Things to Know about the Mining Debate in the Chilean Constitutional Convention

Since the social uprising of October 18, 2019, Chile is undergoing a process of major changes in its legal and constitutional framework. To appease the demonstrations and vandalism that brought the social uprising, politicians of most parties signed an agreement on November 2019 to change the current constitution, which was approved in 1980, under the government of General Augusto Pinochet. In July 2021, a 155-member elected body was installed, with the duty of drafting a new constitution. Unlike in the Congress, at the Constitutional Convention (the “Convention”) the Right and Center-Left parties are in minority, and so far, the Communist Party, a large group of extreme-left independents, and indigenous delegates (which had a reserved seat) have prevailed in the discussion.

The draft of the constitution shall be approved or rejected in a national referendum, which will take place on September 4th, 2022. To appear in the constitution, a given proposal need first to be approved in one of the thematic commissions. Once approved, the specific commission must prepare a “final” proposal that will be elevated for approval by the Plenary of the Convention. Such proposal may or may not have elements of the proposals that the same commission had previously approved. Once in the Plenary, a proposal requires a 2/3 majority for approval. After the approval by the Plenary of all the chapters of the new constitution, a harmonization commission will undertake a final review of the constitution, correcting formal inconsistencies and proposing further substantive changes to the Plenary in cases where it finds that there are normative inconsistencies.

Resource Nationalism vs Free Market

Resource nationalism has been in the heart of the Convention, and several proposals that may radically impact the mining industry have been approved by the relevant commissions, mainly by the commission number 5 of “Environment, Rights of Nature, Natural Commons, and Economic Model” (“Commission No 5), or even by the Plenary, but the final discussion has not yet taken place as of this date.

Both the current constitution and our mining laws, encourage and protect private investments as the engine of the mining activity, which is Chile’s most important economic activity. After a nationalization process of the mining industry that took place under the government of Salvador Allende (1970 -1973), the Military Regime that ruled Chile from 1973 to 1990 and were supporter of a free-market economy gave an special protection to mining investors, aiming to attract private investment, specially from foreign investors; and to do that, the constitution and other laws that need a high quorum to be changed, contained a regulation that gives property to the mining concessionaire over its concession (which in turn gives rights to explore and/or extract and appropriate the substances within the concession), and the right to a compensation to be paid before the expropriation.

Expropriation of mining

At the Commission No 5, four different mining-specific proposals presented by delegates were approved: three stated that the mining industry should be nationalized, and a fourth said that radical changes were needed, such as changing the body empowered to grant mining concessions. Indeed, Chile is the only country that the I knows where the mining concessions are granted by the Courts of Justice, prior an objective procedure followed before them, and without decisive intervention of any kind or any other authority or person. This tradition goes back to the XIX century, and the reason why it was maintained in the constitution of 1980 and in the mining code of 1983 was to avoid the discretion and political bias that a body that depends of the administration of the State – such as it is in the rest of the world- may exercise. Thus, the Courts of Justice, an independent body, is where the concessions are requested nowadays.

None of the proposals contained the amount that will cost to the State the implementation of the proposed measures. In particular, the motions that proposed the expropriation did not state neither the amount needed to compensate not the source of such resources. Furthermore, one of the proposals stated that the owners of the mining companies shall not be compensated, but after that sentence stated rules for determining and paying the compensation, which was below the market value and payable in installments in 30 years.

In connection with the expropriation, it is worth to mention that, as per the national laws in force, in such casas the expropriated investor shall be paid before the expropriation and at market value. Furthermore, Chile has international treaties that contains investments provisions with the countries of origin of the most important mining foreign investors, such as Canada, and Australia, which state that expropriation cannot be discriminatory, and in case of expropriation, a prompt, adequate, and effective compensation at the fair market value of the expropriated investment shall be paid. These same treaties have given powers to the ICSID to settle disputes such as the ones that may arose from a nationalization of the investment of a foreign investor.

