exploration permit issued pursuant to area (Clause 4.5).
Sections 3(aq), 20 and 23 of RA 7942. 6. The contractor is obliged to relinquish
periodically parts of the contract area
In brief, the exploration permit not needed for exploration and
serves a practical and legitimate development (Clause 4.6).
purpose in that it protects the interests 7. A Declaration of Mining Feasibility must
and preserves the rights of the be submitted for approval by the
exploration permit grantee (the would- State (Clause 4.6-b).
be contractor) -- foreign or local -- 8. The contractor is obligated to report to
during the period of time that it is the State its exploration activities
spending heavily on exploration (Clause 4.9).
works, without yet being able to earn 9. The contractor is required to obtain
revenues to recoup any of its State approval of its work programs
investments and expenditures. Minus for the succeeding two-year periods,
containing the proposed work
this permit and the protection it affords, activities and expenditures budget
the exploration works and expenditures related to exploration (Clause 5.1).
may end up benefiting only claim- 10. The contractor is required to obtain
jumpers. Such a possibility tends to State approval for its proposed
discourage investors and contractors. expenditures for exploration activities
Thus, Section 3(aq) of RA 7942 may not (Clause 5.2).
be deemed unconstitutional. 11. The contractor is required to submit an
annual report on geological,
geophysical, geochemical and other
The Terms of the WMCP FTAA information relating to its explorations
within the FTAA area (Clause 5.3-a).
A Deference to State Control
12. The contractor is to submit within six
months after expiration of exploration
period a final report on all its findings
in the contract area (Clause 5.3-b).
13. The contractor, after conducting contractor to an entity other than an
feasibility studies, shall submit a affiliate (Clause 14.1).
declaration of mining feasibility, along
with a description of the area to be We should elaborate a little on the
developed and mined, a description work programs and budgets, and what
of the proposed mining operations they mean with respect to the States
and the technology to be employed,
ability to exercise full control and effective
and a proposed work program for the
development phase, for approval by supervision over the enterprise. For
the DENR secretary (Clause 5.4). instance, throughout the initial five-
14. The contractor is obliged to complete year exploration and feasibility phase of
the development of the mine, the project, the contractor is mandated by
including construction of the Clause 5.1 of the WMCP FTAA to submit
production facilities, within the period a series of work programs (copy furnished
stated in the approved work program
(Clause 6.1).
the director of MGB) to the DENR
secretary for approval. The programs will
15. The contractor is obligated to submit detail the contractors
for approval of the DENR secretary a
work program covering each period of proposed exploration activities and
three fiscal years (Clause 6.2). budget covering each subsequent period
16. The contractor is to submit reports to
of two fiscal years.
the DENR secretary on the In other words, the concerned
production, ore reserves, work
accomplished and work in progress,
government officials will be informed
profile of its work force and beforehand of the proposed exploration
management staff, and other activities and expenditures of the
technical information (Clause 6.3). contractor for each succeeding two-year
17. Any expansions, modifications, period, with the right to
improvements and replacements of approve/disapprove them or require
mining facilities shall be subject to the changes or adjustments therein if deemed
approval of the secretary (Clause
6.4).
necessary.
18. The State has control with respect to Likewise, under Clause 5.2(a), the
the amount of funds that the amount that the contractor was supposed
contractor may borrow within the to spend for exploration activities during
Philippines (Clause 7.2).
the first contract year of the exploration
19. The State has supervisory power with period was fixed at not less than P24
respect to technical, financial and million; and then for the succeeding
marketing issues (Clause 10.1-a).
years, the amount shall be as agreed
20. The contractor is required to ensure 60 between the DENR secretary and the
percent Filipino equity in the
contractor, within ten years of
contractor prior to the commencement of
recovering specified expenditures, each subsequent fiscal year. If no such
unless not so required by subsequent agreement is arrived upon, the previous
legislation (Clause 10.1). years expenditure commitment shall
21. The State has the right to terminate apply.
the FTAA for the contractors
unremedied substantial breach This provision alone grants the
thereof (Clause 13.2); government through the DENR secretary
22. The States approval is needed for any
a very big say in the exploration phase of
assignment of the FTAA by the the project. This fact is not something to
be taken lightly, considering that production facilities and the development
the government has absolutely no of the mine are of pivotal significance to
contribution to the exploration the success of the mining venture. Any
expenditures or work activities and yet is missteps here will potentially be very
given veto power over such a critical costly to remedy. Hence, the submission
aspect of the project. We cannot but of the work program for development to
construe as very significant such a the DENR secretary for approval is
degree of control over the project and, particularly noteworthy, considering that
resultantly, over the mining enterprise so many millions of dollars worth of
itself. investments -- courtesy of the contractor
-- are made to depend on the States
Following its exploration activities or
consideration and action.
feasibility studies, if the contractor
believes that any part of the contract area Throughout the operating period, the
is likely to contain an economic mineral contractor is required to submit to the
resource, it shall submit to the DENR DENR secretary for approval, copy
secretary a declaration of mining furnished the director of MGB, work
feasibility (per Clause 5.4 of the FTAA), programs covering each period of three
together with a technical description of fiscal years (per Clause 6.2). During the
the area delineated for development and same period (per Clause 6.3), the
production, a description of the proposed contractor is mandated to submit various
mining operations including the quarterly and annual reports to the DENR
technology to be used, a work program secretary, copy furnished the director of
for development, an environmental MGB, on the tonnages of production in
impact statement, and a description of the terms of ores and concentrates, with
contributions to the economic and general corresponding grades, values and
welfare of the country to be generated by destinations; reports of sales; total ore
the mining operations (pursuant to Clause reserves, total tonnage of ores, work
5.5). accomplished and work in progress
(installations and facilities related to
The work program for development is
mining operations), investments made or
subject to the approval of the DENR
committed, and so on and so forth.
secretary.Upon its approval, the
contractor must comply with it and Under Section VIII, during the period
complete the development of the mine, of mining operations, the contractor is
including the construction of production also required to submit to the DENR
facilities and installation of machinery and secretary (copy furnished the director of
equipment, within the period provided in MGB) the work program and
the approved work program for corresponding budget for the contract
development (per Clause 6.1). area, describing the mining operations
that are proposed to be carried out during
Thus, notably, the development phase
the period covered. The secretary is, of
of the project is likewise subject to the
course, entitled to grant or deny approval
control and supervision of the
of any work program or budget and/or
government. It cannot be emphasized
propose revisions thereto. Once the
enough that the proper and timely
program/budget has been approved, the
construction and deployment of the
contractor shall comply therewith.
In sum, the above provisions of the approved Work Programme and
WMCP FTAA taken together, far from Budget. It is recognized by the
Secretary and the Contractor that
constituting a surrender of control and a the details of any Work
grant of beneficial ownership of mineral Programmes or Budgets may
resources to the contractor in require changes in the light of
question, bestow upon the State more changing circumstances. The
Contractor may make such
than adequate control and supervision changes without approval of the
over the activities of the contractor Secretary provided they do not
and the enterprise. change the general objective of any
Work Programme, nor entail a
downward variance of more than
twenty per centum (20percent) of
No Surrender of Control the relevant Budget. All other
Under the WMCP FTAA variations to an approved Work
Programme or Budget shall be
submitted for approval of the
Petitioners, however, take aim at Secretary.
