Chilean nationalization of copper
Encyclopedia
The nationalization of the Chilean copper industry commonly described as the Chilenización del cobre
or "Chileanisation of copper
," was the progressive process by which the Chilean government acquired control of the major foreign-owned section of the Chilean copper mining industry. It involved the three huge mines known as 'La Gran Mineria' and three smaller operations. The Chilean owned smaller copper mines were not affected. The process started under the government of President Carlos Ibáñez del Campo
, and culminated during the government of President Salvador Allende
, who completed the nationalization
. This "act of sovereignty" was the espoused basis for a later international economic boycott
, which further isolated Chile from the world economy, worsening the state of political polarization that led to the 1973 Chilean coup d'état.
, El Salvador
, and El Teniente
. Chuquicamata and El Salvador were owned by the Anaconda Copper Company and El Teniente was owned by the Kennecott Copper Corporation. The La Exotica mine, an adjunct of Chuquicamata
, was added to these big mines in 1966.These large mines were mainly self-contained and self-sustaining settlements with their own cities to house their workers, their own water and electrical plants, their own schools, stores, railways, and even in certain cases their own police forces.
Three other mines were eventually nationalized, Cerro de Pasco
's Andina operation, which went to Codelco, and the two mines, Los Bronces and El Soldado, owned by Peñarroya's Disputada de las Condes, which were bought by ENAMI. Evidently these mines did not fit in with ENAMI's plans and Disputada de las Condes was subsequently sold (at a substantial profit) to Exxon Minerals.
signed an agreement with the Anaconda Copper Company (which was afterwards ratified by Congress). In this agreement, the government acquired the 51% of the remaining two major mines (Chuquicamata
and El Salvador
) and also the right for Codelco
to consolidate the international sales of Chilean copper.
This process was known as negotiated nationalization, and was designed to avoid a conflict with international investors (and ultimately with the United States
), and to allow for the acquisition of the technical, financial and marketing knowledge of the multinationals. A similar process was used to acquire a dominant ownership over the rest of the copper industry.
In the agreement, it was established that the Chilean government could buy within the next 13 years (counting from 1970) the remaining 49% of the foreign ownership from the multinational corporations, but only after having paid at least 60% of the current debt due from the purchase of the original 51%. It also fixed a clear formula for the valuation of the assets to be bought, for the liquidation of profits, for the increase of direct investment in new works, and related issues.
In the 1970 presidential election, the outright nationalization without compensation (known as the Chilenization of copper) became one of the basic campaign issues. Two out of the three presidential candidates incorporated the idea into their political platforms, while the third opted for a faster version of the "negotiated nationalization".
After socialist candidate Salvador Allende
won the election, he promised to deal with the issue head-on. In fact, at the beginning of 1971, he sent Congress a project for a constitutional amendment that would allow him to nationalize outright all mines, and to transfer all present and future copper fields to the state. Congress passed this amendment on July 11, 1971, by a unanimous vote, and based on it, on July 16, 1971 law 17.450 was promulgated, and became effective immediately. The event was celebrated as the Day of National Dignity .
In principle, there was complete agreement about the process of nationalization of the mines among all political parties represented in the Chilean Congress, as indicated by the unanimous vote that approved law 17.450. When it came down to the particulars, however, there was much concern about the political use that the Allende administration would make of it. Even so, the bigger concern was for the expected reaction of the U.S. government
.
In October 1971, the General Controller's office handed down the calculations of the indemnizations due, in line with the parameters established by the Constitutional Amendment. According to this document, the American companies were not to receive any compensation for the Chuquicamata
, El Salvador
and El Teniente
mines, and only a very small one for the rest of their properties. The U.S. government reaction was immediate. The United States Department of State
declared: "This serious infraction to international practice can cause damage not only to Chile, but to all other developing countries".
Article 1 of the Chilean Mining Code states that "The State has absolute, exclusive, inalienable and imprescriptible ownership of all mines" but goes on to say that anyone may prospect for and establish concessions or mining rights for the search or mining of substances. It appears that anyone may apply, including boys down to the age of 15 and girls down to the age of 13. As well as the Mining Code, foreign investors have to observe Decree Law No. 600 which deals with foreign investment and investment contracts. This allows tax invaribility for 10 years from start of production, access to the foreign exchange market and the right to return capital actually brought into the country without being taxed. The tax invariability can be extended to 20 years for companies bringing in US$50 million or more. In return for these concessions foreign investors have to pay a combined tax rate of 42% compared with the current 35%. They may change, but once only, to the current mining tax regime but most have opted for the higher tax rate because gives more certainty to financial planning.
