The Chilean “mining boom”: achievements and shortcomings of an effective mining policy

The Chilean “mining boom”: achievements and shortcomings of an effective mining policy By Eduardo Titelman eduardo.titelman@usach.cl “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

...history of Chilean mining... • In pre-colonial Chile, 500 years B.C., small scale mining already existed. • 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.

...history of Chilean mining... • 1971: Nationalization of all large mining companies. • 1990: With the return democracy, the same mining policy is strengthened. • 1974: Beginning of a new mining policy, strongly relying on foreign investment. • 2013: Chile is the main world producer of copper and a significant producer of other metals and industrial minerals.

The key components of current mining policy

...current mining policy Attractive general basic conditions: • The blessing of rich mining deposits; • Adequate infrastructure (roads, ports, energy, water, etc.); • Democracy and political stability.

...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 …attracted by: • 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.

The main results of Chilean mining policy

Criterion # 1 Natural Resource Rent The rent or value of a natural resource is the income remaining after normal payment for all other inputs. A good mining policy should capture most resource rent for the general national benefit.

Source: Foreign Investment Committee

Source: Chilean Copper Commission (COCHILCO)

Source: Elaborated data from Foreign Investment Committee, COCHILCO and financial statements of The Mining Council and CODELCO

Large private in mining in Chile: return on equity (ROE) and tax burden, 2005 – 2011 (Millions of US dollars) Source: Elaborated from data in the financial statements of the Mining Council and CODELCO

Criterion # 2 Mining externalities Industrial mining activity may have significant impacts on sustainability and on the activity of other industries. A good mining policy should maximize positive externalities and minimize the negative ones.

Mining externalities... • Mining “cluster” • “Dutch disease” • Employment • Environment • Strategic resources: Water and energy • Local communities

Criterion # 3 The natural resources curse… Countries that specialize (only) in exporting raw materials to global markets, tend to remain undiversified, underdeveloped and unequal. A good mining policy should be complemented by policies aimed at reducing dependence on exports of raw materials.

Source: Central Bank of Chile

Natural resources curse... • 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

Conclusions

Summing up... • 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. Thank you

Web pages of the institutions quoted in the presentation: The Chilean “mining boom”: achievements and shortcomings of an effective mining policy By Eduardo Titelman eduardo.titelman@usach.cl “Reversing the Resource Curse” Meeting, ACET and the Ford Foundation, Accra, Ghana, August 2013 Chilean Copper Commission: www.cochilco.cl Foreign Investment Committee: www.ciechile.gob.cl Central Bank of Chile: www.bcentral.cl The Mining Council: www.consejominero.cl CODELCO: www.codelco.cl

The Chilean “mining boom”: achievements and shortcomings of an effective mining policy