Clause 8.2, 8.3, and 8.5 of the WMCP
FTAA which, they say, amount to a From the provisions quoted above,
relinquishment of control by the State, petitioners generalize by asserting that
since it cannot truly impose its own the government does not participate in
discretion in respect of the submitted making critical decisions regarding the
work programs. operations of the mining firm.
Furthermore, while the State can require
8.2. The Secretary shall be deemed to
the submission of work programs and
have approved any Work
Programme or Budget or variation budgets, the decision of the contractor will
thereof submitted by the Contractor still prevail, if the parties have a difference
unless within sixty (60) days after of opinion with regard to matters affecting
submission by the Contractor the operations and management.
Secretary gives notice declining
such approval or proposing a We hold, however, that the foregoing
revision of certain features and provisions do not manifest a
specifying its reasons therefor (the
Rejection Notice). relinquishment of control. For instance,
Clause 8.2 merely provides a mechanism
8.3. If the Secretary gives a Rejection
Notice, the Parties shall promptly
for preventing the business or mining
meet and endeavor to agree on operations from grinding to a complete
amendments to the Work halt as a result of possibly over-long and
Programme or Budget. If the unjustified delays in the governments
Secretary and the Contractor fail to handling, processing and approval of
agree on the proposed revision
within 30 days from delivery of the submitted work programs and budgets.
Rejection Notice then the Work Anyway, the provision does give the
Programme or Budget or variation DENR secretary more than sufficient time
thereof proposed by the Contractor (60 days) to react to submitted work
shall be deemed approved, so as
not to unnecessarily delay the programs and budgets. It cannot be
performance of the Agreement. supposed that proper grounds for
8.4. x x x x x x x x x
objecting thereto, if any exist, cannot be
discovered within a period of two months.
8.5. So far as is practicable, the
Contractor shall comply with any
On the other hand, Clause 8.3 seeks thereof. Hence, it clearly retains full and
to provide a temporary, stop-gap solution effective control of the exploitation of the
in the event a disagreement over the mineral resources.
submitted work program or budget arises
On the other hand, Clause 8.5 is
between the State and the contractor and
merely an acknowledgment of the parties
results in a stalemate or impasse, in order
need for flexibility, given that no one can
that there will be no unreasonably long
accurately forecast under all
delays in the performance of the works.
circumstances, or predict how situations
These temporary or stop-gap may change. Hence, while approved work
solutions are not necessarily evil or programs and budgets are to be followed
wrong. Neither does it follow that the and complied with as far as practicable,
government will inexorably be aggrieved if there may be instances in which changes
and when these temporary remedies will have to be effected, and effected
come into play. First, avoidance of long rapidly, since events may take shape and
delays in these situations will undoubtedly unfold with suddenness and urgency.
redound to the benefit of the State as well Thus, Clause 8.5 allows the contractor to
as the contractor. Second, who is to say move ahead and make changes without
that the work program or budget the express or implicit approval of the
proposed by the contractor and deemed DENR secretary. Such changes are,
approved under Clause 8.3 would not be however, subject to certain conditions that
the better or more reasonable or more will serve to limit or restrict the variance
effective alternative? The contractor, and prevent the contractor from straying
being the insider, as it were, may be said very far from what has been approved.
to be in a better position than the State --
Clause 8.5 provides the contractor a
an outsider looking in -- to determine what
certain amount of flexibility to meet
work program or budget would be
unexpected situations, while still
appropriate, more effective, or more
guaranteeing that the approved work
suitable under the circumstances.
programs and budgets are not
All things considered, we take abandoned altogether. Clause 8.5 does
exception to the characterization of the not constitute proof that the State has
DENR secretary as a subservient relinquished control. And ultimately,
nonentity whom the contractor can should there be disagreement with the
overrule at will, on account of Clause 8.3. actions taken by the contractor in this
And neither is it true that under the same instance as well as under Clause 8.3
clause, the DENR secretary has no discussed above, the DENR secretary
authority whatsoever to disapprove the may resort to cancellation/termination of
work program. As Respondent WMCP the FTAA as the ultimate sanction.
reasoned in its Reply-Memorandum, the
State -- despite Clause 8.3 -- still has
control over the contract area and it may, Discretion to Select Contract
as sovereign authority, prohibit work Area Not an Abdication of Control
thereon until the dispute is resolved. And
ultimately, the State may terminate the Next, petitioners complain that the
agreement, pursuant to Clause 13.2 of contractor has full discretion to select --
the same FTAA, citing substantial breach and the government has no say
whatsoever as to -- the parts of the (e) of the WMCP FTAA provides that the
contract area to be relinquished pursuant government agrees that the contractor
to Clause 4.6 of the WMCP FTAA. [56] This shall (e) have the right to require the
clause, however, does not constitute Government at the Contractors own cost,
abdication of control. Rather, it is a mere to purchase or acquire surface areas for
acknowledgment of the fact that the and on behalf of the Contractor at such
contractor will have determined, after price and terms as may be acceptable to
appropriate exploration works, which the contractor. At the termination of this
portions of the contract area do not Agreement such areas shall be sold by
contain minerals in commercial quantities public auction or tender and the
sufficient to justify developing the same Contractor shall be entitled to
and ought therefore to be relinquished. reimbursement of the costs of acquisition
The State cannot just substitute its and maintenance, adjusted for inflation,
judgment for that of the contractor and from the proceeds of sale.
dictate upon the latter which areas to give
According to petitioners, government
up.
becomes a subcontractor to the
Moreover, we can be certain that the contractor and may, on account of this
contractors self-interest will propel proper provision, be compelled to make use of
and efficient relinquishment. According to its power of eminent domain, not for
private respondent,[57] a mining company public purposes but on behalf of a private
tries to relinquish as much non-mineral party, i.e., the contractor.Moreover, the
areas as soon as possible, because the power of the courts to determine the
annual occupation fees paid to the amount corresponding to the
government are based on the total constitutional requirement of just
hectarage of the contract area, net of the compensation has allegedly also been
areas relinquished. Thus, the larger the contracted away by the government, on
remaining area, the heftier the amount of account of the latters commitment that the
occupation fees to be paid by the acquisition shall be at such terms as may
contractor. Accordingly, relinquishment is be acceptable to the contractor.
not an issue, given that the contractor will
However, private respondent has
not want to pay the annual occupation fees
proffered a logical explanation for the
on the non-mineral parts of its contract
provision.[58]Section 10.2(e) contemplates
area. Neither will it want to relinquish
a situation applicable to foreign-owned
promising sites, which other contractors
corporations. WMCP, at the time of the
may subsequently pick up.
