International Investor Chile 2014 by International Investor

CHILE 2014

PACIFIC ALLIANCE

Government Interviews Business Leadersâ&#x20AC;&#x2122; Opinions Key Player Biographies Project Data Sector Reports Market Analysis Roundtable Debates

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CONTENTS CHILE 2014

INTERNATIONAL INVESTOR WOULD LIKE TO THANK ITS KNOWLEDGE PARTNERS:

6 BUSINESS NETWORK: MEET THE LEADERS 10 CHILE FACTS & FIGURES

13 POLITICS & DIPLOMACY 13 OVERVIEW: OPEN TO THE WORLD 16 OPINION: SEBASTIÁN PIÑERA, President of Chile 18 FOCUS: PACIFIC ALLIANCE

The Pacific Alliance agreement between Chile, Colombia, Mexico and Peru, has accepted a new member, Costa Rica. It has great potential if it maintains current momentum and interest.

29 ECONOMY 29 OVERVIEW: EDGING TOWARDS DEVELOPED STATUS 34 ECONOMY IN NUMBERS 36 BUSINESS INTELLIGENCE: FRAUNHOFER

As a result of the efforts to foster innovation, research centres have arrived and will be a valuable component investors should consider in their quest for growth through applied research. 38 FOCUS: CHILE COMMITS TO INNOVATION

Innovation and entrepreneurship are two key factors that underpin economic growth and Chile has made them a focus, adopting a number of policies aimed at stimulating these areas to keep it on a upward trajectory. 41 CARLOS HONORATO, ProChile 42 CARLOS DETTLEFF, Foreign Investment Committee 44 COLIN BECKER, PricewaterhouseCoopers

20 FÉLIX DE VICENTE, Minister of Economy, Development and Tourism 22 INTERNATIONAL VOICE: BARACK OBAMA, President of the United States of America

55 JORGE CLARO, Claro y Asociados 56 INTERNATIONAL VOICE: HIDENORI MURAKAMI, Japanese Ambassador to Chile 57 LUKE Y. MUKAI, Mitsui 58 EDUARDO DE LA MAZA, De la Maza y Asociados

59 BANKING & FINANCE

46 FOCUS: DECREE LAW 600

59 OVERVIEW: STRENGTHENING AND BRANCHING OUT

48 MATÍAS MORI, Foreign Investment Committee

63 RODRIGO VERGARA, Central Bank of Chile

49 ANDRÉS SANTA CRUZ, Confederation for Production and Commerce (CPC)

64 FERNANDO MASSÚ, CorpBanca

50 FOCUS: THE SUCCESS OF THE RETAIL SECTOR

68 FOCUS: A NEW FINANCIAL SERVICES CENTRE

23 PEDRO PABLO ERRÁZURIZ, Minister of Transport and Telecommunications

66 ALBERTO SCHILLING, Banco BICE

Wealth and asset management is growing rapidly in Chile as the developing middle income bracket demand more sophisticated products. With an improved regulatory framework and favourable tax legislation, the industry is looking to become a regional hub.

24 HERNÁN DE SOLMINIHAC, Minister of Mining 25 JORGE BUNSTER, Minister of Energy 26 INTERNATIONAL VOICE: WEN JIABAO, Former Premier of the State Council of the People’s Republic of China 27 LUIS MAYOL, Minister of Agriculture

72 ENERGY 72 ENERGY IN NUMBERS 46

73 OVERVIEW: CLEANER TECHNOLOGIES ON THE RISE

77 ROUNDTABLE: TRANSFORMING CHILE’S ENERGY SECTOR

With a power hungry mining sector, a lack of meaningful power projects being developed and rising energy costs for both industry and consumers, the energy sector is in a state of near crisis. This presents opportunities as well as problems.

120 ROUNDTABLE: EVOLUTION OF THE MINING SECTOR

China’s economic growth has fueled a mining boom. But with cost pressures on all sides and speculation that the copper price ‘super cycle’ may be coming to an end, miners must innovate and evolve in a changing world. 138 BUSINESS INTELLIGENCE: ACCENTURE 141 THOMAS KELLER LIPPOLD, Codelco 142 DIEGO HERNÁNDEZ, Antofagasta Minerals 144 JUAN EDUARDO ERRÁZURIZ, Sigdo Koppers

180 JAVIER BITAR, SAAM Group 181 FOCUS: BUS RAPID TRANSIT 183 ANGEL CABRERA, Empresa Portuaria Iquique 184 ÁLVARO BRUNET, Cámera Marítima y Portuaria de Chile 185 PROJECTS: TRANSPORT

189 TELECOMMUNICATIONS 189 OVERVIEW: GROWTH AND COMPETITION 192 TELECOMMUNICATIONS IN NUMBERS

145 BUSINESS INTELLIGENCE: ANRÍQUEZ NOVOA ABOGADOS

93 IGNACIO CRUZ, Colbún 94 JORGE RODRÍGUEZ GROSSI, Empresa Eléctrica Guacolda 96 PABLO BURGOS, Solarpack

148 MARK BAKER, Sandvik Chile

155 AGRIBUSINESS

102 GREG HOLLAND, British Chilean Chamber of Commerce

155 OVERVIEW: A PILLAR OF ECONOMIC DEVELOPMENT

194 ROBERTO MUÑOZ LAPORTE, Telefónica Chile

105 FOCUS: THE FUTURE OF THE LNG MARKET 108 PROJECTS: ENERGY

111 MINING 111 OVERVIEW: THE BACKBONE OF THE ECONOMY 116 MINING IN NUMBERS 118 BUSINESS INTELLIGENCE: SRK CONSULTING

160 FOCUS: CHILEAN SALMON INDUSTRY 164 PATRICIO CRESPO URETA, Sociedad Nacional de Agricultura 165 RONALD BOWN FERNÁNDEZ, Chilean Fruit Exporters Association (ASOEX) 166 MARÍA EUGENIA WAGNER, Salmon Chile 167 ADOLFO HURTADO, Cono Sur 168 FERNANDO RAGA, CORMA

196 RODRIGO PIZARRO ELISSEGARAY, Internexa Chile 197 ANDREW ZHENG, Huawei Chile 198 NICOLÁS CHIAPPARA, Cisco Systems

199 HUMAN CAPITAL & EDUCATION 199 OVERVIEW: CHALLENGES AND ACCOMPLISHMENTS

After years of success and independence, higher education in Chile is poised for a change in its relationship with the private sector and a period of evolution with a new government entering office.

202 IGNACIO SÁNCHEZ, Pontificia Universidad Católica de Chile

170 PROJECTS: AGRIBUSINESS

204 BERNARDO DOMÍNGUEZ COVARRUBIAS, Duoc UC

175 OVERVIEW: INFRASTRUCTURE CHALLENGES AND PERSPECTIVES IN CHILE 118

195 GERARDO MUÑOZ LOZANO, Claro Chile

169 ANÍBAL ARIZTÍA REYES, Servicio Agrícola y Granadero (SAG)

175 TRANSPORT & LOGISTICS

179 IGNACIO CUETO, LAN Airlines

Deputy Editor Vincent Lebon Regional Editor Jaime Cuomo Sub Editor Nick Howells

Operations Head Raymonde Fraisiers

152 RICARDO CERDÁN, Accenture

100 RUDOLF ARANEDA KAUERT, GasAtacama

104 ANDRÉS KUHLMANN JAHN, Transelec

Editor Thomas Michael Edwards

Sales Consultant James Baron

150 BUSINESS INTELLIGENCE: HIDROMAULE

The agriculture industry relfects the country’s diverse geographic, climate and geological conditions. It has played a key role in the county’s economic success and is now looking to move up the value chain.

Country Manager Ronen van’t Hoog

Pictures Research Jeanne Falies

189

103 FRANCISCO ALLIENDE, Grupo SAESA

Publisher Michele Murzilli

Deputy Production Editor Izabela Austin

147 PABLO ACHURRA FONTAINE, Aramark South America

153 PROJECTS: MINING

98 CARL WEBER, Hidromaule

Publishing Director and Editor-in-Chief Cory D’Abreo

Production and Design Editor Paula Munakova

146 SEBASTIÁN RÍOS, Pucobre 77

Managing Director Ronnie Tracey

205 OVERVIEW: THE GROWING DEMAND FOR HEALTHCARE

Country Office Manager Carolina Vargas del Campo Salinas Photographer Luis Gómez Translation Services Darío Escobar, Gael Vahhab Masrour-Hamadani Circulation Manager Louise Powell This publication is copyright protected. copying any part of International Investor is unlawful without the prior written permission of Capital Knowledge (Hong Kong) Limited. No part of this publication may be reproduced or transmitted in any form or by any means nor held in any information storage or retrieval system. No warranty: No warranty: whilst every reasonable effort has been made to ensure its accuracy, neither Capital Knowledge (Hong Kong) Limited nor any contributor accepts any responsibility or liability for the accuracy of any part of the content in this publication. Readers should also be aware that external contributors may represent firms that may have an interest in companies, funds and/or their securities mentioned in their contributions. No statement in this book is to be construed as a recommendation to buy or sell securities in any entity or enter into or exit an investment of any kind.

208 PROJECTS: HEALTH 209 PROJECTS: TOURISM 212 TOURISM HOTSPOTS 215 HOTEL LISTING

+44 (0)20 7193 2965

info@internationalinvestor.com

business network chile 2014

MEET THE BUSINESS LEADERS

20 Félix de Vicente Minister of Economy, Development and Tourism

49 Andrés Santa Cruz President, Confederation for Production and Commerce (CPC)

6 INTERNATIONAL INVESTOR

Colin Becker Consulting Lead Partner PricewaterhouseCoopers

Sergio del Campo Vice Minister Ministry of Energy

Eduardo de la Maza Partner De la Maza y Asociados

48 Matías Mori Former Executive Vice-President Foreign Investment Committee

57 Luke Y. Mukai President Mitsui

25 Jorge Bunster Minister of Energy

Alberto Schilling Chief Executive Officer Banco BICE

24 Hernán de Solminihac Minister of Mining

Carlos Dettleff Executive Vice-President Foreign Investment Committee

Jorge Claro Founding Partner Claro y Asociados

64 Fernando Massú Chief Executive Officer CorpBanca

Carlos Honorato Director ProChile

ENERGY

27 Luis Mayol Minister of Agriculture

23 Pedro Pablo Errázuriz Minister of Transport and Telecommunications

BANKING & FINANCE

Sebastián Piñera President of Chile

ECONOMY

POLITICS & DIPLOMACY

Gain valuable market intelligence and an understanding of the opinions and business philosophy of those who are shaping the economy. Read International Investor’s interviews with Chile’s business leaders.

78 Marcelo Tokman Former Minister of Energy

Rodrigo Vergara Governor Central Bank of Chile

78 Rodrigo Castillo Executive Director Empresas Eléctricas

chile 2014 business network

78 Carlos Eugenio Finat Díaz Executive Director ACERA

78 René Muga Chief Executive Officer Generadores de Chile

79 Gonzalo Salgado Country Manager Hot Rock Chile

MINING

Francisco Orrego Vice Minister Ministry of Mining

100

122

102

96 Pablo Burgos Chief Executive Officer Solarpack

103 Francisco Alliende Chief Executive Officer Grupo SAESA

123 Jeffrey Dawes President Komatsu Holding Latin America

79 José Ignacio Escobar Chief Executive Officer Mainstream Renewable Power

Jorge Rodríguez Grossi President Empresa Eléctrica Guacolda

Greg Holland Managing Director, British Chilean Chamber of Commerce

122 Jorge Gomez Chief Executive Officer Collahuasi

93 Ignacio Cruz Chief Executive Officer Colbún

Rudolf Araneda Kauert Chief Executive Officer GasAtacama

79 Jorge Rodriguez Ortiz Chief Executive Officer Interchile

79 Francisca Rivero Garay National Representative Fundación Avina

Carl Weber Chief Executive Officer Hidromaule

78 Arturo Errázuriz Executive Director Errázuriz & Asociados

104 Andrés Kuhlmann Jahn Chief Executive Officer Transelec

123 Alejandro Palma Chief Executive Officer SRK Consulting

141 Thomas Keller Lippold Chief Executive Officer Codelco

CHILE 7

business network chile 2014

167 Adolfo Hurtado Chief Executive Officer Cono Sur

168

183

184 Álvaro Brunet Chairman of the Board, Cámera Marítima y Portuaria de Chile

197 Andrew Zheng Chief Executive Officer Huawei Chile

198 Nicolás Chiappara Country Manager Cisco Systems

8 INTERNATIONAL INVESTOR

164

169 Aníbal Ariztía Reyes National Director, Servicio Agrícola y Granadero (SAG)

165 Ronald Bown Fernández President, Chilean Fruit Exporters Association (ASOEX)

194

166 María Eugenia Wagner President Salmon Chile

179

180 Javier Bitar Chief Executive Officer SAAM Group

195 Gerardo Muñoz Lozano Chief Executive Officer Claro Chile

202

147 Pablo Achurra Fontaine President Aramark South America

Ignacio Cueto Chief Executive Officer LAN Airlines

Roberto Muñoz Laporte Chief Executive Officer Telefónica Chile

Ignacio Sánchez Rector, Pontificia Universidad Católica de Chile

146 Sebastián Ríos Chief Executive Officer Pucobre

Patricio Crespo Ureta President Sociedad Nacional de Agricultura

Fernando Raga President CORMA

Angel Cabrera President Empresa Portuaria Iquique

AGRIBUSINESS

152 Ricardo Cerdán Country Managing Director Accenture

TELECOMMUNICATIONS

148 Mark Baker Country Manager Sandvik Chile

145 Laura Novoa Lead Partner Anríquez Novoa Abogados

TRANSPORT & LOGISTICS

144 Juan Eduardo Errázuriz Executive Chairman Sigdo Koppers

HUMAN CAPITAL & EDUCATION

142 Diego Hernández Chief Executive Officer Antofagasta Minerals

196 Rodrigo Pizarro Elissegaray Chief Executive Officer Internexa Chile

204 Bernardo Domínguez Covarrubias Rector Duoc UC

1. All individuals held the positions stated at the time of International Investor’s interviews in Chile. Some may have subsequently left the positions they are said to occupy in this book. 2. International Investor would like to thank all the leaders from government and the business community who have participated in and contributed to our work.

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International Investor is the definitive single reference point of a countryâ&#x20AC;&#x2122;s economy and its government and business leaders. Our insightful interviews with those who are shaping economies and reputable impartial analysis provide our global investor network with valuable market intelligence and an understanding of local business philosophy. www.internationalinvestor.com

at a glance chile 2014

Peru Bolivia

Brazil

Arica

Iquique Calama

Paraguay

Antofagasta

Pacific Ocean

Caldera

Coquimbo

Argentina Valparaíso

Uruguay

Santiago

Concepción

Valdivia

Villarrica

Puerto Montt

A t l a n t i c O c e a n

Falkland Islands

Punta Arenas Tierra Del Fuego

Puerto Williams

10 INTERNATIONAL INVESTOR

chile 2014â&#x20AC;&#x192; at a glance

CHILE: FACTS AND FIGURES ECONOMY OVERVIEW

A t l a n t i c O c e a n

Region:

Latin America & Caribbean

Population:

17,269,525

Life expectancy at birth:

79 years

Population below poverty line:

14.4%

Income category:

High Income

Unemployment:

6.3%

GNI per capita (US$):

14,280

Inflation:

GDP growth:

5.5%

DB 2014 rank:

Exports (US$ in billions):

88.66

Imports (US$ in billions):

70.2

TOPIC RANKINGS DB 2014 Rank

DB 2013 Rank

Change in Rank

Starting a business

Dealing with construction permits

101

-14

Getting electricity

Registering property

-2

Getting credit

-3

Protecting investors

-2

Paying taxes

Trading across borders

-1

Enforcing contracts

No change

Resolving insolvency

102

-4 Source: Doing Business Database, World Bank

STARTING A BUSINESS Indicator

Chile

USA

OECD

Procedures (number)

Time (days)

5.5

5.0

Cost (% of income per capita)

0.7

10.1

4.5

Paid-in minimum capital (% of income per capita)

0.0

13.3 Source: Doing Business Database, World Bank

HOW CHILE AND COMPARATOR ECONOMIES RANK ON THE EASE OF DOING BUSINESS United States

Regional Average (OECD high income)

Chile

Peru

Colombia

43 53

Mexico

116

Brazil

126

Argentina

South Georgia

Rank

185

Source: Doing Business Database, World Bank

CHILE 11

at a glance chile 2014

THE EASE OF STARTING A BUSINESS

THE STRENGTH OF INVESTOR PROTECTION INDEX

United States

Chile

Colombia

Mexico

Peru

48 60

Regional Average (OECD high income) Peru

16 34

Chile Regional Average (OECD high income)

63 79

Colombia

123

Brazil

68 98

Argentina

185

Rank

Brazil 164

Argentina 1

Mexico

Source: Doing Business Database, World Bank

THE EASE OF ENFORCING CONTRACTS United States

Source: Doing Business Database, World Bank

THE EASE OF PAYING TAXES Chile

Regional Average (OECD high income) Argentina

Mexico

United States

Chile

Regional Average (OECD high income)

Colombia 105

Peru

104 118

Mexico 121

Brazil

159

Brazil

185

Rank

153

Argentina 155

Colombia 1

Peru

Source: Doing Business Database, World Bank

THE EASE OF DEALING WITH CONSTRUCTION PERMITS Colombia

Source: Doing Business Database, World Bank

Peru 40 63

Regional Average (OECD high income)

United States

Mexico Chile

117

Peru

Chile

138 150

Mexico 1

185

Rank

107

Argentina 181

Argentina

Brazil

130

Brazil

Colombia Regional Average (OECD high income)

101

THE EASE OF TRADING ACROSS BORDERS

THE EASE OF RESOLVING INSOLVENCY United States

22 31

Chile

40 55

Peru Mexico

Mexico

Regional Average (OECD high income)

Rank

102 110

Peru

129

Argentina

Chile 124

Brazil 1

Colombia

Argentina

Colombia

185

Rank

Source: Doing Business Database, World Bank

United States

185

Rank

THE EASE OF REGISTERING PROPERTY

United States

Regional Average (OECD high income)

185

Rank

135

Brazil 185

Source: Doing Business Database, World Bank

Rank

185

Source: Doing Business Database, World Bank

The charts illustrate a summary of the World Bank’s Doing Business 2014 data for Chile. The first table, on the previous page, lists the overall ‘Ease of Doing Business’ rank (out of 185 economies) and on this page are the rankings by selected topics. Other data on key indicators for each topic and benchmarking against regional and high-income economy (OECD) averages can be found in the Doing Business 2014 database.

12 INTERNATIONAL INVESTOR

politics & diplomacy overview

POLITICS & DIPLOMACY Chile's economy is open to trade and the government rarely intervenes with protectionist measures. Numerous free trade agreements, foreign investment law and tax structure are indicative of a country that wants to attract foreign investment and business, and the economy thrives on the inflow of foreign capital.

OPEN TO THE WORLD regions were created: Arica and Parinacota in the north and the Los Ríos region in the south, bringing the total number of regions to 15. Both regions became operative in October 2007. The regions are divided into a total of 54 provinces, a second-level administrative division, and the provinces are further divided into 346 communes, which are the thirdlevel administrative division and governed by municipalities.

Palacio de La Moneda is the seat of the President of the Republic of Chile

BACKGROUND On September 11, 1973, a military coup headed by General Augusto Pinochet ended the democratically elected Unidad Popular administration led by Salvador Allende (1970−1973). Although undoubtedly a brutal dictator, the influence of Pinochet on the economy of Chile cannot be underestimated. The economy was remodelled from one that was essentially nationalised, protected and industrialised, through import-substitution, into one that favoured free-market, neoliberal policies. The economic reforms were drafted and implemented by a group of technocrats who became known collectively as the Chicago Boys due to their, direct or indirect, association with the Department of Economics at the University of Chicago. With this transformational agenda, and after a period of post-coup military government, a commission was appointed to

work on a new constitution, resulting in the Constitution of 1980, which established a revised presidential system. While the document has been heavily modified at various points since its inception, the 1980 constitution is still in force. The subsequent, post-1990, amendments have established Chile’s institutional democratic credentials. The current administrative divisions of Chile’s territory were established in 1974, when it was divided into and limited to 13 regions, administered on a decentralised basis. The regions established at this time were: Tarapacá, Antofagasta, Atacama, Coquimbo, Valparaíso, Santiago Metropolitan, Libertador General Bernardo O'Higgins, Maule, Bíobío, La Araucanía, Los Lagos, Aysén del General Carlos Ibáñez del Campo, and Magallanes y de la Antártica Chilena. In 2005, the limitation was eliminated by constitutional reform, and in 2006, two new

GOVERNMENT AND REGIONAL ADMINISTRATION Beneath the president, the executive branch in Chile is composed of 16 ministries and four cabinet-level agencies: the Chilean Economic Development Agency (Corfo), the Central Bank, the National Women's Service, and the National Energy Commission. Each minister is appointed exclusively at the president's discretion. The president must be elected by an absolute majority and serves a four-year term without the possibility of immediate re-election. Constitutionally, the president must be a Chilean citizen, born on Chilean territory, who is 35 years old on the day of the election. Government within each region is the responsibility of the intendant (intendente), who is appointed by central government as the presidential representative. Regional government is comprised of the intendant as executive and a regional council, which acts as the executive’s decision-making, nominative, and oversight body. Ministerial regional secretariats support administration, which are decentralised branches of the ministries subordinated to the intendant at a regional level. Each region is divided into provinces and, at a provincial level, the government is run by a governor (gobernador) who is subordinate to the intendant and also appointed by central government. The governor’s office is essentially a decentralised body of the intendant’s office.

CHILE 13

overview politics & diplomacy

Mayors (alcaldes), together with a representative council, form the municipality body and are in charge of municipal administration. The mayor chairs the council, which serves as his decision-making, nominative, and oversight body. Both are elected by popular vote every four years. In turn, each municipality has units to perform its functions, and also has an economic and social council, which is a representative consultative body of the social agencies. THE LEGISLATIVE BRANCH The legislative branch is the National Congress of Chile, which is based in Valparaíso and comprised of a chamber of deputies and a senate. The senate has 48 members who serve eight-year terms. The chamber of deputies has 120 members, who are directly elected for four years. Chile's congressional elections are governed by a binomial system that rewards coalition slates. Each coalition can present two candidates for the two senate and two lower chamber seats of each chamber's electoral district. Typically, the two largest coalitions split the seats in a district. However, if the leading coalition ticket beats the second-place coalition by a margin of more than two-to-one, the winning coalition gains both seats. After the return to a civilian democratic government, political parties began reemerging. Over time, power has been consolidated into two major blocs represented by two major coalitions, the centre-right coalition, known as Alianza, which includes the National Renewal Party (RN) and the Independent Democratic Union Party (UDI), and the centre-left coalition, traditionally known as Concertación, which includes the centrist Christian Democratic Party (PDC), the Social Democratic Radical Party (PRSD), the moderate leftist Party for Democracy (PPD), and the Socialist Party (PS). Since 2013, a new centre-left coalition was establish called the New Majority, which consists of the four main parties of Concertación, but also includes the Communist Party, the Citizen Left party (IC), the Broad Social Movement (MAS) and centreleft independents. THE JUDICIAL BRANCH Chile's judiciary is independent and includes the Supreme Court, a court of appeal, a system of military courts, a constitutional tribunal. The Supreme Court is the highest jurisdictional body in the country and oversees the application of the country’s legislation. It also exercises administrative and disciplinary control over all other courts and judges in Chile. The judges of the Supreme Court are appointed by the president and the decision is

14 INTERNATIONAL INVESTOR

ratified by the senate from lists of candidates provided by the court itself. The courts of appeal, which are in charge of a specific juridical territory, serve as courts of second instance or review to supervise the courts located within their jurisdictions. The Ministry of Justice serves as a liaison between the executive and judicial branches. ECONOMIC IMPACT The current government's major impact on the economy has been to maintain a wealth of economic policies that favour foreign investment and international trade. Chile's economy is open to free trade and the government rarely intervenes with protectionist measures. The foreign investment law and tax structure are indicative of a country that wants to attract foreign investment. The government performs a limited regulatory role with the most regulated areas of the economy being utilities, the banking sector, securities markets and pension funds. Chilean Decree Laws have succeeded in establishing a very favourable investment climate for foreign investors by ensuring they are nearly on a par with Chilean investors. Moreover, administrative procedures related to investment opportunities in Chile have been kept to a minimum. Numerous indicators measured by international agencies suggest that Chile is one of the most stable democratic governments in the region. Thus, most investors feel political risks are much more manageable and predictable than would the case with other Latin American countries. With a well-developed legal system and government support, the economy thrives on the inflow of foreign capital. The government also strongly promotes its export products by offering non-market incentives to exporters, such as simplifying paperwork requirements for new exporters. FOREIGN RELATIONS Chile presents itself to the world as an economy that is open for business. One of the key aspects of this policy is the country’s pursuance of free trade agreements (FTAs). Chile has a greater number of free trade agreements than any other country in the world. It has negotiated globally with countries including China, the U.S., Mexico, Brazil, Australia and Argentina, among others. Consecutive administrations have shown no sign of deviating from this policy and, in October 2013, Chile added to its numerous business treaties by signing an FTA with Thailand. Then, in September 2013, it expanded its existing agreement with Canada. Unquestionably, one of the most important political developments in recent years has

been the signing of the Pacific Alliance. The trade agreement, finalised in April 2012, between Chile, Colombia, Mexico and Peru, created a unified economic bloc for negotiation and trade with other economies. In May 2013, Costa Rica received approval from all founding members to upgrade its status from an observer and candidate to full membership. The basic premise of the agreement is to increase competitiveness by integrating member economies and allowing for the free flow of capital, goods, people and services between member countries. Additionally, another main goal of the alliance is to grow trade with Asia-Pacific countries. With political momentum, a lot of outside interest and the wind in their sails, the development of the Pacific Alliance and its impact on the Chilean economy will be interesting to observe. THE ROAD AHEAD At the time of publication of this edition of International Investor, the Chilean presidential elections have just been decided with the New Majority coalition candidate, Michele Bachelet, winning a runoff vote against Evelyn Matthei, who represented the right wing coalition, Alianza. Bachelet, who previously served as Chile’s president between 2006 and 2010, has promised an ambitious program of reforms during her campaign. The three main pillars of her political program are education reform, tax reform and a new constitution. Thus, Chile has two very interesting development processes to observe in the short and medium term. These being, the impact and progress of the Pacific Alliance agreement, and in what areas, and to what level, will there be a continuity or change in policy from the new president in relation to President Piñera’s administration and the direction he has taken the country over the last four years. International Investor will be following this story as it develops.

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opinion politics & diplomacy

Today, we can start by saying that Chile is growing vigorously. We are very close to achieving full employment. Poverty levels and inequalities are once again decreasing and wages are rising at a healthy rate. All the figures confirm that the quality of education is improving and that crime rates are falling. Chile today offers more incentives for innovation and enterprise and better protection for consumers, workers and the environment than ever before. What is more, in just three years we have rebuilt a large part of what was destroyed by the 2010 earthquake and tsunami. Over the last three years, we have worked hard to lay the foundations and now we can responsibly reap the fruits of our efforts. Respected international organisations such as the United Nations, the OECD and the World Bank have all recognised that Chile is now a better country in which to be born, study, work, set up a business, form a family and grow old.

