the chilean “mining boom”: achievements and shortcomings of an effective mining policy by...
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The Chilean “mining boom”: achievements and shortcomings of an
effective mining policy
By Eduardo [email protected]“Reversing the Resource Curse” Meeting,ACET and the Ford Foundation,Accra, Ghana, August 2013
Agenda
• Turning points in the history of Chilean mining
• The key components of current mining policy
• Main results of the policy
• Conclusions
Turning points in the history of Chilean mining
• Between 16th and 19th centuries, during the Spanish colonial era, its main exports to the metropolis were precious minerals.
• In early 20th century, industrial copper mining began with investments from the USA.
• In pre-colonial Chile, 500 years B.C., small scale mining already existed.
...history of Chilean mining...
• 1990: With the return democracy, the same mining policy is strengthened.
• 2013: Chile is the main world producer of copper and a significant producer of other metals and industrial minerals.
• 1971: Nationalization of all large mining companies.
...history of Chilean mining...
• 1974: Beginning of a new mining policy, strongly relying on foreign investment.
The key components of current mining policy
• The blessing of rich mining deposits;
• Adequate infrastructure (roads, ports, energy, water, etc.);
• Democracy and political stability.
...current mining policy
Attractive general basic conditions:
...current mining policy Two state mining companies
CODELCO:• A very large, successful copper mining
company.
• Overwhelming public opinion against its privatization.
• Investment and labor productivity weaknesses.
• The links between CODELCO and the political system.
...current mining policy
Two state mining companies
ENAMI:
• Provides smelter, refining and export services to small and medium size miners.
• Relatively small production of gold and copper, but crucial to employment in some regions of the country.
...current mining policy
A very dynamic private large scale mining sector
Based upon foreign investment (mainly from Canada, Australia, USA and Japan), attracted to the country by a legal framework, and general economic policies, very friendly towards business and foreign investment:
...current mining policy A very dynamic private large scale mining
sector
• subsidiary role of the state;
• cautious macroeconomic policies;
• consensual regulatory policies;
• LD 600;
• Mining Code and Constitution;
• Low-cost mining license, royalty and tax burden.
…attracted by:
The main results of Chilean mining policy
The rent or value of a natural resource is the income remaining after normal payment for all other inputs.
Natural Resource Rent
A good mining policy should capture most resource rent for the general national benefit.
Criterion # 1
Source: Foreign Investment Committee
0
500
1.000
1.500
2.000
2.500
3.000
1974 1979 1984 1989 1994 1999 2004 2009
Foreign Investment in Mining (Law Decree 600)(Millions of US dollars)
Minería 3 years simple moving average
Source: Chilean Copper Commission (COCHILCO)
0
1000
2000
3000
4000
5000
6000
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Chilean Copper Producction(Thousands of Metric Tons)
Codelco Private Sector
Source: Chilean Copper Commission (COCHILCO)
0
1000
2000
3000
4000
5000
6000
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Chilean Copper Producction(Thousands of Metric Tons)
Codelco Private Sector
Source: Chilean Copper Commission (COCHILCO)
0
2.000
4.000
6.000
8.000
10.000
12.000
14.000
16.000
1994 1997 2000 2003 2006 2009 2012
Fiscal income from mining(millions of US$)
Source: Chilean Copper Commission (COCHILCO)
0%
5%
10%
15%
20%
25%
30%
35%
40%
1994 1997 2000 2003 2006 2009
Share of fiscal income from mining(%)
% of fiscal income from mining Average 2004-2011
Source: Chilean Copper Commission (COCHILCO)
0
1.000
2.000
3.000
4.000
5.000
6.000
7.000
8.000
9.000
1994 1997 2000 2003 2006 2009
Fiscal income from mining: CODELCO and large private mining companies
(millions of US dollars)
Large private mines Codelco
Source: Elaborated data from Foreign Investment Committee, COCHILCO and financial statements of The Mining Council and CODELCO
-20.000
-15.000
-10.000
-5.000
0
5.000
1974 1979 1984 1989 1994 1999 2004 2009
Net mining foreign investment inflow through LD600(Millions of US dollars)
Source: Elaborated from data in the financial statements of the Mining Council and CODELCO
Profits before taxes
ROE before taxes
Normal ROE (maximum)
Current national –
resource-rent given up
2005 7.218 70%
20%
3.917
2006 16.983 133% 10.543
2007 18.561 117% 10.238
2008 11.197 61% 4.613
2009 10.872 50% 5.590
2010 17.132 63% 9.172
2011 14.511 45% 5.427
Total 96.474 49.499
Annual Average 13.782 74% 7.071
Large private in mining in Chile: return on equity (ROE) and tax burden, 2005 – 2011
(Millions of US dollars)
Industrial mining activity may have significant impacts on sustainability and on the activity of other industries.
Mining externalities
A good mining policy should maximize positive externalities and minimize the negative ones.
Criterion # 2
• Mining “cluster”
• “Dutch disease”
• Employment
• Environment
• Strategic resources: Water and energy
• Local communities
Mining externalities...
Countries that specialize (only) in exporting raw materials to global markets, tend to remain undiversified, underdeveloped and unequal.
The natural resources curse…
A good mining policy should be complemented by policies aimed at reducing dependence on exports of raw materials.
Criterion # 3
Source: Central Bank of Chile
0
10.000
20.000
30.000
40.000
50.000
60.000
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Chilean mining and non-mining exports(millions of US dollars)
Mining exports Non-mining exports
Source: Central Bank of Chile
0
10.000
20.000
30.000
40.000
50.000
60.000
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Chilean Exports and share of mining exports(millions of US dollars and %)
Share of mining in total exports Mining exports Non-mining exports
• Limited productive diversification
• Medium range GDP per capita
• Very unequal distribution of income
• Significant reduction in poverty
• Slow growth of human capital
• Relatively low corruption
• Advances in transparency
• Perfectible democracy
Natural resources curse...
Conclusions
• A substantial increase in private foreign investment was achieved, which fuelled a large increase in copper production and exports, and in government revenues from mining.
• Government macroeconomic policy has carefully managed the cyclical macroeconomic effects of mining exports, but a substantial portion of the mining natural resource has been given away to private investors.
Summing up...
• CODELCO, the state owned mining company has performed satisfactorily, but should become more energized and efficient. It has provided substantial fiscal income during the copper boom years.
• Positive externalities of the mining boom have been modest. Negative externalities on environment and shortages of water and energy, should be better managed.
Summing up...
• State and private companies have benefitted from the fact that most mining projects take place far from human settlements, but relations with the community are rather tense and ambivalent.
• Country emancipation from the so called “curse of natural resources” has not (yet) been achieved.
Summing up...
Thank you
The Chilean “mining boom”: achievements and shortcomings of an
effective mining policy
By Eduardo [email protected]“Reversing the Resource Curse” Meeting,ACET and the Ford Foundation,Accra, Ghana, August 2013
Chilean Copper Commission: www.cochilco.clForeign Investment Committee: www.ciechile.gob.clCentral Bank of Chile: www.bcentral.clThe Mining Council: www.consejominero.clCODELCO: www.codelco.cl
Web pages of the institutions quoted in the presentation: