Chile's revision of the Constitution will have a great impact on mining investment

I. Constituent Assembly passes proposals that are not conducive to mining investment

On January 31st, 2022, the Environment Committee of Chile's Constituent Assembly, which is mainly controlled by leftists and independents, adopted a standardized public proposal, (Iniciativa Popular de Norma), which calls for the nationalization of lithium and copper mines. The same committee had previously voted to approve another related proposal for the cancellation of mining operations affecting indigenous land. If any is implemented, it will have a huge impact on the Chilean economy, the global market for metal mines, and the transformation of clean energy.

It is conceivable that these two proposals have been attacked by all groups of society. On the one hand, this is not in line with the spirit of "consensus" change in the Constituent Assembly; on the other hand, nationalization means that Chile faces sky-high compensation both domestically and internationally. Tolosa (Toloza), chairman of the Chilean Kadima Party ((Vamos por Chile)), also criticized the proposal as "a violation of international norms and treaties." In fact, he called it "the most unusual thing ever approved at the General Assembly" and called on the next mining minister, Massera Hernando (Marcela Hernando), to comment on the matter. Diego Hern á ndez, president of the National Mining Association (Sociedad Nacional de Miner í a, said the proposal meant legal instability for investors and reprimanded activists in the Constituent Assembly for trying to expropriate the mining industry at "despicable prices".

On February 2, 2020, a proposal to cancel water permits granted over the past four decades was initially adopted by the Environment Committee, which requires mining, agricultural and sanitation companies to apply for temporary permits for the sustainable development of water resources. and protect the rights of indigenous people. This proposal needs to be approved twice by the above-mentioned committee before it can be submitted to the plenary meeting for approval.

Also in early February, a proposal requiring the State to withdraw from ICSID and expired international treaties and trade agreements was supported by a majority of delegates except Chile Progressive and the Chilean Socialist Party (Colectivo Socialista), and was finally adopted by the Environment Committee of the Constituent Assembly.

Of course, whether these influential proposals will eventually succeed and be internalized as part of the new constitution will depend on whether they can finally win the support of the General Assembly, which, even if adopted by the plenary meeting of the Constituent Assembly, will have to be submitted to a referendum in September.

II. Constitutional Assembly

Chile's current political Constitution was promulgated in 1980 and is considered to be the legacy of the (Augusto Pinochet) military regime of Augusto Pinochet. Many Chileans believe that the old constitution has long been fraudulent, giving too much freedom to the market and too much protection of private property, leaving a small number of people to monopolize the dividend of economic growth for a long time. In particular, the education system under the framework of the Constitution is obsolete and corrupt, which allows private universities to pursue profits, which makes the phenomenon of educational injustice more and more serious. The spread of the epidemic has also led to a growing demand for social welfare and security. After two years of social crisis, the revision of the Constitution has finally become a reality. On May 15, 2021, Chile held the election of deputies to the Constituent Assembly, and 155 deputies were elected, with a public participation rate of 42.5%. Unexpectedly, the right-wing conservatives represented by the current president lost. The Chilean Kadima Party won only 37 seats, while the independents became the dark horse, winning 48 seats, almost 1/3 of the total. Separatists and centre-left opposition parties together won 2/3 of the seats and largely controlled the revision of the new constitution. In addition, the existence of half of the women, 17 indigenous representatives and one disabled person is a testament to the unprecedented tolerance of the Constituent Assembly.

Before the formal start of the Constituent Assembly, it had received 77 standardized public proposals and 248 indigenous proposals (Iniciativa de Pueblos Originarios). These proposals will be considered by the committees of the Constituent Assembly, and after the adoption of a simple majority, they will be submitted to the General Assembly for a vote, and after the adoption of a 2/3 majority, the proposals will become part of the proposal for a new constitution, waiting for a referendum in September 2022.

III. Proposals related to mining investment

Judging from the proposals currently published, the following proposals are directly related to mining investment.

(1) "nationalization of large copper, lithium and gold mining enterprises"

Proposal 5.602 "nationalization of large copper, lithium and gold mining enterprises", submitted by the Copper Protection and Restoration Committee (Comit é de Defensa y recuperaci ó n del Cobre)), was considered and adopted by the Environment Committee in January and received a total of 24045 votes before the deadline.