SEBASTIÁN PIÑERA President of Chile

The United Nations, the OECD and the World Bank have all recognised that Chile is now a better country in which to be born, study, work, set up a business, form a family and grow old

16 INTERNATIONAL INVESTOR

GROWTH, EMPLOYMENT, WAGES AND ENTERPRISE In terms of economic growth, Chile has grown at an average annual rate of 5.8 per cent in the last three years, far exceeding growth during the previous period. This figure is also higher than the Latin American and world growth rates. In fact, Chile is becoming the fastest growing country in the OECD. Our per capita GDP, which was around US$15,000 in 2009, now stands at almost US$20,000. We have created more than 800,000 new jobs, and this has brought us closer to full employment. Over half of these new jobs have benefited women and more than two-thirds of the jobs are permanent, full-time positions with contracts that include health and pension contributions and unemployment benefit. That is to say, these are more stable, better quality jobs. We have also created favourable conditions for over 170,000 new entrepreneurs, generating not only new opportunities but also greater equality. But we are still facing some major challenges. Due to the number of young people entering the workforce, and in order to achieve the same levels of female participation in the workforce as developed countries, we need to create another million jobs before the end of this decade. This will be a challenge for the next Government. In the last three years, wages have increased by 10 per cent in real terms. These increases have been even higher among the most vulnerable groups. According to figures from the Universidad de Chile Employment Survey, the wage gap has been reduced. In addition, the increase in economic growth has generated an additional US$17 billion in tax revenue during these three years, a figure which would previously have taken a decade to achieve. This additional tax revenue has allowed us to reduce taxes for the middle class and small and medium-sized businesses, finance our social program and new infrastructure for development, recover fiscal balance and return foreign savings.

politics & diplomacy opinion

Similarly, we have also laid the foundations to ensure that this growth is sustained and sustainable, by almost tripling the growth of investments, transforming productivity losses into profits, increasing investment in science and technology, promoting innovation and development and implementing educational reform. DEVELOPMENT CHALLENGES We have developed a National Energy Strategy for the next two decades. I would like to focus on two critical aspects, which are electricity generation and transmission. In terms of generation, and in strict accordance with environmental legislation, the Government has approved permits for the construction of around 11,500 megawatts in the last three years, sufficient energy to meet demand for the next decade. However, we have seen an increasing amount of litigation that has even paralysed projects previously approved by the relevant technical organisations. For this reason we have modernised our environmental institutional structure, including the new environmental courts, and we have enacted stricter regulations that meet OECD standards for thermoelectric plants. We have increased investment in transmission from US$100 million a year in the last decade to almost US$900 million in 2012. These works will mean a six-fold increase in the capacity of the transmission system between Santiago and Copiapó and will double the capacity of the Concepción-Santiago system. This will improve energy transmission between power generation plants and the households and industries of Chile. A second challenge for development is water. The lack of investment in water infrastructure, combined with the effects of climate change, have exposed our country to increasingly frequent and severe droughts like the one we are experiencing now. This drought not only affects key sectors of our economy, such as mining and agriculture. It also threatens the water supply for human consumption, particularly in the north of Chile. To counteract this, the entire Coquimbo Region and the municipalities of La Ligua, Petorca and Cabildo in Valparaíso Region have been declared disaster areas; and we have also resumed the construction of large reservoirs, the lack of which explains why in a country with such abundant fresh water as Chile, 84 per cent of it ends up in the sea. Between 2000 and 2011, virtually no new reservoirs were built in our country. Now, we are planning to build 16 reservoirs by 2020 to increase our current water storage capacity by more than 30 per cent. Finally, the third challenge is infrastructure. Chile needs more and better highways, airports and ports. This is why, during our Government, we have spent over US$12 billion on infrastructure for development. We are building 3,513 kilometres of new basic roads. That’s equal to 40 per cent of all the roads that existed when we took office. We are also responding to the dramatic increase in passenger volumes in our airports which, as a result of Chile’s rapid development, have increased from 8 to 24 million in the last ten years. We are working to increase the size of concessionary airports by 30 per cent, with new or remodelled airports in Iquique, Antofagasta, Calama, Temuco and Chiloé, among others. In addition, the tender for the new airport in Santiago will be published this year, which will triple the airport’s current capacity. Another key task has been the enlargement and modernisation of our port system, which has included new port developments in Antofagasta, Iquique, Coquimbo, Valparaíso, San Antonio, Talcahuano, Puerto Montt and Chacabuco. These works will enable us to almost double the capacity of these ports and ensure the growth of our foreign trade. Another important development in these last three years has been the revitalisation of the Concessions System, with investment projects totalling almost US$7 billion during our administration. Among

these are the construction of the Vespucio Oriente highway, for which we will publish the tender in the second half of this year. This will complete Santiago’s Américo Vespucio Ring Road. Another project is the plan for concessionary hospitals. And of course we mustn’t overlook the Chacao Bridge and the Southern Highway. Because a country that wants to be developed cannot leave vast swathes of its territory isolated or poorly connected, as is currently the case with Chiloé and Aysén. MINING Last year the mining sector accounted for 13 per cent of our GDP, 62 per cent of our exports and 25 per cent of our tax revenue. Today we have an investment portfolio of around US$100 billion for the next decade. A quarter of these investments correspond to Codelco, which will consolidate its position as the world’s leading copper producer. To maintain this leadership, Codelco is working on structural projects at many of its mines, including Ministro Hales, Radomiro Tomic II, the New Mine Level at El Teniente, the Chuquicamata Underground project and the expansion of its Andina mine, which in total will produce around two million tonnes of copper, equivalent to one third of Chile’s current production. For these projects to be successful, as well as to ensure Codelco’s strong position and its contribution to the Fiscal Budget, its efficiency and competitiveness need to be substantially improved through a stringent program of cost reductions and emission controls. A CHILE THAT IS INTEGRATED WITH THE WORLD We have continued to develop the successful strategy to insert Chile into international markets that has been adopted by every Government in the last 30 years. A few months ago, new trade agreements came into force with Turkey, Nicaragua and Malaysia and these will soon be joined by agreements with Vietnam, Hong Kong and Thailand. We have also deepened our agreement with the European Union. We continue making progress with the Trans Pacific Partnership (TPP) negotiations, an ambitious integration process aimed at creating the world’s largest free trade area between the major economies on both sides of the Pacific. Then there is the Pacific Alliance, founded by Chile, Colombia, Mexico and Peru. This alliance, which encompasses a combined population of 200 million, one third of Latin America’s GDP and half of the region’s trade, aims to facilitate the free circulation of goods, services, capital and people within the region. This integration effort has not been in vain. In the last three years, our exports have increased 40 per cent, from US$55 billion to almost US$80 billion. And last year Chile was the second highest recipient of direct foreign investment in Latin America after Brazil, with almost US$30 billion. Chile is building an increasingly active presence in the different markets and in political, trade, cultural, scientific and social forums, both regionally and worldwide. This is supported by a foreign policy founded on values and principles that are deeply rooted in the Chilean people, such as unrestricted respect for international law and treaties; the peaceful solution of disputes; non-intervention and the selfdetermination of peoples; fair trade among nations; the promotion of democracy and the defence of human rights at all times, in all places and under all circumstances.

➥ For more information and viewpoints of President Piñera, visit http://www.gob.cl/speeches

CHILE 17

focus politics & diplomacy

The presidents of the four founding states, from left to right: Enrique Peña Nieto, Mexico; Juan Manuel Santos, Colombia; Ollanta Humala, Peru; Sebastián Piñera, Chile

FOCUS: THE PACIFIC ALLIANCE Chile, Colombia, Mexico and Peru are countries with huge potential; each has successfully implemented economic, trade, fiscal and monetary policies. Forming a trade bloc is game changer and the future looks very bright. The Pacific Alliance is an economic and trade integration mechanism. Following a declaration of intent by the four founding member countries of Chile, Colombia, Mexico and Peru in early 2011, the alliance was formerly established via a framework agreement signed on the 6th of June 2012 at the Paranal Observatory In Antofagasta, Chile. In May 2013, Costa Rica received approval to become a permanent member of the bloc and a work group has been set up to facilitate their entry into the alliance. The framework agreement is open, flexible and has pragmatic goals; the main objective is to advance the free movement of goods, services, capital and people. Member countries hope to boost investment among business sectors in the alliance in order to position themselves as an interesting market. It is an ambitious effort, which not only seeks to deepen trade and investment among its members, but also with the rest of the world. ORGANISATION The Council of Ministers is the main entity of the Pacific Alliance, which is composed of the ministers of foreign Affairs and ministers of foreign trade of each member state. The function of the Council of Ministers is to take decisions regarding the implementation of the objectives and specific actions detailed in the framework agreement, as well as the alliance’s presidential declarations. The presidents of each member country agreed to establish a High Level Group (Grupo de Alto Nivel, GAN), attended by deputy ministers of foreign affairs and foreign

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trade, to monitor the progress of the technical groups and evaluate new areas of development. It was also decided that the alliance’s pro tempore presidency will be held successively by each of the parties, in alphabetical order, for annual periods beginning each January. CREDENTIALS AND OBJECTIVES As an economic bloc, the member countries have a total population of over 210 million inhabitants with a GDP per capita of US$13,791. The combined GDP of the four current members is approximately US$2 trillion, which represents a third of total regional GDP. The alliance country’s global trade was worth more than half of the US$1.1 billion total for Latin America and the Caribbean in 2011. Moreover, according to GDP estimates made by the IMF, by 2018, the Pacific Alliance will represent the third largest economy in the world. Since its inception, the bloc has already taken concrete steps to liberalise trade, focusing on openness in relation to foreign investment and integration. Furthermore, the participating countries will minimise their trade tariffs to zero, facilitate production integration and actively promote co-operation between customs authorities, as well as working on interoperability in terms of one-stop shop initiatives for foreign trade. These initiatives will allow swifter businesses within the group and with the rest of the world. The provision of services is also a key component of the scheme. The maritime transport agreement will facilitate co-operation and regional traffic, thus complementing and bolstering existing agreements. Moreover,

politics & diplomacy focus

air services will move toward an open sky policy to expedite the transportation of people and cargo. The Pacific Alliance is much more than a Free Trade Agreement (FTA); it is a space in which integration can be enhanced by way of combined, high-level agreements in the area of trade, as well as promoting the welfare and growth for its member countries. Furthermore, the framework agreement stipulates that the decisions of the Council of Ministers and any other agreements ratified as part of the alliance will not revise or replace the bilateral, regional or multilateral economic, trade and integration agreements in force among the parties. Thus, the Pacific Alliance provides a new integration space aimed towards shaping the process of convergence between existing agreements among member states. Moreover, it provides a new institutional environment for the adoption of initiatives to deepen or complement such agreements, while promoting the region’s insertion into the international economy. The alliance also recognises the importance of private sector involvement and, as a result, created the Pacific Alliance Business Council (CEAP). The council has put forward a number of suggestions to member governments regarding how to proceed. Among these are studies that will expedite proposals on specific topics such as financial integration; harmonisation of tax rules; technical standards in the areas of food, public procurement, drugs and cosmetics; certification and harmonisation of technical regulations, cooperation in education and one-stop shops for foreign trade (VUCE). STOCK EXCHANGE INTEGRATION One project that has been adopted by the Pacific Alliance is the Integrated Latin American Market (MILA). The MILA is a signed agreement between the Stock Exchange of Bogotá, Santiago and Lima, as well as Deceval, DCV and Cavali deposits, which created a regional market to trading variable-yield securities in the three countries. The MILA began operations in May 2011, opening opportunities for investors and intermediaries in the respective countries and enabling them to buy and sell shares from the three stock markets through a local intermediary. This is the first step towards financial integration. Mexico has expressed its intention to join the MILA in 2014 and is pushing through the necessary reforms to allow this to take place. Currently, the market capitalisation of the MILA is approximately US$650 billion and it is the largest Latin American stock exchange by number of issuers. If Mexico joins the MILA, as expected, the market capitalisation will increase to US$1.1 trillion, almost on a par with Brazil’s Bovespa. EXPANSION In terms of expansion, the Pacific Alliance is a non-exclusive integration process that welcomes other economies to the initiative. Since its establishment, it has been gradually integrating countries interested in working on strategic issues in the capacity of observer states. The alliance is an open process in the sense that all countries that share its principles and objectives have the possibility to join as full members, if they accept the agreements and commitments of its founders. In November 2013, the Pacific alliance accepted Germany,

Italy, the Netherlands, the United Kingdom and Switzerland as observer states, bringing the total up to 25 countries. Other countries currently with observer status include: Uruguay, Canada, Guatemala, Panama, Paraguay, Honduras, El Salvador, the U.S., the Dominican Republic, Spain, France, Portugal, Turkey, Japan, China, South Korea, Australia, and New Zealand. CHILE AND THE PACIFIC ALLIANCE For Chile, the Pacific Alliance is a natural progression from the economic opening process that started three decades ago with unilateral tariff reductions; elimination of non-tariff barriers and trade facilitation measures; multilateral participation in the General Agreement on Tariffs and Trade (GATT) and the World Trade Organisation; and through bilateral and regional trade agreements. This economic policy framework has created a network of 22 FTAs with 60 countries that represent 85 per cent of the world GDP and 93 per cent of Chilean export destinations. Additionally, Chile’s participation in the Pacific Alliance is a further step towards consolidating the country’s position in Asia-Pacific markets, to which approximately half of its products are exported. In the last nine years, exports to this region have grown on average 50 per cent more than Chilean exports to the rest of the world. Moreover, four of Chile’s five main trading partners are located in the region. COMPLEMENTARY INTEGRATION The Pacific Alliance has been highly successful in setting policy in many areas that complement economic and commercial issues. For example, tourist visas required by Mexican’s wanting to visit Peru and Colombia have been eliminated; the Student and Academic Mobility Program was founded, which stipulates that each country will grant 100 academic scholarships annually; and the Pacific Alliance Co-operation Fund was established, thus securing resources for co-operation projects aimed at leveraging the advantages of integration. Furthermore, the Pacific Alliance trade promotion agencies have conducted six trade workshops in different countries around the world, and embarked on a series of joint-country presentations at international trade fairs.

The framework agreement is open, flexible and has pragmatic goals; the main objective is to advance the free movement of goods, services, capital and people

FUTURE SCHEDULE OF THE PACIFIC ALLIANCE In terms of future developments, no commercial or economic areas are off limits within the integrating sphere of the Pacific Alliance: pension issues, entrepreneurship and innovation, academic development, energy, mining and infrastructure are all expected to be on the agenda. Projects have already been proposed that aim to strengthen venture capital markets, foster entrepreneurship and innovation, increase tax integration, and develop mining and energy clusters. All of the projects include member and observer countries. Chile, Colombia, Mexico and Peru are countries with huge potential; each has been successful in terms of implementing economic, trade, fiscal and monetary policies. However, as member countries of the Pacific Alliance they will be able to achieve much more and create enhanced development opportunities for their citizens.

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interview politics & diplomacy

FÉLIX DE VICENTE

MINISTER OF ECONOMY, DEVELOPMENT AND TOURISM

INTERNATIONAL INVESTOR: You were appointed as the Economy Minister after leading ProChile, how did your previous position influence your approach to this post? FÉLIX DE VICENTE: My previous position at ProChile was crucial. Firstly, because it gave me a sense and understanding of the importance of working in public service and to value those who deliver hard work for the sake of the country every day. When I took charge of ProChile, I decided to incorporate innovation as a pillar in the various actions the agency was developing at that time. This was reflected in the creation of the program CONTACTChile, a special funding for those businesses and entrepreneurs that incorporate high levels of innovation, with a vision to export products, services or consolidated business models.

We work on the principle that all enterprises that invest in R&D, invest in innovation, resulting in more economic benefits in the long term In addition to supporting the internationalisation capabilities of Chilean SMEs, we launched the Development of Export Capacity program. The objective of this program was to empower all employers in the country that have the desire to open up new markets and help them think about the internationalisation of their products or services. This is why, through ProChile, we supported our SMEs by applying models of training that allowed them to learn about the international process in order to make them sustainable over time. The program was divided into several stages: workshops, exporter coaching and pre-internationalisation. This ensured the SMEs could respond to the main requirements of the interested companies.

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CAREER DEFINING MOMENT

I was student of the current foreign affairs minister, Alfredo Moreno. Shortly after he was offered the post by President Piñera, he called me and asked for my help. This was the most decisive moment of my professional life and marked my start in public service. LESSON IN BUSINESS

My career has always been linked to the private sector, working in different companies. So it has been refreshing to witness first-hand that those who participate in Chilean politics have a legitimate vocation of service and are always looking for the greater good of the country. This speaks a lot for the political maturity of Chile. Furthermore, working at ProChile meant working hand-in-hand with the Ministry of Economy, due the corresponding implementation of the 49 actions of the Competitive Impulses Agenda (Agenda Impulso Competitivo), a set of actions aimed at the promotion of competitiveness in all sectors of our economy. These measures joined the forces of various agencies of government to maximize the efficiency of the use of public resources to increase the image and exporting quality of Chile. We managed to fully achieve our objectives of avoiding redundancies and combined our efforts to promote Chile through the creation of this joint scheme that involved both institutions. This is how Prochile was established, as an institution that coordinates and executes the efforts related to the promotion of Chile abroad through its network of business offices, which is currently composed of 55 offices in more than 40 countries around the world. Ultimately, the work carried out in areas such as innovation, support for SME exporters and the Agenda Impulso Competitivo, were key when undertaking the challenge of leading such an important ministry for the development of Chile.

What efforts has the government made to invest more in research and development (R&D) and to encourage the private sector to increase its development of valueadded products? In 2008, the government passed a law on tax credits for private investment in R&D, but there was still room left for improvement. So, last year, a significant modification to the law was approved, which represented a revolutionary remoulding of the incentives aimed at getting enterprises to invest in R&D. The law became much more flexible, more accessible for SMEs and provided more funds. The result has been much better than we expected and, by the beginning of 2014, we will have certificated approximately five times the projects certificated by the previous law, accounting for almost US$16.6 million. During the period between 2008 and 2012, the projects and contracts certified totalled US$14.4 million. So, in one year, under the new regulatory framework, more projects were certified than in the previous four years. However, our efforts have not just relied on this new law. The budget of CONICYT, the agency in charge of the promotion of science and technology, is the highest in its history. All of this has resulted in a strong drive in the promotion of R&D as source of sustainability for Chile´s economy. We work on the principle that all enterprises that invest in R&D, invest in innovation, resulting in more competitiveness and economic benefits in the long term. What else do you believe needs to be done with regard to SMEs and is this part of a larger plan to modernise Chile’s economy? One of the strategic objectives of the Chilean government´s modernisation agenda is the promotion of innovation and entrepreneurship within the country. With the purpose of simplifying the enterprise creation process, in 2013, we passed a law that allows entrepreneurs to start a business in one day and eliminated the cost, which used to average US$500. This is supported by a web platform providing a simplified system for the creation, modification, transformation, merger, division, closure and dissolution of companies. Since the time the law was enacted and October 2013, more than 12,500 new enterprises have been created under the new law Another important action worth mentioning, which is part of a broader program of initiatives designed to boost Chile’s international competitiveness and support SMEs, is the recent approval of a bill regarding the reorganisation and liquidation of companies and individuals. The new bankruptcy law, a more modern, agile and transparent legal body, will increase both the efficiency in the insolvency process of a company and the recovery rate of

politics & diplomacy interview

creditors; thus it will encourage re-entrepreneurship. This represents a radical renewal of the country’s bankruptcy system. The new law also includes a special chapter on SMEs, which simplifies the liquidation process for companies with sales of less than US$115,000 or with liquidating assets not exceeding US$238,000, a process that will take about seven months. Accordingly, in order to increase SMEs competitiveness, we are focused on improving the quality of human capital through job training, educational reform and the exchange of expertise. Furthermore, we are encouraging investment in innovation in order to increase productivity and added value to the production chain. As I mentioned before, the new R&D Tax Incentive Law, will bolster private investment in R&D. Can you outline how the government is stimulating innovation & entrepreneurship, especially amongst young Chileans, and how are you addressing the issue of the shortage of skilled human capital in Chile? A crucial pillar of our national innovation policy is human capital formation. It is based on a determined intention to improve scholarship and university education, whilst giving a special focus to English language proficiency, the strengthening of technical training and increasing the number of researchers, especially in science and engineering inside the country.

We are encouraging investment in innovation in order to increase productivity and added value to the production chain The key has been to maintain a dual strategy of talent formation and attraction. In terms of talent formation, we have a program called Becas Chile, which is focused on providing scholarships to outstanding students giving them the possibility to continue their studies and develop their knowledge at some of the best universities around the world. The objective is to promote basic and applied research that will produce more academics, skilled workers and professionals, who are not only more productive, but also more creative, innovative and entrepreneurial. As of 2010, 2,922 scholarships have been awarded, allowing the best Chilean researchers to study in one of the 100 best universities in the world. In terms of talent attraction, we can highlight the successful and globally recognised Start-Up Chile program, which attracts the best entrepreneurs around the world to begin their projects in Chile with an initial capital of US$40,000 and a work visa for a year. Since the beginning of the program, SUP Chile entre-

preneurs have raised more than US$32million from all over the world. Furthermore, the ministry’s economic development agency, Corfo, administers special programs that aim at supporting the needs of our researchers, entrepreneurs and companies. These programs generate crossplatform instruments that cover the diverse needs of all sectors of the economy and range from applied research laboratory prototype stages, development of technologies, design and incorporation of new models business to the protection and commercialisation of technologies. Today, Corfo’s innovation department receives almost three times more applications than it did four years ago, with a significant increase in the quality of projects. We can now proudly say that we have been able to support entrepreneurs and innovators from all over the globe. Chile has very unique geographical properties and some of the world’s most attractive tourism locations, how is the Ministry making efforts to strengthen the tourism industry? Currently, tourism accounts for 3.2 per cent of GDP and it is an important source of employment. It is also one of the fastest growing industries in the world and Chile contributes to this trend with great vigour. For this reason, we have established aggressive growth targets for inbound tourism of at least 9.8 per cent per year. Tourism is also a major promoter of environmental conservation, historic heritage and cultural identity of communities. Therefore, through tourism, we can raise awareness of the values that inspire sustainability and convey these to the rest of society. Chile is promoted internationally thanks to a campaign that aims to entice the traveller by portraying the diverse experiences and destinations our country has to offer. The campaign Live the experience! is focused on enjoying our natural landscape and its geographical contrast from the perspective and experiences of the traveller. We have also defined certain markets as priorities for the promotion of tourism, such as Argentina, Brazil, Peru and Colombia in Latin America, and Germany, France, England, and Spain in Europe. In North America, it is the U.S. and Mexico, and in Oceania we are targeting Australia. In all these countries we are executing different promotion strategies, focused on emphasising our cultural heritage and unique natural resources. In early 2013, the government of Chile published its first National Tourism Strategy, which arises from the growing importance tourism represents for the economic development of

One important sphere of Chilean development has been the creation of strong macroeconomic institutions, which help reduce the negative impacts affecting the global economy Chile and the need for a national policy containing a short, medium and long-term vision. The architecture of the National Tourism Strategy 2020 is built upon five pillars: promotion, sustainability, investment and competitiveness, quality and human capital, and market intelligence. Each pillar has a key role in achieving certain objectives and, together, they define our route map for tourism to become more prosperous over the years to come. These pillars make a commitment to the protection of the environment and cultural heritage, community involvement, creating quality jobs, the progress of isolated regions, the recovery of competitiveness, and the offer of quality services, among other challenges. Finally, although the Chilean economy is showing a healthy resilience to the recent slowdown, what is the Ministry of Economy doing to negate its effects? Chile has long been recognised for its openness to international markets; hence, one important sphere of Chilean development has been the creation of strong macroeconomic institutions, which help reduce the negative impacts affecting the global economy. Those tasks not only concern our ministry, but are also part of the whole package of economic policies implemented by our government. Regarding the Ministry of Economy specifically, the Agenda de Impulso Competitivo is our key policy to promote productivity among our industries and create an ecosystem, which fosters fast and consistent growth. It is composed of 60 actions, from which 51 have already been implemented, and 10 more measures to promote investments and other regional measures. We are certain that the risks coming from outside and those which could compromise trade and commerce will be mitigated by the gains in productivity that our economy has made in recent years. In fact, during 2012, our total factor productivity (TFP) was the sole factor that contributed most to the 5.6 per cent of GDP growth. If this trend continues, Chile will stand strongly against the global economic downturn.

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international voice politics & diplomacy

FORGING A STRONGER RELATIONSHIP Barack Obama, President of the United States of America comments on Chile’s economic growth and the Trans-Pacific Partnership

Chile, Colombia, México and Peru are joining together to create not only economic integration, but also educational and scientific exchanges

We’ve got strong relationships throughout the hemisphere, but the relationship between the United States and Chile is as strong and as important as any of the relationships that we have. Chile has been on a remarkable growth trajectory over several decades, and the progress that it’s made in terms of strengthening its economy, pulling people out of poverty, establishing a strong manufacturing and industrial and service base, its strong exports sector are all proof of the talents of the Chilean people but also Chile’s embrace of democracy and human rights and a market economy. And as a consequence, Chile has become not only a leader in the hemisphere but also a leader in the world.  President Piñera’s outstanding leadership has continued and enhanced this process, and he and I have had an excellent relationship in a number of multilateral settings. We had a wide-ranging discussion. Some of the topics were very specific. For example, the process whereby we anticipate Chile being able to achieve membership in the Visa Waiver Program that will facilitate the freer flow of people between our two countries We exchanged on the Trans-Pacific Partnership, a high-standard, high-level trade agreement with the countries of the Asia Pacific region, which is the most dynamic and fastest-growing region of the world. And Chile has been an excellent partner with us in trying to bring this multilateral trade agreement to a close. I congratulated President

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Piñera on the work that Chile is doing in the Pacific Partnership, in which Chile, Colombia, México and Peru are joining together to create not only economic integration, but also educational and scientific exchanges that will not only enhance each member country but also are pointing the way for a model of economic development and growth throughout the region that I think a lot of people are paying attention to.    We also discussed the ways in which the United States and Chile can continue to strengthen its people-to-people exchanges and continue to deepen our cooperation on areas like energy that are so important to the continued prosperity of our people. I think that the relationship between the United States and Chile is extraordinarily strong. I want to thank President Piñera for his friendship and his leadership. I’m confident he’s going to accomplish even more for the Chilean people, and continue to project Chile on the world stage as a very positive force for good.

➥ For more information please go to: www.whitehouse.gov

politics & diplomacy interview

PEDRO PABLO ERRÁZURIZ

MINISTER OF TRANSPORT AND TELECOMMUNICATIONS

INTERNATIONAL INVESTOR: What are the long-term drivers going to be for Chile in terms of infrastructure and mobility? What should investors know about the opportunities for deploying capital in the sector? PEDRO PABLO ERRÁZURIZ: By creating a Transportation Master Plan for each region in the country, we are defining the projects needed to ensure that cities have the necessary infrastructure to provide their people with adequate mobilisation. With these plans, we also hope to encourage the development of public mass transit. In this sector, our country offers large investment opportunities in the short-, mediumand long-term, both in the area of infrastructure development and in the extension of railroad and metro lines, amongst others. In terms of ground transportation, there are roadway infrastructure projects like those for public transportation. Bus fleets also need to be renovated and expanded. Regarding railway infrastructure, investment opportunities range from track construction and rehabilitation to incorporation and renovation of rolling stock. The Metro has new projects planned for the coming years, in addition to the lines that are currently under construction. Another investment area is technology, where we are pushing for the development of Smart Mobility Solutions. For example, we plan to create new transit control centres in addition to projects under development for measurement of travel times. We are open to new ideas that will allow our users to plan their travel more efficiently. What are the driving forces behind the Ports & Shipping Development Plan and why is it vital to the Chilean economy? It is crucial for Chile to have a competitive port infrastructure that can respond to the growing needs of foreign commerce, it is key to the growth of our economy.

CAREER DEFINING MOMENT

One career defining moment has been my move into public service. This has truly been a path of discovery for me. My trips on Transantiago buses, on trains and to different parts of the country have granted me the closeness and empathy necessary to understand people’s needs and expectations and, thereby, understand and suggest solutions that will improve their quality of life. LESSON IN BUSINESS

Contrary to public opinion in Chile, I have found that public service is full of brave and committed individuals who are passionate about what they do. There is a lot of enthusiasm for taking action and creating things that will contribute to people’s quality of life. The Ministry of Transportation and Telecommunication, in particular, has outstanding teams and professionals who are good, committed people seeking out opportunities every day to improve the lives of others. Along these lines, we are working on an enormous project to develop our port infrastructure with bids for terminals in eight of the ten national ports. Upon completion of this program, with a total investment exceeding US$1.8 billion, Chile’s capacity for transferring cargo would increase by 40 million tons. We are also working on a project for a new large-scale port for the central region that should be operative by the middle of the next decade. However, we are also focusing more on the long term. Over the next few weeks, we will present a National Plan for Port Development in which we establish infrastructure requirements for the next 30 years at the national level. This instrument will guide the long-term development of the Chilean port system and include port infrastructure, road accessibility and railroads, in addition to a support infrastructure that the continuously growing regional and domestic economic activity will require.

In terms of domestic rail, what are your thoughts on the future potential of this mode of transport? We are convinced domestic rail transport will play a key role and this government has encouraged the revitalisation of the railways of Chile, encouraging a new business model that focuses mainly on prioritising commuter trains and encouraging the use of trains for cargo transport. Along these lines, we have restored railways to their original fundamental role for development of the country; an alternative which also offers competitive advantages such as less congestion on the highways, less pollution and higher levels of security. To this end, to strengthen the services we are currently offering, we are pushing forward large projects, such as the renovation of rolling stock, track restoration and new station infrastructure. Several such projects have already been carried out in a number of cities. Also, we have projects to create new routes in the near future, like the train that will connect Santiago with Melipilla and the extension of the Biotren from Concepcion to Coronel. As a result, over the last three years, we have seen a 30 per cent increase in the number of passengers using rail services annually, bringing the figure up to 30 million and we hope that once all of the projects underway are up and running this number will triple. Regarding telecommunications, how is the government promoting competition and content provisions through regulatory changes? Since we came to power in government, we have made profound regulatory and legal reforms that have changed the organisational model for the telecommunications industry in Chile. This has required all of the companies to make an unprecedented effort to adapt, create and lead in order to evolve at the same rate as technology and not fall behind as a country. In this way, we have successfully implemented phone number portability, which allows people to change mobile phone companies without losing their cell number and we have gradually eliminated domestic long distance charges from landlines. Additionally, thanks to the opening of telecommunications networks, new competitors have entered the mobile telephone market, increasing competition from three to nine companies and resulting in a significant decrease in the price of communication services. In this context, all reforms associated with technological convergence are focused on eliminating asymmetries between land and mobile lines thereby favouring the development of convergent services, with no territorial restrictions, that have price structures based on multi-service networks.