execution of the FTAA, was a foreign-
owned corporation and therefore not
Government Not qualified to own land. As contractor, it has
a Subcontractor at some future date to construct the
infrastructure -- the mine processing
plant, the camp site, the tailings dam, and
Petitioners further maintain that the other infrastructure -- needed for the
contractor can compel the government to large-scale mining operations. It will then
exercise its power of eminent domain to have to identify and pinpoint, within the
acquire surface areas within the contract FTAA contract area, the particular surface
area for the contractors use. Clause 10.2 areas with favorable topography deemed
ideal for such infrastructure and will need aware of such transaction/s and foster
to acquire the surface rights. The State transparency in the contractors dealings
owns the mineral deposits in the earth, with the local property owners. The
and is also qualified to own land. government, then, will not act as a
subcontractor of the contractor; rather, it
Section 10.2(e) sets forth the
will facilitate the transaction and enable
mechanism whereby the foreign-owned
the parties to avoid a technical violation of
contractor, disqualified to own land,
the Anti-Dummy Law.
identifies to the government the specific
surface areas within the FTAA contract
area to be acquired for the mine Absence of Provision
infrastructure. The government then Requiring Sale at Posted
acquires ownership of the surface land Prices Not Problematic
areas on behalf of the contractor, in order
to enable the latter to proceed to fully
implement the FTAA. The supposed absence of any
provision in the WMCP FTAA directly and
The contractor, of course, shoulders explicitly requiring the contractor to sell
the purchase price of the land. Hence, the the mineral products at posted or market
provision allows it, after termination of the prices is not a problem. Apart from Clause
FTAA, to be reimbursed from proceeds of 1.4 of the FTAA obligating the contractor
the sale of the surface areas, which the to account for the total value of mineral
government will dispose of through public production and the sale of minerals, we
bidding. It should be noted that this can also look to Section 35 of RA 7942,
provision will not be applicable to which incorporates into all FTAAs certain
Sagittarius as the present FTAA terms, conditions and warranties,
contractor, since it is a Filipino corporation including the following:
qualified to own and hold land. As such, it
(l) The contractors shall furnish the
may therefore freely negotiate with the
Government records of geologic,
surface rights owners and acquire the accounting and other relevant data
surface property in its own right. for its mining operation, and
that books of accounts and records
Clearly, petitioners have needlessly shall be open for inspection by the
jumped to unwarranted conclusions, government. x x x
without being aware of the rationale for (m) Requiring the proponent to dispose of
the said provision. That provision does the minerals at the highest price and
not call for the exercise of the power of more advantageous terms and
eminent domain -- and determination of conditions.
just compensation is not an issue -- as For that matter, Section 56(n) of DAO
much as it calls for a qualified party to 99-56 specifically obligates an FTAA
acquire the surface rights on behalf of a contractor to dispose of the minerals and
foreign-owned contractor. by-products at the highest market price
Rather than having the foreign and to register with the MGB a copy of
contractor act through a dummy the sales agreement. After all, the
corporation, having the State do the provisions of prevailing statutes as well as
purchasing is a better alternative. This will rules and regulations are deemed written
at least cause the government to be into contracts.
Contractors Right to Mortgage shares in the net mining revenue, which is
Not Objectionable Per Se the essential thing to consider.
In brief, the alarum raised over the
Petitioners also question the absolute contractors right to mortgage the minerals
right of the contractor under Clause 10.2 is simply unwarranted. Just the same, the
(l) to mortgage and encumber not only its contractor must account for the value of
rights and interests in the FTAA and the mineral production and the sales
infrastructure and improvements proceeds therefrom. Likewise, under the
introduced, but also the mineral products WMCP FTAA, the government remains
extracted. Private respondents do not entitled to its sixty percent share in the
touch on this matter, but we believe that net mining revenues of the contractor.
this provision may have to do with the The latters right to mortgage the minerals
conditions imposed by the creditor-banks does not negate the States right to
of the then foreign contractor WMCP to receive its share of net mining revenues.
secure the lendings made or to be made
to the latter. Ordinarily, banks lend not
only on the security of mortgages on fixed Shareholders Free
assets, but also on encumbrances to Sell Their Stocks
of goods produced that can easily be sold
and converted into cash that can be Petitioners likewise criticize Clause
applied to the repayment of loans. Banks 10.2(k), which gives the contractor
even lend on the security of accounts authority to change its equity structure at
receivable that are collectible within 90 any time. This provision may seem
days.[59] somewhat unusual, but considering that
It is not uncommon to find that a WMCP then was 100 percent foreign-
debtor corporation has executed deeds of owned, any change would mean that
assignment by way of security over the such percentage would either stay
production for the next twelve months unaltered or be decreased in favor of
and/or the proceeds of the sale thereof -- Filipino ownership. Moreover, the foreign-
or the corresponding accounts receivable, held shares may change hands freely.
if sold on terms -- in favor of its creditor- Such eventuality is as it should be.
banks. Such deeds may include We believe it is not necessary for
authorizing the creditors to sell the government to attempt to limit or restrict
products themselves and to collect the the freedom of the shareholders in the
sales proceeds and/or the accounts contractor to freely transfer, dispose of or
receivable. encumber their shareholdings, consonant
Seen in this context, Clause 10.2(l) is with the unfettered exercise of their
not something out of the ordinary or business judgment and discretion.
objectionable. In any case, as will be Rather, what is critical is that, regardless
explained below, even if it is allowed of the identity, nationality and percentage
to mortgage or encumber the mineral ownership of the various shareholders of
end-products themselves, the contractor the contractor -- and regardless of
is not freed of its obligation to pay the whether these shareholders decide to
government its basic and additional take the company public, float bonds and
other fixed-income instruments, or allow
the creditor-banks to take an equity request, which is not at all unreasonable,
position in the company -- the foreign- as it is not equivalent to saying that the
owned contractor is always in a position government must automatically consent
to render the services required under the to it. This provision should be read
FTAA, under the direction and control of together with the rest of the FTAA
the government. provisions instituting government control
and supervision over the mining
enterprise. The clause should not be
Contractors Right to Ask given an interpretation that enables the
For Amendment Not Absolute contractor to wiggle out of the restrictions
imposed upon it by merely suggesting
With respect to Clauses 10.4(e) and that certain amendments are requested
(i), petitioners complain that these by the lenders.
provisions bind government to allow Rather, it is up to the contractor to
amendments to the FTAA if required by prove to the government that the
banks and other financial institutions as requested changes to the FTAA are
part of the conditions for new lendings. indispensable, as they enable the
However, we do not find anything wrong contractor to obtain the needed financing;
with Clause 10.4(e), which only states that without such contract changes, the
that if the Contractor seeks to obtain funders would absolutely refuse to extend
financing contemplated herein from banks the loan; that there are no other sources
or other financial institutions, (the of financing available to the contractor (a
Government shall) cooperate with the very unlikely scenario); and that without
Contractor in such efforts provided that the needed financing, the execution of the
such financing arrangements will in no work programs will not proceed. But the
event reduce the Contractors obligations bottom line is, in the exercise of its power
or the Governments rights of control, the government has the final
hereunder. The colatilla obviously say on whether to approve or disapprove
safeguards the States interests; if such requested amendments to the
breached, it will give the government FTAA. In short, approval thereof is not
cause to object to the proposed mandatory on the part of the government.
amendments.
