A question of Royalties

Billy Hayes

By Latin American standards, Chile is an industrialized nation par excellence. Their exports are on a par with Venezuela’s, ranking a close third to Brazil and Argentina. But, when it comes to the primary industries, like the huge mining industry, in many cases only extraction and transportation is industrialized.

In fact nearly 80% of exports by value are primary, unprocessed or simple manufactured items such as copper ingots or wooden planks. Most of the metals are smelted abroad, from ore shipped in bulk from Chile’s network of ports. This is even the case with copper. Chile is the world’s largest source of copper. The nationalized ‘Codelco’ mines who also ship ore abroad for processing, leaving Chile in the ludicrous position of having to import some metals for domestic use. The Chilean mining industry represents a large and important sector of the economy in terms of export figures but things could be better.

Apart from Codelco and a few smaller operations Chilean mining is largely owned and operated by trans-nationals, even the Bush family has gold mining interests here. Most mines are described as mid-sized (large industrial operations representing one one to ten thousand tonnes of production per day) with up-to-the-minute explosives and equipment excavating large open-face mines.

Driving around Chile’s dusty northern deserts (where most of the mining operations are to be found), it becomes quickly evident which areas have the economically important mines; they’re the ones with the good access. Some of the country’s best and newly-paved roads service these mines, enabling US contractor vehicles to speed in-and-out in the V8 Chevys. When it comes to shipping ore, the roads supplement the network of narrow gauge railways transporting ore from the leaching pits to the ports. In a country where many local roads are rough sandy tracks, this is a major structural advantage, provided, in many instances, at the expense of the Chilean tax-payer. One would hope that the vast mining industry appreciates this industry-friendly gesture, but they don’t seem to be returning the favor.

Chile’s largest mining company had a turnover of about USD$4 billion in 2004. That turnover is greater than the annual taxation that comes from all of the mines in the country! Not just greater, very much greater. Between 1990 and 2003, the total amount of taxes paid to the Chilean government by companies mining on national soil was $1.9 billion dollars. The socialist-leaning government believes that they can do better.

The Lagos government, under the auspices of house secretary Nicolás Eyzaguirre, has offered to enter into negotiations with the powerful mining interests to change matters but they don’t want to listen. Mr. William Hayes, the President of the Consejo Minero (the large mining owners club) explained in an interview in the March 1st edition of Chile’s daily “Finance Daily” that his organization “… had no plan to negotiate with the [Chilean] government”. The topic: Royalty II, the Chilean government’s attempts to supplement the puny taxes from companies mining Chilean deposits.

Speaking about the Royalty II project, Mr. Hayes described the governments plans to augment income from the mining sector as a “discriminatory tax”. When asked about bumper earnings in 2004, the University of San Francisco graduate explained away the record mining profits last year, as the reward of a decade of investment, skewed by global commodity price highs.

Let’s face it, the mining industry is not used to such impositions from the Chilean Government. Only 30 years back Chile experienced a CIA assisted coup leaving them in the iron fist of dictator (General Pinochet), his laissez-faire economists, a dead President: Salvador Allende, and more than one thousand other ‘disappeared’ citizens.

The reason for this coup was, of course, the protection of foreign investment interests, though it was couched as an intervention against communism. Or in Henry Kissinger’s terminology the act was justified by saving the country from its own ‘stupidity’ (read Democracy).

In ’73 it was not just the re-nationalization of the copper mines that disturbed the Chilean oligarchy and their foreign investor friends, but curtailments of the ‘freedom’ of the infamous US-based telecommunications company ITT (now ironically replaced by Spain’s Telefonica).

Nor was this coup an isolated incident. History shows that there have been many other coups and, worse still wars to protect foreign investment interests. For example, at the late 18th. century was a particularly profitable one for Guano mining in the northern deserts. Threats of increased taxation lead to direct intervention. The mines, mostly English owned, used their influence to lead Chile to war with its neighbors in the so-called War of the Pacific.

When Bolivia re-asserted their territorial claims, thus threatening the British fertilizer mining companies with higher taxes, the Chilean navy was brought in to attack Lima. Their success ensured Chile’s victory in the war against Bolivia and Peru. The result: an extended Chile, the annexation of Bolivia’s coast and some of southern Peru’s and (most important) mining-as-usual for the British. All this to protect foreign corporate mining profits? Hell, I’d be smug too.

In a country with this kind of corporate arrogance, the initiation of the Royaly II program is a bold step. It represents a considerable ‘concession’ from mining companies who hate paying taxes, but especially hate to pay royalties, as these cannot be as easily hidden by accelerated depreciation etc. The Royalty II program is expected to become legislation by May 2005, however it is likely to meet with stiff opposition. It has already become an issue in the upcoming Presidential election with the mining interests likely to fall in behind ultra-conservative candidate Joaquín Lavín .

Chile is one of Latin America’s most (neo)liberalized economies (a legacy of the billionaire ex-dictator of the country one Senator for Life Mr. Augusto Pinochet Ugarte). It has yet to be proven that Pinochet’s huge personal wealth can be attributed even practicly to a low taxation regime for the mining industry. However, it is hard to believe that his fortunes could have accrued without some generous donation. I mean he did lead the coup to depose Allende and that has got to be worth something.

In the words of William Hayes: “… we shall see. One day at a time. … The parliamentarians have their work cut out for them and we do ours. They need to make decisions as to what is right for the country. It is obvious that it isn’t good for the Mining Sector.”

This is definitely one to watch.

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