MiningSector in LatinAmerica recenttrendsand pendingchallenges in ResourcesGovernance

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1 MiningSector in LatinAmerica recenttrendsand pendingchallenges in ResourcesGovernance Jean Acquatella Ph.D Economic Affairs Officer, Natural Resources Division U.N ECLAC, Santiago, Chile UNEP, ECLAC, Min. Environment Chile High Level Seminar 25 May 2014,

2 Contents 1. Mining sector trends in Latin America Mining sector response to the metals price cycle Mining rents and private investment in exploration and development. 2. State participation in Mining sector Rents during Analysis of State s participation in mining rents. - Resource governance challenges. 3. Resources governance challenges to leverage Mining sector contribution to post-2015 development goals. Need to improve progressiveness during up-cycles. Review and improve existing Mining taxation instruments ( RRT, windfall taxation, avoid fiscal competition through strengthened regional integration) Improvedpublic investmentand use of resourcerents( resourcerentlong term investment and stabilization funds, with specific uses?) Increased transparency and accountability of rent generation and investment. Local development impact and managing of socio-environmental conflicts.

3 In Latin America the productive structure remains concentrated in primary sectors LATIN AMERICA AND THE CARIBBEAN: EXPORT STRUCTURE BY TECHNOLOGY INTENSITY, a (Percentages of the total) Source: ECLAC, on the basis of United Nations Commodity Trade Database (COMTRADE). a Cuba and Haiti not included. Data for Antigua and Barbuda refer only to 2007, and data for the Bolivarian Republic of Venezuela only to 2008; data for Honduras do not include 2008; data for Belize, Dominican Republic, Saint Kitts and Nevis, Saint Lucia, Suriname and Grenada (exports only) do not include 2009.

4 Resource Export Dependence (2007 peak year for mineral/oil prices before global financial crisis)

5 Fiscal Dependence on Resource Revenues

6 Oil/Gas and Metals price cycle PRIMARY COMMODITY PRICE INDEX, (January 2003=1) Petróleo, gas natural y carbón Metales Performance differs between Oil/Gas and Mining sectors in terms of % State appropriation of rents, investment and production dynamics in response to the price cycle.

7 Mining Sector : Economic Rent Refined cooper prices London Metals Exchange and average productioncosts LAC * ( USD cents per lb.) 400 International Price Net profits (appropriated by mining industry) Extraction Cost At mine head. Tax payments (appropriated by States) Factor payments beyond extraction phase (labor, sale costs, debt service.) ,000 45,000 40,000 35,000 30,000 25,000 Mining sector Economic Rent for selected countries (Millions US$, year 2009)** Precio Cu (BML) Costo de producción (promedio América Latina)** 20,000 15,000 10,000 5,000 Source: basedondata fromcochilco* Averageproductioncostsrefersto direct and indirectmining costs, interestpaymentsand depreciation, minus proceeds from sale of indirect products, (C3, according to Brook Hunt terminology), ** Costsforperiod reflectonlychile.. 0 ** World Bank ( WDI) World Development Indicators Database Mineral Rent( % GDP)

8 LAC region is where Mining rents increase the most globally EstimatedMiningSector rent: 0.54% PIB regional avg , Almostcuadrupledto2.08 % PIB regional avg ,000 90,000 RENTA DEL SECTOR MINERO EN LAS PRINCIPALES REGIONES MINERAS, (En millones de US$ de 2005) LAC 80,000 70,000 60,000 50,000 40,000 30,000 LAC 20,000 10, Fuente: Comisión Económica Norteamérica para América Latina Asia y el del Caribe Este (CEPAL), y el Pacífico* sobre la base de America informacióndel Latina Banco y el Caribe Mundial, World Development Indicators. Estadística: Mineral Rent (% GDP) definidacomopreciointernacional costounitariode producción paracanasta de 10 minerales.nota: *El dato del año 2009 de Asia del Este y el Pacífico corresponde al año 2006.

