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Industry and Mining
Division
Industry and Energy Department
Finance and Private Sector Vice Presidency
September 1995
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A. WHAT IS THE PRESENT SITUATION ?
The countries of the Latin America and
Caribbean (LAC) region are liberalizing their economies to encourage domestic
growth and attract foreign investment. To be successful, this process
requires parallel reforms in the civil service, national institutions, and
the legal and fiscal frameworks of each of the countries concerned. As part
of their overall economic reform efforts several countries have taken
initiatives to modernize their mining sectors. The World Bank has provided
support to several countries reforming their mining sectors and has provided
loans and technical assistance credits to five countries in LAC namely, Argentina, Bolivia,
Ecuador, Mexico and Peru for reforms including the
modernization of mining legal and investment regimes along the lines outlined
in the boxes below .
B. WHAT ARE THE CHARACTERISTICS OF LAC MINING LEGAL FRAMEWORKS?
There are three types of mining law regimes in Latin American countries:
administrative, adjudicative and contractual. Mining rights are established
and extinguished by administrative proceedings of the mining ministry in Mexico, Peru
and Brazil; but by judges
through adjudicative proceedings in Bolivia
and Chile.
Contractual regimes prevail in Colombia,
Honduras and Venezuela. In
all the major mining countries the terms and conditions for mining rights are
fixed in the mining law.
Administrative regimes are more responsive to policy changes, require
fewer legal professionals than adjudicative regimes and are consequently
easier to reform. However, it is essential that the institutions responsible
for granting and extinguishing mining rights have no authority to conduct
mining operations themselves Adjudicative regimes, in contrast, have the
attractive quality of a judicial officer authorized to grant and extinguish
mining rights independently of any state mining interests but they require a
strong, independent judiciary not found in most LAC countries.
A significant feature of the Chilean mining law is that it provides for
arbitration by an independent judiciary. Countries with administrative
regimes should also incorporate arbitration mechanisms into their frameworks.
Contractual regimes use contracts to define mining rights and obligations
instead of including them in the mining law. It is better, however, to define
those rights and obligations in the mining law and to supplement the law with
agreements on the essential stabilization terms necessary to attract foreign
investment.
Some regimes, for example Chile
and Peru,
include stabilization agreements which have played a major role in attracting
new investment. Such agreements allow investors to "lock-in"
specified tax, customs and foreign exchange provisions for terms of up to 20
years. The investor is assured of long term fiscal and foreign exchange terms
and in return makes an enforceable commitment to carry out a specified and
verifiable investment program. Stabilization agreements typically have
standard, non-negotiable forms and terms to avoid the possibility or
appearance of special treatment, but contain no tax incentives or
modification of mining rights which might distort investment decisions.
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WHAT ARE THE CHARACTERISTICS OF SUCCESSFUL MINING LEGAL
REGIMES?
Successful mining legal regimes minimize the potential for corruption
and reduce lengthy processing time by eliminating discretion in
implementation of the law. This includes eliminating any requirement for a
mining right applicant to demonstrate either the existence of a
commercially viable deposit, or the applicant's financial and technical
ability to carry out a work program; eliminating or standardizing
work/investment/production requirements; establishing clear procedures for
the issuance of mining title; specifying the obligations of holders of
mining rights and the means of complying with them; and limiting the
grounds for their cancellation. The title holder should have exclusive rights
to explore for, or exploit, all concessionable minerals within a
concession. There is no efficient way of administering multiple concession
rights for district minerals within a single concession area.
Security and Transferability of Title
The successful Latin American Mining law regimes treat security of title as
the top priority. The law should also recognize the right of the title
holder to transfer both exploration and exploitation concessions to another
investor or other third party. This flexibility improves liquidity for
investors, enables them to obtain financing, and is a necessary condition
for the development of an active mineral property market.
Modernizing the Cadaster
Modernization of the mining cadaster is also a key priority, as it is a
pre-requisite for a private investment-driven mining sector. The law should
require that concessions conform to a regular geometric shape, have borders
which run only north-south and east-west, and that they be identified by
their UTM (Mercator Universal Transverse projection) coordinates. The key
legal issue involved is integration of existing concession rights into the
new system so as to minimize potential conflicts and disputes.