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interview politics & diplomacy

The solution to this is a combination of politics and companies making some changes to the way they operate. At Chuquicamata, an open pit mine, they are now going underground, to directly source better quality mineral seams. By changing mining methodology we are being more efficient, however, it does require a lot of investment.

HERNÁN DE SOLMINIHAC MINISTER OF MINING

INTERNATIONAL INVESTOR: With a US$ 100 billion of investment planned over the next eight years, what do you believe are the biggest hurdles for growth in the sector? HERNÁN DE SOLMINIHAC: The US$ 100 billion of investment, to be deployed in a relatively short period of time, is roughly the same amount invested in the entire history of the mining sector in Chile. In this regard, there will be challenges in just implementing this level of project investment. However, energy is the biggest challenge; Chile is growing and needs to double its energy matrix capacity every 10 to 12 years. The second challenge is water; mines are developed in the desert and hence have a shortage of water. Thirdly, we need to prepare people to build and operate new project sites, both in terms of numbers and in terms of skills. Productivity costs pose another important challenge, and work is needed to achieve more competitive labour productivity. Lastly, with regards the next generation of mines, we also need to increase the number of areas under exploration. Focusing on human capital, what do you believe the government can do in order to support the requirements of the industry? It is very important to have a sufficient number of trained people, so together with industry and other stakeholders we have made a diagnosis to better understand what types of professionals will be needed for future mining activity. Depending on how many billions of dollars are invested, there is a range of between 44,000 to 75,000 people that will be needed for future project operation. We mostly require technicians; around 83 per cent of human resources needed are technicians, operators and maintenance people. In order to achieve this, we are collaborating with the Ministry of Education and education institutions to better prepare students

24 INTERNATIONAL INVESTOR

CAREER DEFINING MOMENT

Before becoming minister, I was dean of engineering at university where I taught for 30 years. The president asked me to become minister of public works in March 2010. The earthquake happened on February the 27th and we entered the government on March the 11th. That was an important time for me to be in that position and to help our country with reconstruction. LESSON IN BUSINESS

In order to do a good job, you have to think about the people and not yourself. To do a good job in politics is to think about the people that you are working for and strive to achieve the best for them; to be altruistic. towards the end of their education with information on opportunities in the mining sector. We are also working together with the Ministry of Labour, for example, and developing after school programs to train people. This is financed by the private sector; in Chile, it is mandatory that one per cent of wages are reinvested in training. With regards education institutions, they are adjusting their curricula in an attempt to increase the interest in the mining sector, and we are working with technical schools and universities in order to influence their graduate output and the educational process in support of the industry. We’re also making an emphasis on female participation; the mining sector right now employs about 7.4 per cent women. The mine with the highest proportion of women in its labour force has 27 per cent woman, so we have a great opportunity to promote female participation and increase the number of woman working in the mining sector. Another thing to bear in mind is the aging characteristics of our mines. Chuquicamata and El Teniente, for example, are over a hundred years old and their ore grade quality is diminishing.

What effect has such a sophisticated mining sector had on other industries? The mining industry in Chile is world-class and anything that is developed for mining purposes could also have applications in other sectors. In that sense, the mining services cluster can develop products and processes that assist the mining sector in Chile, whilst exporting and growing as an innovative sector in its own right. We encourage this and invest money in support. For instance, the Ministry of Economy makes available funds through Corfo, the development bank. We also approved a tax incentive to do research and development, which allows up to 50 per cent of costs to be recovered. Does the government have any plans regarding water facilitation for the mining sector? Just as we have formulated a national strategy on energy, there is one for water. The first objective of which is to make more efficient use of water. Second is to strengthen the water institutions that we have in Chile. The third point relates to how we can take care of the shortage of water. In this regard, we are working in several areas; one is to improve a numbers of dams and also to store rainwater. Another objective of the plan is to further develop technologies such as filtration and desalination. Mining companies often use of seawater, either directly or after desalination. In the north of Chile we have a shortage of fresh water but we the ocean is nearby. The problem here really is energy. By solving the energy problem, the water issue is resolved, at least for mining purposes. How can government work with mining companies to improve community relations? As a country, we recently changed our environmental policy with a new institution: the Ministry of Environment, where new regulations have been introduced. All new projects need to go through environmental evaluation and part of the process is to communicate and involve local communities situated near areas of planned mining development. We are currently refining guidelines on how to do this consultation with the community. However, we recommend talking with communities as early in the project as possible.

politics & diplomacy interview

JORGE ALBERTO BUNSTER BETTELEY MINISTER OF ENERGY

INTERNATIONAL INVESTOR: Which policy areas will have the largest impact on the Chilean energy sector in the coming years? JORGE ALBERTO BUNSTER BETTELEY: We have recently developed a national energy strategy that we hope will direct the development of the sector for the next 50 years. The strategy was launched in February 2012 and is underpinned by six pillars. The first pillar is energy efficiency, and we have a program going ahead with an important budget and strong government support that aims toward bringing energy efficiency into the national culture. Our objective is to involve the public and businesses in a dialogue about how the country and its citizens can use energy in a more efficient way.

We have recently developed a national energy strategy that we hope will direct the development of the sector for the next 50 years The second pillar is non-conventional renewables. Chile has the potential to make renewables, both conventional and nonconventional, an important part of the energy sector. Today, although non-conventional renewables account for a small share of the matrix, not more than 4.5 per cent, the rate of growth and development in this area is becoming an increasingly important market. We hope to raise the percentage of renewables in the sector to between 10 per cent and 15 per cent by 2025. Accordingly, this will create opportunities for investment. The third pillar is the role of the traditional energies. Here we want to focus on hydroelectricity. Chile has a lot of water and we want to make a concerted effort to increase the use of this resource. However, at the same time, we have to address environmental and community concerns that can

CAREER DEFINING MOMENT

I think when I decided to enter Government office. I had worked all my life in the private sector. Then, three years ago, President Piñera invited me to work in the public sector. I think that was the moment when I began to see my work and my contribution to the country in a different way, and it certainly has been very gratifying. LESSON IN BUSINESS

Always focus on the customer needs, whichever sphere you are working in. In the public sector, this would be the common good of the general population; in the private sector, it would be the real customers of the specific market in which your company works. sometimes make developing these projects problematic. The fourth pillar is transmission. We have a long and narrow country, so transmission is a key aspect in the development of the energy sector. Congress is currently debating how to strengthen this sector and produce a more robust transmission system that would, in turn, make the system more open to the integration of new renewables. There are two projects that are helping us move closer to this goal: “the electric highway” and “the concessions project,” both of which aim toward invigorating the transmission sector. Furthermore, in order to make use of the efficient generation in the north of Chile, we are looking at an interconnection between the North (SING) and Central (SIC) Systems. This pillar is a very important part of the overall strategy and we are putting a lot of effort into moving this forward. The fifth pillar of the strategy is to encourage a more competitive electrical market. Distribution and transmission are often natural monopolies, so it is very important to configure an industry that has lower barriers of entry for the generation and transmission

sectors. We can then create a competitive environment that secures lower prices and provides opportunities for companies to enter the market. The sixth pillar is regional integration. This may be some way off, but our vision is to move the whole region i.e. Argentina, Peru, Bolivia etc. towards a more integrated electrical network. Of course, local integration between the North and the Central systems is part of this, but we are also thinking about network integration on larger scale. The legal system that regulates the electrical sector has been operating for 30 years, so it gives a very stable legal framework within which companies can function. We think there are many opportunities ahead in the energy sector for companies that are already in Chile, or foreign companies that may be looking to invest in the future. What plans do you have to structure the tendering process to allow nonconventional energy providers to compete as the market grows? We think renewables are already competitive. There are projects being built in all non-conventional technology areas: wind, solar, biomass, and hydroelectricity. In wind technology, we have almost 200 megawatts operating, 450 megawatts in construction and an additional 3,000 megawatts approved for construction. We see a ‘take-off’ situation with many of these technologies. One company recently informed us that they intended to build a solar plant with 100 megawatts of capacity, distributing at under US$100 per megawatt. The current high price of energy allows non-conventional providers to be more competitive and that encourages the market to grow. We know that we may still need some initiatives and we are trying to organise a special state subsidy in order to launch these types of projects in the north of Chile. However, we are very cautious not to commit ourselves to large subsidies, as has happened in Europe. Nevertheless, we would like to be able to promote the development of these energies in a competitive and transparent mechanism. Is it possible to create a winning formula between environmental stakeholders, the private sector, and the Government to catalyse large project development? This is a key issue. Citizens are more empowered now than they have ever been and it is easier for people to make their opinions heard. Occasionally though, pressure groups can inhibit the development of good projects and make progress more difficult, but I am sure this problem can be overcome by engaging the population and communicating our ideas clearly.

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international voice politics & diplomacy

A SIGNIFICANT PARTNER Wen Jiabao, Former Premier of the State Council of the People’s Republic of China on relations with the Economic Commission for Latin America and the Caribbean (CELAC)

We should increase high-level contacts, establish various forms of government consultation mechanisms, expand exchanges between legislatures, political parties and local governments, and enhance experience sharing on governance. China proposes to launch a cooperation forum between the two sides as a higher platform for enhancing our overall cooperation. China is a staunch supporter of the efforts of Latin American and Caribbean countries in seeking strength through unity. We would like to set up a regular foreign ministers’ dialogue mechanism with the CELAC Troika and hold the first round of dialogue within this year. We are also ready to explore the possibility of establishing a ChinaCELAC leaders’ meeting mechanism at an appropriate time.

26 INTERNATIONAL INVESTOR

ECONOMIC COOPERATION AND TRADE Second, expand common interests with a focus on economic cooperation and trade. The two sides should oppose trade protectionism, open markets wider to each other, improve the trade mix, enhance customs and quality inspection cooperation, and bring our trade to over US$400 billion in the next five years. We not only import raw materials from this region, but want to buy more manufactured goods and high value-added products so as to achieve balanced and sustainable growth of our trade. Our two sides should step up cooperation in investment and finance. China will initiate a cooperation fund between the two sides. Chinese financial institutions will contribute a first tranche of US$5 billion to the fund, and we welcome the participation of Latin American and Caribbean countries in developing the fund for our joint investment in cooperation projects in manufacturing, high and new technologies, sustainable development and other fields. The China Development Bank will coordinate the efforts in setting up a special loan of US$10 billion to facilitate our cooperation in infrastructure development, including railways, roads, ports, power plants, power grids and telecommunication facilities that are closely linked to production and people’s livelihood. We encourage competitive and reputable Chinese companies to invest in this region to enhance our industrial cooperation. At the same time, we want to explore the possibility of establishing industrial cooperation mechanisms with Latin American and Caribbean countries and this region as a whole to promote closer industrial links and collaboration. China is considering signing currency swap agreements with more Latin American and Caribbean countries, settling bilateral trade with local currencies with them, and establishing more bank branches in each other’s countries. AGRICULTURAL COOPERATION Third, safeguard food security through agricultural cooperation. Latin America and the Caribbean, blessed with fertile land and

favorable weather conditions, has a unique advantage in agricultural production, while China has been a long and stable export market for farm produce from this region. China proposes to launch a China-Latin America and the Caribbean agricultural ministers’ forum and hold the first meeting in China in 2013. We propose to put in place an emergency food reserve of 500,000 tons between the two sides for natural disaster response and humanitarian relief. The Chinese government will contribute US$50 million to set up a special fund for our agricultural cooperation and development. We plan to establish five to eight agricultural research and development centres, agricultural processing demonstration parks and agricultural investment zones in this region. The two sides will exchange 500 agricultural experts and technicians in the next five years and strive to bring our trade in agricultural products to over US$40 billion. CULTURAL EXCHANGES Fourth, enhance people-to-people friendship through cultural exchanges. Both the Chinese and Latin American civilisations are open and inclusive. We should actively promote intercivilisational dialogue, expand cooperation in education, culture, media, sports.The Chinese government supports setting up Chinese cultural centres in this region and will offer 5,000 scholarships to Latin American and Caribbean countries in the next five years. China proposes to launch a scientific and technological innovation forum between the two sides for stronger cooperation in space and aviation, new energy, resources and the environment, ocean, and polar science research. We support the holding of a China-Latin America and the Caribbean young political leaders’ forum to provide more opportunities for youth exchange between the two sides. Both China and Latin American and Caribbean countries have rich tourism resources. It is necessary to put in place a tourism facilitation mechanism between the two sides to promote each other’s tourism resources, and encourage airlines to open more direct flights to facilitate personnel exchanges.

politics & diplomacy interview

LUIS MAYOL

MINISTER OF AGRICULTURE

INTERNATIONAL INVESTOR: Fresh and processed foods and wine exports currently represent 24 per cent of exports and are projected to grow to 35 per cent by 2030. In what ways can Chile improve its competitiveness to drive this increase in trade? LUIS MAYOL: Chile opened its economy to the world over 30 years ago. Since then, an important part of the country’s growth and development has come from interacting with the world market because, even though it has a stable and growing economy, it is still a small economy and would have considerably less opportunity for growth and development than if it did not. An essential starting point for improving the competitiveness of agriculture has to do with water resources. We have made a significant effort and investment in seeking more and better water sources for our agricultural needs. However, this has been increasingly difficult as the water deficit we face each year has become more intense. Through the National Irrigation Commission, we encourage our farmers to use resources efficiently. In addition to this, we are significantly increasing the area of irrigation resulting in improved production efficiency. Compared to 2009, we have increased the investment made for this purpose by almost 150 per cent. That is, we have increased investment from US$58 million in 2009 to US$144 million in 2013. In addition, we are promoting a bill endorsing private investment in irrigation, through which we want to increase the maximum amount of investment, currently about US$1.5 million, to nearly US$11.5 million. This investment will allow the direct participation of water user associations in irrigation projects, it will involve many irrigators and will also mean many other irrigation works can be implemented on a much a wider scale. Another issue has to do with research and development. It is incredibly important to

CAREER DEFINING MOMENT

The main thing in my career was becoming Minister of Agriculture, one of the most important sectors of Chile’s economy. LESSON IN BUSINESS

In politics, it is having persistence, patience and clearly defined objectives. continuously improve the genetic varieties of fruit and vegetables, so that they have better characterisitics. This is then reflected in the quality of the produce and, ultimately, leads to better prices. The National Agricultural Research Institute plays a key role in this. The ministry also facilitates access to relevant information about farming that allows for better decision-making at the time of sowing or planting. This reduces uncertainty and the actual risk of these activities themselves. In terms of international trade, we have many trade agreements with countries around the world and currently our agreements covering more than 70 per cent of the world’s population and more than 90 per cent of the geographical world product. In this sense, we are focused on executing these agreements and having a greater amount of quality products produced in Chile. In addition to this, there is significant demand developing in emerging economies in Asia and Latin America, of which we will look to take advantage. Another important issue is related to the labour skills of the workers. The skills councils for industry that is currently being implemented will mean that we can identify and better address human capital development in order to improve the match between the labour market demand and the supply of education. This should result in an increase in the productivity of workers. Moreover, and also related to human capital, the assimilation of urban labour standards into these predominantly rural economic sectors is

an issue that must be dealt with. This requires discussion and agreement by employers and workers. For example, issues regarding the distribution of daily work periods depending on the season and negotiations regardling mutually agreed working conditions and benefits must be resolved. Through the Chilean Agency for Food Safety (ACHIPIA), which is based in our ministry, we directly advise the President on matters of formulation and implementation of policies and programs related to quality and food safety. In October 2013, President Piñera signed a bill which changed the Ministry of Agriculture into the Ministry of Agriculture, Food, Fishieres and Forestry Resources. This will improve our competitiveness and is a major step towards fulfilling a commitment, even an obligation to Chile, namely to transform it into a global power in agriculture, food, fisheries and forestry. The change will also address the demands of international and local health and safety matters related to food. In this regard, Chile already has a huge advantage because its geographical features are an excellent way of impeding the entry of pests or diseases into our territory. This is coupled with strict control processes enforced by the Agriculture and Livestock Service (SAG), which promotes sanitary interests with particular emphasis on border control with neighbouring countries. It is self evident that when consumers can rely on the quality and health of foods the products can obtain better prices. Which industries within the agriculture sector do you believe deserve the most attention from a foreign direct investment perspective? The development and strengthening of productive activities in Chile, including agriculture, have been mainly driven by both national and international market forces. Therefore, the Chilean government chooses not to promote or encourage specific activities over other alternatives. What we require from the state is to provide a favourable atmosphere for the proper development of investment in all productive sectors. This means, among other things: fostering conditions such as political stability; defending the transparency of internal and external markets; a favourable institutional framework to facilitate and promote exports; low tariffs and a wide network of international treaties that promote contact between investors, exporters and importers; the space for companies to define their own more agile production structure; and updated unilateral protection of any particular subsector. However, we must move towards a more diverse export sector than fruits, vegetables

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interview politics & diplomacy

and timber, which are the ones that currently stand out. This is the reason for our efforts to attract investment to assist in product development and raising food quality to the level recognised by the standards that characterise global demand. Biomass could be a long-term renewable solution to the energy problem in the agriculture industry. What policies have been implemented to ensure investment in this resource? The Chilean government recognises the need to diversify energy that we currently have and that is why, in its National Energy Strategy 2012, it makes a particular point of endorsing non-conventional renewable energies. It also recognises the difficulties that have hindered the realisation of many NCRE projects and proposes courses of action to solve them. The report recommends a bidding mechanism for development of NCRE be implemented. Whereby, in order to attract investors to develop NCRE projects, bids will be held open for NCRE blocks, where participating generators may be awarded a grant from the state to improve their energy sales conditions, defined according to the bids. A geo-referenced platform will be designed that outlines the economic potential for NCRE projects. There will be tools to update information for the public that will guide and facilitate private investment decisions regarding NCRE projects. In terms of promoting and financing projects, there will be a focus on the design and implementation of mechanisms to promote projects and investment in NCRE, which means creating effective hedging instruments like insurance, new credit lines with international financing, feasibility studies, among other economic incentives. There are also a number of strategies regarding technology. Each of the different NCRE technologies presents different obstacles to their development, so the plan stipulates a different strategy for each of the energies: solar, wind, bioenergy, biomass, geothermal, mini-hydro and tidal power. The Ministry of Energy and the Centre for Renewable Energy service encourages the development of NCRE projects of all kinds, using the following methods: endorsement and development of projects, providing useful information, skill education, and the promotion of participation from all stakeholders to promote cooperation. With respect to energy obtained from biomass, the National Institute of Agricultural Development (INDAP) is conducting a new project about digesters for both individual farmers and associations, creating thermal energy and bio-fertilisers for use in family farming. With these policies and programs we

28 INTERNATIONAL INVESTOR

look to increase competitiveness in the industry, reducing production costs, and achieve growth through sustainable and environmentally friendly energy, while diversifying the country’s energy matrix. Please explain how the program for indigenous land development (ILDP) aims to promote growth within agriculture whilst strengthening relations with communities throughout Chile? The delivery program of land to indigenous communities seeks to reimburse the loss which these communities suffered from overlapping domain titles at the beginning of the last century. This is a process that does not interfere with the overall productive sector development as it is limited to very specific geographical areas which, except for some areas in the forestry sector, do not have intensive agricultural activities.

We are promoting a bill endorsing private investment in irrigation, through which we want to increase the maximum amount of investment The indigenous land policy seeks to address the low level of social development of the population living in the region of Araucania and attempts to go beyond the help provided by welfare. In this task, the Ministry of Agriculture provides support to indigenous farmers through a development program specially formulated by INDAP, which as an organisation is dedicated to supporting small-scale agriculture. This initiative complements the actions of the National Indigenous Development Commission, an agency specially formulated to support the nine indigenous groups recognised by the International Labour Organisation and by the Chilean government. How are the issues of hygiene and waste management dealt with within the agricultural sector? Is there an opportunity for innovation and investment? In Chile it is estimated that there are approximately more than 50,000 tonnes of agricultural waste per year from agricultural and agro-industrial activities related to harvesting, pruning, and processing of fruits and vegetables. However, it is possible to see agricultural residues as raw materials that can be reused. For example, waste can be used as an energy source, like ethanol or in biogas generation; it can be used to generate products, such as compost; or the bioactive compounds present in vegetable matter, such as antioxidants, pigments, soluble fibre, essential oils and bio pesticides can be recovered and used accordingly.

The main way to tackle the issue of hygiene and waste management in the agricultural sector in Chile is through the implementation of systems of Good Agricultural Practices (GAPs) and HACCP, particularly in the fruit growing for export sector and, to a lesser extent, in the production of vegetables. The implementation of these systems have been supported by the adoption of Clean Production Agreements (CPA’s), where the private sector is committed to implement and comply with a series of measures related to manufacturing, including measures to improve sanitation and waste management. There is still a lot of room for improvement in these two areas. For example, the main agricultural residue of cereal crops is straw and stubble. These residues are used mainly for livestock (food or bedding for animals) or the straw is incorporated into the soil with the stubble. However, the burning of straw and stubble on the premises is still a common procedure in some regions. In other countries, this kind of waste is used for many different purposes, such as papermaking, in the cultivation of mushrooms, as fuel and as a carbon source for composting residue that is very thick or excessively rich in nitrogen. Thus, there is a tremendous opportunity for innovation and investment in the area of waste product recycling. Furthermore, regarding composting there are many opportunities for innovation and investment, another example is on intensive farms and in greenhouses that grow vegetables and flowers. In many situations, crop residues must be removed before starting the next crop and, in the absence of sufficient time or to avoid phytosanitary risks, the plant debris is stacked outside to facilitate drying and to reduce the volume. These residues could be taken to other less intensive land and incorporated into the soil, be burned for energy, taken to landfills, turned into compost within the grounds or be transferred or sold to composting facilities. These innovative practices to deal with waste are gaining relevance in Chile because they allow for a significant reduction in the volume of waste and are extremely useful in terms of stabilising organic matter and sanitising production by eliminating or reducing pathogens. Finally, liquid waste management, which is regulated in Chile, is the process whereby liquid waste is handled by subjecting it to a biological treatment that consists of four basic steps: separation of solids, extended aerated storage, decanting and purification. It is extremely efficient in the reduction of certain parameters such as pH and suspended solids. Moreover, this treatment yields a final residue that fully complies with applicable environmental regulations and rules.

economy overview

ECONOMY Chile has made enormous progress in the last 30 years. The pro-market, pro-competition principles that informed economic policy have expedited the increase in the country’s GDP per capita to a level that puts Chile on course to become a developed economy.

EDGING TOWARDS DEVELOPED STATUS

Chile is the world’s number one copper producer

During 2013, Chile entered the group of economies classified as high-income by the World Bank. The country’s GDP per capita, measured in purchasing power parity (PPP), tripled between 1985 and 2012 rising from US$6,238 to US$18,211. The inflation rate has been reduced from more than 30 per cent in the mid-1980s to stable range of between 2 and 4 per cent per year. The poverty rate has dropped from 45 per cent in 1987 to 14.4 per cent in 2011, while indigence has been reduced from 17.4 per cent to 2.8 per cent in the same period. Moreover, life expectancy has increased from 71.5 years in 1985 to 79.3 in 2012; a figure that is greater than the life expectancy in the US, Mexico, Thailand and just below the UK, Germany and Korea. Another important indicator of development is the drop in infant mortality rate, which has decreased to eight in every thousand, while the mean years of schooling reached 9.7 years in 2012

THE ECONOMIC AND INSTITUTIONAL FRAMEWORK The two main factors that have facilitated the improvement in economic indicators have been a sound, free market economic framework and institutional stability. However, the improvement has also been achieved as a result of many reforms implemented since the mid-1970s that were focused on key areas, such as the pension system, trade regulations, the liberalisation of financial markets, the independence of the Central Bank and the solvency of the public sector. In the early 1980s, Chile became the first country in the world to phase out a pay-asyou-go pension system and replace it with an individually funded private system run by competing private fund managers. In 2008, some additional reforms were approved, these being: the inclusion of selfemployed workers in the pension system; increased competition among the private

pension fund managers; and the creation of a guaranteed minimum pension for participants who have not accumulated enough assets to fund their pensions. After suffering a deep banking crisis in 1982, Chile introduced major financial reforms through the General Banking Law, which was enacted in 1986. This established the sound, financial regulatory framework that is the core of the Chilean banking system today. Since the minimum capital requirements were set by Basel I in 1988, banking regulation in Chile has progressively adopted a modern risk-management approach. The banking system continues to grow, while maintaining asset quality and adequate capitalisation levels. In its 2013−2014 Global Competitiveness Report, The World Economic Forum ranked Chile 10th among 148 countries regarding the soundness of its banks, with an overall assessment of 6.3 on a scale where 7 relates to a generally healthy banking system with sound balance sheets (see fig.1). Both the pension and the financial reforms have led to a substantial increase in aggregate savings and contributed further to the development of the domestic capital markets. TRADE AND INFLATION Chile is considered to be an open economy and has followed three different strategies to promote commercial integration with the rest of the world. First, a decision was taken to unilaterally reduce the international trade tariff, which is currently operating as flat tariff of 6 per cent. Second, a strong emphasis was put on the signing of free trade agreements (FTAs). As of 2013, Chile has a greater number of FTAs than any other nation and has signed agreements with more than 90 per cent of its trade partners, including Australia, China, India, Japan, Mexico, the U.S., the EU and South Korea.

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overview economy

A STRUCTURED ECONOMY Since 2001, the public sector has followed a structural target rule, which stipulates that public expenditure is determined yearly in the budget law according to long-term revenues, including long-term fiscal revenues from copper, Chile’s main export product. This fiscal rule ensures an increase in fiscal savings in years when the economy expands at a greater rate than the long-term growth rate and when the spot price for copper is larger than the long-term copper price. The key assumptions underlying the trend in GDP growth and the long-term copper price are set following the recommendations of two panels of independent experts. As a result, Chile has built a sovereign fund of almost 8.5 per cent of GDP or US$23 billion (see fig. 2), which may be used in the event of an economic crisis, for example. Indeed, Chile used almost US$9 billion from the sovereign fund during the 2009 financial crisis. The fiscal rule has been institutionalised by the Fiscal Responsibility Law approved in 2006 and is one of the main credibility assets of the country. This law legislated for the creation of two sovereign wealth funds and established the basic institutional framework necessary for their management. The funds effectuated were the Pension Reserve Fund (PRF), created at the end of 2006, and the Economic and Social Stabilisation Fund (ESSF), launched in early 2007. The PRF’s objective is to finance the government’s guarantee regarding the payment

30 INTERNATIONAL INVESTOR

STRENGTHS ■■ Soundness of banking system ■■ Fiscal solvency ■■ Political stability ■■ Independent central bank ■■ Very open economy

WEAKNESSES Large income inequality ■■ Exports still highly concentrated on copper ■■ High energy costs ■■

THREATS Social pressures might affect economic growth ■■ Worldwide economic crises might have a large effect in the country

OPPORTUNITIES ■■ The country will be soon classified as a developed economy ■■ Labour force is becoming more educated

■■

1. SOUNDNESS OF BANKS (RANKING AMONG 148 COUNTRIES)

2. CHILE: SOVEREIGN FUNDS 25

Canada (1)

US$ in billions, December

Finally, it has been participating in a number of multi-lateral agreements. At present, Chile is negotiating the Trans-Pacific Partnership (TPP) with countries such as Australia, Brunei, the U.S., Japan, Malaysia, New Zealand, Singapore, Vietnam, Canada and México. As a result, Chile currently has an effective tariff rate lower than 1 per cent. The Chilean government has long adhered to the importance of economic institutions in terms of economic growth and macroeconomic management. Thus, the Chilean Central Bank has been independent since 1989, monetary policy is determined based on inflation targets and the Chilean peso exchange rate is operated in a floating regime. The inflation rate, which was greater than 30 per cent in 1985 and averaged more than 20 per cent during the 1980s, considerably decreased after 1989, as a response to the new institutional design of the Central Bank. Since 1999, it has fluctuated between figures lower than 4 per cent per year, with the exception of 2007 and 2008, when it increased due to an international food price shock. Currently, the Central Bank inflation target moves between 2 and 4 per cent.