In fine, the foregoing evaluation
On the other hand, Clause 10.4(i) and analysis of the aforementioned
provides that the Government shall FTAA provisions sufficiently overturns
favourably consider any request from petitioners litany of objections to and
[the] Contractor for amendments of this criticisms of the States alleged lack of
Agreement which are necessary in order control.
for the Contractor to successfully obtain
the financing. Petitioners see in this
provision a complete renunciation of Financial Benefits Not
control. We disagree. Surrendered to the Contractor
The proviso does not say that the
government shall grant any request for One of the main reasons certain
amendment. Clause 10.4(i) only obliges provisions of RA 7942 were struck down
the State to favorably consider any such was the finding mentioned in the Decision
that beneficial ownership of the mineral sale, which can be legally asserted and
resources had been conveyed to the enforced as against the State.
contractor. This finding was based on the
As public respondents correctly point
underlying assumption, common to the
out, any interest the contractor may have
said provisions, that the foreign contractor
in the proceeds of the mining operation is
manages the mineral resources in the
merely the equivalent of the consideration
same way that foreign contractors in
the government has undertaken to pay for
service contracts used to. By allowing
its services. All lawful contracts require
foreign contractors to manage or operate
such mutual prestations, and the WMCP
all the aspects of the mining operation,
FTAA is no different. The contractor
the above-cited provisions of R.A. No.
commits to perform certain services for
7942 have in effect conveyed beneficial
the government in respect of the mining
ownership over the nations mineral
operation, and in turn it is to be
resources to these contractors, leaving
compensated out of the net mining
the State with nothing but bare title
revenues generated from the sale of
thereto.[60] As the WMCP FTAA contained
mineral products. What would be
similar provisions deemed by
objectionable is a contractual provision
the ponente to be abhorrent to the
that unduly benefits the contractor far in
Constitution, the Decision struck down the
excess of the service rendered or value
Contract as well.
delivered, if any, in exchange therefor.
Beneficial ownership has been
A careful perusal of the statute itself
defined as ownership recognized by law
and its implementing rules reveals that
and capable of being enforced in the
neither RA 7942 nor DAO 99-56 can be
courts at the suit of the beneficial owner.
said to convey beneficial ownership of
[61]
Blacks Law Dictionary indicates that
any mineral resource or product to any
the term is used in two senses: first, to
foreign FTAA contractor.
indicate the interest of a beneficiary in
trust property (also called equitable
ownership); and second, to refer to the Equitable Sharing
power of a corporate shareholder to buy of Financial Benefits
or sell the shares, though the shareholder
is not registered in the corporations books
as the owner.[62] Usually, beneficial On the contrary, DAO 99-56,
ownership is distinguished from naked entitled Guidelines Establishing the Fiscal
ownership, which is the enjoyment of all Regime of Financial or Technical
the benefits and privileges of ownership, Assistance Agreements aims to ensure
as against possession of the bare title to an equitable sharing of the benefits
property. derived from mineral resources. These
benefits are to be equitably shared
An assiduous examination of the among the government (national and
WMCP FTAA uncovers no indication that local), the FTAA contractor, and the
it confers upon WMCP ownership, affected communities. The purpose is to
beneficial or otherwise, of the mining ensure sustainable mineral resources
property it is to develop, the minerals to development; and a fair, equitable,
be produced, or the proceeds of their competitive and stable investment regime
for the large-scale exploration,
development and commercial utilization of activity is conducted, and (iii) persons and
minerals. The general framework or communities directly affected by the
concept followed in crafting the fiscal mining project. The major taxes and other
regime of the FTAA is based on the payments constituting the basic
principle that the government expects real government share are enumerated below:
[65]
contributions to the economic growth and
general welfare of the country, while the Payments to the National
contractor expects a reasonable return on Government:
its investments in the project.[63]
Excise tax on minerals - 2 percent
Specifically, under the fiscal regime, of the gross output of mining
the governments expectation is, inter operations
alia, the receipt of its share from the taxes Contractor income tax - maximum
and fees normally paid by a mining of 32 percent of taxable income for
enterprise. On the other hand, the FTAA corporations
contractor is granted by the government Customs duties and fees on
certain fiscal and non-fiscal imported capital equipment -the
rate is set by the Tariff and
incentives to help support the formers
[64]
Customs Code (3-7 percent for
cash flow during the most critical phase chemicals; 3-10 percent for
(cost recovery) and to make the explosives; 3-15 percent for
Philippines competitive with other mechanical and electrical
mineral-producing countries. After the equipment; and 3-10 percent for
vehicles, aircraft and vessels
contractor has recovered its initial
investment, it will pay all the normal taxes VAT on imported equipment, goods
and services 10 percent of value
and fees comprising the basic share of
the government, plus an additional share Royalties due the government on
for the government based on the options minerals extracted from mineral
reservations, if applicable 5
and formulae set forth in DAO 99-56. percent of the actual market value
The said DAO spells out the financial of the minerals produced
benefits the government will receive from Documentary stamp tax - the rate
an FTAA, referred to as the Government depends on the type of transaction
Share, composed of a basic Capital gains tax on traded stocks -
government shareand an additional 5 to 10 percent of the value of the
government share. shares
Withholding tax on interest
The basic government share is payments on foreign loans -15
comprised of all direct taxes, fees and percent of the amount of interest
royalties, as well as other payments made Withholding tax on dividend
by the contractor during the term of the payments to foreign stockholders
FTAA. These are amounts paid directly to 15 percent of the dividend
(i) the national government (through the Wharfage and port fees
Bureau of Internal Revenue, Bureau of
Licensing fees (for example, radio
Customs, Mines & Geosciences Bureau permit, firearms permit,
and other national government agencies professional fees)
imposing taxes or fees), (ii) the local
Other national taxes and fees.
government units where the mining
Payments to Local Governments:
Local business tax - a maximum of foreign stockholder in case of a foreign
2 percent of gross sales or receipts national, and all such other taxes, duties and
(the rate varies among local
government units) fees as provided for under existing
laws. (Bold types supplied.)
Real property tax - 2 percent of the
fair market value of the property,
based on an assessment level set The government, through the DENR
by the local government and the MGB, has interpreted the
Special education levy - 1 percent
insertion of the phrase among other
of the basis used for the real things as signifying that the government is
property tax entitled to an additional government share
Occupation fees - PhP50 per to be paid by the contractor apart from the
hectare per year; PhP100 per basic share, in order to attain a fifty-fifty
hectare per year if located in a sharing of net benefits from mining.