On June 16, 2005, Law 20.026 was published in Chile's Official Gazette ("Diario Oficial"). The Law establishes a specific tax on mining activities, which came in force on January 1, 2006 consisting of a sliding scale according to copper production from nothing below 12,000 tonnes p.a. to 5% above 50,000 tonnes p.a. on production in excess of 12,000 tonnes p.a. Foreign companies that signed a DL 600 contract before Dec 1 2004 and are still liable to 42% tax are not affected by this. Companies bringing in US$50 million or more now can be granted invariability of mining taxation but must pay normal income tax. They must also submit their annual financial statements to external audit and to the Securities and Insurance Supervisor as well as their quarterly statements and an annual report on the property.
A fact not widely appreciated is that mining companies are generally granted generous concessions to allow them to recoup their initial capital expenditures because of the very risky nature of mining. This gives rise to a long initial tax free period and the suspicion that they are avoiding tax. The most important of these in Chilean law are organisation and startup expenses, interest expense, technical assistance, tax losses and asset depreciation, which may be accelerated. This explains why it was some years before Escondida started to pay tax.
Spanish language
Spanish , also known as Castilian , is a Romance language in the Ibero-Romance group that evolved from several languages and dialects in central-northern Iberia around the 9th century and gradually spread with the expansion of the Kingdom of Castile into central and southern Iberia during the...
or "Chileanisation of copper
Copper
Copper is a chemical element with the symbol Cu and atomic number 29. It is a ductile metal with very high thermal and electrical conductivity. Pure copper is soft and malleable; an exposed surface has a reddish-orange tarnish...
," was the progressive process by which the Chilean government acquired control of the major foreign-owned section of the Chilean copper mining industry. It involved the three huge mines known as 'La Gran Mineria' and three smaller operations. The Chilean owned smaller copper mines were not affected. The process started under the government of President Carlos Ibáñez del Campo
Carlos Ibáñez del Campo
General Carlos Ibáñez del Campo was a Chilean Army officer and political figure. He served as dictator between 1927 and 1931 and as constitutional President from 1952 to 1958.- The coups of 1924 and 1925 :...
, and culminated during the government of President Salvador Allende
Salvador Allende
Salvador Allende Gossens was a Chilean physician and politician who is generally considered the first democratically elected Marxist to become president of a country in Latin America....
, who completed the nationalization
Nationalization
Nationalisation, also spelled nationalization, is the process of taking an industry or assets into government ownership by a national government or state. Nationalization usually refers to private assets, but may also mean assets owned by lower levels of government, such as municipalities, being...
. This "act of sovereignty" was the espoused basis for a later international economic boycott
Boycott
A boycott is an act of voluntarily abstaining from using, buying, or dealing with a person, organization, or country as an expression of protest, usually for political reasons...
, which further isolated Chile from the world economy, worsening the state of political polarization that led to the 1973 Chilean coup d'état.
The mines involved in the nationalization
By the late 1950s, the three principal copper mines in Chile were: ChuquicamataChuquicamata
Chuquicamata, or "Chuqui" as it is more familiarly known, is by digged volume the biggest open pit copper mine in the world, located in the north of Chile, 215 km northeast of Antofagasta and 1,240 km north of the capital, Santiago...
, El Salvador
El Salvador mine
El Salvador mine is a combined open pit and underground copper mine in Chile, it is owned by the state owned copper mining company Codelco...
, and El Teniente
El Teniente
El Teniente is an underground copper mine in the Chilean commune of Machalí in Cachapoal Province, O'Higgins Region, near the town of Sewell, above mean sea level in the Andes. Mining at El Teniente is reported to have started as early as 1819...
. Chuquicamata and El Salvador were owned by the Anaconda Copper Company and El Teniente was owned by the Kennecott Copper Corporation. The La Exotica mine, an adjunct of Chuquicamata
Chuquicamata
Chuquicamata, or "Chuqui" as it is more familiarly known, is by digged volume the biggest open pit copper mine in the world, located in the north of Chile, 215 km northeast of Antofagasta and 1,240 km north of the capital, Santiago...
, was added to these big mines in 1966.These large mines were mainly self-contained and self-sustaining settlements with their own cities to house their workers, their own water and electrical plants, their own schools, stores, railways, and even in certain cases their own police forces.
Three other mines were eventually nationalized, Cerro de Pasco
Cerro de Pasco
Cerro de Pasco is a city in central Peru. It is the capital of the Pasco region, and an important mining center. It is connected by road and by rail to the city of Lima.- Overview :...
's Andina operation, which went to Codelco, and the two mines, Los Bronces and El Soldado, owned by Peñarroya's Disputada de las Condes, which were bought by ENAMI. Evidently these mines did not fit in with ENAMI's plans and Disputada de las Condes was subsequently sold (at a substantial profit) to Exxon Minerals.