Hong Kong (4) Singapore (5) Australia (9) Chile (10) Brazil (12) Luxembourg (21)

2.5

3.4

7.3

5.9

20.2

11.3

3.8

4.4 15.6

15.0

12.7

13.2

2010

2011

5 0 2008

Costa Rica (24) Mexico (30)

2009

2012 2013 (September)

ESSF: Economic Social Stabilisation Fund PRF: Pension Retirement Fund

Malaysia (40)

Source: Ministry of Finance

India (49) United States (58) France (62)

3. LABOR INCOME, Q5/Q1

China (72) Ecuador (90)

1990-1993

12.6

Argentina (99) Belgium (109)

1994-1999

12.1

2000-2005

12.3

Korea (113) Bolivia (126) Greece (148)

2006-2009

1 - insolvent and may require a government bailout 7 - generally healthy with sound balance sheets Source: World Economic Forum, The Global Competitiveness Report 2013-2014

of future minimum pensions. The PRF’s capital increases each year by an amount equivalent to 0.2 per cent of the previous year’s GDP. If the actual fiscal surplus exceeds 0.2 per cent of GDP, the PRF receives a contribution equivalent to the surplus, up to a maximum of 0.5 per cent of GDP. Thus, the accumulation rule does not depend on the fiscal situation. The Economic and Social Stabilisation Fund is administered to finance fiscal deficits in years of economic crisis or increase fiscal savings in years of extraordinary economic growth. Thus, the ESSF provides fiscal spending stabilisation, since it reduces the dependency on global business cycles and sta-

11.0

2010-2013

9.5

Source: Ministry of Finance

bilises revenue volatility derived from fluctuations of the copper price and other sources. If the fiscal budget surplus is larger than 0.5 per cent of GDP, the ESSF receives the difference between the effective budget surplus and 0.5 per cent of GDP, which corresponds to the contribution to the PRF in that year. Chile was under military dictatorship for 17 years between 1973 and 1989. The post-regime democratic government, which was coalition of parties from the centre and centre-left, ruled for 20 years between 1990 and 2010. In 2010, a right-wing coalition government was elected and, at the end of 2013, the country elected another centre-left coalition.

GAMIO P R O P I E D A D E S REAL ESTATE & CORPORATE RELOCATION INDUSTRIAL COMERCIAL RESIDENCIAL OFICINAS

WWW . GAMIO . CL

TEL.: 2233 8200

overview economy

Notwithstanding this variation, political institutions in Chile have been reasonably stable and have allowed the economy to develop. In fact, between 1990 and 2013, the ruling administration has largely continued the economic policy initiated by the military government. In 2013 Worldwide Governance Indicators, published by the World Bank, Chile ranked 88.2 per cent in the Rule of Law indicator, which captures perceptions of the extent in which agents have confidence in and abide by the rules of society. Percentile ranks indicate the percentage of countries worldwide that rank lower than the country in question. In this particular indicator, Chile is at a similar level to other OECD countries, which average 87.1 per cent, and significantly better than the average of other Latin American countries, which is 51.2 per cent (see sector data pg. 34). Similar results were achieved in the Voice and Accountability indicator, which measures perceptions related to democratic participation and free expression; Government Effectiveness, which measures perceptions related to the quality of public services and policy formation and the independence of the civil service; Regulatory Quality, which measures the perception of the ability of the government to formulate and implement sound policies related to private sector development; and Control of Corruption. However, Chile is in between Latin American and OECD

countries in the Political Stability indicator, which measures perceptions relating to governmental destabilisation. CHILE: RECENT ECONOMIC OVERVIEW Chile’s GDP was US$268.2 billion in 2012 and has a population of 17.46 million individuals. Market-oriented structural reforms have been recognised as fundamental pillars of the socalled golden period of growth in Chile. In fact, economic growth performance from 1986 to 1997 was remarkable, with annual growth in real GDP terms averaging 7.2 per cent. However, the Asian financial crisis in 1998 had a significant impact on Chile and the country’s subsequent performance was less outstanding with average economic growth falling to 3.5 per cent in the period between 1998 and 2009. Chile’s economy has recovered since the 2009 downturn and grew 5.8 per cent on average between 2010 and 2012. It is projected that growth in 2013 will be around 4.5 per cent. MOVING TOWARDS DEVELOPMENT Chile is edging closer to becoming a developed nation. According to the IMF, Chile’s GDP per capita (PPP) in 2012 reached US$18,354, a similar figure to the GDP per capita of Estonia when they were classified as an ‘advanced economy’. Furthermore, the IMF predicts that, by 2018, Chile’s GDP per capita at PPP will have risen to more than US$25,000.

These economic figures were considered by the Organisation for Economic Co-operation and Development (OECD) to be strong enough to invite Chile to become a member country and, in May 2010, it became the first South American country to join the institution. While Chile has consistently improved its GDP per capita in the last 30 years, there is significant income inequality in the country. This is a characteristic of almost all LatinAmerican countries, which had an average income inequality figure, measured by the Gini-index, of 50 per cent in 2012, much larger than OECD country average, which is around 31 per cent (see fig. 4). Some progress has been made in the last few years. According to the OECD, Chile has reduced income inequality considerably especially among young people. In fact, inequality measured by the ratio between the labour income of the richest fifth of population, quintile five (Q5), vis-à-vis the labour income of the poorest fifth, quintile one (Q1), has decreased from a ratio of around 12 between 1990 and 2005 to an average ratio of 9.3 between 2010 and 2012 (see fig. 3). Despite this, income inequality remains a pressing problem, which must be addressed with some urgency. In 2012, exports of goods and services totalled almost US$92 billion, representing 34.2 per cent of GDP, while imports amounted to US$91 billion or 33.9 per cent of GDP.

5. FISCAL REVENUES - PRIVATE MINING COMPANY TAXES + CONTRIBUTION OF CODELCO, % OF GDP

4. INCOME INEQUALITY: GINI-INDEX Dominican Rep.

0.565

10 9

Brazil

0.550

Guatemala

0.547

Columbia

0.525

Chile

0.520

Venezuela

3.1 2.3

0.493

1 0

Argentina

0.492

2006

2007

2008

2009

2010

2011

2012

2013 (p) Source: DIPRES

Maxico

0.456

6. FISCAL REVENUES - NON-MINING FISCAL INCOME, % OF GDP

Bolivia

0.450

Nicaragua

0.443

Ecuador

0.434

El Salvador

0.424

17 16

0.406

Uruguay

0.402

18.5

18.2 17.4

Peru

OECD

4.2

2.5

0.492

0.487

4.4

Honduras

0.485

5.7

Costa Rica

Panama

8.2

0.505

Paraguay

8.4

16.6

16.1

19.0

18.4

17.1

14 12

0.316

11 0.0

0.1

0.2

0.3

0.4

GINI

32 INTERNATIONAL INVESTOR

0.5

0.6

0.7

10 2006

2007

2008

2009

2010

2011

2012

2013 (p) Source: DIPRES

economy overview

7. PUBLIC DEBT: A COMPARISON (2012, % OF GDP) 180 160 140 120 100 80 60 40 20 0 -20 -40

156.9 155.4

84.2

81.9 57.2

71.9

90.2 84.1

103.2

117.4 87.9

123.8 102.3

127.0

111.6

103.2

38.0 10.1

2.5

11.9 -6.7

Estonia

-17.6

Chile

Sweden

Germany

Spain

France Gross

United States

Ireland

Portugal

Italy

Greece

Net

8. SOVEREIGN BOND ISSUANCE (YIELD, %) 11 10 9 8 7 6 5 4

3.89% 3.35%

2002

1990

1970

1930

1929

1928

1926

1924

1921

1911

1909

1896

1893

1887

1873

1866

1822

2011

2.38%

Source: Eurostat, OECD, IMF and MF-Chile

Chile remains in the lead as the world’s number one copper producer and sits on 28 per cent of known global copper reserves. In 2012, the country’s share of the global copper production was 32 per cent. Mining (including copper) represents 13 per cent of Chilean GDP. In terms of Chile’s other economic sectors: industry represents 10 per cent, the services sector, including financial services, housing services and firm services represents 34 per cent; and 8 per cent of GDP is represented by construction. Mining, specifically copper, is Chile’s main export product by a fair margin and amounted to US$42 billion in 2012, representing almost 45 per cent of the country’s exports of goods and services. Chile exports its products to a diverse range of countries and geographical locations around the globe, nearly 50 per cent of Chilean exports go to Asian countries and approximately 30 per cent go to the U.S. and the European Union. Interestingly, only 17.5 per cent of its exports are to Latin American countries (see sector data pg. 35). A potential source of economic vulnerability is related to Chile’s dependence on copper; however, that dependence has decreased in the last 20 years. The commodity accounted for 75.5 per cent of total goods

exports in 1970, but this figure had decreased to 53.5 per cent by 2012. Notwithstanding, copper fiscal revenues are vitally important for the Chilean economy. This revenue consists of corporate tax from mining, royalty on mining, the additional tax on capital if dividends are paid to nonresidents, and the dividends paid by the stateowned mining company, Codelco. Clearly, this revenue is affected by fluctuations in the copper price. For example, copper fiscal revenues represented more than 8 per cent of GDP in 2006 and 2007, when the copper price increased significantly. However, in 2013, they accounted for just 2.3 per cent of GDP (see fig. 5). This is offset by the structural target rule making the public sector less vulnerable to a copper price downturn. In addition, Chile has consistently increased fiscal revenues from the non-mining sector, which have risen from 16.1 per cent of GDP in 2006 to a projected 18.4 per cent of GDP in 2013 (see fig. 6). Sound fiscal management decisions have provided the country with an enviable public debt position. In gross terms, public debt accounted for 11.9 per cent of GDP, while in net terms, or debt less assets, Chile’s public debt was negative, indicating that the country is a net creditor with assets larger than debt by almost 7 per cent of GDP. As

figure 7 shows, compared to other world economies, this is an exceptionally strong and fairly unique situation. This analysis is supported by the fact that international markets and credit rating agencies are quite confident in the Chilean fiscal situation. Chile has gone to the international markets in the last three years to issue sovereign bonds and the result has been bond emissions at historically low rates (see fig. 8), the lowest of any emerging market. Moreover, credit rating agencies have improved Chile’s sovereign bond rating every year since 2010 (see sector data pg. 34). Sound fiscal and monetary policies have been key elements in ensuring low inflation and a responsible fiscal situation in which the country saves in good times and dissaves in bad times, allowing debt emission at very low rates to the international capital market. Vulnerability to copper price, Chile’s main export, still remains, but it has decreased over time. However, income inequality is one area in which the country must still improve. Chile has made enormous progress in the last 30 years. The pro-market, pro-competition principles that informed economic policy have expedited the increase in the country’s GDP per capita to a level that puts Chile on course to become a developed economy.

CHILE 33

sector data economy

ECONOMY IN NUMBERS International Investor’s summary of key data and quantitative dynamics of the sector. For more detailed information, please contact International Investor directly.

GENERAL ECONOMY STATISTICS Population

17,400,000

Population growth (5 year average)

1.0%

GDP (US$ in billions)

268.6

GDP growth (average, last 5 years)

3.8%

GDP per capita (PPP)

$22,400

Inflation rate (2012) Value added by primary activities*

3.0% 3.4%

Value added by industry including mining

39.1%

Value added by services

57.5%

Gross financial debt as percentage of GDP

12.2%

Net financial debt as percentage of GDP

-6.9%

Exchange rate (CLP per USD)**

486.8

Export of goods and services (as a share of GDP)

34.2%

Import of goods and services (as a share of GDP)

33.9%

Current account balance (as a share of GDP)

-3.5%

Total FDI between 2010 and 2012 (US$ in millions) Net international investment position (as a share of GDP, 2011)

68,627 -9.5%

Gross domestic expenditure on R&D (as a share of GDP, 2010)

0.4%

Unemployment rate 2012

6.4%

Employment rate for (15-64 year olds) Income inequality (Gini coefficient, 2011)

61.8% 0.501

Relative poverty rate (2009)

30.2%

Net official development assistance (as a share of GNI)

0.0%

* Agriculture, Hunting and Fishing, Forestry ** Period average for 2012. The SPOT price on 1 October 2013 was 502.83 Source: OECD, World Bank, International Monetary Fund, Inter-parliamentary Union, Central Bank of Chile and UNCTAD

RECENT CREDIT RATING CHANGES Agency

Date of change

Credit rating before

Credit rating now

Moody's

Jun-10

Aa3

Fitch

Feb-11

A+

Standard & Poor's

Dec-12

A+

AA-

DBRS

Feb-13

A (high)

AA (low)

GOVERNANCE INDICATORS (2012, PERCENTILE RANK) 100 80

80.1

87.0 60.6

59.2

93.3

86.6 87.3

75.4 55.3

57.9

91.4

88.2 87.1

87.1 55.8

51.2

84.9 57.0

40 20 0

Voice and Accountability Chile

OECD

Political Stability

Government Effectiveness

Regulatory Quality

Rule of Law

Control of Corruption

Latin America Source: World Bank, Worldwide Governance Indicators 2013

34 INTERNATIONAL INVESTOR

economyâ&#x20AC;&#x192; sector data

PERSONAL INCOME TAX STRUCTURE

R&D TAX SUBSIDY CERTIFICATIONS

US$ in millions

15 12 9

7.0

3.8

3 0

1.0

0.1

2008 Previous law

2.7

2009

2010

2011

2012

New law

Percentage of average wage

0-13.5

0-107

83.4

13.5-30

4.0

107-238

10.8

30-50

8.0

238-396

3.0

50-70

13.5

396-555

1.3

70-90

23.0

555-713

0.6

90-120

30.4

713-951

0.4

120-150

35.5

951-1189

0.2

>150

40.0

>1189

0.2

* As of October 2013,1 UTM = CLP40,528 or US$81

Source: CORFO (June 2013)

Source: OECD Economic Surveys 2013 Chile

CHILE'S EXPORTS BY PRODUCT 2012

CHILE'S EXPORTS BY DESTINATION 2012 25

23.3%

17.5%

15.3%

13.7%

12.2%

10.7%

7.3%

European Union

Emerging Asia (excl China)

United States

Japan

21.7%

5 Latin America

53.5%

China

Share of tax payers (2011)

2013 Tax rate (%) Exempted

Monthly tax unit (UTM)*

9.7

copper

Other

other

7.7%

5.4%

chemicals

fresh fruit

4.2%

2.7%

pulp, paper and other

forestry and wooden furniture

Source: Central Bank of Chile

2.5%

2.3%

salmon

wine

Source: Central Bank of Chile

VENTURE AND SEED CAPITAL FUNDING 120

100

2000

2005

CORFO seed funding (US$ in millions)

2006

2007

2008

VC investments with public funding (millions of US$) VC deals in small firms

2009

2010

Early stage investment (US$ in millions) New VC funds

2011

2012

Int'l patent applications by Chileans Source: OECD, Echecopar et al (2013)

CHILE 35

business intelligence economy

INNOVATION THROUGH RESEARCH As a result of the government’s push to foster innovation, Fraunhofer has established a research centre to encourage economic growth through applied research

An aquaculture research station at FCR-CSB

Fraunhofer scientists are looking for creative solutions and contribute to technology, product and services developments in all areas of private business and public administration

THE FRAUNHOFER GESELLSCHAFT The Fraunhofer Gesellschaft is Europe’s largest application-oriented research organisation. Fraunhofer´s research efforts are geared entirely to the needs of people and focus on the following areas: health and environment; safety and security; information and communication; mobility and transportation; and energy and water. As a result, the work undertaken by Fraunhofer´s researchers and developers makes a significant impact on people’s lives. Fraunhofer scientists are looking for creative solutions and contribute to technology, product and services developments in all areas of private business and public administration. Fraunhofer designs new products, improves methods and techniques, and finds new applications. The purpose of Fraunhofer Gesellschaft is to transform scientific findings into useful innovations. In this way, it helps to further economic growth, structural evolution and full employment. The 66 Fraunhofer institutes use structured processes to identify technological areas that are relevant to industry and the short-term and long-term demands of the contract research market. Our choice of research fields is based on this information. The ability to collaborate is an essential component of the Fraunhofer Gesellschaft. The organisation forms internal and external co-operative alliances to ensure the exchange of ideas it needs to maintain its competitiveness and penetrate new markets. Fraunhofer-Gesellschaft carries out publicly funded pre-competitive research. This forms the basis of the contract research projects conducted for customers. Private sector earnings enable the organisation to finance a major proportion of its budget through its own means. Our organisation cultivates working relationships in all technologically advanced regions of the world. Collaborations with locally based research institutions help Fraunhofer institutes to gain access to new markets. FRAUNHOFER IN CHILE AND LATIN AMERICA Various Fraunhofer institutes operate a broad

36 INTERNATIONAL INVESTOR

range of collaborations with Latin American universities, government agencies and companies. However, in Chile, the Fraunhofer Gesellschaft established its first wholly owned subsidiary in the region. The Chilean government, which is committed to research and innovation, created a funding mechanism similar to the one Fraunhofer Gesellschaft enjoys in Germany. The government initated a long-term funding arrangement established by the Ministry of Economy and its Economic Development Agency, Corfo. This initiative aims towards the attraction and establishment of International Centres of Excellence and allows these International Centres of Excellence to establish research facilities in Chile that are partly funded by the Chilean government. THE FRAUNHOFER CHILE RESEARCH FOUNDATION AND ITS RESEARCH ACTIVITIES The Fraunhofer Chile Research Foundation was established in 2010 in order to bring the Fraunhofer approach to innovation to Chile. The Fraunhofer Chile Research − Centre for Systems Biotechnology (FCR-CSB) was the first centre launched under the umbrella of the Foundation. These particular projects were initiated by the Fraunhofer Institute for Molecular Biology and Applied Ecology (Fraunhofer IME), based in Aachen. The institute obtained funding for the establishment of this centre from Corfo, on a 10-year funding basis, in December 2010. FCR-CSB The FCR-CSB started operations on January 2, 2011. Staff at the centre work closely with Chilean research organisations and aim to provide research services for a broad range of public and private enterprises not only in Chile, but also the wider Latin American region. The centre expects to make a longlasting contribution to Chile’s pioneering spirit and economic strength by supporting the country’s traditional economies based upon raw materials, agriculture, aquaculture and the sustainable use of natural resources.

economy business intelligence

Our research is focused on addressing the needs of local and regional industries. Working in multidisciplinary teams, technology platforms have been established which allow our scientists to address the needs of industry. At present, we are focused on customers in agriculture, aquaculture, renewable energies and managing large data sets, with particular emphasis on bioinformatics and their application in life sciences. In the future, we aim to expand our activities to sectors such as in forestry, mining and the health care market. We are looking for new application fields and new customers in all our research areas. AQUACULTURE We are providing solutions that will contribute to the development of a sustainable aquaculture industry in Chile. The salmon industry has undergone major changes due to the appearance of a number of devastating diseases. Our work programs are focused on three critical areas to provide solutions to the industry. First, we are developing methods for the early detection of diseases. Second, we are providing innovative solutions for the control of fish diseases, such as oral vaccines based on plant based production systems and innovative treatments based on therapeutic peptides. Third, we are working on strategies for the overall reduction of disease pressure in production systems via the design of new net cages and a net cleaning service. In addition, we are providing consultancy and analytical services to companies and government agencies. AGRICULTURE AND RENEWABLE RESOURCES In this sector, we have designed and tested new nanomaterials for the improvement of water and wine, and we are looking for applications in fruit juices and oils. We carry out extensive computer-aided selections and the design of nanoparticles. This enables us to tailor nanostructures for specific purposes in the food industry, such as removing unwanted or harmful compounds in food. We are now developing processes to produce these materials at an industrial scale. We also provide toxicology testing facilities and regulatory advice. As bees are key pollinators for many crops used in Chilean agriculture, this is another area of research. We are developing best practices for keepers in order to provide improved pollination success. We are also using honey as a source for the identification of novel, valueadded ingredients. Lastly, we are identifying novel ingredients for the food and feed industries for plants and microalga. As part of this, we are developing crop species not only for novel ingredients, but also as energy crops. Moreover, we are developing pilot processes that combine the extractions of oils together with value-added prod-

ucts and we are applying the latest breeding technologies for the improvement of crops. BIO-COMPUTING To be able to handle and interpret the increasing amounts of biological and other data generated in different business areas, we have developed a significant computing infrastructure, which allows us to the generate innovative solutions for biological data processing, analysis and visualisation. This cyberinfrastructure is being used in database management and modelling activities for in-house clients, as well as external collaborators. We are now also focusing on the analysis of a range of fungal species in order to improve their performance in industrial processes. NANOMEDICINE We are developing nanomaterials for use in medicine. This addresses diagnostic needs and drug delivery, as well novel drug treatments. FOKUS INNOCITY FOKUS InnoCity is collaborating with partners to establish smarter city concepts for Latin America that will tackle current and future challenges in the fields of fixed and mobile broadband network deployments, government, health, public security, mobility and energy. FOKUS InnoCity offers its broad competency base in consulting on the development of ICT-based solutions in urban areas, integration of systems, and conceptualisation of technical and organisational implementation. FOKUS InnoCity was opened in October 2012 in Santiago. It is part of the Fraunhofer Chile Research Foundation and is a collaboration with Fraunhofer FOKUS of Berlin. Smart Cities rely on an integrated communication infrastructure linking various legacy and state of the art mobile broadband communication networks for the seamless provision of Smart City Applications. The related Fraunhofer FOKUS test beds and toolkits are deployed on all continents around the globe and are used by international network operators and major equipment manufacturers for their Next Generation Network (NGN) rollouts and seamless multimedia application prototyping. Fraunhofer FOKUS supports citizens and governmental bodies with platform and device independent city applications. Within the field of smart city apps, Fraunhofer FOKUS offers solutions for administrative services and municipal service providers, as well as providing citizens with access to up-to-date information and administrative services. Some of the fields of operations of FOKUS InnoCity are as follows: e-government; IT for public safety; e-health; smart energy; smart mobility; smart buildings; connectivity for remote regions; and, interoperability.

FOKUS InnoCity is looking for partners in local government, telecommunications, mining and the ICT sector to develop applications in these fields, so they can be actualised as commercial products. FRAUNHOFER ISE In 2013, Fraunhofer Chile Research established a collaborative project with Fraunhofer ISE (Institute for Solar Energy Systems) in Freiburg, Germany. The purpose of the collaboration is to bring know-how from Germany to Chile and develop technological solutions locally, which will accelerate the deployment of solar energy systems in Chile. Solar energy systems are required in the Chile to meet the energy demand of its largest industry, mining. Applications in other industrial sectors, such as agriculture, will also be developed and will help in the development of a ‘solar economy’ for Chile. Fraunhofer ISE has applied to be a new Centre of Excellence in the second call from Corfo for the attraction of new International Centres of Excellence in Chile. Initially, we aim to work in the following areas: concentrator photovoltaics; concentrated solar thermal power (CSP); electrical grids and economic systems analysis; solar thermal process heat for industry, commerce and agriculture; and solar water treatment. The direction of the development of this project will be driven by local needs and requirements by industries working in the field of renewable energies. OUTLOOK The Fraunhofer Gesellschaft offers many more technological solutions than those outlined here. In particular, its support for the manufacturing industries in Germany should be mentioned. It is supporting German companies in their drive to excel in export markets. As FCR is already established in Chile, we have the opportunity to develop similar links with local Chilean companies.

WOLFGANG SCHUCH General Manager

+56 9 6597 9364

wolfgang.schuch@fraunhofer.cl

FRAUNHOFER CHILE RESEARCH FOUNDATION Mariano Sánchez Fontecilla 310, Piso 14, Las Condes, Santiago, Chile +56 2 2378 1652 www.fraunhofer.cl

CHILE 37

focus economy

Government approved a record budget for 2013 of US$1 billion for science, technology and innovation, which represents an 8.9 per cent increase by from 2012

FOCUS: CHILE COMMITS TO INNOVATION Chile has recognised that innovation and entrepreneurship are two key factors that underpin economic growth and has adopted a number of policies aimed at stimulating these areas Chile not only exports commodities, but also knowledge and world-class talent. Several recent innovations support this premise from the creation of the vaccine against hepatitis B to the evolution of a software program that allows technological devices to be found when lost or stolen. It is become clear to domestic firms that innovation must be a business attitude. It is not enough to have experience and surpass competition; new horizons must be explored and conquered. Thus, the Ministry of Economy, Development and Tourism is looking to increase the productivity and competitiveness in every sector of Chile’s economy by generating the conditions that facilitate innovation. The Government of Chile declared 2013 as the Year of Innovation. Under this banner, the state committed to inspiring the population to undertake and create solutions that improve the quality of life in the country. The Year of Innovation was preceded by and provided continuity for 2012’s Year of Entrepreneurship, which fostered the creation of 67,000 new enterprises. For the Year of Innovation, the Chilean government has implemented a wide-ranging schedule of activities that encourage Chileans to imagine Chile in the future. Through various competitions, events, festivals and seminars, in every economic sector, public and private organisations, students, businesses and scientists have all been invited to think about how this future Chile can be improved through innovation. These projects are part of an integral plan that has been executed over several years. According to

38 INTERNATIONAL INVESTOR

the Global Innovation Index of the French business school (INSEAD) and the World Intellectual Property Organisation (WIPO), Chile will be the top South American country for innovation in 2013. This is hardly surprising, as the country has been actively working to develop a wide range of tools and programs to put itself in pole position for innovation and entrepreneurship. NATIONAL INNOVATION AND ENTREPRENEURSHIP SYSTEM Chile´s National Innovation Policy 2010—2014 consists of several pillars that the majority of the world’s most innovative countries consider to be fundamental enablers of innovation and facilitate global connections and financing (see illustration below). The policy is based in a strong belief in people, in their ideas and in their creativity. It recognises the individual liberty to innovate, act entrepreneurially and acknowledges 1. TITLE TO GO the HEREdiversity of Chile as a source of wealth. 1. CULTURE AND ENVIRONMENT 2. HUMAN CAPITAL 3.INSTITUTIONS AND REGULATIONS 4. GLOBAL CONNECTION 7.

R&D

8. Technology Transfer

5. FUNDING

Entrepreneurship & Commercialisation

economy focus

The pillars are fundamental variables put in place in order to create an innovation ecosystem. INVESTMENT IN SCIENCE AND EDUCATION Innovation requires resources; thus, in order to promote innovation and entrepreneurship, the government approved a record budget for 2013 of US$1 billion for science, technology and innovation spending, which represents an 8.9 per cent increase from 2012. Both science and education have been identified as key tools in the innovative process. Consequently, numerous projects have been developed to promote and support scientific research, which, combined with education, will train future Chilean scientists. The Ministry of Economy has identified these areas as priorities, as it has been shown that the factors that drive productivity will not be labour costs, but improvement in basic, technical and scientific skills. Investment in education is viewed as a long-term project in Chile, since it will lay the foundation for the innovation projects that will make a significant contribution to the country’s future development. The Ministry of Education through the National Commission for Scientific and Technological Research (CONICYT) has been supporting human capital formation through the provision of master and doctoral scholarships abroad. In 2013, it estimates it will have granted scholarships to approximately 1,400 students. In terms of doctoral studies, in 2012, 309 applicants were accepted primarily by universities in the UK (24 per cent) and the U.S. (23 per cent). Through the program Attraction and Insertion of Advanced Human Capital (PAI), CONICYT invited academic institutions and national research centres wishing to incorporate new researchers to present their employability projects. The program aimed to promote scientific capacity, strengthen graduate programs and provide training in the international collaborative networks of these entities. Finally, FONDECYT, the main program for individual basic science funding, has increased its budget by 80 per cent since 2010. This program supported more than 1,200 new research projects in 2013 and its approval rating is one of the highest in the world, exceeding 50 per cent. As a result, today, at least one out of two scientists in the country receive research funding, which represents a significant contribution to an already dynamic and vibrant science environment. ENTREPRENEURSHIP AND COMPETITIVENESS Clearly, one engine that stimulates job creation is entrepreneurship. For this reason, the government declared 2012 as the Year of Entrepreneurship. Numerous projects have been developed aimed at strengthening entrepreneurship and competitiveness, such as the implementation of the Research and Development Act, a law regarding industrial property and new laws to facilitate the creation of companies and streamline procedures. These government initiatives target one goal, that being, to make innovation and entrepreneurship available for all Chileans and provide those who want to develop an idea with the tools to do so. A number of programs have been introduced to ensure this eventuality

is realised, such as ChileVa! from CONYCIT; Acciona, coordinated by the National Council for Culture and the Arts; Contest of Ideas, from the Chilean Economic Development Agency; and Penguins without Borders, from the Ministry of Economy and Corfo. These programs mean that Chileans can present their proposals on a diverse range of subjects. RESEARCH & DEVELOPMENT LAW Companies of all sizes can make great leaps in competitiveness by orientating their innovation and business strategies towards research and development. The recent R&D Law arises from the need to create real incentive for companies that invest in these areas and, thus, promote a more innovative culture within Chilean companies. In developed countries, investment in R&D accounts on average for almost 2.4 per cent of GDP, according to the OECD. In Chile, this figure was only 0.42 per cent in 2010. Therefore, in the medium term, the country’s challenge is to increase this percentage in order to improve its competitiveness. Another area that needs to be addressed is the need to achieve higher levels of business expenditure on R&D (BERD). Firms in Chile invest just 40 per cent of total R&D expenditure, whereas in OECD countries this number is above 60 per cent. During the period 2008 – 2012, the value of projects and contracts certified in Chile reached US$14.4 million. In 2013 alone, this figure reached US$16.6 million. Under the new regulatory framework, in one year, the value of projects and contracts certified amounted to more than in the previous four years.