Access to Land
A common problem in unreformed mineral law regimes is that huge areas have
been reserved for potential future exploitation by state entities in
perpetuity by government fiat. Mining law reform needs to liberate such
reserves and limit the ability of government to create reserves in the
future.
Non-Discrimination
The mining code should not contain any discriminatory eligibility criteria
for holding of mining rights. Legal provisions which prohibit foreigners
from owning mining titles have the effect of restricting capital formation
in the domestic mining industry. Legal reforms should also ensure that
under the law parastatal mining companies do not receive preferences over
private sector mining companies and investors.
Surface Rentals
Most Mining Codes require the concession holder to make regular payments of
a per hectare fee in order to retain the concession. The best practice is
characterized by having low surface rentals during exploration, when they
constitute a significant share of total cost, and higher rentals during
exploitation in those countries with a two-concession system. Rates should
be set in the mining code or regulations and indexed for inflation. An
alternative is the use of annual minimum work or investment requirements
but these require monitoring and enforcement which many countries are ill-equipped
to provide.
Transparency and Accountability
Licensing of mining concessions must be transparent and accountable. A
mining law should be explicit about the procedures for obtaining,
maintaining and terminating mining rights; specify timeframes within which
applications must be filed and licenses must be issued; provide for notice
periods and an opportunity to be heard before any significant action is
taken; require that all decisions affecting solicited or acquired rights be
in writing; and provide opportunities for administrative and/or judicial
review of decisions.
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WHAT ARE THE CHARACTERISTICS OF SUCCESSFUL MINING
INVESTMENT REGIMES?
Two essential conditions to attract long-term investment in mining are,
first the freedom to export and to sell mineral output at world market
prices without restriction and, second, access to foreign exchange at
market rates. Investors also look for a stable and equitable tax regime
which provides competitive incentives and rewards for investors while
ensuring adequate compensation to the country for the resources extracted.
Countries which have high royalties, import duties or output- or
cost-related taxes will find themselves at a competitive disadvantage in attracting
mining investments compared with countries that emphasize income taxes and
allow early recovery of exploration and capital investments.
Royalties and Output-Related Taxes
In a radical departure from prior practice, Chile,
Mexico and Peru have
eliminated all royalties or production taxes on mineral output. Other
countries with less of a mining tradition will find it necessary to compete
with these royalty-free regimes.
Income and Dividend Taxes
The cumulative effective rate of taxation on corporate income and dividends
paid in the LAC countries ranges from 30% to 42%. Several also impose an
asset tax of 1% or 2% of the value of corporate assets, but there are
usually provisions allowing for offsetting asset tax liability.
Mandatory Profit Sharing
Mandatory profit sharing, which is a feature of the labor legislation of
many LAC countries constitutes an additional "hidden
tax". Countries which impose it should give consideration to capping
the liability, or making it a tax deductible expense, in order to enhance
their competitiveness.
Value Added Tax (VAT)
Value-added tax (VAT) at rates ranging from 10% to 18% is the main
revenue-generating tax in several LAC countries. The tax is payable on
inputs and usually refundable for exporters. The amounts involved are
significant. It is important for countries reforming their investment
frameworks to design an efficient and credible mechanism for fairly and
expeditiously processing VAT refunds or credits for exporting industries
such as mining.
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C. THE REFORM PROCESS - WHAT SHOULD COUNTRIES DO ?