9 Mining sector profitability in LAC reached unprecedented historic levels AMÉRICA LATINA Y EL CARIBE: RENTABILIDAD SOBRE ACTIVOS DE LAS 500 MAYORES EMPRESAS DE LA REGIÓN, 2010 (En porcentajes) Mining Profit/ Assets ratio far exceeds profitability indicators of all other economic sectors in the region( 2010 data) Fuente: Comisión Económica para América Latina y el Caribe (CEPAL), sobre la base de información estadística de América Economía, diciembre 2011 (

10 Miningsectorgrowthin LAC drivenby privateinvestmentin exploration and development Global exploration investment cuadrupled from 2.2 to 10.7 Billion USD ; and doubled from 10.7 to 21.5 Billion USD between LAC region has consistently captured the largest share (approx. 25%) of this investment. Fuente: CEPAL 2013, Recursos naturales: situación y tendencias para una agenda de desarrollo regional en ALC.Presentado en Reunión CELAC, 27 enero 2014.

11 Mexico, Peru, Chile and Brasilaccount for 75% of total LAC mining investment Fuente: CEPAL 2013, Recursos naturales: situación y tendencias para una agenda de desarrollo regional en ALC.Presentado en Reunión CELAC, 27 enero 2014.

12 Regionalshare(%) in total world investmentin MiningExploration Investment by Region MM US$ Europe 5.7% 11.0% 10.5% $ 77.0 Latin America 29.5% 32.0% 28.6% $ North America 12.6% 15.3% 19.9% $ Oceania 18.6% 14.4% 16.5% $ Africa 18.6% 14.2% 14.4% $ Asia 15.0% 13.0% 10.2% $ 75.0 Total 100.0% 99.9% 100.0% Total [MMUS$] $ 86.0 $ $ Source: Economic Commission for Latin America and the Caribbean (ECLAC), based on official figures, and data from Trends in Worldwide Exploration

13 FDI flowsreinforcespecializationin Natural ResourceSectors, particularly in South America w/o Brazil. Political concern towards primary sector concentration and its implication for long term development trajectory 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% AMÉRICA LATINA Y EL CARIBE: SECTORES DE DESTINO DE LA INVERSIÓN EXTRANJERA DIRECTA SEGÚN REGIÓN, (En porcentajes) 0% Brasil América del Sur (sin Brasil) México, Centroamérica y el Caribe Recursos Naturales Manufacturas Servicios Fuente: Comisión Económica para América Latina y el Caribe (CEPAL), sobre la base de cifras preliminares y estimaciones oficiales al 29 de abril de 2013.

14 LAC Mining Exports growth during is highly concentrated in ore and metal concentrates, rather than higher value added metal manufactures and refined metals ALC: evolución de las exportaciones de minerales primarios y manufacturas de minerales a, (En millones de dólares de 2005) Menas y concentrados de metales (28) Metales no ferrosos refinados (68) Acero y productos derivados (67) Manufactura de metales y no metales (66 y 69) Fuente: CEPAL 2013, Recursos naturales: situación y tendencias para una agenda de desarrollo regional en ALC.Presentado en Reunión CELAC, 27 enero 2014.

15 País MINING SECTOR RENTS (% GDP) OIL& GAS RENTS (% GDP) MINING FISCAL REVENUE (% total Fiscal revenue) OIL& GAS FISCAL REVENUE (% total Fiscal revenue) Argentina 0.05 x Bolivia x4 Almost quatripled to n.d Brasil 0.64 x x Chile (GMP-10+CODELCO) Chile (sólo minería privada GMP-10) x3 x5 x.4 Estimated Mining Sector rent: 0.54% GDP regional avg , 2.08% GDP regional avg Estimated Oil/Gas Sector rent: 3.61% GDP regional avg , Colombia Ecuador x Guatemala1/ n.d. n.d n.d. Doubles0.3 to Guyana Honduras 0.25 x Jamaica 3.43 x México Nicaragua 0.07 x x Perú República Dominicana Suriname Venezuela, RB x4 x2 América Latina Australia Canadá Estados Unidos Sudáfrica Fuente: Elaborado sobre la base de datos de COMTRADE, UNCTAD, Banco mundial y CEPAL. 7.11% GDP regional avg