A radically different mining regime

As the surveys started to show that the new constitution may be rejected in the referendum (something unthinkable a few months ago), the Plenary of the Convention started to reject the most radical proposals. Probably because of that, the same delegates that proposed a nationalization at the Commission No 5, drafted a new proposal that was submited to the Plenary, which does not stated the expropriation, but will be, if approved, a radical shift not only from the constitution and mining laws from the early 80s (currently in force), but from what has been the Chilean mining tradition. That proposal, along with several other matters contained in the motion submitted by the Commission No 5, was rejected by the Plenary, and should be re-submitted soon to be voted again.

Indeed, with the proposal submitted by the Commission No 5 to the Plenary, we can already form an opinion about the mining regulations that will be raised again to the Plenary, and how it will affect mining if approved in that instance. In general, the approved regulations increase the role of the State in mining, while making the rights of individuals precarious, and includes several generic definitions that generate uncertainty as to their concretion in future laws and in the practical application that will be made of them.

Principles of the new mining regime

The first thing that draws attention is the principle that both the exploration and exploitation of mining substances will be subject "to a regulation that considers their finite, non-renewable and intergenerational interest". Agreeing this principle with another that states that the State must set guide mining policy, it is possible to conclude that the State will set extraction quotas, and that neither privates nor the State itself acting through their companies, will be free to decide the methods, times and quantities in the stages of exploration and exploitation. This not only distances us from countries that have more advanced mining, such as Australia and Canada, but also puts at serious risk the contribution of the mining industry to the Chilean economy.

As mentioned, it is established in the proposal that the State must guide the mining policy in all its phases, and must consider "democratic, social and ecological criteria for decision-making”. These concepts are very broad and generate a series of doubts, in particular the concept of "democratic", because although it sounds good, it can lead to a series of practices that threaten the mining industry. Could the inhabitants of a region, for example, vote to completely ban mining in their region? and what would happen to those who already have concessions in place but have not started a project? In short, there are many questions that are open and, being mining an activity that requires large investments and a long time to recover them, uncertainty is the perfect ingredient to scare away investment.

The approved regulations also establish a series of geographical areas in which mining is prohibited, also establishing that the Constitution or future laws – which so far seems that a simple majority would suffice to approve – may include more areas as prohibited. At this point it is important to take into account the impacts of this regulation on present and future mining, which can even lead to the closure of mining operations that currently operate, with the consequent loss of jobs. ?Unfortunately, studies of these impacts have not been presented by those who sponsor this regulation, which should be considered before proposing any regulation because, otherwise, it can be based on unfounded assumptions or mere ideology.

From Judicial Concessions to Administrative Authorizations

A radical change that was approved is to end the current concession regime, to move to one in which administrative authorizations (granted by a body of the State administration), of temporary nature, under the terms and conditions that a future law will establish. It is worth to say that currently the only obligation that the mining concessionaire has in Chile is to pay a relatively small mining fee (“patente minera”) each year. There is no obligation of exploring, exploiting or otherwise working the mining concession.?

The respective article continues expressly indicating that such authorizations do not grant ownership.?This regime is not bad per se, and in fact is similar to that in force in most countries. Unfortunately, until the law that will establish the terms and conditions is issued, we will not know what to expect, adding another factor of uncertainty. Moreover, the context within which this regulation has been proposed is not an environment favorable to mining, and especially to the private initiative.

Minerals and other substances banned from the Private Initiative

Among the substances which cannot be exploited by private individuals but only by the State or its enterprises are lithium, non-metallic minerals, hydrocarbons, and those substances situated in areas which the Constitution and the law consider to be of national interest. ?This provision leaves private individuals totally out with regard to the exploitation of substances that may currently be the subject of a concession, such as non-metallic minerals, or other substances in respect of which the State may grant individuals administrative concessions or special exploration contracts, such as hydrocarbons and lithium. Finally, it establishes that a future law could determine other substances that cannot be exploited by individuals, thus amplifying the uncertainty produced by the other provisions that we have commented, since those individuals who currently have concessions -or authorizations in the future- , which grant them the right to exploit substances, could be prevented from doing so because a future law ?determines that. And in the absence of a special quorum for the approval of such laws (as intended by the Convention), we can assume that occasional majorities within the Congress or the body that replaces it could declare substances as not subject to exploitation by private investors, without further limitation.