To compare the process of reform of the legal framework for mining, the
Latin American countries can be considered in the following four groupings:
The Reformed Countries - Chile,
Mexico and Peru
Chile, Mexico and Peru have all followed a roughly
similar reform process. In all three, structural macroeconomic reform was
followed by reform of the mining law, regulations and institutions; these
reforms were brought about by strong executive leadership. In each country the
reforms are well advanced. Each has been successful in attracting significant
amounts of foreign investment in the mining sector, as well as seeing
increased activity by domestic investors. The process of mining legal reform
has been enhanced in both Chile
and Peru
by constitutional reforms that strengthen private property rights and other
matters of importance to investors. There are several differences however. Chile and Mexico
adopted entirely new mining laws, while Peru extensively modified its
existing law. Chile and Peru offer further assurances to foreign
investors in the form of stabilization agreements, while Mexico
entered the North American Free Trade Area (NAFTA). Chile's debt-equity swap program and Peru's
privatization program offered special investment opportunities. Overall, the
positive response of foreign investors demonstrates the efficacy of the
comprehensive reform programs in these countries. In Chile, a
mature market for mining properties has developed which is making a
significant contribution to local capital formation and generating
significant taxable capital gains. The key features of the Chilean legal
framework which have enabled this development are: the reliability of the
mining cadaster; security of title and unrestricted transferability of rights
under the Mining Code; and constitutional guarantees of mining property
rights.
The Secondary Reformers -Argentina,
Bolivia, Ecuador and Guyana
Argentina, Bolivia, Ecuador
and Guyana
all implemented structural macroeconomic reforms followed by mining law
reforms in the late 1980's and early 1990's. However. the
reforms have not been as comprehensive as in Chile,
Mexico and Peru, and the
countries have so far achieved only modest success in attracting new foreign
investment. In Argentina,
the reform process has been complicated by differences between the federal
and some of the provincial governments over land tenure and taxation. These
are being resolved through the new mining law and the enabling regulations
which are presently being drafted.
In Bolivia,
the only one with a very long-standing mining tradition, early reform efforts
failed to address the need to radically reduce the size and role of the state
mining company, COMIBOL. Constraints included constitutional and statutory
obstacles to privatization of mines which had been nationalized in 1952; the
lack of an effective mining cadaster; and inadequate security of title under
the Mining Code. Bolivia
is currently considering a new Mining Code which will replace the current
adjudicative regime with an administrative regime.
Both Ecuador and Guyana have
weak institutional and regulatory capabilities. Strengthening of mining
sector regulatory staff, and more effective
supervision of small-scale mining are key priorities in both countries. In
addition, an effective cadastral system needs to be put in place in Ecuador.
The Major Unreformed Countries - Brazil,
Venezuela and Colombia
Brazil, Venezuela and Colombia all have
semi-industrialized economies with extensive infrastructure, a large pool of
skilled technical and professional personnel, and established legal systems.
However, in each case the framework for private investment in the mining
sector needs considerable improvement. The reform efforts of each of these
countries need to be focused on establishing clear and consistent
jurisdiction and authority over mining rights; providing greater security of
title; eliminating discretion in the procedures for granting or canceling
rights; eliminating unnecessary requirements and restrictions on
transferability of mining rights; and creating competitive and stable fiscal
structures.
In Brazil,
a constitutional amendment to remove a prohibition on majority foreign
ownership of mining enterprises has recently been approved. A thorough review
of the legal and institutional framework applicable to mining is now needed.
In Venezuela,
the necessary political leadership for mining reform has been lacking and
much of the mining activity is under the dominance of the parastatal mineral
producer CVG which is a serious disincentive to private investors who are
mostly interested in sole acquisition of mining rights.
Colombia
has established gemstone, nickel and coal mining industries. However, medium
and large scale mining enterprises can only obtain mining rights in the form
of contracts which are more restrictive and of a lesser legal status than the
rights obtainable under the codes of the other LAC countries
. Colombia
could become more attractive for private investment by reforming its Mining
Code and sectoral institutions along the lines of the Mexican and Peruvian
reforms.
The Smaller Countries of Central America and the Caribbean
These countries have geological advantages somewhat similar to those of Mexico, but except for Jamaica,
their legal and institutional frameworks are generally outdated and weak.
Their reforms should focus on removing obstacles to direct foreign investment
and clarifying and simplifying procedures for the acquisition and maintenance
of mining rights. They could also consider legislation to authorize
stabilization agreements along the lines of Chile
and Peru.
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