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. • 1974: Beginning of a new mining policy, strongly relying on foreign investment. • 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. The key components of current mining policy ...current mining policy Attractive general basic conditions: • The blessing of rich mining deposits; • Adequate infrastructure ports, energy, water, etc.); (roads, • 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. Foreign Investment in Mining (Law Decree 600) (Millions of US dollars) 3.000 2.500 2.000 1.500 1.000 500 0 1974 1979 1984 1989 Minería Source: Foreign Investment Committee 1994 1999 3 years simple moving average 2004 2009 Chilean Copper Producction (Thousands of Metric Tons) 6000 5000 4000 3000 2000 1000 0 1950 1955 1960 1965 1970 1975 Codelco Source: Chilean Copper Commission (COCHILCO) 1980 1985 Private Sector 1990 1995 2000 2005 2010 Chilean Copper Producction (Thousands of Metric Tons) 6000 5000 4000 3000 2000 1000 0 1950 1955 1960 1965 1970 1975 Codelco Source: Chilean Copper Commission (COCHILCO) 1980 1985 Private Sector 1990 1995 2000 2005 2010 Fiscal income from mining (millions of US$) 16.000 14.000 12.000 10.000 8.000 6.000 4.000 2.000 0 1994 1997 2000 Source: Chilean Copper Commission (COCHILCO) 2003 2006 2009 2012 Share of fiscal income from mining (%) 40% 35% 30% 25% 20% 15% 10% 5% 0% 1994 1997 2000 2003 % of fiscal income from mining Source: Chilean Copper Commission (COCHILCO) 2006 Average 2004-2011 2009 Fiscal income from mining: CODELCO and large private mining companies (millions of US dollars) 9.000 8.000 7.000 6.000 5.000 4.000 3.000 2.000 1.000 0 1994 1997 2000 2003 Large private mines Source: Chilean Copper Commission (COCHILCO) 2006 Codelco 2009 Net mining foreign investment inflow through LD600 (Millions of US dollars) 5.000 0 1974 1979 1984 1989 1994 1999 2004 2009 -5.000 -10.000 -15.000 -20.000 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) Normal ROE (maximum) Current national – resource-rent given up Profits before taxes ROE before taxes 2005 7.218 70% 3.917 2006 16.983 133% 10.543 2007 18.561 117% 10.238 2008 11.197 61% 2009 10.872 50% 5.590 2010 17.132 63% 9.172 2011 14.511 45% 5.427 Total 96.474 Annual Average 13.782 20% 4.613 49.499 74% Source: Elaborated from data in the financial statements of the Mining Council and CODELCO 7.071 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. Chilean mining and non-mining exports (millions of US dollars) 100% 60.000 90% 50.000 80% 70% 40.000 60% 50% 30.000 40% 20.000 30% 20% 10.000 10% 0% 1960 0 1965 1970 1975 1980 1985 Mining exports Source: Central Bank of Chile 1990 1995 Non-mining exports 2000 2005 2010 Chilean Exports and share of mining exports (millions of US dollars and %) 100% 60.000 90% 50.000 80% 70% 40.000 60% 50% 30.000 40% 20.000 30% 20% 10.000 10% 0% 1960 0 1965 1970 1975 1980 Share of mining in total exports Source: Central Bank of Chile 1985 1990 1995 Mining exports 2000 2005 Non-mining exports 2010 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 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 Web pages of the institutions quoted in the presentation: 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