mineral reservation
The additional government share is
Community tax - maximum of
PhP10,500 per year
computed by using one of three options
or schemes presented in DAO 99-56: (1)
All other local government taxes,
a fifty-fifty sharing in the cumulative
fees and imposts as of the effective
date of the FTAA - the rate and the present value of cash flows; (2) the share
type depend on the local based on excess profits; and (3) the
government sharing based on the cumulative net
Other Payments: mining revenue. The particular formula to
be applied will be selected by the
Royalty to indigenous cultural
contractor, with a written notice to the
communities, if any 1 percent of
gross output from mining government prior to the commencement
operations of the development and construction
Special allowance - payment to phase of the mining project.[66]
claim owners and surface rights Proceeds from the government shares
holders
arising from an FTAA contract are
Apart from the basic share, distributed to and received by the different
an additional government share is also levels of government in the following
collected from the FTAA contractor in proportions:
accordance with the second paragraph of
National Government 50
Section 81 of RA 7942, which provides
percent
that the government share shall be
Provincial Government 10
comprised of, among other things,certain
percent
taxes, duties and fees. The subject
Municipal Government 20
proviso reads:
percent
The Government share in a financial or Affected Barangays 20
technical assistance agreement shall consist percent
of, among other things, the contractors The portion of revenues remaining
corporate income tax, excise tax, special after the deduction of the basic and
allowance, withholding tax due from the additional government shares is what
contractors foreign stockholders arising from goes to the contractor.
dividend or interest payments to the said
Governments Share in an 99-56 the said additional government
FTAA Not Consisting Solely share. Such a share was to consist not of
of Taxes, Duties and Fees taxes, but of a share in the earnings or
cash flows of the mining
In connection with the foregoing enterprise. The additional government
discussion on the basic and additional share was to be paid by the contractor on
governmentshares, it is pertinent at this top of the basic share, so as to achieve a
juncture to mention the criticism leveled at fifty-fifty sharing -- between the
the second paragraph of Section 81 of RA government and the contractor -- of net
7942, quoted earlier. The said proviso has benefits from mining. In the Ramos-
been denounced, because, allegedly, the DeVera paper, the explanation of
States share in FTAAs with foreign the three options or
contractors has been limited to taxes, formulas -- presented in DAO 99-56 for
[68]

fees and duties only; in effect, the State the computation of the additional
has been deprived of a share in the after- government share -- serves to debunk the
tax income of the enterprise. In the face claim that the governments take from an
of this allegation, one has to consider that FTAA consists solely of taxes, fees and
the law does not define the term among duties.
other things; and the Office of the Solicitor Unfortunately, the Office of the
General, in its Motion for Solicitor General -- although in
Reconsideration, appears to have possession of the relevant data -- failed to
erroneously claimed that the phrase fully replicate or echo the pertinent
refers to indirect taxes. elucidation in the Ramos-DeVera paper
The law provides no definition of the regarding the three schemes or options
term among other things, for the reason for computing the additional government
that Congress deliberately avoided setting share presented in DAO 99-56. Had due
unnecessary limitations as to what may care been taken by the OSG, the Court
constitute compensation to the State for would have been duly apprised of the real
the exploitation and use of mineral nature and particulars of the additional
resources. But the inclusion of that share.
phrase clearly and unmistakably reveals But, perhaps, on account of the
the legislative intent to have the State esoteric discussion in the Ramos-DeVera
collect more than just the usual taxes, paper, and the even more abstruse
duties and fees. Certainly, there is nothing mathematical jargon employed in DAO
in that phrase -- or in the second 99-56, the OSG omitted any mention of
paragraph of Section 81 -- that would the three options. Instead, the OSG
suggest that such phrase should be skipped to a side discussion of the effect
interpreted as referring only to taxes, of indirect taxes, which had nothing at all
duties, fees and the like. to do with the additional government
Precisely for that reason, to fulfill the share, to begin with. Unfortunately, this
legislative intent behind the inclusion of move created the wrong impression,
the phrase among other things in the pointed out in Justice Antonio T. Carpios
second paragraph of Section 81,[67] the Opinion, that the OSG had taken the
DENR structured and formulated in DAO position that the additional government
share consisted of indirect taxes.
In any event, what is quite evident is from the option that is based on the net
the fact that the additional government mining revenue, as compared with the
share,as formulated, has nothing to do other two options, considering only the
with taxes -- direct or indirect -- or with basic and the additional shares; and that,
duties, fees or charges. To repeat, it is even though production rate decreases,
over and above the basic government the government share will actually
share composed of taxes and duties. increase when the net mining revenue
Simply put, the additional share may be and the additional profit-based options
(a) an amount that will result in a 50-50 are used.
sharing of the cumulative present value of
Furthermore, it should be noted that
the cash flows[69] of the enterprise; (b) an
the three options or formulae do not yet
amount equivalent to 25 percent of
take into account the indirect taxes[70] and
the additional or excess profits of the
other financial contributions[71] of mining
enterprise, reckoned against a
projects. These indirect taxes and other
benchmark return on investments; or (c)
contributions are real and actual benefits
an amount that will result in a fifty-fifty
enjoyed by the Filipino people and/or
sharing of the cumulative net mining
government. Now, if some of the
revenue from the end of the recovery
quantifiable items are taken into account
period up to the taxable year in question.
in the computations, the financial
The contractor is required to select one of
modeling would show that the total
the three options or formulae for
government share increases to 60
computing the additional share, an option
percent or higher -- in one instance, as
it will apply to all of its mining operations.
much as 77 percent and even 89 percent
As used above, net mining revenue is -- of the net present value of total benefits
defined as the gross output from mining from the project. As noted in the Ramos-
operations for a calendar year, less DeVera paper, these results are not at all
deductible expenses (inclusive of taxes, shabby, considering that the contractor
duties and fees). Such revenue would puts in all the capital requirements and
roughly be equivalent to taxable income assumes all the risks, without the
or income before income tax. Definitely, government having to contribute or risk
as compared with, say, calculating anything.
the additional government share on the
Despite the foregoing explanation,
basis of net income (after income tax), the
Justice Carpio still insisted during the
net mining revenue is a better and much
Courts deliberations that the
more reasonable basis for such
phrase among other things refers only to
computation, as it gives a truer picture of
taxes, duties and fees. We are bewildered
the profitability of the company.
by his position. On the one hand, he
To demonstrate that the three options condemns the Mining Law for allegedly
or formulations will operate as intended, limiting the governments benefits only to
Messrs. Ramos and de Vera also taxes, duties and fees; and on the other,
performed some quantifications of the he refuses to allow the State to benefit
government share via a financial from the correct and proper interpretation
modeling of each of the three options of the DENR/MGB. To remove all doubts
discussed above. They found that the then, we hold that the States share is not
government would get the highest share limited to taxes, duties and fees only and
that the DENR/MGB interpretation of the Collections Not Made Uncertain
phrase among other things is correct. by the Third Paragraph of Section 81
Definitely, this DENR/MGB interpretation
is not only legally sound, but also greatly The third or last paragraph of Section
advantageous to the government. 81 provides that the government share
[72]

One last point on the subject. The in FTAAs shall be collected when the
legislature acted judiciously in not contractor shall have recovered its pre-
defining the terms among other operating expenses and exploration and
things and, instead, leaving it to the development expenditures. The objection
agencies concerned to devise and has been advanced that, on account of
develop the various modes of arriving at a the proviso, the collection of the States
reasonable and fair amount for share is not even certain, as there is no
the additional government share. As time limit in RA 7942 for this grace period
can be seen from DAO 99-56, the or recovery period.
