Ploughing profits into projects.
With strong Asian demand for metals and sky-high prices for commodities, resource-rich Latin American countries should be swimming in cash for public works and social projects. Instead, stories of mismanagement still abound. In the Peruvian Andes, tax money has been ploughed into palatial six-story town halls and municipal swimming pools in communities where more than a third of the population lives without running water or proper sewage. In Caracas, Venezuela’s oil wealth can’t cure an acute housing crisis, and the mayor is trying to seize a private golf course for Greenfield construction. Even Chile, which effectively socks away riches from historically high commodity prices, could spend the cash more wisely.

“We’re seeing the benefit of globalization, of the growth of China and India, in the most isolated areas,” says Beatriz Boza, executive director of Ciudadanos al Dia, an activist think-tank in Peru. The problem is the local population often doesn’t see it, she explains. The mining and hydrocarbons industries make up just under 5% of Peru’s GDP, and mining accounts for more than half the country’s exports.

In an effort to improve the quality of life in remote and impoverished regions where the vast majority of Peru’s mineral wealth lies, the country has a 9-year-old mining canon that currently calls for 50% of taxes paid by mining companies to be returned to local authorities in mining regions and earmarked for investment projects. Boza says the vat of cash available for local officials to spend should reach an estimated $400 million this year, up from $17 million in 2002. 

But the canon has proven inefficient to administer, and some communities have failed to make the most of it. According to the Peruvian Institute of Mine Engineers, the southern regions of Moquegua and Tacna received around $265 million from the canon in 2005, but they only managed to spend $40 million. One of the chief failures of the canon is that Peru has so many municipalities that the money ends up being spread too thinly, and there is little coordination among local governments to spend it wisely. Finally, there’s no mechanism to prepare for the lean years. “There’s an addiction to spending,” Boza notes.

In neighboring Chile, where the economy is even more reliant on extraction-based industries, mining companies boast that they helped make the country the beacon of Latin American prosperity that it is today. Private miners have funded modern road and port facilities – indeed the National Mining Society says that without mining and its impact on the energy, construction and transport industries, Chile’s gross domestic product would be some 17% lower.

The state expects to collect $42 billion from a controversial new royalty on mining operations being paid for the first time this year. Those funds are destined for research and technological innovation in general, an area where Chile lags badly, rather than for roads, ports, schools and hospitals. “We’d need to have five royalties to have infrastructure that is ideal,” says one government source. “Even though we’ve got a decent road network, there’s still more to do.” He says Chile should invest in transport communications to connect cities, and in improving low-cost housing.

The Chilean government is keenly aware that, despite the copper price bonanza, the pace of economic growth in the second quarter of 2006 was the lowest in three years. Thus it sees investment in research and development as a better bet to guaranteeing future prosperity than plowing mining-related profits into bricks and mortar. “Even if high copper prices are here for a while, if we don’t apply policies to boost innovation, in 20 years Chile will be just the same as it is today,” the government source says.

While Peru, like Chile, had a busy privatization program in the 1990s that vastly improved telecommunications, road and airport facilities, it has further to go to equal its southern neighbor’s much coveted standard of living. New President Alan Garcia has been swift to encourage mining companies enjoying unexpected profits to give more back in the form of a voluntary tax, and has vowed to tackle the problems that have long plagued the canon. Meanwhile, Prime Minister Jorge Del Castillo announced in September that Cerro Verde, which is controlled by US miner Phelps Dodge and is building an $800 million expansion to its operation in Arequipa in southern Peru, was pitching in $50 million to fund a water treatment plant in the province over and above its canon commitments. Local authorities will pay another $50 million from the mining canon for a sewage facility, and the twin plants will benefit 250,000 people.

In Chile, although tax revenue from mining companies is not directly channeled to infrastructure, Carlos Rubilar, the government’s director-general of public works reckons around a quarter of the country’s annual $2 billion spending on the sector indirectly comes from mining. Only state-owned Codelco, the world’s biggest copper company, makes specific contributions to any sector. In a lingering legacy to its creation under the military dictatorship of Augusto Pinochet, Codelco pays 10% of its profits to the armed forces. Nevertheless, what to do with the extra cash flowing into state coffers from mining company taxes and Codelco’s income remains a hot debate in Chile.

Chile’s mission is to boost spending on research and development from a paltry 0.7% of GDP now to around 3 or 4%. Though it is still working out how best to assign the mining royalty cash, its priority areas include promoting corporate innovation and boosting scientific and technological centers. The aim is to invest in human capital for state-of-the-art minds rather than just state-of-the-art roads.

Some mayors are applying a similar approach in Peru. One, in Independencia in the central highlands, is using the mining canon to offer guarantees for microcredits that help local farmers, for example, switch to more profitable crops. “Development isn’t a question of money but of vision, management capacity and results,” says Boza. LF

Argentina Rising

There’s a country in South America with rich deposits of gold, copper, silver, base metals and lithium. Better yet, for multinational mining firms looking to develop new projects, most of this wealth is untapped. The country is – surprise – Argentina, and investment in extraction-related activities there is taking off. “Mining is more important today than red meat,” boasts Héctor Colón, executive secretary of Argentina’s Federal Mining Council, an arm of the federal government that maps a nationwide mining policy together with the provinces that officially own the resources. Indeed, Argentina’s mining exports surged to $1.6 billion in 2005 from $260 million a decade earlier, making the sector more important than even the country’s trademark export – beef – which brought in $1.4 billion last year.
This year Argentina returned to the top 10 exploration destinations in an annual survey conducted by Canada’s Metals Economics Group after being bumped out by Mongolia in 2004. Adding to the attraction, especially with rocketing Asian demand keeping metals prices sky high, is that an estimated three-quarters of Argentina’s mineral wealth is unexplored. In exploration alone, $1.2 billion has been committed for 2006, Colón says. Just for current projects – not including new discoveries – investment of more than $5 billion is forecast for the 2006-2010 period. Despite world-class mines and projects – including Xstrata’s Bajo de la Alumbrera copper and gold mine – Argentina is far from being as big a mining prospect as traditional destinations in the region like Chile, Peru or Mexico. “It’s not that it’s not taking off, it’s just that other countries are seeing increased investment as well,” says Jason Gould, director of corporate exploration strategies at the Metals Economics Group.
As production expands, Argentina is seeking ways to add value to its emerging position in the industry. “Closing the cycle of refinery and smelting could be one of our ace cards in the next decade,” says Colón. A treaty with Chile, which has helped, essentially, to eliminate the border in mining projects along the Andes, could allow Chile to process metals in Argentina and for Argentina to export via Chile. “There’s no question Argentina is emerging relatively quickly as a destination of choice for junior and senior companies,” says Vince Borg, a spokesman for the world’s top gold producer, Barrick Gold. Barrick owns the Veladero gold mine that went into production in Argentina in September 2005, and it’s awaiting approval by Argentine authorities for the environmental impact study on its nearby $1.5 billion Pascua-Lama project, which straddles the border with Chile. Argentine companies pay royalties to provincial governments, but the national government is not expecting a major mining tax bonanza just yet. Nor is the tax revenue earmarked, at a national level, for specific projects or goals like building bridges or paving roads. LF