Second stage of nationalization
On June 26, 1969, President Eduardo Frei MontalvaEduardo Frei Montalva
Eduardo Frei Montalva was a Chilean political leader of world stature. In his long political career, he was Minister of Public Works, president of his Christian Democratic Party, senator, President of the Senate, and president of Chile from 1964 to 1970...
signed an agreement with the Anaconda Copper Company (which was afterwards ratified by Congress). In this agreement, the government acquired the 51% of the remaining two major mines (Chuquicamata
Chuquicamata
Chuquicamata, or "Chuqui" as it is more familiarly known, is by digged volume the biggest open pit copper mine in the world, located in the north of Chile, 215 km northeast of Antofagasta and 1,240 km north of the capital, Santiago...
and El Salvador
El Salvador, Chile
El Salvador is a mining town in the commune of Diego de Almagro, Chañaral Province, Atacama Region, Chile. Located at an elevation of more than 2,300 meters in the foothills of the Andes and in the middle of the Atacama Desert, it has a population of approximately 7,000 inhabitants...
) and also the right for Codelco
Codelco
CODELCO is the Chilean state owned copper mining company formed in 1976 from the foreign owned copper companies that were nationalised in 1971. The headquarters are in Santiago and the seven-man board of directors is appointed by the President of the Republic...
to consolidate the international sales of Chilean copper.
This process was known as negotiated nationalization, and was designed to avoid a conflict with international investors (and ultimately with the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
), and to allow for the acquisition of the technical, financial and marketing knowledge of the multinationals. A similar process was used to acquire a dominant ownership over the rest of the copper industry.
In the agreement, it was established that the Chilean government could buy within the next 13 years (counting from 1970) the remaining 49% of the foreign ownership from the multinational corporations, but only after having paid at least 60% of the current debt due from the purchase of the original 51%. It also fixed a clear formula for the valuation of the assets to be bought, for the liquidation of profits, for the increase of direct investment in new works, and related issues.
Third stage of nationalization
The process of "negotiated nationalization" met with vociferous critics from the leftist political parties, and from a section of the President's own Christian Democratic Party. The idea was accused of bowing to American Imperialism, being too slow and too expensive.In the 1970 presidential election, the outright nationalization without compensation (known as the Chilenization of copper) became one of the basic campaign issues. Two out of the three presidential candidates incorporated the idea into their political platforms, while the third opted for a faster version of the "negotiated nationalization".
After socialist candidate Salvador Allende
Salvador Allende
Salvador Allende Gossens was a Chilean physician and politician who is generally considered the first democratically elected Marxist to become president of a country in Latin America....
won the election, he promised to deal with the issue head-on. In fact, at the beginning of 1971, he sent Congress a project for a constitutional amendment that would allow him to nationalize outright all mines, and to transfer all present and future copper fields to the state. Congress passed this amendment on July 11, 1971, by a unanimous vote, and based on it, on July 16, 1971 law 17.450 was promulgated, and became effective immediately. The event was celebrated as the Day of National Dignity .
In principle, there was complete agreement about the process of nationalization of the mines among all political parties represented in the Chilean Congress, as indicated by the unanimous vote that approved law 17.450. When it came down to the particulars, however, there was much concern about the political use that the Allende administration would make of it. Even so, the bigger concern was for the expected reaction of the U.S. government
Federal government of the United States
The federal government of the United States is the national government of the constitutional republic of fifty states that is the United States of America. The federal government comprises three distinct branches of government: a legislative, an executive and a judiciary. These branches and...
.
Compensation
Originally, the expropriation was based on the book value of the properties. Nevertheless, the Allende administration introduced the idea of "excessive profits" into the calculation of indemnization for the mines. This idea was based on the concept that the multinational corporations had reaped profits far in excess of what was considered "normal business practice". The way this was done was by comparing copper profits in Chile with the companies' profits elsewhere in the world. It was calculated that twelve percent was the worldwide profit rate for these companies, and that they had made $774 million above this in Chile from 1955 to 1970: "This deduction exceeded the book value of the companies' properties".In October 1971, the General Controller's office handed down the calculations of the indemnizations due, in line with the parameters established by the Constitutional Amendment. According to this document, the American companies were not to receive any compensation for the Chuquicamata
Chuquicamata
Chuquicamata, or "Chuqui" as it is more familiarly known, is by digged volume the biggest open pit copper mine in the world, located in the north of Chile, 215 km northeast of Antofagasta and 1,240 km north of the capital, Santiago...