Chile not only exports commodities, but also knowledge and worldclass talent

INDUSTRIAL PROPERTY Intellectual property is a legal area that aims to encourage innovation, creativity and technology transfer, as well as facilitate consumer decision-making. The National Institute of Industrial Property (INAPI) is the agency responsible for the management and care of industrial property services in Chile. It is also responsible for promoting the protection that industrial property affords, and to disseminate technological assets and information. INAPI contributes to innovation and entrepreneurship by creating and maintaining an efficient and balanced system for the use and protection of industrial property rights, while also promoting competition and transfer of technology to society. Chile has recognised the strong correlation between the level of technological development in a country and access to information. Thus, it has digitised and organised all patent related literature in order to facilitate the use of this information by entrepreneurs and innovators. Chile has also developed platforms for the sharing of information and experience around intellectual property, creating communities of innovators and entrepreneurs with similar interests and motivations. CREATING AN ENTERPRISE IN ONE DAY The Chilean government has passed reforms over the past few years that have made starting a business in the country much easier. In January 2013, the Law regarding the immediate constitution of enterprises was approved by congress. This initiative means companies can be started in one day, subject to an online procedure, at

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focus economy

zero cost. It will potentially enable 370,000 informal entrepreneurs to join this new system allowing access to development programs from the government and the financial sector. This builds on a reform that came into effect in 2011, which already streamlined the procedures necessary to start a business. Before the enactment of these laws, it took almost seven working days to create a company and an approximate cost between US$550 and US$700. According to official figures, up to October 2013, nearly 12,500 new enterprises were created under the new Law.

Since the beginning of the program, Start-Up Chile entrepreneurs have raised more than US$32 million in capital from all over the world

TOOLS FOR ENCOURAGING INNOVATION INTERNATIONAL CENTRES OF EXCELLENCE (ICE) This program aims to support the establishment of International R&D Centres in Chile and will improve R&D activities, technology transfer and commercialisation in technological frontier areas. The government is counting on these centres having a high economic impact both nationally and internationally. The ICE are oriented towards international business and non-profit institutions that perform research and development activities at a very high standard and have international recognition. The program also provides support for the installation and operation of the International Centres in Chile, as well as direct support for activities associated with R&D. The support for co-founding an ICE is set at a maximum of US$12.8 million over eight years. For Business Excellence Centres the maximum is US$8 million in four years. The first Institutional call in 2009—11 brought four centres to Chile: Fraunhofer, a German institution focusing on biotechnology; CSIRO, an organisation from Australia that delivers mining and mineral processing research; INRIA, a French research body dedicated to digital science and technology; and Wageningen UR, a Dutch research centre affilitated with the local university focusing on the food industry. During 2013, four new centres were approved: the pharmaceutical giant Pfizer will open a centre related to genomics research; Emerson Process Management from the U.S. will open a Mining Centre for Excellence; GDF Suez-Laborelec will start a centre to look at renewable energy; and Telefónica’s centre will carry out research on smart cities. BECAS CHILE PROGRAMME Becas Chile are scholarships, granted by the Ministry of Education, that pay for tuition at top overseas universities. This programme aims to convert Chile into a knowledge-driven society and, through this, boost the country’s economic, social and cultural development. Becas Chile is based on the strategic pillars established by the Government in relation to Education and Innovation. The Chilean government’s strategic priorities are reflected in both the rearrangement and institutional strengthening of the actors who make up the National Innovation System. This is combined with a historic increase of public resources and tax incentives for private investment in research development. It is designed to strengthen Chile’s universities, businesses and the State itself by promoting basic and applied research, scientific and technological development, and innovation and entrepreneurship.

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The main objective of this program is to establish a comprehensive, long-term policy of advanced human capital formation abroad and is promoted through three lines of action: to increase opportunities for training and development abroad; to modernise and articulate government scholarship programs; and to promote international links and co-operation. START UP CHILE (SUP) Start-Up Chile is a program created by the Chilean Government, and executed by Corfo, that seeks to attract early stage, high-potential entrepreneurs to bootstrap their start-ups in Chile, using the country as a platform to go global. The main objective of this accelerator program is to transform Chile into an innovation and entrepreneurial hub of Latin America and is a primary focus for the Ministry of Education. In 2010, the pilot program brought 22 start-ups from 14 countries to Chile, providing them with US$40,000 of equity-free seed capital and a temporary 1-year visa to develop their projects for six months, along with access to important social and capital local networks. These selected entrepreneurs were chosen by an admission process conducted by Silicon Valley experts and a Chilean Innovation board that focuses ardently on global mind-sets and worldwide potential. Start-Up Chile has a goal of having 1,000 ‘bootstrappers’ participate by the end of 2014. The first application process of 2011 brought 87 start-ups to Chile from over 30 countries after having received 330 applications. During the second process, conducted in July of 2011, more than 650 start-ups applied. Start-Up Chile has gained impressive international acknowledgment, being recognised by publications such as Forbes, The Economist, BusinessWeek, and TechCrunch and has inspired spinoffs all around the world, like Start-up America, Britain, Greece, and Italy. Since the beginning of the program, Start-Up Chile entrepreneurs have raised more than US$32 million in capital from all over the world. CONTACTCHILE CONTACTChile is a programme designed by ProChile that facilitates business people and entrepreneurs that incorporate high levels of innovation to export their products, services or consolidated business models. Through access to specialised networks, ContactChile seeks to support and strengthen the internationalisation of Chilean entrepreneurship and innovation with high export potential, thus contributing to positioning valueadded projects in the international arena. The selected companies and entrepreneurs have the advantage of being part of a community that aims to serve as a way of generating synergies, business opportunities and investment, strengthening the group through an ‘umbrella brand’ in international market. This brand differentiates companies and entrepreneurs from its international competitors, and contributes to the image of Chile as an economy which generates products and services with high value, reflecting the public commitment to potential customers, partners and opinion leaders in foreign markets.

economy interview

CARLOS HONORATO PROCHILE Director

INTERNATIONAL INVESTOR: Could you outline the main operations of ProChile? CARLOS HONORATO: ProChile was created 39 years ago when it was decided that, due to the country’s wealth of resources, but small domestic demand, it needed to have an open market in order to develop. ProChile is focused on export promotion, which is our core business, but three years ago we began involving ourselves in attracting foreign investment, promoting tourism and other international operations. We have evolved into an international office that has a prominent role in the country’s operations outside Chile. Since we have a network of 54 offices and 200 employees working abroad, it is important to put that resource to good use. In terms of our exports, we have been focusing on value-added products and, in that sense, innovation and entrepreneurship is very important for us. We have put a lot of effort into ensuring our entrepreneurs and our innovators cooperate, and we have initiated programs like Start-up Chile, which attracts entrepreneurs to Chile, and ContactChile, which helps our entrepreneurs to globalise and export products and services from Chile. If we don’t innovate, we risk remaining a commodity-based economy. We have a lot of natural resources and we aim to add value through innovation. For example, Copper has many different uses, one of which is as an antibacterial agent that can be used to prevent illness. Without innovation, these kinds of products would never come to market. Consequently, in the last three or four years, Chile has been working to create an ecosystem in order to foster innovation within the industries in which we are a globally competitive: mining, forestry and agribusiness. For this ecosystem to work we need to create it in Chile and then take it abroad; ProChile plays a key role here. We are helping our entrepreneurs to go abroad, so they can globalise their companies. We help them to

CAREER DEFINING MOMENT

After university, I had a great position in a multinational company, but it wasn’t really what I wanted. So I went to study abroad at Babson College, an institution that completely focuses on entrepreneurship and innovation. It changed my perspective and resulted in my decision to enter the public sector. I am now in a position where I can really influence change and help people to develop their own ideas. LESSON IN BUSINESS

If there is something that you really want, don’t let others take you. You can make it by getting involved, being a team player and being passionate about the project. find different growth paths for innovation in other countries, so they can generate capital, if necessary, or gain experience. Moreover, we are looking at technology transfer and education: how the academic, private and public sectors can work together to form this ecosystem. We also want to create a level playing field in terms of movement of goods and services, and we are negotiating certain terms within the Pacific Alliance, so our entrepreneurs can move within these four countries like a single market. How important are Asian markets for the development of Chile’s economy? In the last decade Asian markets have become very important. In 2006, we signed a free trade agreement (FTA) with China, adding to the agreements we signed with Korea and Japan in 2004. As a result, more than 50 per cent of our exports go to Asia. Since 2008, China has become our number one trade partner. Although, if you discount copper, the U.S. is our number one trade partner. Seventy per cent of our GDP is trade, so our economy has to be very open. In terms of value-added products and our global success

in agribusiness, there is much more space within which to expand into Asian markets, especially in China. Furthermore, Japan and Korea are markets we are developing not only in terms of mining products, but also agribusiness, forestry and innovation. Regarding the slowdown in copper demand, our economy is driven by mining and copper and our GDP has been growing very fast as a result. The world has been in a different stage with China growing at 10 per cent per year. We do not expect that to continue, but it is still growing at 7 per cent, which is not slow, and its second and third cities are growing at about 15 per cent. They need our products. Chile is always looking for more FTAs, particularly in Southeast Asia, where there are 600 million consumers. Our president has just signed an FTA with Thailand, we are beginning the process in Indonesia and we already have FTAs with Malaysia and Singapore. We think this market has huge potential for us. We also have some agreements in India and that is a huge market. Yet, when you look at Latin America, as a result of the Pacific Alliance, there has been a lot of growth for our non-copper exports in this area too. We also need to focus much more on our own region, as our trade with the countries of the Pacific Alliance is only 7 per cent. Interestingly, trade between European countries is 71 per cent and between Asian countries is 53 per cent, but within Latin America it is about 27 per cent. It would benefit the whole region if we can improve this figure. What about the financing angle, how well developed is the venture capital market in Chile? With regard to financing, at least in Chile, Colombia and Peru, the markets are not very well developed in terms of venture capital or angel investors. We want to help to strengthen those markets, so we need to go abroad and tell the markets that there are a lot of things happening in Latin America, in terms of the Pacific Alliance and, more specifically, here in Chile. When you talk about the Pacific Alliance the market expands and becomes infinitely more attractive to investors. Moreover, the idea that banks or venture capitalists would open an office in Chile just for the Chilean market is nonsensical. However, trying to attract them to open an office in a country that is a gateway to the Pacific Alliance, to sell it as a whole market, is much easier. We not only want to help to develop our own markets in order to have more venture capital, but also show venture capitalists from around the world that Chile is the place to see the projects for the whole region, a location from which you can expand into the region.

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interview economy

CARLOS DETTLEFF FOREIGN INVESTMENT COMMITTEE Executive Vice-President

INTERNATIONAL INVESTOR: Please provide us with a broad overview of the main operations that the Foreign Investment Committee (CIEChile) undertakes? CARLOS DETTLEFF: The Foreign Investment Committee is the State of Chile’s foreign investment promotion agency. It represents the State of Chile in its dealings with foreign investors and helps to position Chile as an attractive destination for foreign investment and international business through administration and communication of the corresponding legal norms, the development of promotional activities and the preparation of relevant information for existing and potential foreign investors in Chile. CIEChile develops all types of initiatives to communicate, promote, coordinate and implement measures to foster the entry of foreign direct investment (FDI) into Chile and provides general information about Chile, its economic and social environment, legal framework and policies on foreign investment. It ensures correct application of the Foreign Investment Statute (DL 600) in order to safeguard the rights of both the state and foreign investors. It publishes an up-to-date and accurate statistical register of foreign investment under the Foreign Investment Statute and regular reports on Chile’s business climate and specific investment opportunities in both public and private projects. It also attends the needs of foreign investors as regards information and contacts with other government bodies and schedules meetings with business associations. In addition, it coordinates the defence and representation of the Republic of Chile through the Foreign Investment Arbitration Defence Program in cases filed by foreign investors before arbitral tribunals. KEY SECTORS How have levels of FDI changed in recent times and what has been the impact? FDI has shown an important increase in recent years, reaching record levels.

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Between 2010 and 2012, it totalled US$ 68,627 million, up by 42 per cent from US$ 48,403 million between 2006 and 2009. As a result, it represented 9.2 per cent of GDP in 2010−2012 as compared to 7 per cent in 2006−2009. It is also important to note that the inflow in 2012, at US$30,323 million, was the highest ever in the country’s history. The impact of FDI on the Chilean economy has been evident in its important contribution in areas that include economic growth, gross fixed capital formation, total factor productivity, employment and wages, the formation of human capital and export growth. There are concrete examples of this: companies in Chile that have overseas partners pay wages which are, on average, 130 per cent higher than companies of the same size and in the same sector, but without foreign investors. Similarly, we have studies indicating that 15 per cent of job creation in Chile between 2009 and 2011 was the result of the increased inflow of FDI. The importance that Chile gives to FDI is reflected in the government’s decision to bring activities for its promotion and attraction, previously spread across different institutions, under a single agency: the Foreign Investment Committee (CIEChile). This enables us to provide a more agile and efficient service to those who are interested in investing in our country. Can you elaborate on the main sectors that attract FDI in Chile. Where are the opportunities for foreign investors? Foreign investment is welcome across all sectors of the Chilean economy. However, the sectors in which it is highest are mining, services, the electricity, gas and water industries and manufacturing. The case of mining is particularly striking because Chile is the world’s leading producer of copper, nitrates, iodine and lithium and the sixth largest of silver. Opportunities are, moreover, not confined to mining since the

country also requires world-class mining suppliers. In the case of infrastructure, Chile has a transparent concessions system through which public tenders worth US$7,000 million will be awarded in 2013−2014, including highways, airports and hospitals. These tenders are open to international bidders who compete on equal terms with local companies. Very attractive opportunities also exist in the food industry. In 2012, agribusiness exports reached US$13,775, representing over 17 per cent of the country’s total exports. Chile is the world’s leading exporter of grapes, plums and blueberries and, in the case of avocados, kiwis, raspberries and apples, one of the three most important. It is also the world’s fifth largest wine producer and its second largest salmon producer. These industries still have much room for growth since Chile is on the road to becoming a food power.

Along with our economic growth, a network of trade agreements makes our country an outstanding commercial platform with preferential access to markets It is important to note that Chile has a very extensive network of trade agreements. Twenty-two such agreements are currently in operation, covering 60 countries and allowing foreign investors who produce or add value to their products in Chile to export to the rest of the world on very advantageous terms. This is an excellent opportunity in that foreign investors have preferential access to markets that represent 86 per cent of global GDP. In other words, Chile is not only an excellent platform from which to enter Latin America, but also offers the possibility of exporting to 63 per cent of the world population. In energy, Chile faces a very important challenge since, in order to maintain our rate of economic growth, we need to increase our electricity generation and distribution capacity. The country currently has an installed capacity of 17,000 megawatts, to which it needs to add over 8,000 megawatts in new projects by 2020 and this calls for foreign investment. This is also the case with tourism. Chile has great potential for the development of tourism. The country’s geography means it has a great diversity of landscapes that are not only attractive to the 3.5 million people who visited the country last year, but also represent a great business opportunity in a sector that requires increased investment in order to continue growing. If growth of tourism maintains its current rate, Chile will need at least 74,500 additional hotel rooms by

economy interview

2020 or, in other words, more than double its current capacity of 70,400 rooms. That will imply investment of close to US$5,000 million and represents an excellent opportunity for the development of new projects and for foreign investment. In 2012, Chile registered its highest ever figure for FDI. What factors do you believe are responsible for attracting this influx of FDI? Chile has a stable track record as a destination for foreign investment. It is characterised by its reliability, transparency and competitiveness as well as the excellent business prospects it offers. It is, moreover, a place where it is easy to do business. These hallmarks, together with a legal framework that is respected, are our principal letter of recommendation because they are backed by state policies that have remained unchanged for 30 years. Along with our economic growth, a network of trade agreements makes our country an outstanding commercial platform with preferential access to markets that represent 86 per cent of global GDP and the maturity of our domestic market, this has transformed our country into an excellent haven during times of crisis. Over the years, we have seen how companies have come to Chile seeking better prospects and, when they realised the opportunities it offers, have stayed. The country’s trade agreements, as well as the government’s decision to establish a single investment attraction agency, have proved to be excellent measures made with astute vision. DIFFERENTIATION What do you believe are the key, specific services that the CIEChile offers to investors, and how has the CIEChile differentiated itself from other investment promotion agencies? The Foreign Investment Committee publishes information about the country’s business climate, portfolios of investment opportunities in public and private sectors, reports and other publications about specific sectors, information about the Foreign Investment Statute and statistics. In addition, it assists investors in preparing schedules of meetings and serves as a channel for their enquiries and requests to other government bodies. Even more importantly, however, we are responsible for guaranteeing one of Chile’s principal attractions as a destination for foreign investment: that foreign investors receive the same treatment as domestic investors, and that is our undertaking, equality of conditions with Chilean investors. It is important to note that, in recent years, Chile has refocused the way it pro-

motes the country as a destination for foreign investment. As part of the Competitiveness Enhancing Agenda of the Ministry of Economy, Economic Development and Tourism, a new institutional framework for the attraction of foreign investment was implemented, strengthening these activities and bringing them together under CIEChile. In this way, the Foreign Investment Committee became the only government agency responsible for promoting Chile as a destination for foreign investment, permitting greater efficiency in the use of resources and the implementation of a single strategy at the government level that makes better use of the ProChile export promotion agency’s network of commercial offices around the world. As part of this effort, we have also implemented a number of different initiatives. Since 2010, CIEChile has signed agreements with the country’s leading business associations in order to compile a portfolio of projects in the public and private sectors in fields such as infrastructure, energy, mining and agribusiness. By using this portfolio, which comprises projects for over US$ 161,000 million, we are able to present the specific investment opportunities Chile offers in a more practical and efficient way at international conferences, meetings and seminars, as well as through commercial offices and embassies. In 2010, in a bid to expand the matrix of countries that have traditionally invested in Chile, we launched a strategy for the attraction of investment from Asia, particularly focusing on China. This included the creation of a unit for the attention of Chinese investors and the provision of services and documents in Mandarin. Historically, Chinese investment in Chile has been low and, at US$104 million, it represented a mere 0.11 per cent of the total inflow since 1974. However, as result of our strategy, in 2012, investment applications for over US$200 million were received from Chinese companies, positioning China as one of the ten largest sources of applications for the first time. Furthermore, due to our work with the Chinese company Sky Solar, in 2013, the value of applications increased to a record US$1,245 million. A regional work plan for the attraction of foreign investment was also designed and implemented. This involved the creation of local working groups, led by regional authorities from the economy ministry and including the principal public and private players, in order to boost foreign investment in the country’s different regions. As part of this strategy, four conferences took place in the regions, as well as, a seminar in Santiago on attraction of investment in remote regions.

In a bid to improve the design of foreign investment attraction policies, CIEChile also created a research department to prepare documents and studies on the scope and impact of foreign investment in different sectors as well as its benefits for the country. To date, it has published two academic papers on the impact of foreign investment on the Chilean economy and coordinates the publication of sector reports that serve to identify new investment opportunities. In 2012, we created the Investor Attention Unit, with personnel specialised in different sectors, and to date it has advised 429 potential investors from 47 different countries. In 2013, CIEChile boosted its international presence through its participation in the world’s most important investment fairs as well as in sector events in Latin America, the U.S., Europe, Oceania, Africa and Asia. It now also has investment agents who operate in the South Korean and Chinese target markets. In 2013, we also promoted the International Investment Forum Chile 2014 around the world and selected 150 overseas companies to participate in the event, which takes place in January 2014 in Santiago, Puerto Varas and Calama. It will include multi-sector seminars, field visits and over 600 one-to-one meetings between local and overseas companies. How has the formation the Pacific Alliance impacted the CIEChile, and can we expect a joined-up approach to FDI anytime soon? The Pacific Alliance is an initiative that will bring benefits for the region since it will enable us to undertake joint investment promotion in future. When you are promoting a country like Chile, or any other South American country, you cannot assume that the potential investor knows who you are and how you have performed. To the extent that the Pacific Alliance improves and heightens Chile’s visibility in countries that have only a limited presence as foreign investors, this will be positive. This approach will surely mean joint efforts to attract foreign investment. That said, we are also confident that our country’s solid credentials as a destination for foreign investment will allow it to maintain its current position of leadership.

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interview economy

COLIN BECKER

PRICEWATERHOUSECOOPERS Consulting Lead Partner

INTERNATIONAL INVESTOR: What is your assessment of the mining industry today and the challenges it needs to address? COLIN BECKER: Mining has traditionally been and will continue to be the primary driver of Chile’s economy. It’s a mature sector that has gone through a very positive cycle lasting approximately 10 years, referred to as the super cycle. However, following the drop in commodity prices in 2013, the mining sector in Chile is in a unique and complex situation. Compared to other mining countries, most of the challenges facing the industry are not specific to the sector, but rather refer to the Chile as a whole; these integrated challenges require an integrated approach. Some of the leading financial advisors have been quick to comment the commodity and copper super cycle has come to the end, due to a cooling off of the development of the Chinese economy. Unfortunately, these same institutions have a poor historical track record of forecasting Chinese growth. Also, when I hear comments from financial institutions that are both market makers and market takers, I am cautious and sceptical because of their potential commercial interests. The markets have generally understated the strength and resilience of the Chinese economy and its impact on demand for copper. Nobody really registered the beginning of the super cycle and we did not think it was a super cycle for the first five years. Ten years ago, the collective wisdom was that Chinese double digit growth was not going to be sustainable, but it ended up exceeding all expectations. The same can be said about China’s role in the recovery of the world economy, once again the financial advisors were ‘surprised’ by the effectiveness of Chinese incentive plans to accelerate recovery, especially in developing economies. The impact of the financial crisis was short lived in Chile, with copper prices bouncing back as fast as they initially dropped.

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CAREER DEFINING MOMENT

Arriving in Chile and starting my career at PwC in the early 1990s at the early stages of the mining boom that catapulted Chile, in a 20 year period, from a small, closed developing economy into a vibrant, open economy. This gave me a unique opportunity to develop strong and focused mining and transaction services groups in PwC, during one of the most exciting stages of Chile’s history. LESSON IN BUSINESS

Be courageous in challenging the status quo and offering an independent opinion. What this illustrates is that we consistently underestimate China. I am not sure we are at the end of the cycle and the most recent information indicates that China’s economic growth rate has recovered. It’s important to consider that a Chinese growth rate of 6 or 7 per cent is applicable to a bigger base. No one expects or requires the double digit growth seen during the last decade, anything over 6 to 7 per cent will result in a huge growth in demand in absolute terms, with a ripple effect on other developing economies in Asia, South America and Africa. Importantly, it is not just the current demand, but also the perceived demand that is key to the mining industry. Projects take anywhere from 15 to 20 years from inception to first production. With such long lead times in development, future demand (the perceived demand) is vital in determining what and where you are going to develop. This also means that challenges that are a problem today have the potential to be a bigger problem when you project them going forward five or ten years from now, and that is always been a major challenge to management in mining companies. Whereas the Chinese growth will continue to be key to commodity prices and activity in the mining sector, one of the key lessons

learnt in the recent market volatility is that mining is in a new phase now where growth cannot occur at any cost. There has been a noticeable shift of emphasis towards being tighter on controlling costs of projects and managing the core challenges related to the scarcity and costs of energy, water and human resources. The recent drop in commodity prices and activity in the sector has afforded mining companies a window of opportunity to try address some of these issues, not only at an industry level, but even at a wider national level. For instance, it is not just the mining industry that needs more and cheaper energy; the whole country needs more energy. Whether it is for a new hospital or a new public transport initiative, the energy debate is a national one. I would also like to see a broader approach to the water question, rather than dealing with it at an industry level, or even worse on a mine-by-mine basis. For instance, some of the mega-mines that are currently building or plan on building 100-150 kilometre long pipelines from sea level to 3,000 or 3,500 metres. However, in these cases, it might make more sense to double the diameter of the pipe being built, look for potential offtakers and try to capture synergies for the industry. However, the core issue is broader; it is about national infrastructure not just mining. Consequently, the solution should involve other stakeholders and industry sectors that should pool resources to invest in this infrastructure. Given its size and importance, the mining industry has a responsibility to be the leading player in these initiatives, but it needs a more integrated approach. It is of little to no use finding a solution only for the mining sector; an integrated, national plan or roadmap should be put forward that sets the strategy for the next 10 to 20 years to address challenges facing water, electricity and talent development. Failing that, an integrated plan for the northern sector of the country could be considered in which the mining sector would clearly be an important stakeholder. That said, our recent ministers of mining have been exceptional regarding their long-term view and commitment to the growth and sustainability of the sector, and so has the minister of public works. What about the softer challenges, such as community engagement? How is the Chilean mining industry dealing with these important issues? Let me start by saying that Peru is now considered to be one of the really interesting mining destinations for the next 20 years. It has high quality undeveloped mining de-

economyâ&#x20AC;&#x192; interview

posits of copper, silver and gold. However, compared to Chile, it is still considered to be relatively high risk when it comes to the mining community issues and the social license to operate. The social license to operate is centred on stakeholder engagement and participation. When we referred to mining communities 15 years ago, we tended to refer primarily to those communities that were in the vicinity of the mine. This no longer applies; now, the mining community of Chile is the whole country. We are talking about a sector that contributes approximately 50 per cent of all exports and represents 30 per cent of the GDP. The development of the health, education and utilities sectors in Santiago was driven by the mining community and, moreover, by companies that initially came to Chile looking to participate in the opportunities created by the huge investments made in upgrading the infrastructure, services and utilities, with a large portion of this financing being generated by the mining sector. The mining community has this huge power, but also this huge responsibility of stakeholder engagement and participation. The stakeholders, whether they are government, suppliers, clients, employees, or the population at large, have got to feel that they are also fairly participating in benefits attributable to the mining community. That has been a key focus point for the mining companies during recent years, but they also understand that a great deal more needs to be done towards that goal. Mining companies need to emphasise that, even though the super cycle may be coming to an end, they are still committed to the country in the long term and towards a sustainable development of the industry. This commitment needs to be underwritten with continued investment in communities and in the development the country. ASSET MANAGEMENT Moving on to the asset management industry. What are your observations of the growth in this sector? On the issues of pension funds, Chile is considered as a pioneer in this field. The current pension system was implemented in the early 1980s and is managed by the Administradoras de Fondos de Pensiones (AFPs). Under this system, all workers are obliged by law to belong and contribute to a private pension fund. This formed the cornerstone of the asset management industry in Chile and installed a culture of savings in Chile. Since its inception, the system has been hugely successful, both in terms of guaranteeing a financially viable and sustainable pension scheme for Chileans, as well as helping to develop the local stock market.

