Chile took a decided tilt to the left in elections this month.
Socialist Party leader Michelle Bachelet won the first round of voting with nearly twice the votes of her right-wing rival, Evelyn Matthei, and looks certain to become president in the second round of voting Dec. 15. Ms. Bachelet’s New Majority coalition – including six Communist Party candidates – won a majority in Congress.
The central plank of Ms. Bachelet’s platform is a pledge to increase corporate taxes from 20 to 25 per cent over four years and use the proceeds to fund sweeping reform of education, health and pensions, bolstering the role of the state in every field. She also says she will make businesses pay tax on reinvested earnings.
But none of that should alarm foreign investors, says Karin Poniachik, the former head of the country’s foreign investment council, who served as minister of mining during Ms. Bachelet’s first term as president four years ago.
“Oh, hide the babies, the Communists are going to eat them,” she joked, but then went on to say the first Bachelet government was as friendly to business and particularly foreign investors as the right-wing government that succeeded it.
Yet in an interview the day after the election, Ms. Poniachik said that there are key issues that a foreign investor eyeing Chile ought to be concerned about. And it’s an open question whether Ms. Bachelet will have the political agenda to take them on, given the scope of her social agenda.
“We’ve been extremely successful attracting foreign investment historically … but we’re competing with other countries that are increasingly attractive, especially in mining – countries that have higher ore rates and cheaper energy.”
Ms. Bachelet has said that as president she will revisit the law that shields foreign investors from the impact of tax reforms – a law on the books since 1974.
“People I’ve been debating say, ‘Foreign investment is not going to come into this country’,” Ms. Poniachik said. “No. Foreign investment is going to continue coming because Chile is super-attractive for mining. But we’re getting less competitive. Not because of royalties – it’s prices, the cost of energy, it’s the uncertainty around … the courts being more involved than regular institutions in environmental and other approvals.”
Ms. Poniachik cited three areas of concern.
Most important, she said, is energy – prices are high here and likely to keep climbing, because Chile is so dependent on imports, and because no political leader has been willing to take on popular opposition to new energy developments. Hydroelectric dams are continually blocked by environmental groups; nuclear power is unpopular in this country still scarred by the massive 2010 earthquake and solar power generation facilities are viewed as unattractive. Chile has shale gas reserves that might become financially viable, she noted, but in the meantime there is growing environmental opposition to the use of imported coal as well.
The second problem, Ms. Poniachik, is water. Chile is four years into a critical drought that is damaging agriculture and tourism industries; for mining, both water supply and water quality are going to become areas of growing concern that the government has not, so far, adequately addressed.
“Third, communities are much more empowered, which is why we are seeing a lot more court processes – they want more, they want a share. They are concerned about water issues … and they don’t see what’s in it for them.” Those community groups are increasingly turning to the courts, which are seen as one of the more trustworthy institutions. The Federation of Chilean Industry recently reported that $55-billion worth of infrastructure, energy and mining projects that have received environmental approvals are tied up in court cases, she noted.
Chile also faces growing competition from countries where existing mines have higher-grade ore rates. “Chile’s ore grades are falling at a quick rate – you need to invest more than you used to, to produce one ton. Operating costs are high.” That requires technology and innovation – to access deeper veins and more subterranean mining – that isn’t being developed at present, she added.
Meanwhile skilled labour is scarce and that’s driving costs higher too.
Ms. Bachelet’s proposed reform of education and other social services ought to hearten foreign investors, Ms. Poniachik said, because Chile needs the human capital.
She stressed the importance of economic diversification for the country, but noted that the reality is that Chile is going to be dependent on mining – most of it by foreign firms – for a long time to come.
“We have the natural resources, this is a big help, but foreign investors want to know that if they comply with legislation we will provide the energy supply and the human capital, and manage the public consultations process.”