16 Fiscal revenue increased everywhere, but critical question is: How did the State s share in total Resource Rent generated evolved during up-cycle after 2004?? País MINING SECTOR RENTS (% GDP) OIL& GAS RENTS (% GDP) MINING FISCAL REVENUE (% total Fiscal revenue) OIL& GAS FISCAL REVENUE (% total Fiscal revenue) Argentina Bolivia n.d x Brasil == Chile (GMP-10+CODELCO) Chile (sólo minería privada GMP-10) Colombia Ecuador X Guatemala1/ n.d. n.d n.d. 0.3 = Guyana Honduras x Jamaica = México Nicaragua Perú x = 3.8 República Dominicana Suriname Venezuela, RB América Latina x4 x2 Australia Canadá Estados Unidos Sudáfrica Fuente: Elaborado sobre la base de datos de COMTRADE, UNCTAD, Banco mundial y CEPAL. x4 x9 x1.5

17 Perverse Fiscal competition among mining countries: reduction in mining corporate income tax rates

18 Mineralspricecyclebreakstheprevious trend of falling real prices for metals

19 Contents 1. Mining sector trends in Latin America Mining sector response to the metals price cycle Mining rents and private investment in exploration and development. 2. State participation in Mining sector Rents during Analysis of State s participation in mining rents.

20 Analysis of State participation in Mining and Oil/Gas sector Rents during the price cycle. Contrast between Mining and Oil/Gas sector performance and Fiscal regimes. Need to increase progressivity of Mining taxation regimes. Need to strengthen fiscal capacity in smaller countries with incipient but emerging mining ( Guatemala, Honduras etc.) Manage tensions between maintaining dynamic exploration & development investment and strengthened sectoral fiscal regimes. Increased regional integration to avoid fiscal competition.

21 Chile Taxes and fiscal payments by Mining Companies compared with Total national Tax revenue*, and estimated total Mining Sector Rent each year (in millions of USD) 40,000 35,000 30,000 Estimated Mining Sector Rent 25,000 20,000 15,000 Total national Tax revenue Mining Fiscal receipts 10,000 35% 5, % > Ingresos tributarios totales (Gobierno central) Rentas mineras totales Tributación y aportes totales de la minería (sin impuesto específico) Impuesto específico declarado por GMP-10 Fuente: Elaboración propia sobre la base de datos de COCHILCO, CEPAL, Banco Mundial, FMI y Banco Central de Chile. Notas: * Los ingresos tributarios son del Gobierno Central. Los datos fueron tomados de CEPAL y del Banco de Chile. ** La tributación y aportes totales de la minera incluye los dividendos de CODELCO y los excedentes de ENAMI.

22 Chile Taxes and fiscal payments by Mining Companies as percentage of total MiningSector Renteachyear (%) 45% 40% TOTAL 35.7% 35% 30% 25% CODELCO 22.1% 20% 15% GMP % 10% 5% <5% 0% Aportes de las empresas privadas CODELCO ENAMI Tributación minera total (incluye royalty) In , total fiscal revenue from mining reaches 35.7% of total sector rent. Fiscal contribution from State company CODELCO is 22% ( 2/3 of total ), even though CODELCO only controls 1/3 of total cooper production. Fiscal revenue contribution of Private Mining Companies reaches 13.6 % of sector rent. In Private Mining fiscal contribution is less than 5 % of sector rent except for

23 60% Chile Taxes, royalties and fiscal payments by Mining Companies ( % of total Fiscal Revenues) 50% 40% 30% 20% 10% 0% CODELCO Tributación empresas privadas GMP-10 (sin impuesto específico) ENAMI Tributación minera total (incluye impuesto específico) Impuesto específico declarado por GMP-10 Fuente: Elaboración propia sobre la base de datos de COCHILCO. Nota: Los ingresos tributarios corresponden al Gobierno Central, que en promedio, corresponden al 93% de los ingresos tributarios del Gobierno General.