Originally, the system was characterised by a number of restrictions related to the investment profile and the large bulk of the AFPâ&#x20AC;&#x2122;s capital was invested in the local stock market. These restrictions initially proved to be very positive for the local stock market, providing capital to companies and accelerating the development of local industries. But there was also a negative impact in that some local companies became overvalued too quickly. This situation was rebalanced about ten years ago when pension funds were allowed to invest a larger portion of their funds abroad. As the industry matures, the merits of the current pension fund system continue to weigh up favourably to alternatives in other countries. The pension fund system has been tested and has shown to be very resilient in both the Asian crisis and the global financial crisis. As testament to its success, there are a number of countries now that are looking to see how they can replicate it. The next driving force in the sector is the emergence of a middle-income bracket in Chilean society and, like any emerging country, the consolidation of the ultrawealthy bracket. This has allowed for the wealth management industry to develop into a more sophisticated system and has seen the emergence and growth of a number of specialised wealth management providers over the last ten years. The past success and potential for continued growth of the industry has attracted a wave of foreign investor interest over the last five years, not just in this second level of wealth management, but also in the pension funds market, all looking to enter into the Chilean market and also use this as a platform to branch out to the region and pan pacific rim. HEALTH SECTOR One of the recent developments lately has been the investment that is pouring into the health sector. Could you provide us with more detail of how this market is developing? It is noteworthy to look at the history of the financial and retail industries in Chile. Twenty years ago, banks were largely local and the retail industry was epitomised by small, family-run stores. Now, Chile has a mix of large local banks that compete head-tohead with international banks and a number of major retail chain stores that are not only hugely successful in Chile, but also on a regional basis. We are observing the same trend in healthcare, with smaller healthcare businesses consolidating and adopting a different level of sophistication. All of this growth is being driven by the emerging middle class, which

has different demands and quality of life expectations. The development of the healthcare sector in Chile lags behind the banking and retail sectors, but it is clearly moving in the same direction, with a lot of the same economic groups and local investors who have been behind the success of the banking and retail sectors now present in the health sector. Astute foreign investors, who have learnt lessons from the consolidation and regional development of the retail and financial markets and understand the people who have been driving those very successful models, are jockeying to invest into the health sector. Investors in this sector fully understand the potential of Chile to become a serious player in the development of the health sectors in Peru, Colombia and, hopefully, other countries, like Ecuador. Letâ&#x20AC;&#x2122;s look at PwC in Chile at a more strategic level. What is PwC going to be doing over the next five years in Chile? PwC is celebrating its 100th year in Chile and is also at a stage where it is evolving its service model in reaction and anticipation of new demands from our clients and the market. Our assurance and tax and legal areas have been the cornerstones of success during the last 100 years in Chile, but we are also very proud of the development of our consulting practice. In line with similar initiatives by other countries in the PwC network, in Chile we have made major investments in building up our consulting practice in areas such as business consulting, corporate finance and technology. Strategic business consulting, an area that has traditionally been dominated by two or three global consulting players, has recently become a major focus area for traditional audit and tax firms with very impressive results. According to the Kennedy Report that reviews the consulting industry worldwide, PwC is acknowledged as one of the three leading players in management consulting. The PwC network has been investing a lot in strategy consulting and we have been building up our team in Chile with a view to tapping into this powerful group. We are the only accounting firm with 100 years of continued uninterrupted success in Chile and we are excited at the challenge of providing value and trust to our clients for the next 100 years. We recently integrated our consulting practices at a regional level in order to better serve our clients looking to capture the benefits of the enormous growth and potential offered by the pan pacific region over the next 10 to 20 years. We are confident that this move will also provide exciting opportunities for our staff, many of which hunger for broader experience.

CHILE 45

focus economy

Manufacturing represents 7.9 per cent of FDI in Chile

FOCUS: DECREE LAW 600 Encouraging investment in goods and services, Decree Law 600 levels the playing field between foreign and local investors

WHAT IS DECREE LAW 600? Decree Law (DL) 600 is a mechanism for the entry of capital into Chile. Under this regime, whose use is optional, foreign investors bringing capital, physical goods or other forms of investment into Chile may ask to sign a foreign investment contract with the State of Chile. This contract establishes a series of rights and obligations of both parties related to an investment. It cannot be modified or rescinded unilaterally by either party, and since 1974, the majority of foreign investors have chosen to use this mechanism. By 2011, foreign investment worth almost US$82 billion had been materialised through DL 600, representing 56.5 per cent of the foreign capital effectively entering Chile during that period. DL 600 can be used by: ■■ Foreign individuals ■■ Foreign legal entities including: ●● Companies (in any of their legal forms) ●● Corporations and foundations ●● Foreign states ●● International organisations ■■ Chilean individuals and legal entities domiciled abroad ACCESS TO THE FORMAL EXCHANGE MARKET An investor is guaranteed access to the formal foreign exchange market, both for incoming capital and for acquiring the currency to remit capital or profits. Under DL 600, a foreign investment is only considered as such, and the foreign investor acquires the status of a foreign investor, once the corresponding capital has been transferred to Chile.

46 INTERNATIONAL INVESTOR

CAPITAL AND PROFIT REMITTANCE In order to encourage investment in the production of goods and services, investors are entitled to remit capital one year after its entry. No tax or other levy applies to such remittances up to the amount of the investment materialised. Foreign currency for these remittances can only be acquired with the proceeds of the total or partial sale or liquidation of the shares or rights corresponding to the foreign investment. Profits can be remitted at any time, once the investor has paid the corresponding taxes as demonstrated with a payment receipt. For the remittance of both capital and profits, the investor can use the most favorable exchange rate available on the formal foreign exchange market after obtaining a certificate from the Executive VicePresidency of the Foreign Investment Committee. ACCESS TO ALL ECONOMIC SECTORS Within the limits established by Chilean law, investors can undertake any type of economic activity. DISCRIMINATION COMPLAINT MECHANISM Article 9 of DL 600 establishes the principle of non-discrimination, guaranteeing that, in the exercise of their business activities, foreign investors operating under this law will be subject to the same laws and regulation as local investors in the same sector of activity. In order to ensure the effectiveness of this guarantee, Articles 9 and 10 of DL 600 establish an administrative procedure to prevent or overturn decisions that are at odds with the principle of non-discrimination.

economy focus

FDI IN CHILE 2009-2012 • BY SECTOR

• BY COUNTRY OF ORIGIN Transport & communications

Construction 2.4%

1.7%

Manufacturing

Switzerland

Brazil

3.0%

2.9%

France

United Kingdom

3.3%

7.9% Agriculture & fishing

Electricity, gas & water

0.5%

10.9%

2.3%

Netherlands

Others

6.1%

18%

Japan 6.2%

Total:

US$ 81,516

Bermuda

milion

7.6%

US$ 81,516 milion

Cayman Islands 7.9%

Spain 12.9%

British Virgin Islands 9.7% Services

Mining

Canada

26.6%

50.1%

9.7%

United States 10.5% Source: Central Bank of Chile

Article 10 of DL 600 regulates this procedure and requires that an appeal is filed against ‘legal norms’ that can be ‘considered discriminatory’. The first condition refers to whether an appeal is admissible and the second to the grounds on which it can be accepted. TAX REGIME All persons domiciled in Chile must pay taxes on income wherever it is generated, while non-residents are liable to tax only on income generated in Chile. According to 2013 Tax Regime, all Chilean companies must pay 20 per cent corporate tax. Foreign investors are liable for an additional tax on profit remittances and may choose between two regimes. COMMON TAX REGIME The additional tax on profit remittances is currently 35 per cent, against which investors can credit the 20 per cent corporate tax. As a result, the additional tax paid by an investor cannot exceed 35 per cent.

INVARIABILITY OF SPECIFIC TAX ON MINING ACTIVITIES For investors signing new foreign direct investment contracts for mining projects worth at least US$50 million, Article 11 ter of the DL 600 Foreign Investment Statute offers the option of an invariability regime for the specific tax on mining activities. Investors with existing foreign investment contracts who wish to use this special regime cannot make use of the invariability regimes established in Articles 7 and 11 bis of DL 600 or must cease to do so when applying to use Article 11 ter. Invariability takes three forms: that established in Article 7, which is a right pertaining to all foreign investors using DL 600 that locks in their rate of corporate income tax for a period of ten years, and the invariability regimes for industrial or extractive projects and mining projects, worth in both cases at least US$50 million, established in Articles 11 bis and 11 ter, respectively. In the latter two cases, invariability is not a right, but is subject to authorisation by the Foreign Investment Committee.

By 2011, foreign investment worth almost US$82 billion had been materialised through DL 600, representing 56.5 per cent of the foreign capital effectively entering Chile during that period

SPECIAL TAX REGIME Foreign investors can choose to use an invariable tax regime under which the rate of additional tax on profit remittances is 42 per cent, but cannot be modified during a period of ten years. An investor can exit from this regime at any time in favor of the standard regime, but cannot subsequently return to the special regime. INDIRECT TAXES Foreign investors can request that their investment contracts stipulate that, during the investment’s implementation, they will not be liable for changes in taxes on sales and services and in import tariffs on machinery and equipment not produced in Chile and included in a list complied for this purpose by the Ministry of Economy. Goods that comply with these conditions will be exempt from payment of the corresponding value-added tax (VAT).

➥ Source: Foreign Investment Chile

CHILE 47

interview economy

foreign country, after critical mass is reached, they move there and then look to develop business in other countries in the region. Asian market interest in agriculture is another area. Only 12 per cent of Chinese land is arable and they need to feed one third of the world’s population. Thus, they are not only net importers of agricultural seafood products, but they also need to mitigate supplier’s risk, so they are coming here in order to explore the possibility of gaining control of assets.

MATÍAS MORI

FOREIGN INVESTMENT COMMITTEE

Former Executive Vice-President

INTERNATIONAL INVESTOR: In terms of foreign investment, why Chile? MATÍAS MORI: Chile is one of the fastest growing economies in the region and is distinguished by its stability, the strength of its institutions and its legal predictability. Our public policies are geared towards attracting FDI and we have a very strong track record of welcoming FDI and dealing with foreign investors in an ex-ante and ex-post fashion. The public policy in Chile related to foreign direct investment is very clear, simple and effective. Local companies and foreign companies need to abide by the same rules; there are no short cuts and no reserved sectors or industries. Everybody is welcome to participate and this crucial element has made Chile one of the top ten destinations for FDI worldwide.

Our public policies are geared towards attracting FDI and we have a very strong track record of welcoming FDI and dealing with foreign investors in an ex-ante and ex-post fashion What can you tell us about the development of Chinese investments in Chile and the region? When we took office in 2010, we realised that we needed a strategic plan to attract FDI and noticed that many countries with high growth rates, such as the BRICS, had not previously been targeted by this office. So we began by raising awareness about Chile in those markets. China is a massive exporter of FDI, but, in 2010, Chinese investment in Chile was less than US$100 million and there was no clear, consistent effort to attract Chinese capital. We knew we had to rectify this, so we created strong links with the embassies and used

48 INTERNATIONAL INVESTOR

CAREER DEFINING MOMENT

The most defining time of my educational and life experience was living in different cities and countries around the world, in the US and Europe, and being involved in the international practice of law. It opens up the way you think, the way you interact with business people and makes you a much more adaptable person to an ever changing landscape. LESSON IN BUSINESS

Never underestimate your opponent. the offices of trade representatives in China to conduct seminars to promote interaction. After we identified that cultural exchange was critical in order to secure Chinese investment in Latin America, especially Chile, we translated our documents and websites into Chinese and hired Chinese nationals to facilitate the process of hosting business delegates. Our strategy has shown real results. With the Pacific Alliance in place, Chinese business has become increasingly more interested in Chile. To some extent there was a lack of knowledge in Asia about Latin America. Asian businessmen tend to conflate the whole of Latin America with Brazil because of the size of market. The Pacific Alliance, with the significant common market it is assembling, can counterbalance the weight of Brazil’s market. In your opinion, what are the most exciting areas attracting FDI in Chile? There are two areas connected to the mining industry that are interesting. The first is mining services companies, which represent a wide range of sectors and industries such as engineering, logistics, architecture, and follow the mining operations. The second is banking. Foreign banks have shown interest in opening branches here to cater to their clients. In general, when they see many of their clients establishing in a

How do you see FDI inflows progressing in the coming years? Given the macroeconomic situation of the world, growth rates will be adjusted downwards and, as a result, FDI inflows will tend to moderate. Several initiatives have been taken to ensure Chile is stays ahead of the game in terms of the investment environment. For example, the state has introduced the Competitive Impulse Agenda, which lists 50 actions addressing issues that, according to the main actors in the countries economy, are obstructing business. It aims to reduce all factors that could reduce productivity. I think it is very important that the public and private sectors work together towards this common goal. What is the key to Chile’s continued development nationally and regionally? With regard to Chile’s development, human capital is a key issue. We need to investment in our education system at all levels because, in the development of a country, the type of wealth that will take you out of poverty is different from the type of wealth that will ensure the leap towards full development. Productivity at this second stage is critical and this productivity is achieved through qualified human resources. Regionally, my advice for investors looking at Pacific Alliance markets is they should see Chile as a base from which to grow. The statistics back this up; Chile is a very open country with 22 Free Trade Agreements. Furthermore, it is important to remember that FDI attraction is not a zero sum game, it benefits the whole region.

economy interview

ANDRÉS SANTA CRUZ CONFEDERATION FOR PRODUCTION AND COMMERCE (CPC) President

INTERNATIONAL INVESTOR: Can you tell us the main operational activities of the CPC concerns? ANDRÉS SANTA CRUZ: The CPC is the organisation that is representative of the entire private sector in Chile. It is made up of presidents and leading stakeholders, who are in charge of day-to-day politics in their respective sectors, and who come together around one table. We discuss and communicate views on all of the common themes with which the private sector must engage: energy; labour and investment rules; and other regulatory issues, for example. We coordinate views on all topics that are common to the private sector and present them to the authorities, the government and the unions.

We need to put more money in education, but our priority should be basic education not university education We bring together the National Agricultural Society (SNA), the National Chamber of Commerce, Services and Tourism (CNC), the National Mining Society (SONAMI), the Manufacturers Association (SOFOFA), the Chilean Chamber of Construction (CChC) and the Association of Banks (ABIF); representing all the medium and large private sector companies across the country’s many industries. In terms of foreign investment, why choose Chile? Chile has good institutions and we have clear rules that are respected; this is not that common in the world today. It is an open market, with a private sector that is growing and that presents room and opportunities for investors. The government is also not heavily involved in controlling economic industries or production and leaves the private sector with

CAREER DEFINING MOMENT

I am a farmer, and as a young man, I thought that I must to be involved in the organisation of the agriculture sector. Many years afterwards, I went on to eventually become the president of the National Agricultural Association. LESSON IN BUSINESS

To put people at the centre of everything you do and conduct business with high ethical standards. freedom to operate. For these reasons, it is a good environment for companies and institutions to come and invest here in Chile. I would also like to add that we have had a very strong economic policy over the last 30 years with an independent central bank and a good balance sheet that is a result of good fiscal management. We are a healthy economy that is open to investors. On the CPC website there is a poll that asks visitors what they think is the most important task for Chile to achieve developed country status by 2018. What is your answer to this question? I believe that increasing this country’s productivity has a big correlation with education, so I think we have to focus on education. Currently, in Chile, one of the overarching political discussions is regarding the education sector. Recently, we have seen people in the streets and students are demanding a better quality of education. Their focus has been on more money for higher education and free higher education for all. Compared to 20 years ago, when there was 100,000 students continuing their education at a university, young people now have far greater access to universities. We now have approximately 1.2 million students that undertaking studies in a wide range of subjects. That is a great development in terms of access, and now we have to focus on quality.

However, I do not necessarily think that everyone must go to university. It may be more beneficial, for the country and the student, if some were to follow a slightly different path. There are many technical high schools that have had a great effect across all industries because students receive a more specific education and are able to develop more relevant skills. Thus, in the future, they will earn better salaries and achieve a higher productivity in their work. We need to put more money in education, but our priority should be basic education not university education. Education reform at a primary and secondary level is the real challenge to ensure the quality of schools and the efficacy of the student classes is as good as it can be. That should be the central part of the debate, but it is not the focus at the moment. We have to invest more in our work force, but recognise that this does not start when people leave school; the process begins long before this point. We need to give people more opportunities and the way to do that is through access to good quality education. I am confident we will see some productive political debate on this matter going forward. What is the biggest challenge to the continued growth and competitiveness of Chile’s commercial industries? Our biggest problem is in the energy sector. The cost of energy in Chile is high and we need more investment in energy. In addition to laws and regulations that encourage this investment, we also need to develop the politics of this debate and a society that understands that it is good for us to invest in energy. This will ensure that companies do not lose their competitiveness and that we will not end up paying more for the energy we consume as individuals. In addition to energy and its effect on competitiveness, the other big challenge is the productivity of our labour market. Labour productivity is not growing at the rate the country requires in order to maintain the levels of competitiveness that we are experiencing today. So, for me, it is these internal factors that will have the biggest impact on our competitiveness going forward. What do the results of the recent presidential election mean for the country, particularly the commercial industries represented by the CPC? All candidates in the recent election have a track record that proves that they will look after Chile, and who can build on a long history of good economic policies, a thriving private sector, and well established regulations and legal framework, which allow our country to grow. I think we can expect a path to further growth and a better life for all the Chileans.

CHILE 49

focusâ&#x20AC;&#x192; economy

The Chile retail market has 57 shopping malls with a total GLA of 2.8 million square meters

FOCUS: RETAIL EXPANSION IN CHILE With a rise in consumer spending power and the development of credit markets in the country, the Chilean retail sector is expanding rapidly

RETAIL IN CHILE In general, the Latin American retail market has shown positive growth in the last few years, with a healthy increase in the per capita GDP of between 0.9 and 6.3 per cent. Total income for the region reached US$321,495 million in 2012. The retail industry in Latin America can be characterised as having a positive correlation with an increase in consumer income, this has given many key retail players in the region the motivation to plan aggressive regional expansion strategies in order to capitalise on the aforementioned income growth. The main countries leading these developments in the retail industry are Brazil, Mexico and Chile, which have shown larger growth than Argentina, Peru and Colombia. 1. DISTRIBUTION OF THE RETAIL SEGMENTS IN CHILE 60 50

CHILEâ&#x20AC;&#x2122;S PROMINENCE IN THE RETAIL SECTOR With approximately 17.5 million inhabitants and a per capita GDP of US15,424 (nominal, 2012), Chile is the country with the highest retail sector development in the region, after Brazil and Mexico, with approximately US$25,000 million in sales and 4,074 million square metres of selling surface. Chile is generally characterised as being a market with a strong concentration tendency. The retail industry in Chile is a good example of this tendency as a few large, mostly local-based, actors have gained control of an overwhelming majority of the market. The sector has shown high market penetration when compared to its peer countries in the region and the rise in consumer buying power and expenditure have been the major industry drivers, boosting the growth 2. MARKET DISTRIBUTION BY COMPETITORS 50

51%

42% 40

40 31%

0 Supermarket

Department Store

Home Improvement Source: PwC

50 INTERNATIONAL INVESTOR

26%

18%

14%

10% 5%

CENCOSUD RIPLEY

FALABELLA HITES

OTROS

WALLMART

SMU Source: PwC

economyâ&#x20AC;&#x192; focus

3. INCOME ON ORDINARY ACTIVITIES (US$ IN BILLIONS) 25 21.4

18.0 15.1

13.4 9.0

11.1

10.0

12.4

4.9

5.4

5.9

6.5 2.1

0.4

CENCOSUD

FALABELLA

0.5

5.1

FALABELLA

HITES

WALLMART

2011

2012

2013

1.9

0.3

CENCOSUD

1.3

1.7

3.1

3.2

4.6

5.1

6.5

6.6

7.3 4.3

7.4

9.1

RIPLEY Source: PwC

5. SALES PER SQUARE METER (US$ IN THOUSANDS)

1.16 1.22

1.44 1.42 1.36

1.38 1.46 1.44

1.0

1.18 1.22 1.22

1.5

1.52 1.44 1.44

1.88 1.94 2.00

2.0

0.56

0.5 0.0

CENCOSUD FALABELLA

HITES

2011

WALLMART 2012

2013

RIPLEY

SMU Source: PwC

6. OWN BRANDS SALES PERCENTAGE 35

33%

30 25

25%

22%

21%

RIPLEY

HITES

20 15 10 5 0

CENCOSUD

FALABELLA

2.5

2.3

3.7

4.3

4.4

WALLMART 2011

2012

RIPLEY

2013

SMU Source: PwC

rate of the retail industry in the country. Moreover, the development of credit markets that focus on lower income consumers have helped increase the market volume of the industry. The three main subdivisions that participate in the industry are: supermarkets with 51 per cent participation, department stores with 18 per cent and the home improvement segment with 31 per cent, as of the end of 2012 (see fig.1).

4. NET MARGIN (%)

2.3

0.6

HITES 2010

2.2

Source: PwC

KEY PLAYERS The main retail operators in Chile are Falabella and Cencosud, which both have a significant advantage in activity income over other important players such as Wallmart, Ripley, Hites and SMU. Most of the key players in the industry operate with an integrated business model, which includes diverse retail formats, real state business, credit card operations and a branded bank, owned by the company. This kind of model offers a number of competitive advantages relating to scale economy, risk diversification and customer loyalty. It is also common practice among the major players in the industry to offer credit cards to the middle and lower segments of the consumer base, especially to those without access to credit cards from the banking sector. STRENGTHS AND WEAKNESSES OF PLAYERS IN THE RETAIL MARKET Falabella is the leading company in the retail sector in Chile and had 29 per cent of market share at the end of 2012. The next largest corporate entity is Cencosud, which includes the brands Paris and Johnson and has acquired 24 per cent of the market. The third largest player is Ripley with 21 per cent. When comparing the revenue of these top players, Falabella and Cencosud far exceed that of the other competitors, with Cencosud leading by a significant sum. Nevertheless, when analysing profit margins, Falabella is the clear leader and reported a 2012 net profit margin of 7.3 per cent compared to Cencosud, which only managed 1.7 per cent. However, in terms of sales per square metre, Wallmart came out on top, over Falabella and Cencosud,

CHILE 51

focusâ&#x20AC;&#x192; economy

7. SUPERMARKET PARTICIPATION BY COMPETITOR 50

8. HOME IMPROVEMENT PARTICIPATION BY COMPETITOR 80

44%

33%

16%

10 0

71%

30 7%

WALLMART

CENCOSUD

SMU

TOTTUS

18%

11%

10 0

SODIMAC (Falabella)

EASY (Cencosud)

CONSTRUMART (SMU)

Source: PwC

2012

Cencosud

Tottus

Walmart

2012

SODIMAC

EASY

Market Share

33%

Market Share

71%

18%

Number of Stores

214

326

Number of Stores

Selling Surface (m2)

525

155

748

Selling Surface (m2)

649

300

Sales Growth 2012

12.7%

22.3%

12.4%

Sales Growth 2012

17.2%

Gross Margin 2012

23.8%

23.6%

25.5%

Gross Margin 2012

28.8%

28.7%

EBITDA Margin 2012

7.4%

3.6%

9.8%

EBITDA Margin 2012

8.3%

7.6%

Source: PwC

Company issued credit cards are a tool used by almost every retailer to help improve customer loyalty and also target the lower segments of the consumer market

Source: PwC

with sales of US$2,000 per square metre. Still, when comparing the Chilean retail companies in all their operations throughout Latin America, Falabella dominates sales in Peru, Argentina, and Colombia, countries in which Ripley and Cencosud are also competitors. Even though Falabella only has two thirds of the selling surface of Cencosud and a similar amount of selling surface to Ripley, they manage to have a higher net profit margin (see fig. 4). These figures are due to a more efficient and productive operation. Two major factors that play an important role in the integrated business model are own brands and exclusive brands. Brands that are the creations of the retailers themselves yield on average 20 per cent higher profit margins than other brands. Furthermore, brands for which the chain has exclusivity help to raise consumer flow through the store and boost cross-selling. Approximately 33 per cent of FalabellaÂ´s sales are derived from own brand products, this is a relatively high figure when compared to Cencosud which derives 25 per cent of its sales from own brand products, Ripley with 22 per cent or Hites with 21 per cent (see fig.6). Another element that plays an important role in department stores product offering is financial services. Company issued credit cards are a tool used by almost every retailer to help improve customer loyalty and also target the lower segments of the consumer market. Falabella has even partnered with visa in order to provide customers with a multi-purpose credit card. MARKET PERSPECTIVE AND TRENDS The three main operating segments in Chile are: supermarkets, home improvement centers and department stores, each have very different profit margin figures. Supermarkets have an average 8 per cent profit margin, department stores have a 5 per cent average profit margin and home improvement has 13 per cent. This inequality stems from different factors such as

52 INTERNATIONAL INVESTOR

Source: PwC

competition, inventory rotation time, and the amount of own brands implemented in the segment. These three business areas react differently to market shocks. The department store and home improvement markets follow the trend of private consumption in the economy, while supermarkets tend to show resistance in high volatility periods. This behavior led to an uneven selling surface increase in the three segments between 2010 and 2012. The major players have expanded their selling surface unevenly in an attempt to balance good and bad economic cycles with higher margin segments, thus decreasing their business risk and sensitivity to market fluctuations. Accordingly, supermarkets experienced a 34.5 per cent increase in square metres, followed by department stores and home improvement stores with 29.3 per cent and 20.0 per cent, respectively. SUPERMARKETS The supermarket segment, having three quarters of the total market participation, is a perfect example of the concentration tendency set out above. It has a market size of US$12,422 million and 1.4 million square metres of selling surface. The three main competitors have gained more than 90 per cent of the market in the last 10 years. During this period, 80 per cent of the smaller supermarket chains were acquired by the three main players. A growth in the supermarket income segment is to be expected supported on the fact that the Chilean per capita food expenditure is 55 per cent lower than the average level of developed economies like the U.S., Germany and France. However, the supermarket segment in Chile is far more developed than the rest of the region in terms of selling surface versus population with an average of 117 square metres for every thousand inhabitants, a number well above competing countries in the region,

economy focus

2012

FALABELLA

CENCOSUD

RIPLEY

HITES

FORUS

La POLAR

ABCDIN

Market Share

29%

24%

22%

10%

Number of Stores

240

Selling Surface (m2)

254

377

252

182

Sales Growth 2012

11.8%

28.3%

10.1%

12.2%

17%

-16.1%

11.4%

Gross Margin 2012

28.8%

27.1%

33.4%

25.8%

59.7%

17.3%

28.3%

EBITDA Margin 2012

4.5%

4.6%

12.1%

-15.4%

2% Source: PwC

like Colombia and Peru with 44 and 22 square metres per thousand inhabitants, respectively. When comparing these numbers to Latin America´s average of 63 square metres per thousand inhabitants and taking into account the segments penetration projections in Chile, a clear and growing opportunity inside and outside Chile can be observed.

FUTURE TRENDS IN CHILE STRIP MALLS BLOOMING IN URBAN AREAS The strip mall format has increasingly gained popularity in the last few years, becoming one of the most popular commerce formats. They are widespread throughout Santiago, in the major cities in Chile and at least one is to be found in lower grade cities.

HOME IMPROVEMENT The income revenue for the home improvement segment in Chile reached US$4,653 million in 2012 with 1.14 million square metres of selling surface. This particular market is even more concentrated than the supermarket segment with only three competitors controlling the totality of the market. These competitors are Sodimac, Easy and Construmart (see fig.8). The segment’s volume grew by 40 per cent in 2012. This segment shows many acquisitions being made by the main competitors with Falabella growing mainly through mergers and acquisitions, while Cencosud has been growing organically. Currently, the segment has a market penetration of 67 square metres per thousand inhabitants. In developed countries this value rises to 500 square metres per thousand inhabitants, leaving plenty of space for expansion in Chile. Likewise, in Latin America, the segment is underdeveloped giving Chilean companies a potential lucrative opportunity to expand in the region as a whole.

CONVENIENCE STORES AS A GROCERY SELLING SPOT Increasingly busy lifestyles have given rise to the development of the convenience store market, especially in Santiago. The convenience store format has experienced a boom with the opening of a number of new stores. This format is expected to become the main distribution channel for groceries. Currently, new stores are mainly being located strategically in the wealthier parts of Santiago.

DEPARTMENT STORES The department store segment in Chile has matured considerably. Total sales in this market rose to US$7,946 million in 2012, divided among seven competitors, of which three control 74 per cent of the market. These being, Falabella, Cencosud and Ripley. The segment has a market penetration of 64 square metres per thousand inhabitants. Given the fact that there is a vast amount of selling surface in the department store segment in Chile, the key players are investing heavily in opening stores in other countries in the region. The investment in this area represents up to 50 per cent of total investment in the segment. The high penetration of department stores in Chile can be partially explained by cultural differences; in other regional markets, consumers prefer to shop in specialised stores. In fact, Chile has a comparable amount of selling surface area to developed countries , yet the sales are per square metres are lower. Thus, an increase in productivity per square metre is expected in line with an increase in the countries GDP per capita and the growth of the consumer loan market.

MALLS AS A SOCIAL SPACE IN CHILE Consumers are going to the mall not only to do their shopping, but also for entertainment and to spend time with their friends and family. Almost every main city in Chile has a mall and the largest malls, located in Santiago, register an average of four million visitors a month.

Consumers are going to the mall not only to do their shopping, but also for entertainment and to spend time with their friends and family

OPTICAL PRODUCT SHOPS ARE AIMING TO INCREASE CONSUMER EXPENDITURE The per capita expenditure on optical products is around US$20 in Chile, way below the US$80 average of other OECD countries. Companies are pushing strategies to help raise the expenditure on products that are not prescription-based, such as sunglasses and aesthetic oriented products. INTERNET BASED RETAIL CLOTHING SALES REACH CRITICAL POINT IN 2013 In 2013, several competitors entered the internetbased retail clothing market. The distribution channel is a key element that will need to be improved if these market actors wish to achieve their sales targets. Moreover, lead times and exchange methods are very important in ensuring the consumers preference towards internet shopping over the traditional markets.