, El Salvador
El Salvador, Chile
El Salvador is a mining town in the commune of Diego de Almagro, Chañaral Province, Atacama Region, Chile. Located at an elevation of more than 2,300 meters in the foothills of the Andes and in the middle of the Atacama Desert, it has a population of approximately 7,000 inhabitants...
and El Teniente
El Teniente
El Teniente is an underground copper mine in the Chilean commune of Machalí in Cachapoal Province, O'Higgins Region, near the town of Sewell, above mean sea level in the Andes. Mining at El Teniente is reported to have started as early as 1819...
mines, and only a very small one for the rest of their properties. The U.S. government reaction was immediate. The United States Department of State
United States Department of State
The United States Department of State , is the United States federal executive department responsible for international relations of the United States, equivalent to the foreign ministries of other countries...
declared: "This serious infraction to international practice can cause damage not only to Chile, but to all other developing countries".
Aftermath
The nationalised Chilean mines were kept under state control after the Pinochet's 1973 Chilean coup d'état, despite the junta's pro-U.S. leanings and this is still the case, largely because of public sentiment and because Codelco is a major contributor to the Chilean Exchequer. Codelco pays income tax, all dividends go to the government and it also pays a 10% tax on the export value of copper products and associated byproducts according to Law 13,136.Article 1 of the Chilean Mining Code states that "The State has absolute, exclusive, inalienable and imprescriptible ownership of all mines" but goes on to say that anyone may prospect for and establish concessions or mining rights for the search or mining of substances. It appears that anyone may apply, including boys down to the age of 15 and girls down to the age of 13. As well as the Mining Code, foreign investors have to observe Decree Law No. 600 which deals with foreign investment and investment contracts. This allows tax invaribility for 10 years from start of production, access to the foreign exchange market and the right to return capital actually brought into the country without being taxed. The tax invariability can be extended to 20 years for companies bringing in US$50 million or more. In return for these concessions foreign investors have to pay a combined tax rate of 42% compared with the current 35%. They may change, but once only, to the current mining tax regime but most have opted for the higher tax rate because gives more certainty to financial planning.
On June 16, 2005, Law 20.026 was published in Chile's Official Gazette ("Diario Oficial"). The Law establishes a specific tax on mining activities, which came in force on January 1, 2006 consisting of a sliding scale according to copper production from nothing below 12,000 tonnes p.a. to 5% above 50,000 tonnes p.a. on production in excess of 12,000 tonnes p.a. Foreign companies that signed a DL 600 contract before Dec 1 2004 and are still liable to 42% tax are not affected by this. Companies bringing in US$50 million or more now can be granted invariability of mining taxation but must pay normal income tax. They must also submit their annual financial statements to external audit and to the Securities and Insurance Supervisor as well as their quarterly statements and an annual report on the property.
A fact not widely appreciated is that mining companies are generally granted generous concessions to allow them to recoup their initial capital expenditures because of the very risky nature of mining. This gives rise to a long initial tax free period and the suspicion that they are avoiding tax. The most important of these in Chilean law are organisation and startup expenses, interest expense, technical assistance, tax losses and asset depreciation, which may be accelerated. This explains why it was some years before Escondida started to pay tax.
See also
- NationalizationNationalizationNationalisation, also spelled nationalization, is the process of taking an industry or assets into government ownership by a national government or state. Nationalization usually refers to private assets, but may also mean assets owned by lower levels of government, such as municipalities, being...
- Economic history of ChileEconomic history of ChileThe economy of Chile has shifted substantially over time from the subsistence agriculture practised by its indigenous peoples to an early husbandry-oriented economy and finally to one of mining and agriculture. Chile started to industrialize in the 1930s with the creation of CORFO that established...
- Chile under AllendeChile under AllendeSalvador Allende was the president of Chile from 1970 until 1973, and head of the Popular Unity government; he was the first Marxist ever to be elected to the national presidency of a democracy...
- Chile under PinochetChile under PinochetChile was ruled by a military dictatorship headed by Augusto Pinochet from 1973 when Salvador Allende was overthrown in a coup d'etat until 1990 when the Chilean transition to democracy began. The authoritarian military government was characterized by systematic suppression of political parties and...
- Miracle of ChileMiracle of ChileThe "Miracle of Chile" was a term used by free market Nobel Prize winning economist Milton Friedman to describe liberal and free market reorientation of the economy of Chile in the 1980s, 1990s and the purported benefits of his style of economic liberalism...
- CodelcoCodelcoCODELCO is the Chilean state owned copper mining company formed in 1976 from the foreign owned copper companies that were nationalised in 1971. The headquarters are in Santiago and the seven-man board of directors is appointed by the President of the Republic...