The fate of the mining concessions already constituted

A point of vital importance that has not yet been approved to be raised to the plenary is the fate of the mining concessions already constituted. However, considering the initiatives that had been previously approved, it is foreseeable that these concessions will be terminated, with the current concessionaires becoming holders of administrative authorizations, subject to a series of conditions to survive. Equally important is to know the fate of the current concessions for lithium, non-metallic minerals and other substances that would become prohibited to be exploited by privates. Will they be expropriated or will the rights acquired by their owners be respected??It should be recalled that an expropriation or a severe limitation (which could be considered as indirect expropriation) obliges the State to compensate the expropriated person promptly. Needless to say, if that is the case, we are talking about tens of billions of dollars, which could be used for other purposes that have a greater impact on the well-being of Chileans. Likewise, it is necessary to consider that those who exploit these substances today are companies with a great knowledge built over decades, so it would be na?ve to think that the State could exploit them with the same capacity as the current concessionaires.

Impacts on private investors and the Chilean economy

Analysing all this regulation as a whole, it is easy to conclude that it is not intended to promote mining so that it becomes more sustainable and increases its contribution to the progress of the country. The contribution of the mining industry is key to enabling the current administration of President Boric to fulfill its program and to meet the legitimate social demands of the citizens.

It is enough to read the regulations that we are commenting to realize that the delegates who sponsored them think that, weakening the role of the private sector –and reducing mining in general through extraction quotas and other means–, provides better results than encouraging it to invest and move towards a more modern and "green" mining. If the regulations recently approved by the Commission No 5 are approved by the Plenary, achieving a mining totally committed in the long term to the progress and well-being of the surrounding communities, the regions in which the activities are carried out and the country in general, will be only an impossible desire to fulfill.

The future of mining in Chile

The discussion on the future of mining should not be an ideological discussion, but a discussion "with the numbers in sight", analyzing whether the proposed measures achieve the objective that is aimed. Without detracting at all from the role of the State-owned mining companies (Codelco and Enami), which in fact we should strengthen, the great engine of the mining sector since the 90s has been the private investment, specially from foreign companies. Reducing legal certainty, as the recently approved regulations do, will not bring more income or more jobs for Chile, on the contrary, it would decrease them.

Does everything mentioned above imply that changes to mining institutions are not desirable? Of course not. As in any activity, the regulation of mining must evolve. But decisions should be made based on studies of impacts, not ideology. An example is the transition from the current concessions to the proposed administrative authorizations. If the body that will grant them is one of a technical and independent nature, and the terms and conditions of such authorizations are reasonable, like all the rest of the provisions that affect mining, perhaps the investment will not decrease. On the other hand, there is no doubt that this measure entails a diminishing legal certainty for the holders of mining rights, and have studies been carried out comparing the advantages and disadvantages of one system or another? Probably not or, if they were done, they are not cited. For its part, the State has an important role to play, both through its companies, such as Codelco and Enami, and creating the conditions to continue moving towards modern and sustainable mining.

Besides the mining-specific proposals, there are others that will impact the mining industry, such as the recognition of the “Rights of the Nature” (which is only recognized in one country: Ecuador), which was approved by the Plenary, or giving indigenous groups veto powers over local projects, which is still under discussion. Regarding the indigenous rights, the new constitution aims to be one of the most “indigenist” constitution of the world. The scope of the rights and in particular the definition (if any) of what is “indigenous territories” will greatly affect the mining industry, specially in Northern Chile, were most of the mining activity takes place.

If what we are looking for is Chile's progress, mining is our best ally, and we should treat it as such, not as an enemy that must be reduced to a minimum. In this way, we can aspire not only to a more sustainable mining, but also to improve the quality of life of all Chileans – and especially the most vulnerable.