The proposal argues that copper, lithium and gold mines, which are mainly controlled by foreign companies, are rich enough to meet domestic development needs, but enterprises do not pay enough taxes, resulting in the loss of the country's main resources. As a result, it is required to amend the provisions on mining and public interest in the Constitution, and directly nationalize large copper, lithium and gold mining companies with an annual production capacity of more than 36,000 tons in temporary provisions. If the proposal is incorporated into the constitution, the levy will be fully implemented within six months of the promulgation of the new constitution. Under the proposal, nationalized companies can receive book value as of December 31, 2021 as compensation.

Considering that the country has been nationalized, the proposal caused a sensation. Bloomberg also commented a few days ago that the proposal for nationalization is unlikely to fall to the ground. At first glance, the left-wing radical leader Borrick won the election in December, but it was only after his defeat in an earlier vote that he faced a more moderate governing philosophy to defeat the conservative opponent. As a result, Bloomberg believes that the most radical groups in the Constituent Assembly face "moderation" pressure.

Another similar proposal, which is now waiting to be submitted for a vote, has the support of the Chilean Socialist Party (Colectivo Socialista), Chilean Dignity (Chile Digno), the Independence (Independientes No Neutrales) and the wide Front (Frente Amplio), and is likely to be passed. Although the proposal also agrees that "all deposits of metallic and non-metallic minerals, fossil materials and hydrocarbons are absolute, exclusive, inalienable and inviolable public assets", there is no need to nationalize mining enterprises. instead, the original open-ended mining concession was granted a specific period of time and offered a five-year transitional period. Compared with the proposal for nationalization, the proposal is obviously more realistic and more likely to be passed.

(2) abolish water permits

The current Water Code stipulates that the government grants private subjects the right to use water resources through administrative means, which can be circulated in the market. This model has been running for 40 years, but the problem of water shortage in Chile has become increasingly prominent in recent years. In 2021, even 53.2% of cities declared water shortage, and the basic rights of 8.1% of the population were impaired. In the process of changing the constitution, there are at least 12 proposals related to the use of water, most of which are put forward by indigenous people. Among them, Proposition 1594 calls for the protection of salt flats and wetlands near the Andes and the prohibition of development in these areas.

A few days ago, the Environment Committee of the Constituent Assembly considered and adopted a proposal to terminate the right to use water obtained under the Water Code. Under the proposal, mining, agricultural and health companies need to apply for temporary permits, requiring the government to give priority to human water use, the sustainability of water resources and the rights of indigenous peoples when managing water resources. Other non-industrial water users will be compensated within two years. Temporary water permits can be amended or revoked by the relevant authorities.

If the proposal is eventually passed by the Constituent Assembly and incorporated into the constitution, foreign miners will need to apply specifically to the government for temporary water permits instead of buying water permits from the market.

(3) proposal on "safeguarding people's sovereignty in free trade agreements"

In addition to demanding the protection of human rights, the following elements of the proposal have caused great controversy:

1. As soon as the new constitution is promulgated, Chile should immediately withdraw from the ICSID and expired international treaties and free trade agreements.

2. Trade or investment agreements that have been ratified or entered into force and related to the institutions, rights and sovereignty established in the new Constitution shall be reviewed within three years after the promulgation of the Constitution, and citizen participation shall be introduced into the review.

3. It shall be proposed to amend, annul or withdraw from international treaties that contravene the new Constitution within three years after the promulgation of the Constitution.

4. The domestic court is the only court that has jurisdiction over disputes between investors and the State.

If the proposal is finally passed, Chile will apply for withdrawal from the Washington Convention and terminate 23 bilateral investment agreements at the same time. Investments made after the denunciation takes effect and the bilateral agreement is terminated shall no longer be subject to the jurisdiction of ICSID. And the proposal provides that after the entry into force of the new constitution, the Chilean domestic courts are the only courts with jurisdiction over disputes between investors and the State. Therefore, although the Chilean courts are relatively independent, they are likely to fall into national protectionism, which will have a negative impact on investors.

In response, Luis A. (Luis Lara í n Arroyo, a former director of the National Planning Office, criticized the bill as impoverishing Chile. He believes that supporters of the proposal are completely led by left-wing politicians and intellectuals.

IV. Summary

At present, the Constituent Assembly is still in full swing, and proposals are being considered and revised every day. According to the schedule announced by the Constituent Assembly, the final constitutional proposal will be announced in July, and a referendum on whether to pass the constitutional proposal will be held in September. It is suggested that foreign mining investors should keep an eye on the progress of the conference and try their best to make further investment decisions after the new president takes office and the constitutional proposal is put to a referendum.