SANTIAGO, July 8 (Reuters) - Chile's Congress on Thursday rejected a government proposal to revamp mining royalties to help pay for reconstruction after a massive quake, in a major political blow for President Sebastian Pinera.
The proposed change in mining royalties aimed to raise up to $1 billion out of a wider $8.4 billion package to fund rebuilding after the Feb. 27 disaster which killed over 500 people and ravaged industries in south-central Chile.
Pinera will likely be forced to tap copper boom savings held abroad or issue more debt to plug the financing gap, which the government has warned could pressure the peso currency CLP=CL CLP=.
The Harvard-trained conservative could see his image tarnished by the rejection if reconstruction efforts are delayed while people displaced by the earthquake face cold, rainy weather in the south.
"The alternative we have now is not the best for us. The preferred path would have been to tax big mining companies that would have contributed $1 billion for reconstruction," government spokeswoman Ena Von Baer told reporters after the reform was struck down. "The Concertacion (opposition coalition) has turned its back on the quake victims."
The political blow also stoked worries about mining regulations in the world's top copper producer as opposition lawmakers considered the already controversial reforms insufficient.
Mining Minister Laurence Golborne later told Reuters the government has no plans to insist on the royalty overhaul. He said there was no risk of the opposition introducing tougher mining regulations as Chilean law did not allow Congress to introduce bills to change tax codes.
"The president has the last word on it, but as far I understand, this is it," Golborne said. "It is not worth insisting."
The Concertacion coalition has approved all the tax changes proposed in the bill except for the mining royalty increase, even after the government made concessions to seek approval.
The center-left opposition coalition wanted the government to make the short-term royalty increase permanent.
The end of the mining reform could be a bitter-sweet win for global miners like BHP Billiton (BHP.AX) (BLT.L) and Xstrata XTA.L.
While they will be spared paying higher taxes immediately, they could face tougher terms once their royalty contracts expire and need extending by Congress. Most current royalty contracts expire in 2017.
The government wanted to raise royalties by replacing the current fixed rate for a sliding one that varies depending on the companies' margins in exchange for extending a tax freeze for eight years.
The proposal was criticized by mining companies, but industry insiders said it would have had little impact on investment in a country that holds most of the world's copper used in the manufacture of goods ranging from freezers to cars.