➥ International Investor would like to thank PwC for this contribution

CHILE 53

economy interview

sectors. Our partners at the firm have very different backgrounds and business experience. As a result of this approach, we are able to find opportunities where others cannot find them. The interesting thing is that we coinvest and, therefore, believe totally in the quality of our projects.

JORGE CLARO

CLARO Y ASOCIADOS Founding Partner

INTERNATIONAL INVESTOR: What is the history of Claro y Asociados and how you are positioned with regard to project investment today? JORGE CLARO: I started the company in 1981 with a friend; it was called Claro & Mendes. We were former classmates at the Pontificia Universidad Católica de Chile and we worked together for four years before I founded Claro y Asociados in 1985. In the beginnning, we did studies on enterprises had problems with banks regarding their finances and we did a lot of ‘medical’ work for these kind of companies. However, this subsequently has evolved into a mixed strategy, where we act as a consultancy that also makes investments in private equity and private funds in many different sectors. Even though our approach is more entrepreneurial, clients and potential partners appreciate our consulting experience, analytical capability and credibility. We are not a pure consultancy, but consulting is part of the package.

I believe that online businesses and e-commerce will be a good area of growth for Chile A good consultant should also be entrepreneurial, but as a consultant you do not take many risks. The Chilean football channel is an example of real entrepreneurship because we took monumental risks. I had done some advisory work for the Chilean Football Federation in 1997 and had the idea that they should form a football channel, but was unable to sell the idea at the time. In 2002, I had the opportunity to sell the idea again and this time ended up with a partnership in which the Chilean Football Federation owned 80 per cent of the company and we got 20 per cent. Currently, the business is fundamental for the development of Chilean football clubs.

CAREER DEFINING MOMENT

In 2002, I proposed to the Chilean Football Federation that they form a partnership with me to create a football television channel. This was a turning point and I became much more focused on entrepreneurship. It is the most important enterprise that I have invested in. Looking back, the decision to study economics after civil engineering was also very important for me. It changed my whole life from that moment and led to Claro y Asociados. LESSON IN BUSINESS

You need to select the best people with whom you want to work. Not only academically, but also morally. Good people in the broadest sense of the word. Around US$60 million will be distributed to clubs this year. With a multiple of 10 times EBITDA it would be valued at between US$800 million and US$1 billion. In 2003, by the same measure, its value was US$36 million. Also, in real estate, for example, we have made an investment with a private firm partner on a project valued at US$80 million. We invested a total of US$40 million and take on 10 per cent or 15 per cent equity with our partner. This is the model we are developing: a model that entails co-investment with investors that are interested in projects in Chile. What kind of investors are you attracting? They are mainly local investors, such as family offices, for example. To fully cater to foreign investors and family offices is the next step for us. We are fully competent in terms of consultancy and this, combined with our investment management business, means we are able to invest selectively in projects and also act as a channel for wealth management. This appeals to higher risk wealth management funds that are looking for projects that are ‘bite-sized’. We are administrating different funds and the number of funds is growing across many

What should potential investors in Chile be aware of in terms of challenges, issues and opportunities? Chile is a very good country in which to invest. However, you cannot compare Chile with many of its neighbouring countries, such as Argentina. In terms of regional competition, Peru is growing; however, the political climate in Peru is fairly unstable. The political environment is very stable in Chile. One of the main challenges you need to consider is the size of the market. Businesses cannot easily achieve the size they need to be efficient and profitable, unless you produce something that you can export. The lamb production industry, for instance, does not have a big market here in Chile, but has a big market outside of Chile. The basic strategy investors should consider is to begin here on a small scale and then achieve the necessary scale by exporting. Clearly, we know the television industry quite well and we are observing the evolution of the relationship between the television and the telecommunication sector. The telecommunications sector is growing in Chile and, in the case that an opportunity arises, we would be interested, but not for the moment. Our current focus is to diversify and use our knowledge and our credibility to start new enterprises in different sectors; however, it is not easy to discover really good new projects in which to invest. So far I think we have discovered two or three, which is enough for the time being, and we can wait for new projects in other sectors, where our partners have experience. I believe that online businesses and e-commerce will be a good area of growth for Chile. We also started a social fund, which began with just US$4 million. As a result, we are also looking for investors that do not necessarily want to invest in something with a very high rate of return in economic terms, but in something that provides a very high rate of return socially. This fund has mainly invested in small businesses over the last two or three years, and I am very happy to say we are now very adept at selecting small businesses of US$500,000 and growing them to US$1 million. However, in closing, I would like to add that, in these last four years, Chile has experienced significant growth. Investors who are new to the country should know that has to do with three main things: people, entrepreneurship, and their confidence in the government.

CHILE 55

international voice economy

A VALUABLE RAPPORT Hidenori Murakami, Japanese Ambassador to Chile talks to International Investor about the strength of the bilateral relationship and the potential of the Pacific Alliance agreement

from the outside but once they feel it, they try to sustain the relationship.

INTERNATIONAL INVESTOR: Why has the rich, bilateral relationship between Japan and Chile lasted so long? HIDENORI MURAKAMI: Generally speaking, Japanese businessmen trust the comfortable business environment in Chile. Japan also relies on the supply of natural resources from this country. Chile is our number one copper exporter, which is indispensable for the industry and livelihood of the Japanese nation. Chilean businessmen trust the way Japanese businessmen do business and see them as long-lasting partners and vice versa. This is key to having a reliable and deep relationship between the two countries. Also, the mindset of the Chileans and the Japanese are somewhat similar; Japanese business people are sometimes slow to respond to approaches

56 INTERNATIONAL INVESTOR

How can you best describe Japanese business interests in Chile? The Free Trade Agreement (FTA) had a very positive impact, not necessarily in terms of trade itself, but in the general confidence created by this treaty and the investment treaty, which together generated a surge of investment and trade. Copper is by far the most significant export from Chile to Japan, approximately 70 per cent of total exports, and the rest is mainly agricultural products like salmon, pork, wine and fruits, as well as forestry products. Exports from Japan to Chile are mainly machinery and automobiles and, surprisingly, we also export combustibles, such as kerosene. Other exports are equipment for construction and mining. Interestingly, with regard to the salmon market, technological cooperation from Japan helped to create and initiate aquaculture in Chile. It became an exporting sector due to joint effort between the two countries. I think the Japanese companies already involved have made a lot of investment in aquaculture and through that investment they are transferring the suitable technologies to Chile. However, Chile is already quite advanced in terms of disease control. What about the development of the economic relationship, are their any new trade partnerships or areas opening up in the near future? Chile and Japan signed an FTA in 2007, which lapsed after 5 years and we are in the phase of renegotiation. Another important development is the negotiation of the double taxation treaty. Currently, an agreement of this kind is not in place, but that doesn’t seem to have hindered any investment. However, once this is agreed, I think it will create an even better environment for Japanese investors. On the multilateral front, the regional integration initiative, the Pacific Alliance, and also the Trans-Pacific Partnership are under

The Pacific Alliance is a very good initiative, it is moving very quickly and it has substance

negotiation. These are areas where we would like to co-operate with Chile. So, with the conclusion of the Trans-Pacific Partnership negotiation, the progress of the Pacific Alliance negotiations and Japan’s co-operation in the Pacific Alliance as an observer state, we will expand the scope and area of our cooperation in Chile and in the region. The Pacific Alliance is a very good initiative, it is moving very quickly and it has substance. While other initiatives are taking very long time without many substantive results, the Pacific Alliance is making lots of progress in fields like the movement of people, elimination of visa of tariffs and combining particular regional markets. These four countries are not only becoming the focus of attention in Latin America from the other regional nations and the world, but they are also advancing the market. There are a lot of observers and potential observers who would like to become full members, Costa Rica, Panama, Canada, Australia, and maybe even Uruguay and Paraguay. I think there is huge potential. There are several initiatives that look to establish a ‘knowledge exchange’ between Chile and Japan. How important is this area of the relationship? The science sector is another area where we have a good relationship with Chile. The agreement between the two institutes of Antarctic research is a new development and one of the many initiatives we have. There are other areas as well, such as in the area of astronomy; Japan is part of the ALMA project and, of course, Chilean scientists are also involved. At the University of Chile, many academics are working together with us and at the University of Tokyo there is another project, which is called the Tokyo Atacama Observatory. Moreover, Japanese academics are researching about the prevention of disasters, for example, early warning systems for tsunamis. So, we work together in the area of systemic programs, which involves advanced communications technology and assimilation.

economy interview

LUKE Y. MUKAI MITSUI

President

INTERNATIONAL INVESTOR: Please tell us about Mitsui’s participation in the Chilean economy? LUKE Y. MUKAI: Generally, Mitsui has business interests in a wide range of sectors, such as energy, mineral resources, infrastructure, foods and chemicals. About ten years ago we evolved from a trading company, an intermediary for exports, imports and domestic commercial transactions, into an investment company with a focus on investing in businesses and sectors with good growth potential and where we can add value, especially businesses in the energy and mineral resource sectors. This is coupled with a corporate philosophy to contribute to the economic and social development of each country that we operate in through actively searching for new business opportunities that specifically add value to the economy. At a global level, 80 per cent of our US$ 3,275 million after tax profit is derived from energy and mineral resources related investments in commodities, such as oil, gas, iron ore, coal and copper. In Chile, we have invested in Collahuasi, Anglo American Sur (AAS), Los Pelambres and Caserones. In these investments, we have minority stakes and we act as financial investors. At the same time, we are also involved in trading of the production of these mines through other subsidiaries and investments. Apart from our main investments related to copper mining, we act as the Toyota distributor and provide auto loans. We are also in the business of fertiliser, wood chips, and salmon aquaculture. With regards to the automobiles, we want to increase the domestic market share of Toyota cars and this is also true for our fertiliser business. Regarding export businesses, such as salmon and woodchips, our goal is to increase sales to Asian countries, with a focus on China. These areas represent our trading business interests where we take an active role. In terms of businesses in which

CAREER DEFINING MOMENT

As an economics student, I studied for one and a half years in Mexico. I wanted to use my Spanish during my career and also contribute in development of Latin America countries. Mitsui with its subsidiaries in Spanish speaking countries provided me with the chance to do this. I have been working for Mitsui for 33 years, most of that time has been spent in Latin American Countries: Mexico, Colombia, Venezuela, and since 2013, Chile. LESSON IN BUSINESS

To always look for opportunities to provide solutions and business contributions that work for both customers and the countries where you work. we play the role of an investor, this includes investments in power generation, water, ports and a liquefied natural gas (LNG) terminal. Our investment and financing has doubled in the past two years, mainly in the mining industry. At the moment it has reached a figure of around ¥400 billion. What projects that you participate in do you consider most interesting? One of the sectors in which Mitsui has concentrated its investments is mining. This is highlighted by our partnership with Codelco in the purchase of Anglo American Sur, our participation in Pan Pacific Copper with the development of Caserones, and the stake we have in Collahuasi. We have been working together with Codelco since the strategic alliance agreement last year, where we look to assist by proposing solutions for business management and, through peripheral business and trading, utilise Mitsui’s comprehensive strength. In addition to collaboration on mining investment, we are looking at other areas where our total and integral power can be used as an advantage. In this sense, we are always studying new projects. We are still learning about mineral

resources industry in Chile, so for now we are financial investors, but we are involved in the trading aspect of minerals. We analyse opportunities considering the investment environment, as well as the situation of the market and select good competitive projects. We have already done business in supplying machinery for mining and infrastructure and have developed mining-related businesses. We are also studying the opportunity to participate in desalination projects with potential partners. Anglo American Sur operations have been going well recently. Although we will have to observe the trend in the prices of copper and its impact in this business area, we look forward to the contribution AAS will make to overall profits. Also, the operation of Collahuasi has been improving and it is expected to meet the production goals for 2013. With regard to the Caserones project, the production of copper cathodes has already started and the production of copper concentrates is planned from the end of January 2014. We will make every effort, with the collaboration of Pan Pacific Copper, to begin production of concentrates, as planned. What are your plans in relation to the energy sector? We have investments in shale gas extraction in the U.S., which presents potential synergies across all business units from production to transportation, distribution, generation and trading of gas and derivatives products, such as condensates. We also have investments in areas of the petrochemical industry that utilise gas, so we have investments all along the value chain. In Chile, we are studying some coal, gas and renewable energy projects. We expect to invest several tens of billions of yen. At the moment, we don’t have an investment that has materialised yet. However, we are interested in Luz Minera. We have an interest in renewables, such as solar and wind power, but we are not tied to any specific projects. Our number one priority is conventional energy projects. What is your view on the salmon industry and the opportunities it presents? The salmon aquaculture industry is characterised by volatile prices because there are still many small and medium-sized enterprises in Chile. However, that said, due to the strengthening of the regulatory environment, a restructuring of the industry is expected in the future. We have invested in the aquaculture business and our ability to market salmon to China, in addition to servicing the strong demand from Japan. Similarly in Brazil, where we have invested in grain production and are also involved in transporting and trading grain.

CHILE 57

interview economy

EDUARDO DE LA MAZA DE LA MAZA Y ASOCIADOS Partner

INTERNATIONAL INVESTOR: How do you differentiate yourself from other investment focused law firms in Chile? EDUARDO DE LA MAZA: Smaller firms, in general, are not only different in size, but also in areas of practice. However, we are a spin-off from a bigger firm and, as a result we are capable of providing services at the same quality as a larger firm. We have good exposure to the market and we are an established business with local contacts. Knowing local people in Chile is critical and it makes us a valid counterpart. Even though, as a small firm, it can be difficult to get the big accounts, we have the flexibility and we are a good alternative for small and medium-sized investors. We are able to pay greater attention to their concerns because they are more important to us than they would be to a big law firm.

There will be an increase in demand for apartments to rent... it would be very interesting if an institutional investor or a fund were to acquire a residential building Our different business areas fit well together mainly because of our clients. All clients, at some point, tend to present different kinds of requirements, but this is particularly the case when you are reorganising the assets of wealthy families. I used to work with about five major family offices in Chile and they often act as investors in a variety of different kinds of projects. In terms of the corporate area, we focus strongly on mergers and acquisitions. We do a lot of work in finance and, in that regard, I think that the firm benefits from my experience in the securities commission, the equivalent of the Financial Services Authority in the UK. I was a senior lawyer there for six

58 INTERNATIONAL INVESTOR

CAREER DEFINING MOMENT

In my second year of law school, I started getting more interested in business and even considered switching to a business course, but I became a father so I didn’t have the luxury of changing and starting again with a different discipline. My careerdefining moment was when I got the opportunity to run a business and practice law at the same time. LESSON IN BUSINESS

To be able to learn from failure. years and then I spent another six years at a major law firm as the attorney for banks and credit rating agencies. In this role, I got the opportunity to obtain a deep understanding of some of the larger transactions. We also counselled some issuers of debt and stocks, focusing on assessing securities, before they went to market. Where are the opportunities today in Chile’s real estate market? I think commercial real estate is interesting here in Chile. Over the last five years, this has been epitomised by the development of strip centres, which are small commercial centres often located at a street corner. Until 2011, it was possible to gather capital into a fund and acquire real estate assets by the fund directly. As the fund was only a vehicle and not a taxpayer, it was possible to construct a building, sell it, and make a profit with the tax deferred until the profits were distributed. That stimulated the construction of the financial district in Santiago. The developers would construct a building and then sell to an insurance company. The insurance company, in turn, would rent out all of this office space. However, now the market is more or less saturated. Going forward, most of the development will be in Santiago and investors are looking for different types of assets. Perhaps in the

last 5−10 years it was strip centres, 20 years ago they discovered shopping malls, but, today, a clear new trend has yet to emerge. Regarding the residential market, one thing I have noticed is that, in Europe or the US, all the buildings are very well maintained and renovated on a regular basis. In Chile, there are a large number of buildings that have become dilapidated. This is due to the fact that most people buy, as opposed to rent. When you have rotation of ownership, people do not invest that much in renovation and so the condition of many buildings has really deteriorated in the last 30 years. I think that institutional investors, such as insurance companies, will enter the residential renting business. So far they are only in the development of residential properties; they build and sell like everybody else builds and sells, it is a three-year cycle. There will be an increase in demand for apartments to rent in the near future and it would be very interesting if an institutional investor or a fund were to acquire a residential building with the sole purpose of maintaining and managing it. Another area of interest relates to warehousing. Warehouses are being built for medium-sized companies that are mainly branches of foreign companies. We are certifying them with lead environmental certificates. Some of these projects are good for investors looking for quality storage space. What are your views on the renewable energy sector and the growth opportunity it presents for the local wealth management community, as well as foreign investors? I think that solar energy should be the flagship technology because of the natural conditions in Chile. It is interesting to note that Germany happens to be the biggest producer of solar energy in the world, but it is always cloudy out there! The point is that, with recent technological advances, it is now possible to produce not only with direct radiation, but also with indirect radiation. The north of Chile is huge and land is very cheap because you can rent from the government, with very good leasing terms. The rule of law is good here, so if you sign a lease with government, you can be sure that they will respect it, it is almost like owning the place. So there is a vast untapped area to place panels, excellent irradiation and energy hungry mining clients to cater for. Also, there has been a huge change in this field because of the changes in the prices of the equipment. For instance, the infrastructure for generating one megawatt five years ago used to cost US$8 million, now it costs only US$2 million. Collectively, these conditions make for a very interesting investment opportunity.

banking & financeâ&#x20AC;&#x192; overview

BANKING & FINANCE The banking industry is moving to a more agile banking model based on cost reductions, processes and resource efficiency in order to drive profitability. This trend is likely to intensify in the Chilean market in the near future and the pursuit of growth is seeing banks venture abroad.

STRENGTHENING AND BRANCHING OUT

The Central Bank was created in 1925, and it is an autonomous institution of constitutional rank

HISTORY The banking industry in Chile has undergone many changes since the 1970s. At that time, it was characterised by a limited product offering, minimal competition, high margins and almost non-existent professionalisation. The use of technology was not commonplace and was limited in scope to very basic computer applications. In 1973, the banking industry began to open and, from 1975 onwards, many banks, which had previously been nationalised, started to be privatised. Several important measures were enacted during this period, such as the liberalisation of credit loans; the reduction of the reserve requirement on domestic currency deposits; access to external credit; and the liberalisation of interest rates. In the 1980s, after the 1982â&#x2C6;&#x2019;1984 financial crisis, competition increased, while high margins were maintained. Technology professionals began to acquire a greater presence in

the market, computer power improved and more emphasis was put on centralised batch processing and the transactional management of large portfolios. Also, during this period, ATM machines were introduced into Chile. At the end of 1986, a comprehensive bank reform was implemented introducing substantial changes in the legal framework for the industry in line with modern concepts of prudent regulation and effective supervision. As a result, the state had to intervene in 14 banks and 8 finance companies. Eight of these banks and all the societies were liquidated and closed. Furthermore, mergers and special drawing rights took place, reducing the number of institutions from the 63 that existed in 1981 to 40 in the late 1980s. Due to these mergers and acquisitions, some very large banks were created and were able to obtain a significant market share. The business climate also created space for niche banks, with high levels of specialisation in

certain areas or business lines, to emerge. Cheaper financing lines, in terms of interest rates and commissions, price competition, and regulatory changes fostered the reactivation of the economy. As a consequence, financial institutions had to generate greater operational efficiencies by introducing automation processes and ensuring better business management practices. Moreover, regulatory agencies imposed new measures related to information processing, forcing the banks to be increasingly computerised and automated. Many changes occurred in the banking and finance sector during the 1990s, the most important of which were a high growth rate and increase in operational efficiency of the main players, consolidation and market concentration, and the international integration and an increase in foreign participation in ownership. In recent years, the system has faced lower growth rates, domestic inflation in the range of 2 to 4 per cent, and historically low interest rates. This has had consequences for the banking system; placements have disrupted the high growth trend that has been salient for approximately 12 years, and the provisions that have been set and the writeoffs that have occurred have been unlike anything seen in the last 15 years. All this has generated the need to increase internal efficiency levels. Consequently, a new scenario seems to be evolving in the banking system, and it will likely be characterised by: stabilised portfolio risks; a more open system allowing the entry of new institutions; the emergence of new sources of business financing, like credit unions, commercial houses and compensation funds; and more flexible regulation. Today, it is not just banks and financial institutions that are involved in financial business. New players are constantly entering the market, especially retail sector companies

CHILE 59

overview banking & finance

financing consumer operations. This reality has imposed a more demanding climate in which banks, traditional or otherwise, are operating. GENERAL CONTEXT Currently, it is the banks that are the financial intermediaries with greater presence in the market. In Chile, there are 25 commercial banks in operation and they are supervised by the Superintendency of Banks and Financial Institutions (SBIF), which also controls the operations of other financial institutions in the system. These banks have nearly two million branches spread throughout the country. The Central Bank plays a special role in the system, establishing the monetary and exchange policies, through which it ensures the stability of the currency and the normal functioning of the internal and external payments. Another important institution in Chile’s financial system is the Santiago Stock Exchange, which is the main trading centre of the country on which more than 150 companies are listed. The Chilean stock market has experienced a considerable increase in size in the last 20 years due to the order and balance achieved in the economy. Much of this expansion is due to the experience gained as a result of the economic crisis in 1982, which led to many reforms that helped stabilise the system and reduce risk. The current pension system is considered by some to be one of the most innovative reforms in the economic history of Chile. The system is privatised and citizens can choose between five Pension Fund Administrators (AFP) to accumulate pension savings. These AFPs collect 10 per cent of the gross wage of its contributors, the money goes to an individual account and it is invested in bonds with fixed or variable income or, alternatively, in other economic sectors. REGULATORY AGENCIES There are four regulatory agencies in the financial sector, namely, the Superintendency of Banks and Financial Institutions (SBIF), the Superintendency of Securities and Insurance (SVS), the Superintendency of Pensions (SP) and the Central Bank. SUPERINTENDENCY OF BANKS AND FINANCIAL INSTITUTIONS The Superintendency of Banks and Financial Institutions was created in 1925 and it is an autonomous public institution related to the government through the Ministry of Finance. The mandate imposed by the General Banking Law is for SBIF to supervise the banks and other financial institutions in order to safeguard depositors and the public interest.

60 INTERNATIONAL INVESTOR

1. CHILEAN BANKING PERFORMANCE INDICATORS 60%

50.55

49.93

16.52 15.92 13.10

50%

50.28

50.19

15.07

14.45

14.48

14.10 13.42

13.47 13.23

13.59 13.18

Apr-13

May-13

Jun-13

40%

30%

20%

10%

Jun-12

Jul-12

Aug-12

Sep-12

Oct-12

Efficiency

Nov-12 ROE

Dec-12

Jan-13

Capital Adequacy

Feb-13

Mar-13

ROAE

Source: Superintendency of Banks and Financial Institutions

CENTRAL BANK The Central Bank is an autonomous agency with constitutional status (and technical character) with its own legal entity and assets. It is tasked with ensuring the stability of the currency and the normal functioning of payments in Chile, both internal and external. To this end, it has different responsibilities related to the following areas: the issue of banknotes and coins; regulation of the amount of money in circulation; regulation of the financial system and the capital market; the power to control the stability of the financial system; fiscal agent functions; and authority related to foreign exchange transactions and statistical functions. SUPERINTENDENCY OF PENSIONS The Superintendency of Pensions is the controlling entity that represents the State within the Chilean pension system. Its purpose is to monitor and control the Solidarity Pension System administered by the Institute of Social Security, Private Pension Fund Administrators (AFP) and the Severance Pay Fund Administrator (AFC), an organisation that collects contributions, invests resources and pays unemployment insurance benefits. SUPERINTENDENCY OF SECURITIES AND INSURANCE (SVS) The Superintendency of Securities and Insurance is a body whose role is to supervise and regulate the activities and entities involved in the securities and insurance market in Chile. SUMMARY OF THE CURRENT BANKING LANDSCAPE IN CHILE As of June 2013, placements grew in twelve months at a rate of 9.3 per cent. Commercial loans rose by 8.9 per cent, consumer loans

by 9.7 per cent and housing loans by 8.9 per cent. Total deposits recorded an increase of 7.8 per cent in the 12 months preceding June 2013. In the same period, the trajectory of the Provisions for Loans index was slightly downward, confirming the trend in the second quarter of 2013, reaching 2.3 per cent in June 2013. The trajectory of the index of loans in arrears of 90 days or more, showed a significant drop in the 12 months preceding June 2013, reaching a value of 2.2 per cent. However, a slight increase was observed in the second quarter of 2013, specifically in May. The banking system maintained its financial strength characteristics presenting a capital adequacy of 13.2 per cent (see fig.1, June 2013). Regarding operational efficiency indicators, the index of operating expenses to operating revenues reached 50.2 per cent, while the index of operating expenses to assets was 2.3 per cent (see fig.1). MARKET PLAYERS There are currently 24 banks established and operating in the country. Of this number, 18 are considered ‘banks established in Chile’, which are: Banco de Chile, Banco Internacional, Scotiabank Chile, Banco de Crédito e Inversiones, CorpBanca, Banco Bice, HSBC Bank (Chile), Banco Santander-Chile, Banco Security, Banco Falabella, Deutsche Bank (Chile), Banco Ripley, Rabobank Chile, Consortium Bank, Banco Penta, Banco Paris, Banco Bilbao Vizcaya Argentaria, Chile (BBVA) and Banco Itaú Chile. There are 5 branches of foreign banks in the country, these being: Banco do Brasil SA; JP Morgan Chase Bank, N. A.; Banco de la Nación Argentina; The Bank of Tokyo-Mitsubishi UFJ,

banking & finance overview

2. EVOLUTION OF THE NUMBER OF ISSUERS IN CHILE 500

400

300

200

100

2002

2003

2004

2005

2006

2007

2008

2009

2010

Foreign Capital Investment Funds Housing Funds

Mutual Funds Investment Funds

Source: Superintendency of Securities and Insurance

3. EVOLUTION OF THE NUMBER OF INVESTORS IN CHILE 35 30 25 20 15 10 5 0

2002

2003

2004

General Fund Administrators Mutual Fund Administrators Investment Fund Administrators

2005

2006

2007

2008

Foreign Capital Investment Fund Administrators Housing Fund Administrators General Insurance Companies

2009

2010

Life Insurance Companies

Source: Superintendency of Securities and Insurance

4. EVOLUTION OF THE NUMBER OF INTERMEDIARIES IN CHILE 60

2002

2003

2004

2005

2006

2007

2008

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Securities Agents Brokers Rating Agencies and Clearing Houses Source: Superintendency of Securities and Insurance

“Chile has the strongest sovereign bond rating in South America and is the first country from that continent to join the Organisation for Economic Co-operation and Development. It is the world’s leading producer of copper. An innovative, countercyclical fiscal policy accumulates surpluses when copper prices are high and operates in deficit only when prices and economic activity are low. This has helped to maintain fiscal balance. The economy is very open to imports, but is also an export powerhouse in minerals, wood, fruit, seafood, and wine. Contractual agreements in Chile are the most secure in Latin America. Courts are transparent and efficient. Property rights are strongly respected, and expropriation is rare. Lingering intellectual property rights concerns involve protection of patents and copyrights, although the government has amended its copyright law, ratified the Trademark Law Treaty, and approved the International Convention for the Protection of New Varieties of Plants. The top income tax rate is 40 per cent. The corporate tax rate increase instituted in 2010 was temporarily lifted during the first half of 2012. Other taxes include a value-added tax (VAT) and a property tax. The overall tax burden equals 17.3 per cent of GDP. Government spending is 23.3 per cent of total domestic output. Public debt is about 10 per cent of GDP. Chile has made progress in eliminating regulatory bottlenecks. It takes eight days and seven procedures to start a business, with no minimum capital required. Bankruptcy procedures remain cumbersome. Minimum wage increases have exceeded overall productivity growth in recent years, but labour laws generally facilitate efficient hiring and dismissal procedures. Inflation has risen slightly in the wake of continuing strong domestic demand. The trade-weighted average tariff rate is 4 per cent, and non-tariff barriers are relatively low. Chile has actively pursued free trade deals with many countries. Guided by a transparent and efficient investment regime, foreign and domestic investors generally receive equal treatment. With the well-capitalised and stable banking sector offering a wider range of services, the financial system remains one of the region’s most stable and developed.” Source: The Heritage Foundation

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overview banking & finance

Ltd; and DNB Bank ASA. There is also the State Bank, Banco del Estado de Chile. MARKET TRENDS & OPPORTUNITIES INTERNATIONALISATION OF CHILEAN AND LATIN AMERICAN BANKING The last amendment to the General Banking Act legislated for the possibility of domestic banks doing international business, which may be effected through three channels: crossborder loans and financial investments; the establishment of branches or representation offices abroad; and direct investment in shares of banking companies established abroad. Cross-border placements are loans granted from Chile to another country without direct commercial presence. These credits may be granted by local banks, either to support the bank’s customers and grant funding for their operations abroad, or by finding new customers abroad, in accordance with agreed upon regulations. Such regulations are mainly related to the amount and type of operations allowed and to the provisions related with the assessment and recognition of the country’s risk. Regarding bank branches or subsidiaries abroad, the most important requirements relate to the conditions of macroeconomic stability and to the regulatory system of the country in which the branch is going to operate. It also has to guarantee the correct operation of the branch and have a permit from the Superintendency of Banks and Financial Institutions to develop the controlling acts that may be required in the particular country. TECHNOLOGY REVOLUTION Technology is revolutionising the world with universal computing, large volumes of data, social networking and other advances that are changing how we think, buy, connect and work. The vast majority of traditional sales are now influenced by online searches and/ or digital communication. Data collection is already providing useful insights in areas such as fraud detection, customer interests, intelligent prediction, customer segmentation, targeted marketing and customer service. Cyber security continues to be a pressing issue. Cyber-attacks are expected to increase in frequency, which will result in greater focus on cyber security at the highest levels of organisations and potential legislative approaches to ensure security. An interesting example of this is the recent adoption of the EMV chip. The chip is an antifraud device that the Chilean banking system has been developing during the last years to avoid card cloning, which is a major problem in the country. Many issuers are already launching new cards incorporating this technology in the market.