agencies concerned did an admirable job We believe that Congress did not set
of conceiving and developing not just one any time limit for the grace period,
formula, but three different formulae for preferring to leave it to the concerned
arriving at the additional government agencies, which are, on account of their
share. Each of these options is quite fair technical expertise and training, in a
and reasonable; and, as Messrs. Ramos better position to determine the
and De Vera stated, other alternatives or appropriate durations for such recovery
schemes for a possible improvement of periods. After all, these recovery periods
the fiscal regime for FTAAs are also being are determined, to a great extent, by
studied by the government. technical and technological factors
Besides, not locking into a fixed peculiar to the mining industry. Besides,
definition of the term among other with developments and advances in
things will ultimately be more beneficial to technology and in the geosciences, we
the government, as it will have that innate cannot discount the possibility of shorter
flexibility to adjust to and cope with rapidly recovery periods. At any rate, the
changing circumstances, particularly concerned agencies have not been
those in the international markets. Such remiss in this area. The 1995 and 1996
flexibility is especially significant for the Implementing Rules and Regulations of
government in terms of helping our RA 7942 specify that the period of
mining enterprises remain competitive in recovery, reckoned from the date of
world markets despite challenging and commercial operation, shall be for a
shifting economic scenarios. period not exceeding five years, or until
the date of actual recovery, whichever
In conclusion, we stress that we do
comes earlier.
not share the view that in FTAAs with
foreign contractors under RA 7942, the
governments share is limited to taxes, Approval of Pre-Operating
fees and duties. Consequently, we find Expenses Required by RA 7942
the attacks on the second paragraph
of Section 81 of RA 7942 totally
unwarranted. Still, RA 7942 is criticized for allegedly
not requiring government approval of pre-
operating, exploration and development Under Section 24, an exploration
expenses of the foreign contractors, who permit holder who determines the
are in effect given unfettered discretion to commercial viability of a project covering
determine the amounts of such expenses. a mining area may, within the term of the
Supposedly, nothing prevents the permit, file with the Mines and
contractors from recording such expenses Geosciences Bureau a declaration of
in amounts equal to the mining revenues mining project feasibility. This declaration
anticipated for the first 10 or 15 years of is to be accompanied by a work program
commercial production, with the result for development for the Bureaus
that the share of the State will be zero for approval, the necessary prelude for
the first 10 or 15 years. Moreover, under entering into an FTAA, a mineral
the circumstances, the government would production sharing agreement (MPSA), or
be unable to say when it would start to some other mineral agreement. At this
receive its share under the FTAA. stage, too, the government obviously has
the opportunity to approve or reject the
We believe that the argument is based
proposed work program and budgeted
on incorrect information as well as
expenditures for development works on
speculation. Obviously, certain crucial
the project. Such expenditures will
provisions in the Mining Law were
ultimately become the pre-operating and
overlooked. Section 23, dealing with the
development costs that will have to be
rights and obligations of the exploration
recovered by the contractor.
permit grantee, states: The permittee
shall undertake exploration work on the Naturally, with the submission of
area as specified by its permit based on approved work programs and budgets for
an approved work program. The next the exploration and the
proviso reads: Any expenditure in excess development/construction phases, the
of the yearly budget of the approved work government will be able to scrutinize
program may be carried forward and and approve or reject such expenditures.
credited to the succeeding years covering It will be well-informed as to the amounts
the duration of the permit. x x of pre-operating and other expenses that
x. (underscoring supplied) the contractor may legitimately recover
and the approximate period of time
Clearly, even at the stage of
needed to effect such a recovery. There is
application for an exploration permit, the
therefore no way the contractor can just
applicant is required to submit -- for
randomly post any amount of pre-
approval by the government -- a proposed
operating expenses and expect to recover
work program for exploration, containing
the same.
a yearly budget of proposed
expenditures. The State has the The aforecited provisions on approved
opportunity to pass upon (and approve or work programs and budgets have
reject) such proposed expenditures, with counterparts in Section 35, which deals
the foreknowledge that -- if approved -- with the terms and conditions exclusively
these will subsequently be recorded as applicable to FTAAs. The said provision
pre-operating expenses that the requires certain terms and conditions to
contractor will have to recoup over the be incorporated into FTAAs; among
grace period. That is not all. them, a firm commitment x x x of an
amount corresponding to the expenditure
obligation that will be invested in the Specifically, Section 80 is condemned
contract area and representations and for limiting the States share in a mineral
warranties x x x to timely deploy production-sharing agreement (MPSA) to
these [financing, managerial and just the excise tax on the mineral product.
technical expertise and Under Section 151(A) of the Tax Code,
technological] resources under its such tax is only 2 percent of the market
supervision pursuant to the periodic work value of the gross output of the minerals.
programs and related budgets x x x, as The colatilla in Section 84, the portion
well as work programs and minimum considered offensive to the Constitution,
expenditures commitments.(underscoring reiterates the same limitation made in
supplied) Section 80.[73]
Unarguably, given the provisions of It should be pointed out that Section
Section 35, the State has every 80 and the colatilla in Section 84 pertain
opportunity to pass upon the proposed only to MPSAs and have no application to
expenditures under an FTAA and approve FTAAs. These particular statutory
or reject them. It has access to all the provisions do not come within the issues
information it may need in order to that were defined and delineated by this
determine in advance the amounts of pre- Court during the Oral Argument --
operating and developmental expenses particularly the third issue, which
that will have to be recovered by the pertained exclusively to FTAAs. Neither
contractor and the amount of time needed did the parties argue upon them in their
for such recovery. pleadings. Hence, this Court cannot make
any pronouncement in this case regarding
In summary, we cannot agree that
the constitutionality of Sections 80 and 84
the third or last paragraph of Section
without violating the fundamental rules of
81 of RA 7942 is in any manner
due process. Indeed, the two provisos will
unconstitutional.
have to await another case specifically
placing them in issue.
No Deprivation of On the other hand, Section 112 [74] is
Beneficial Rights disparaged for allegedly reverting FTAAs
and all mineral agreements to the old and
It is also claimed that aside from the discredited license, concession or lease
second and the third paragraphs of system. This Section states in relevant
Section 81 (discussed above), Sections part that the provisions of Chapter
80, 84 and 112 of RA 7942 also operate XIV [which includes Sections 80 to 82] on
to deprive the State of beneficial rights of government share in mineral production-
ownership over mineral resources; and sharing agreement x x x shall
give them away for free to private immediately govern and apply to a mining
business enterprises (including foreign lessee or contractor. (underscoring
owned corporations). Likewise, the said supplied) This provision is construed as
provisions have been construed as signifying that the 2 percent excise tax
constituting, together with Section 81, an which, pursuant to Section 80, comprises
ingenious attempt to resurrect the old and the government share in MPSAs shall
discredited system of license, concession now also constitute the government share
or lease. in FTAAs -- as well as in co-production
agreements and joint venture agreements contract area is inadequate to sustain
-- to the exclusion of revenues of any large-scale mining operations. Thus, there
other nature or from any other source. is no reason to think that the law through
Section 112 intends to exact from FTAA
Apart from the fact that Section 112
contractors merely the same government
likewise does not come within the issues
share (a 2 percent excise tax) that it
delineated by this Court during the Oral
apparently demands from contractors
Argument, and was never touched upon
under the three forms of mineral
by the parties in their pleadings, it must
agreements. In brief, Section 112 does
also be noted that the criticism hurled
not apply to FTAAs.