24 Peru Taxes and other fiscal revenue paid by Mining companies*, relative to Mining Sector rent. absolute values(us$ millions each year) 25,000 20,000 15,000 10,000 12,000 M 5, ,500 M 14.2% 2.9% > Ingresos tributarios Tributación minera total Rentas mineras Regalías Fuente: Elaboración propia sobre la base de datos de Superintendencia Nacional de Administración Tributaria (SUNAT), Banco Mundial y FMI. Notas: * Los ingresos tributarios son los del Gobierno Central. Incluyen: Impuestos a la renta, a la producción y consumo, a la importación y otros ingresos como impuesto a las transacciones financieras, temporal a los activos netos, a las acciones del Estado, etc. ** Los impuestos pagados por las empresas mineras incluyen el 100% del impuesto a la renta minera.

25 Peru Taxes and fiscal payments by Mining Companies as percentage of total MiningSector Renteachyear (%) % 29% % Tributación + Regalías Tributación Regalías State rent appropriation has been decreasing from 35% in 2004 to 19.5% en Fiscal contribution from Mining Companies during peak price year ( 2007) reached 29% of sector rent. In 2007 the contribution of Mining to total Fiscal Revenue in Perúpeaked at 19.4%.

26 Peru Taxesand fiscal paymentsbyminingcompaniesas percentage of total Central Govt. Revenues(%) % 3 % < Tributación + Regalías Tributación Regalías Fuente: Elaboración propia sobre la base de datos de Superintendencia Nacional de Administración Tributaria (SUNAT) y FMI. Nota:

27 Guatemala Taxes and other fiscal revenue paid by Marlin Gold Mine, relative to Mining Sector rent. absolute values(us$ millions each year) Rentas mineras totales Impuestos sobre la Renta Regalías Gob/Mun Fuente: Elaboración propia sobre la base de datos de Instituto de Desarrollo Global y Medio Ambiente, FMI y World Bureau of Metal Statistics.

28 Mining : State appropriation of sector rent vs State participation in sector rents, and fiscal contribution of mining as % of total fiscal revenue País State participation (%) Mining sector rent (anual avg. for period) Fiscal contribution Mining Sector (%) total fiscal revenues (anual avg. for period) Before Before Total period Total Period Bolivia (datos CEPAL) (*) (*) (*) 0,9 3,0 2,6 Bolivia (datos PIEB) Bolivia (sin COMIBOL, datos PIEB) Chile (cobre, GMP-10+CODELCO) Chile (CODELCO with dividends) Chile (10 largest private mining GMP-10) Colombia Guatemala Honduras Perú (*) 27.4 (*) Australia (minería metálica) Canadá 38,6 10 largest Mining multinationals Taxes paid globally (% gross rents.) Fuente: Elaborado sobre la base de datos de COMTRADE, Banco mundial y CEPAL. Calculado como el promedio de los porcentajes de participación anuales (utilizando precios nominales). Los datos PIEB para Bolivia se tomaron del estudio de Rolando Jordán (PIEB, 2010). (*) No se pudo calcular el porcentaje de participación en estos períodos por errores estadísticos.

29 Mining fiscal receipts increase in absolute terms. However as % of total estimated Mining Rents their heterogenousbehaviour does not reflect progressive State participation in mining sectorrentsduring the latest price cycle.