against this Section is rooted in
unwarranted conclusions made without Notwithstanding the foregoing
considering other relevant provisions in explanation, Justices Carpio and Morales
the statute. Whether Section 112 may maintain that the Court must rule now on
properly apply to co-production or joint the constitutionality of Sections 80, 84
venture agreements, the fact of the matter and 112, allegedly because the WMCP
is that it cannot be made to apply to FTAA contains a provision which grants
FTAAs. the contractor unbridled and automatic
authority to convert the FTAA into an
First, Section 112 does not specifically
MPSA; and should such conversion
mention or refer to FTAAs; the only
happen, the State would be prejudiced
reason it is being applied to them at all is
since its share would be limited to the 2
the fact that it happens to use the word
percent excise tax. Justice Carpio adds
contractor. Hence, it is a bit of a stretch to
that there are five MPSAs already signed
insist that it covers FTAAs as
just awaiting the judgment of this Court on
well. Second, mineral agreements, of
respondents and intervenors Motions for
which there are three types -- MPSAs, co-
Reconsideration. We hold however that,
production agreements, and joint venture
at this point, this argument is based on
agreements -- are covered by Chapter V
pure speculation. The Court cannot rule
of RA 7942. On the other hand, FTAAs
on mere surmises and hypothetical
are covered by and in fact are the subject
assumptions, without firm factual anchor.
of Chapter VI, an entirely different chapter
We repeat: basic due process requires
altogether. The law obviously intends to
that we hear the parties who have a real
treat them as a breed apart from mineral
legal interest in the MPSAs (i.e. the
agreements, since Section 35 (found in
parties who executed them) before these
Chapter VI) creates a long list of specific
MPSAs can be reviewed, or worse, struck
terms, conditions, commitments,
down by the Court. Anything less than
representations and warranties -- which
that requirement would be arbitrary and
have not been made applicable to mineral
capricious.
agreements -- to be incorporated into
FTAAs. In any event, the conversion of the
present FTAA into an MPSA is
Third, under Section 39, the FTAA
problematic. First,the contractor must
contractor is given the option to
comply with the law, particularly Section
downgrade -- to convert the FTAA into a
39 of RA 7942; inter alia, it must
mineral agreement at any time during the
convincingly show that the economic
term if the economic viability of the
viability of the contract is found to be
inadequate to justify large-scale mining All in all, while there may be cogent
operations; second, it must contend with grounds to assail the aforecited
the Presidents exercise of the power of Sections, this Court -- on
State control over the EDU of natural considerations of due process --
resources; and third, it will have to risk a cannot rule upon them here. Anyway, if
possible declaration of the later on these Sections are declared
unconstitutionality (in a proper case) of unconstitutional, such declaration will
Sections 80, 84 and 112. not affect the other portions since they
are clearly separable from the rest.
The first requirement is not as simple
as it looks. Section 39 contemplates a
situation in which an FTAA has already Our Mineral Resources Not
been executed and entered into, and is Given Away for Free by RA 7942
presumably being implemented, when the
contractor discovers that the mineral ore
reserves in the contract area are not Nevertheless, if only to disabuse our
sufficient to justify large-scale mining, and minds, we should address the contention
thus the contractor requests the that our mineral resources are effectively
conversion of the FTAA into an MPSA. given away for free by the law (RA 7942)
The contractor in effect needs to explain in general and by Sections 80, 81, 84 and
why, despite its exploration activities, 112 in particular.
including the conduct of various geologic Foreign contractors do not just waltz
and other scientific tests and procedures into town one day and leave the next,
in the contract area, it was unable to taking away mineral resources without
determine correctly the mineral ore paying anything. In order to get at the
reserves and the economic viability of the minerals, they have to invest huge sums
area. The contractor must explain why, of money (tens or hundreds of millions of
after conducting such exploration dollars) in exploration works first. If the
activities, it decided to file a declaration of exploration proves unsuccessful, all the
mining feasibility, and to apply for an cash spent thereon will not be returned to
FTAA, thereby leading the State to the foreign investors; rather, those funds
believe that the area could sustain large- will have been infused into the local
scale mining. The contractor must justify economy, to remain there permanently.
fully why its earlier findings, based on The benefits therefrom cannot be simply
scientific procedures, tests and ignored. And assuming that the foreign
data, turned out to be wrong, or were way contractors are successful in finding ore
off. It must likewise prove that its new bodies that are viable for commercial
findings, also based on scientific tests exploitation, they do not just pluck out the
and procedures, are correct. Right away, minerals and cart them off. They have first
this puts the contractors technical to build camp sites and roadways; dig
capabilities and expertise into serious mine shafts and connecting tunnels;
doubt. We wonder if anyone would relish prepare tailing ponds, storage areas and
being in this situation. The State could vehicle depots; install their machinery and
even question and challenge the equipment, generator sets, pumps, water
contractors qualification and competence tanks and sewer systems, and so on.
to continue the activity under an MPSA.
In short, they need to expend a great the foreign contractors are allowed to
deal more of their funds for facilities, recover their investments and costs, the
equipment and supplies, fuel, salaries of end result is that they practically get the
local labor and technical staff, and other minerals for free, which leaves the Filipino
operating expenses. In the meantime, people none the better for it.
they also have to pay taxes,[75] duties,
fees, and royalties. All told, the
exploration, pre-feasibility, feasibility, All Businesses Entitled
development and construction phases to Cost Recovery
together add up to as many as eleven
years.[76] The contractors have to Let it be put on record that not only
continually shell out funds for the duration foreign contractors, but all businessmen
of over a decade, before they can and all business entities in general, have
commence commercial production from to recoup their investments and
which they would eventually derive costs. That is one of the first things a
revenues. All that money translates into a student learns in business school.
lot of pump-priming for the local economy. Regardless of its nationality, and whether
Granted that the contractors are or not a business entity has a five-year
allowed subsequently to recover their pre- cost recovery period, it will -- must -- have
operating expenses, still, that eventuality to recoup its investments, one way or
will happen only after they shall have first another. This is just common business
put out the cashand fueled the economy. sense. Recovery of investments is
Moreover, in the process of recouping absolutely indispensable for business
their investments and costs, the foreign survival; and business survival ensures
contractors do not actually pull out the soundness of the economy, which is
money from the economy. Rather, they critical and contributory to the general
recover or recoup their investments out of welfare of the people. Even government
actual commercial production by not corporations must recoup their
paying a portion of the basic government investments in order to survive and
share corresponding to national taxes, continue in operation. And, as the
along with the additional government preceding discussion has shown, there is
share, for a period of not more than five no business that gets ahead or earns
years[77] counted from the commencement profits without any cost to it.
of commercial production. It must also be stressed that, though
It must be noted that there can be no the State owns vast mineral wealth, such
recovery without commencing actual wealth is not readily accessible or
commercial production. In the meantime transformable into usable and negotiable
that the contractors are recouping costs, currency without the intervention of the
they need to continue operating; in order credible mining companies. Those
to do so, they have to disburse money to untapped mineral resources, hidden
meet their various needs. In short, money beneath tons of earth and rock, may as
is continually infused into the economy. well not be there for all the good they do
us right now. They have first to be
The foregoing discussion should serve extracted and converted into marketable
to rid us of the mistaken belief that, since form, and the country needs the foreign
contractors funds, technology and know- Another objection points to the alleged
how for that. failure of the Mining Law to ensure real
contributions to the economic growth and
After about eleven years of pre-
general welfare of the country, as
operation and another five years for cost
mandated by Section 2 of Article XII of the
recovery, the foreign contractors will have
Constitution. Pursuant to Section 81 of
just broken even. Is it likely that they
the law, the entire after-tax income arising
would at that point stop their operations
from the exploitation of mineral resources
and leave? Certainly not. They have yet
owned by the State supposedly belongs
to make profits. Thus, for the remainder of
to the foreign contractors, which will
the contract term, they must strive to
naturally repatriate the said after-tax
maintain profitability. During this period,
income to their home countries, thereby
they pay the whole of the basic
resulting in no real contribution to the
government share and the additional
economic growth of this country. Clearly,
government share which, taken together
this contention is premised on erroneous
with indirect taxes and other
assumptions.
contributions, amount to approximately 60
percent or more of the entire financial First, as already discussed in detail
benefits generated by the mining venture. hereinabove, the concerned agencies
have correctly interpreted the second
In sum, we can hardly talk about
paragraph of Section 81 of RA 7942 to
foreign contractors taking our mineral
mean that the government is entitled to
resources for free. It takes a lot of hard
an additional share, to be computed
cash to even begin to do what they
based on any one of the following factors:
do. And what they do in this country
net mining revenues, the present value of
ultimately benefits the local economy,
the cash flows, or excess profits reckoned
grows businesses, generates
against a benchmark rate of return on
employment, and creates infrastructure,
investments. So it is not correct to say
as discussed above. Hence, we definitely
that all of the after-tax income will accrue
disagree with the sweeping claim that no
to the foreign FTAA contractor, as the
FTAA under Section 81 will ever make
government effectively receives a
any real contribution to the growth of the
significant portion thereof.
economy or to the general welfare of the
country. This is not a plea for foreign Second, the foreign contractors can
contractors. Rather, this is a question of hardly repatriate the entire after-tax
focusing the judicial spotlight squarely on income to their home countries. Even a
all the pertinent facts as they bear upon bit of knowledge of corporate finance will
the issue at hand, in order to avoid show that it will be impossible to maintain
leaping precipitately to ill-conceived a business as a going concern if the
conclusions not solidly grounded upon entire net profit earned in any particular
fact. year will be taken out and repatriated. The
net income figure reflected in the bottom
line is a mere accounting figure not
Repatriation of necessarily corresponding to cash in the
After-Tax Income bank, or other quick assets. In order to
produce and set aside cash in an amount
equivalent to the bottom line figure, one
may need to sell off assets or immediately co-production agreement, joint venture
collect receivables or liquidate short-term agreement or MPSA to be a Filipino
investments; but doing so may very likely corporation (at least 60 percent owned by
disrupt normal business operations. Filipino citizens).
In terms of cash flows, the funds We question the logic of this
corresponding to the net income as of a reasoning, premised on a supposedly
particular point in time are actually in parallel or analogous situation. We are,
use in the normal course of business after all, dealing with an essentially
operations. Pulling out such net different equation, one that involves
income disrupts the cash flows and cash different elements. The Charter did not
position of the enterprise and, depending intend to fix an iron-clad rule on the 60
on the amount being taken out, could percent share, applicable to all
seriously cripple or endanger the normal situations at all times and in all
operations and financial health of the circumstances. If ever such was the
business enterprise. In short, no sane intention of the framers, they would have
business person, concerned with spelt it out in black and white. Verba
maintaining the mining enterprise as a legis will serve to dispel unwarranted and
going concern and keeping a foothold untenable conclusions.
in its market, can afford to repatriate
Second, if we would bother to do the
the entire after-tax income to the home
math, we might better appreciate the
country.
impact (and reasonableness) of what we
are demanding of the foreign contractor.
The States Receipt of Sixty Let us use a simplified illustration. Let us
Percent of an FTAA Contractors base it on gross revenues of, say, P500.
After-Tax Income Not Mandatory After deducting operating expenses, but
prior to income tax, suppose a mining firm
makes a taxable income of P100. A
We now come to the next objection corporate income tax of 32 percent
which runs this way: In FTAAs with a results in P32 of taxable income going to
foreign contractor, the State must receive the government, leaving the mining firm
at least 60 percent of the after-tax income with P68. Government then takes 60
from the exploitation of its mineral percent thereof, equivalent to P40.80,
resources. This share is the equivalent of leaving only P27.20 for the mining firm.
the constitutional requirement that at least
60 percent of the capital, and hence 60 At this point the government has
percent of the income, of mining pocketed P32.00 plus P40.80, or a total
companies should remain in Filipino of P72.80 for every P100 of taxable
hands. income, leaving the mining firm with
only P27.20. But that is not all. The
First, we fail to see how we can government has also taken 2 percent
properly conclude that the Constitution excise tax off the top, equivalent to
mandates the State to extract at least 60 another P10. Under the minimum 60
percent of the after-tax income from a percent proposal, the government nets
mining company run by a foreign around P82.80 (not counting other taxes,
contractor. The argument is that the duties, fees and charges) from a taxable
Charter requires the States partner in a
income of P100 (assuming gross The reason happens to be the fact that in
revenues of P500, for purposes of petroleum operations, the bulk of
illustration). On the other hand, the expenditures is in exploration, but once
foreign contractor, which provided all the the contractor has found and tapped into
capital, equipment and labor, and took all the deposit, subsequent investments and
the entrepreneurial risks expenditures are relatively minimal. The
-- receives P27.20. One cannot but crude (or gas) keeps gushing out, and the
wonder whether such a distribution is work entailed is just a matter of piping,
even remotely equitable and reasonable, transporting and storing. Not so in mineral
considering the nature of the mining mining. The ore body does not pop out on
business. The amount of P82.80 out its own. Even after it has been located,
of P100.00 is really a lot it does not the contractor must continually invest in
matter that we call part of it excise machineries and expend funds to dig and
tax or income tax, and another portion build tunnels in order to access and
thereof income from exploitation of extract the minerals from underneath
mineral resources. Some might think it hundreds of tons of earth and rock.
wonderful to be able to take the lions
As already stated, the numerous
share of the benefits. But we have to ask
intrinsic differences involved in their
ourselves if we are really serious in
respective operations and requirements,
attracting the investments that are the
cost structures and investment needs
indispensable and key element in
render it highly inappropriate to use
generating the monetary benefits of which
petroleum operations FTAAs as
we wish to take the lions share. Fairness
benchmarks for mining FTAAs. Verily, we
is a credo not only in law, but also in
cannot just ignore the realities of
business.
the distinctly different situations and
Third, the 60 percent rule in the stubbornly insist on the minimum 60
petroleum industry cannot be insisted percent.
upon at all times in the mining business.