30 Mining fiscal receipts increase in absolute terms. However as % of total estimated Mining Rents their heterogenousbehaviour does not reflect progressive State participation in mining sectorrentsduring the latest price cycle. País Renta minera f (% del PIB) g h g h g h i Argentina a Bolivia Minería Privada COMIBOL Brasil Chile (GMP-10+CODELCO+ENAMI) Chile (Codelco + ENAMI) b Chile (GMP-10) b Colombia (Minería + Carbón) e Colombia (Minería) Colombia (Carbón) Ecuador a Guatemala Guyana Honduras a Jamaica a México e Nicaragua a Perú República Dominicana Suriname América Latina a e Australia ( min. metalica) Canadá Estados Unidos Sudáfrica a Ingresos fiscales por Minería (% del PIB) Ingresos fiscales por Minería (% de ingresos fiscales totales) Ingresos fiscales por Minería (% de renta minera) Fuente: CEPAL 2013, Recursos naturales: situación y tendencias para una agenda de desarrollo regional en ALC.Presentado en Reunión CELAC, 27 enero 2014.

31 Mining Sector Oil&Gas sector Rents multiply x 4 State appropriation < 33% (benchmark int l) Guatemala, Honduras < 13% of total rent appropriated by State Private concesion regimes, State participation the exception. Use of traditionalfiscal instruments( corporate income tax and royalties) Need to introduce PROGRESSIVE INSTRUMENTS i.e. Resource Rent Taxes(RRT) etc. Price cyclegeneratesinvestmentboom, growingproduction. Rising energy costs. Price prospects? POLICY CHALLENGE: How to achieve more progressivefiscal regimes? Efficient public investment of resource rents? Rents multiply x 2 State appropriation 45-65% Apprent Regressivity of rent appropriation during boom??? State Oil companies are the rule. Use of progressive fiscal instruments forrentcapture ( windfalltaxes, contratos PSC, participación directa) Price cycle does not generate investment boom Decreasing production/consumption ratios and reserves Rising production costs. POLICY CHALLENGE: How to mobilize required investment to meet growing energydemand??? Regional integration? Shale gas development?

32 PROSPECTS and UNCERTAINTIES: Int l Metal Prices and Energy Costs???? Scenarios: Persistence of commodity price cycle? New scenario determines need to introduce progressive fiscal instruments( RRT, windfall taxation, etc.) and improved tax administration.???

33 Uncertainties 1. Correction of expectations and rationalization of announced investments projects Cost increases, in particular energy costs. Expectations of downward adjustments in world metal prices. Impact of European financial crisis. Increasing number of socio-environmental conflicts. 2. Social impact of increased rents? Earmarked use of Mining and Oil/Gas fiscal receipts? Indirect: Improved fiscal balances enable increased social spending? Indirect: Improved macroeconomic stability, debt reduction? vs. currency appreciation? Increased investment in Mining and Oil/Gas associated with increasing socio/environmental conflicts in the region.

34 Contents 1. Mining sector trends in Latin America Mining sector response to the metals price cycle Mining rents and private investment in exploration and development. 2. State participation in Mining sector Rents during Analysis of State s participation in mining rents. - Resource governance challenges. 3. Resources governance challenges to leverage Mining sector contribution to post-2015 development goals. Need to improve progressiveness during up-cycles. Review and improve existing Mining taxation instruments ( RRT, windfall taxation, avoid fiscal competition through strengthened regional integration) Improvedpublic investmentand use of resourcerents( resourcerentlong term investment and stabilization funds, with specific uses?) Increased transparency and accountability of rent generation and investment. Local development impact and managing of socio-environmental conflicts.

35 Y = αf(k, L, Nnr, Nre, S) WeakSustainabilityCriteria requires non decreasing National Capital in its broadest sense. Y = α[ K + H + Nnr + Nnr+ S ] National Income (welfare) $ H + N + S α technological change resources efficiency time

36 Major regional challenges to strengthen Resources Governance to maximize resource sector s contribution to the post-2015 development agenda. Strengthen State capacity to update existing fiscal regimes in order to achieve more progressive taxation of resource rents, in particularly during upward price cycles. Needforconcertedregional effortamongcountriestoavoidfiscal competition. Institutionalize mechanisms to ensure efficient public investment of resource rent revenues into human capital ( education), infrastructure, technology development and innovation), isolating them from political pressure to use them as current expenditure. Resource rents are not substitutes for national tax regimes. Develop Transparency and public information disclosure mechanisms on Resource Rentrevenuepaymentsand theiruse bygovernments. Develop long-term State Policy for strategic economic diversification and structural change towards gradual decoupling of national dependence of resource sectors. Strengthen State capacity to manage and resolve increasing socio-environmental conflicts related

37 Oil prices rise, but investment in drilling activity falls. Production/consumption ratio and reserves fall. Indice 2000= Oil Price boom, but production costs also rise. ALC Price WTI -- Cost investment --- Costooperation Mundo ALC Mundo ALC Mundo ALC Mundo ALC Mundo World drilling activity rises in response to price boom, not so in LAC ( exceptions Brazil and Colombia) ALC Mundo ALC Mundo ALC Mundo ALC Mundo ALC Mundo ALC Mundo Oil drills in activitiy Upstream investment lag in LAC is worrisome and jeopardizes the region net exporting position as supplier of oil & gas in world markets. Fuentes: Baker and Hughes 2012, BP 2011, AIE 2011, IHS CERA 2012 Nota: Datos sin escala

38 Net Fiscal position has historically been a deficit: -Low saving rate -Low tax burden

39 Back to business as usual after 2009?

40 Lower tax burden relative to other regions. Within Lat. America resource exporters tend to lower tax burdens.

41 Strength and Quality of Fiscal Institutions correlated with performance: State participation in Resource Rents Positive socio-economic and local impact from public investment of resource rents Positive use of resource based Stabilization/Invesment Funds Trinidad & Tobago 2007 National Heritage and Stabilization Fund.

42 Increasing socio-environmental conflicts to project development Economic sector impacted 3%3% 2%2% 90% AGRICULTURA PESCA GANADERIA COMERCIO TURISMO Elaborado con la información del Observatorio de Conflictos Socio-Ambientales en América Latina (OLCA)

43 Renewable energy and Hydroelectric development trends in Latin America and the Caribbean

44 South America( UNASUR ): Renewable Energy shares in 2010 South America World average Hidroelectricity 11% 2% Biomass 17% 8% other renewables (wind, solar) 3% 2% Total renewable 31% 12% Natural gas 24% 23% Oil 41% 33% Coal 3% 26% Total fossil energy 68% 82% Nuclear 1% 6% South America World

45 Hidroelectricity has been loosing share in power generation since the 1990s Participación (%) de la hidro en la oferta total de electricidad en América Latina Source: IEA OECD Stat Source: Own elaboration based on statistical data from SIEE ( OLADE ) and IEA database.

46 Power sector policy reforms undertaken during 1990s have: Reduced the number of Large Hidro Projects( State sponsored) Have favored project economies for smaller, less risky private thermal generation projects CO2/KWh in power generation gr. CO2 / Kwh Post reform 90s?? ALC OECD Europe Source: IEA OECD Stat database. Emissions from fuel combustion 2010 Elaboración: J. Acquatella, H. Altomonte. CEPAL con información de Agencia Internacional de Energía,

47 Natural Resources contribution to LAC regional development agenda: Emphasis in strengthened governance of Resource Sectors.

48 2013 Thank you very much!!!! ANNEXES Jean Acquatella Ph.D. Energy and Natural Resources Unit United Nations ECLAC Economic Commission for Latin America and the Caribbean Santiago, Chile.

49 Increasing socio-environmental conflicts to project development Economic sector impacted 3%3% 2%2% 90% AGRICULTURA PESCA GANADERIA COMERCIO TURISMO Elaborado con la información del Observatorio de Conflictos Socio-Ambientales en América Latina (OLCA)