62 INTERNATIONAL INVESTOR

In terms of innovation, new payment terminals from Transbank, the only payment processor in Chile, are beginning to arrive in the country. These terminals support Near Field Communication (NFC) technology that enables contactless payments by just tapping the card on the payment terminal, an important step for mobile payments. Furthermore, the first mobile payments pilot program was launched in August 2012, which allows for payments through NFC enabled devices. The initiative is being driven by Movistar, Banco Santander, Samsung, MasterCard and Oberthur Technologies. Other initiatives have been developed on mobile payments in Chile; for example, there was a pilot between Transbank and Kuapay using Quick Response (QR) codes. Moreover, PwC Chile has have developed a strategic and comparative analysis of the different global mobile payment business models, which includes an assessment of those business models that would be the most suitable for the Chilean market. It also included the analysis of the strengths and weaknesses of each of the models studied. AGILE BANKING Another significant trend that is currently impacting financial institutions is the new way in which banks are operating. They are attempting to be more agile in the market and reduce costs. There are many banks in Chile operating with fragmented or duplicated business processes and not leveraging their technological resources in an optimal way. The market is trying to move to a more agile banking model based on cost reductions, processes and resource efficiency in order to drive profitability. This trend is likely to intensify in the Chilean market in the near future. CUSTOMER CENTRIC Creating a positive impact on customer experience and building products around this idea is another important trend in Chilean banking. Clients are changing and are now a lot more aware of their ability to make choices. Moreover, thanks to social media, clients are significantly more connected and can make their views known in public fairly easily. Client expectations are growing constantly and, in order to satisfy them, there is likely to be an increase on the investment in digital media and technology, such as mobile banking, online payments or mobile payments. Clients are consistently demanding more digital services than Chilean banks are currently offering. In an industry in which the products have essentially been the same for the past 100 years, new trends are inclined to avoid uniform products and traditional pricing structures in order to listen to the voice of the customer,

who wants to buy innovative banking products adjusted to their own profile. In this way, clients can be provided with the value they are looking for in their banking experience. Different benchmark studies and several reports that reflect this change have been carried out by PwC Chile. The body of work reveals the importance of understanding not only the shift in the digital world, but also the responsibility that corporations have to really understand their customers. STRENGTHENING FINANCIAL INTEGRATION Within the framework of a capital increase from the Inter-American Development Bank (IDB), global and regional integration was established as an institutional priority. This priority reinforces the support of the IDB to the integration efforts that are taking place in the region, particularly related to the Pacific Alliance. Recently, the Pacific Alliance countries ratified the decision to financially integrate at the IV Summit of alliance countries held in Paranal, Chile, confirming its support for progress both in the technical and regulatory aspects of the integration process of the Mexican Stock Market with the Latin-American Integrated Market (MILA), already formed by the Chilean, Colombian and Peruvian stock markets. Given the current financial crisis, the LatinAmerican Integrated Market has obtained substantial gains, accumulating a capitalisation growth of 21.3 per cent from the beginning of 2013 to the end of April 2013 reaching US$727 million. This new market is now the second largest in Latin America and the Caribbean after Brazil, which is valued at US$1,500 million, and ahead of Mexico, which is valued at US$460 million. In terms of the number of listed companies, MILA is the largest market in the region with 544 companies, Mexico has 427 and BOVESPA (Sao Paulo) has 381. Additionally, Standard & Poor’s index MILA 40, which measures the performance of that market in New York, showed an increase of 1.3 per cent in April 2013, closing up with a rise in local indexes during the previous 12 months of 16.5 per cent for Peru, 13.6 per cent for Colombia and 9.8 per cent for Chile.

banking & finance interview

RODRIGO VERGARA CENTRAL BANK OF CHILE Governor

INTERNATIONAL INVESTOR: How would you define the role of the Central Bank in Chile? RODRIGO VERGARA: The Central Bank’s mandate is both price stability and the proper functioning of the payment system. We have an inflation target scheme that has been in place since 2000 and since that time inflation has averaged 3 per cent, which is the goal we have been aiming for. We are pleased that this objective has been met successfully. We also have a role in relation to maintaining financial stability, so we participate in the council of financial stability and publish a financial stability report. We also play a regulatory role regarding several aspects of the banking system.

Per capita income and purchasing power in this country are the highest in Latin America What do you believe are the main threats to the financial stability of Chile? What plans do you have to mitigate these threats? The main threats, at least in the short term, are coming from abroad. Chile is a small, open economy, so it is very important what happens in the rest of the world. For instance, the recovery of the U.S. and financial stability abroad are extremely important for Chile. The eurozone is improving, but I think that, in the next two or three years, growth in the advanced world is going to be driven by the U.S. Any global volatility will have some effect on our economy. Secondly, around a quarter of Chilean exports go to China. China is our main trade partner and the largest consumer of copper worldwide, so the copper price depends very much on what happens with the Chinese economy. In the last few years, we have seen some slowdown in the Chinese economy, now growing between seven and eight per cent.

CAREER DEFINING MOMENT

It was when I was appointed governor of the Central Bank of Chile two years ago. Being the head of this institution is a very important and demanding challenge. LESSON IN BUSINESS

In Chile, we are doing very well, but that does not guarantee that we will do very well in the future. We have to stay concerned, make necessary reforms and be active by looking at different risks and problems that might arise in the future. Never be complacent and never believe that you are done. That is below the growth rate of the last five years, but it is still a very high growth rate and, of course, we must remember that the Chinese economy is now much bigger. From an internal point of view, we have a lot of challenges. Chile had an economic growth rate averaging 5.5 per cent over the last three decades. Over the last four years, it has matched this longer term average growth rate. If we want to maintain this pace of development, we need to increase our productivity and implement reforms in several areas such as energy, education and improving the skills of our labour force. What effect has the emerging middle class had on the economy? Per capita income and purchasing power in this country are the highest in Latin America. We have a growing middle class that now has access to goods and services that were unimaginable 10 or 20 years ago. That is definitely a big success, however, it poses new challenges. The new middle class is more demanding and aware of their rights, which I think is good, but it is important to be aware of the restrictions that we have as a country. Demands, such as more goods and services, better quality of education and health, as well as pensions are legitimate,

however, it is important to be clear that not all these demands can be satisfied at once. Trying to satisfy all these demands in a very short period of time can cause disequilibrium and we must manage this carefully. Then there is the middle-income trap, in which countries that get to the middle-income level are not able to break through and become a high-income country. That is a big challenge for Chile in the coming years. I am optimistic and I think the country has the institutions to overcome this challenge successfully. We have to navigate this transition with intelligence. Chile has the deepest financial market in Latin America and the middle-income bracket of society has access to many financial services, consumer loans and mortgages, for example. There is a growing market in terms of all types of financial products for the consumer. Local and foreign banks are expanding services in to this market, but there is room for more institutions if they wish to come. The Central Bank, of course, keeps an eye on the growth of household debt. Fortunately, what we have observed is that the ratio of household debt to income has actually marginally declined during 2013. This is important because it means that consumption increases in the middle class are basically being produced through labour income as opposed to through debt, which is good for financial stability in the medium term. Are you concerned about lower FDI driven capital inflows and what is your overall outlook? The country has had a lot of FDI in previous years, driven by a boom in mining investment. All over the world this boom has been levelling off. So, I think we can expect a lower contribution of the mining sector to FDI as a result. The World Economic Outlook, prepared by the IMF, had three case studies of countries with resilient capital accounts. One was Chile. These are countries that have received large capital inflows, but also have large capital outflows, both FDI and portfolio outflows. The result is more stable net capital flows. Chilean companies and institutions, such as pension funds and insurance companies, are investing abroad; so net flows have been somewhat smaller. Thus, I do not see major issues here. We have been very successful in the last three decades and now we have new challenges, both in terms of developing our middle class and in terms of increasing productivity in order to maintain our growth rates for the next ten years. We are already a middleincome country and we would like to become a developed nation. Now, we have to maintain what we have done, whilst implementing changes to face this new stage in the Chilean development process.

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interview banking & finance

FERNANDO MASSÚ CORPBANCA

Chief Executive Officer

INTERNATIONAL INVESTOR: Please tell us about the banks operations and activities in Chile? FERNANDO MASSÚ: The Chilean banking industry has a penetration of around 80 per cent of GDP. That means that the banking industry is highly developed in Chile relative to the other countries in Latin America, where the average is 40 per cent. Thus, most of the financial products you find in developed markets, you can find in Chile. Also, the majority of the banks class themselves as ‘universal banks’, meaning that they approach different segments, from the various retail sub-segments to medium-sized companies up to big corporations, servicing all types of clients. We do not see many banks that are only operating in a niche of the market.

We have a very concentrated banking industry in Chile. The four main private banks have a market share of approximately 60 per cent We have a very concentrated banking industry in Chile. The four main private banks have a market share of approximately 60 per cent. If you add Banco Estado, which is a public bank with 13 per cent, the five major banks have over 70 per cent, so it is very concentrated industry indeed. As penetration goes up, spreads are going down, increasing competition in an already very competitive industry. Banking is also very regulated industry; we have a very solid institutional framework in Chile and independent authorities that are supervising the banking industry. It is a very open industry and you can obtain funds locally and from abroad. Moreover, there are not any barriers for entry into the Chilean market so multinational investment banks such as JP Morgan, Bank of America and Merrill Lynch are already here.

64 INTERNATIONAL INVESTOR

CAREER DEFINING MOMENT

The most important point in my professional career is to be part of this bank, while it is expanding abroad, and having the opportunity to deal with the challenges of this strategic plan. It is really interesting and attractive for me to be part of transforming the industry. LESSON IN BUSINESS

You have to rise to all challenges and accept them, even if it seems very difficult. Do not to be afraid to go for it. It’s important to lead and be a driving force in the market. In summary, the banking industry in Chile is much more developed than the rest in Latin America; it is well regulated and very open. CorpBanca, due to the high banking penetration and fierce competition, is looking to become a regional bank. In other investmentgrade countries, we also see an institutional framework similar to the one in Chile, as well as some other very well regulated markets, together with solid independent authorities that regulate the banks. However, outside Chilean borders in the region we can identify better spreads with relatively low risk and the opportunity of introducing products and knowledge from Chile. That is the reason we settled on a strategic plan in order to become a regional bank in the future and the reason we began operations in Colombia. What are the most exciting areas in the Chilean economy from a banker’s perspective? The GDP per capita is growing very fast in Chile. At the moment it is around US$19,000 per capita per annum and individuals are getting wealthier. Those products relating to wealth management, such as sophisticated programs for savings, will be a good target area for banks to focus on.

Another interesting segment are mediumsized companies because there are a lot of opportunities to develop in Chile. These kinds of companies represent more than 80 per cent of employment in Chile. They are also very important from a retail perspective because the directors and senior management of these companies represent the segment of the market in which wealth is growing. Therefore, there are a lot of benefits to building client base and brand within this market, as it can lead to wealth management opportunities with the sector’s employees. At CorpBanca, we are putting a lot of effort into approaching these companies and retail clients. All the targets of products related to private banking, from wealth management and to medium-sized companies, are the main focus of different domestic objectives. What are the challenges that you think you are going to face in those areas? The challenge in this regard is a phenomenon that is occurring in all emerging markets, which is that a lot of international financial institutions are coming to Chile. For example, there are acquisitions, like BTG Pactual acquiring Celfin that recently got approval to operate as a bank. They are working very hard in order to take this approach to target prospects as well and the same is true for Peru. There is a lot of movement around the region to get strategic positions in order to get direct access to these types of clients in countries that are improving their wealth. So, we will be seeing fierce competition coming not only from inside Chile, but also from abroad. How is CorpBanca differentiating itself in this environment? It is difficult to differentiate yourself in terms of products and quality of service because it is very easy to copy one product from another place. You are not going to find products that are very distinct here in Chile because companies mostly offer the same. Maybe the big names coming from abroad can offer a broader range of funds and more countries to invest in. What we offer to our client base are mostly things that are happening in our own country. For example, we can get to local projects and investment ideas faster and with a deeper understanding than the overseas competition. That is a differentiating factor and something very difficult to copy. Also, there is a big advantage in being Chilean, there is a lot of kudos that comes with that and it is something you definitely cannot replicate. What can you tell us about the acquisition of Helm Bank and your strategic objectives for Colombia? Before acquiring Helm Bank we had already

banking & finance interview

decided on becoming a regional bank. We chose Colombia as our first location for expansion because they have a much lower banking penetration, around 30 per cent compared to Chile’s 80 per cent. Furthermore, Colombia has a solid institutional framework and the population is almost three times that of Chile. We think that if the peace agreement evolves at a good pace, Colombia is going to improve their growth rate significantly. So, there are a number of components that make Colombia’s market very attractive. We first bought the operation that Banco Santander had in Colombia in June 2012. With this acquisition, we gained about a 3 per cent market share and we started to look for other acquisitions. Then, at the end of 2012, we made a commitment with the owners of Helm Bank in order to analyse a potential future transaction. That transaction was completed in August of 2013, when we finally bought Helm Bank.

We are going to be a very relevant bank in Colombia; we will be the fifth largest bank in the country We are going to be a very relevant bank in Colombia; we will be the fifth largest bank in the country in terms of market share. We believe we have the right size in order to compete within the industry. There is a very good opportunity not only with local companies and the retail area in Colombia, but also with Chilean companies going abroad. More than 120 corporate clients of our bank in Colombia come from Chile. Colombia is in vogue and there will continue to be a lot of investment flowing into this market. How does this fit into your broader internationalisation and regional plans? First, we have to consolidate our operations in Colombia. In less than a year we bought two banks and we are waiting for permission from the Colombian authorities to merge these banks. We hope to obtain authorisation for this merger by March 2014 and we are also aiming to develop all the synergies that we planned to obtain with this merger. CorpBanca is going to almost double its net revenues in the next two to three years, so we will become a different bank with a different size. That is our major focus right now. What can you bring to the market and how will you facilitate expected growth? If you see the financial products that are in Colombia right now, they are essentially plain,

vanilla products. When a country develops, one of the main areas that develops simultaneously is mortgages, as a result of a rise in real estate ownership. In the retail segment, for example, mortgages are very important and in Chile you have many different products relating to different tenures, different currencies, some with fixed interest rates and some variable rates. There are a lot of different types of products in order to meet the requirements of every client. In Colombia, you only have one type of product. Moreover, in terms of retail investment products, Chile has a large number of different products depending on the needs of each client. In Colombia, the industry is much less developed in that sense and we have the potential to bring all those products that we offer here in Chile to Colombia. Another point worth noting is that our Chilean operations have a better credit rating than our operations in Colombia. Thus, some operations can be funded with the rating from Chile, while applying the funds in Colombia; this decreases the cost of the capital obtained for the Colombian business. In addition, when looking at efficiency ratios such as cost to income, in Colombia, the ratio is around 58 per cent, compared to Chile where the number is around 45 per cent. So, there are a lot of potential improvements that can be made in these areas, which will translate into better prices for clients. We will take advantage of all the opportunities that our Chilean business presents in terms of products, ratings, funds and know-how.

Chilean industry is transforming from having a local market base to having a regional market base and we are going to see a higher presence of Chilean companies in the region

authorities as well as a very good separation between politics and economics. This isn’t the case for Venezuela or Argentina. Chilean industry is transforming from having a local market base to having a regional market base and we are going to see a higher presence of Chilean companies in the region as the Pacific Alliance develops. If, through the Pacific Alliance, agreements are reached in terms of harmonising taxes, in terms of capital funding and free market movement, there is the potential to really increase the scale of penetration and even compete with markets like Brazil. We are also going to see an increase of foreign companies coming to Chile. This is a phenomenon that is happening, so going forward it will be interesting to see how Chilean industry reacts to this challenge.

Apart from thin margins domestically, what else has been the catalyst for this strategy and does it have anything to do with the Pacific Alliance? It is worthwhile noting that the banking industry is the last sector to expand within the region. Supermarkets, for example, are very developed Chile. If you see the penetration figures in Chile, they are below developed countries, but far above other Latin American countries. With a population of around 17 million, Chile is a country without much space to grow. Consequently, supermarket chains like Cencosud and other large companies like LATAM Airlines Group have entered Colombia and Brazil already. Retail companies, like París and Falabella, are in Peru, Colombia and Brazil. We are the first Chilean bank to go abroad. The countries that are going to be very attractive are the ones in the Pacific Alliance because they have very similar economic and financial conditions. All of them have a very solid institutional framework, independent

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interview banking & finance

ALBERTO SCHILLING BANCO BICE

Chief Executive Officer

INTERNATIONAL INVESTOR: From a commercial banking perspective, what are the most exciting sectors in Chile’s economy today? ALBERTO SCHILLING: There has been lots of activity in the real estate and infrastructure sectors; growth in these areas has been very strong. Moreover, as these sectors are not too big or too international, they primarily get there financing from commercial, Chilean banks. It is an important area from a commercial banking perspective. In terms of the energy sector, when projects get approval they are very important, but recently many projects have stalled before they get going. Nevertheless, the sector always gives the appearance of activity and velocity, and always takes up a large amount of newspaper copy. The retail sector has been performing very well. In fact, some Chilean retail companies have outgrown the country’s market and have become regional players. Chilean banks are still important in this sector to an extent, but they have lost a degree of intimacy with the industry as the major retailers have tapped into international capital markets for their financing needs. The mining sector is certainly booming; however, Chilean commercial banks are outside of the centre of activity of the big mining companies. We have little direct exposure to the Chilean mining sector, large Chilean mining developments generally belong to big, internationally listed companies, which raise their project finance or corporate funds for development internationally. Consequently, Chilean banks have not become experts in mining and do not have the knowledge to really get into mining project finance. Instead, we have concentrated on the prodigious growth of the local second and third ring companies that supply and provide services to the mining industry. These companies all rely on Chilean commercial banks to

66 INTERNATIONAL INVESTOR

CAREER DEFINING MOMENT

After four years with Banco BICE, I had a chance to work with Rothschild’s in London. The experience of working in the City, for a bank that for generations has been so successful, allowed me to understand the value of being a long-term banker; it encouraged me to continue my career in this business. LESSON IN BUSINESS

To realise the importance of completely understanding your client and their business. Lending, collecting interest and getting your capital back is, at the end of the day, the ABC of banking, which no banker should forget. It is the same ABC and thought process needed as an investment banker, an equities dealer, or an investment adviser. provide financing, so indirectly we have been benefiting from the growth in this sector. FUTURE GROWTH Can you elaborate a bit more on your strategy and how you intend to drive the bank’s growth in the next five years? We have outlined a five-year plan. Broadly speaking, we aim to double the bank’s size in that time. We will do this by continuing to focus on the sectors in which we have a competitive advantage, without losing sight of our main goal, which is to give the best quality of service to our customers. We do not set ourselves targets in terms of market share; we want to continue to be considered the bank with the best quality of service in Chile. We started in Chile as a corporate bank solely focused on providing services to Chilean corporations. Approximately 15 years ago, we began providing services to retail clients, which were mainly the owners and managers of these corporate companies. Over time, we have developed our banking model, and now we have three clearly identified divisions of clients: the traditional corporate clients with which we started; medium-size Chilean com-

panies; and affluent retail clients who require personal financing solutions. In the near future, we are probably not going to change our focus dramatically; however, we are slowly but surely evolving into a more balanced bank. We want to be less dependent on big international and Chilean corporate clients and focus on a larger number of smaller clients. Thus, a greater proportion of our income and profits can be derived from this more balanced portfolio. In terms of specific sectors, we will concentrate on; real estate and infrastructure concessions, which have been and will continue to be our main field of expertise; agri-business, where we provide long-term financing solutions for Chilean growers and investors in dairy, cereal, olive oil etc.; the energy sector, specifically renewable energy; and the financial sector. In the energy sector, we will focus on smaller or medium-size renewable energy projects. We have the capital and the necessary knowledge of the business through our shareholders, so we understand the risks involved. Consequently, we have created a portfolio of approximately smaller 20 projects, from 1 megawatt up to and including 100 megawatts. However, our focus is projects from 1 to 50 megawatts. Historically, another area of expertise has been the financial sector. We have always been a very liquid bank and being liquid helps us provide services to other banks or to work in the capacity of a financial intermediary. We have been involved in servicing stockbrokers, mutual funds, life insurance companies, leasing companies, factoring companies, other banks, and this will continue in the future. The plan involves working on a mixture of objectives that are aggressive, but well considered; they are realistic. Fundamentally, a financial services company needs a staff that has a good understanding about the projects they are financing. Our plan is a combination of old-fashioned commercial banking, significant objectives related to growth, and the best possible returns for our clients and shareholders. There are two drivers of a commercial bank: efficiency (your cost to income ratio) and the quality of the loan book. That is what is important for our shareholders and for us, the managers. Therefore, moving forward, we will not compromise the quality of our loan book, we will continue growing without putting efficiency at risk and we will try to double the size of the bank. Is asset management part of the bank? Yes, Banco BICE has four subsidiaries. We provide commercial banking, cash management services, savings products and investment products. Through the subsidiaries of the bank, a stockbroker, an asset manager,

banking & financeâ&#x20AC;&#x192; interview

â&#x20AC;&#x2030;We have the ability to wait, the capacity to fund and experienced bankers that have the proper approach to clients. That makes us stand out as financiers for renewable energy projects an insurance broker and a securities dealer, we provide a complete product offering. In terms of wealth management, we offer this directly through the bank. Through our subsidiaries, BICE Inversiones Corredores de Bolsa and BICE Inversiones Administradora General de Fondos, we provide stockbroking and mutual fund management or asset management with an orientation to retail clients. A sister company to Banco BICE is BICE Vida, a life insurance company. Both are held by a common holding company which is called BICE Corp, which has two legs, a commercial bank with subsidiaries in the asset management business and the life insurance business, started approximately 20 years ago, in partnership with Allianz. INVESTMENT IN RENEWABLES What are the particular characteristics that make Banco BICE a good partner for renewable energy projects in Chile? We are a bank that is owned by three families; therefore, the overall approach that has been advocated by the shareholders and passed down to management has always been to think long-term. With regard to renewable energy projects, this approach is very conducive to that because it can sometimes take four to six years to get from the idea stage to the production stage. These projects require a bank with patience. They require an executive staff with patience, and the capacity to deal with people that sometimes have a lot of passion, but lack a well designed engineering plan. They also require an executive staff with the ability to clearly and precisely outline what you can offer as a bank from the beginning, in a totally transparent way. So, we have the ability to wait, the capacity to fund and experienced bankers that have the proper approach to clients. That makes us stand out as financiers for renewable energy projects. The combination of these factors has proven to be an almost magic trilogy and has allowed us to take a leadership role in renewable project finance in Chile. We have learnt a lot through our experiences. Now, we are much more selective

regarding with whom we make a partnership, but this learning cycle has allowed us to approach project financing in a much more strategic manner. Furthermore, we have gained in-depth knowledge about the different subsectors within renewable energy, for example, in the hydroelectricity subsector, run-of-river plants and dams developed for irrigation. Currently, we are starting to go through a similar learning curve with wind energy projects. However, we are still in the initial stages of our development into this area. Thus, we currently prefer to work together with international banks that have more expertise, due to the number of wind energy projects in Europe. This way, we can gain a better understanding of the key questions and decisions. Then, after two or three times working in partnership, we can continue alone. Are you evaluating solar energy or any other sources at the moment? Yes, we are currently studying and evaluating the potential of photovoltaic projects. Some of our people have been flying around the world to see solar plants. I am convinced that the solar potential in northern Chile is huge, but has to be combined with other more permanent sources of energy. In the next couple of years, we are going to see a lot of capital going into solar projects. However, we still have to understand how well solar panels function in extreme conditions, such as high altitude or salty climates with lots of wind and sand. We will go through the curve here too in order to get involved in solar energy; it is a process. We feel we understand hydro relatively well by now, and we are starting to commit an important amount of money to wind. Geothermal is further away for us and the initial investment is too risky; we just donâ&#x20AC;&#x2122;t understand enough about it at the moment. With regard to Biomass, we have a more knowledge. Chile produces a lot of biomass in the south as a result of forestry and wheat production. There are some projects that are being designed and some clients are already burning biomass to reduce their energy costs. The other more exotic renewable is wave energy from tidal waters, but that too is far away. We aim to continue our involvement in the renewable space, ideally doubling or tripling our exposure over the next couple of years. However, Chile will continue to construct traditional coal burning thermal capacity. If we can participate in some of those projects by joining with other banks, that would be fantastic. Conventional energy projects in Chile have traditionally raised the debt they require from large international banks, at terms and costs that were not possible for Chilean banks. While this has been happening, we have concentrated on the spaces in between. However,

many of the big international banks are no longer interested because they are looking to reduce their balance sheet or they have funding problems themselves. Therefore, conventional energy projects in Chile do not have the same options for financing and they are coming to Chilean banks instead; there is temporary space for Chilean banks to be more active in the traditional energy business. It is worth noting that, although conventional energy projects are less costly to construct, they are more expensive to run. If you construct a two megawatt run-of-river plant, the amount of dollars you invest per megawatt installed is much higher than a traditional coal plant. Yet, once constructed, the running cost is practically zero. With a coal plant the investment per megawatt is smaller, but you have to purchase the material you burn. This potential conventional energy opportunity notwithstanding, we will not reign in our enthusiasm for renewable energy. However, the challenge in renewable projects has been to obtain a proportion of the equity. The sponsors are normally the owners of the water rights or of the terrain where the project will be constructed. These projects typically obtain 65 per cent to 80 per cent of their capital from banks and the balance needs to be funded by equity. Sometimes, it is this part that is the most difficult to get because the owners believe they are sitting on a pile of gold, which they want to sell at an outrageous value and this creates problems with their equity providers. Do you have any fund-based products in the pipeline at BICE Inversiones aimed at investors interested in these types of projects? Yes, we are thinking about that. However, I would say the Chilean financial community has seen this equity gap in many projects and there are now more visible family offices and investors who are starting to put money down. It is becoming less of a challenge for the sponsor to raise the equity required. Clearly, once these groups have designed their project, they need a bank that is able to lend and, for this reason, we are thinking about launching our own Banco BICE fund to go into this asset class or risk. We are having talks with investors that are willing to invest, as well as with targets that are willing to receive the investments. Thus, during 2013, we are going to raise some funds to direct that. We have yet to decide how public this will be or whether it will be aimed at specialised investors. We also have to determine further what types of investors we are going to target, foreign or Chilean. In terms of project finance, there are advantages and disadvantages to both.

CHILE 67

focus banking & finance

90 per cent of Chilean wealth, booked in the country or elsewhere, is managed in Chile

FOCUS: A NEW FINANCIAL SERVICES CENTRE The wealth and asset management industry is growing rapidly in Chile. With an improved regulatory framework and favourable tax legislation, the industry is looking to become a regional hub. THE ASSET MANAGEMENT INDUSTRY For the past 20 years, as a result of legislation passed in 1980 by the Chilean government establishing a privatised pension fund system, the asset management industry in Chile has been largely dominated by the large private pension funds managers called Administradoras de Fondos de Pensiones (AFP). The legislation also made it obligatory for all employed people to belong and contribute to a local pension fund of their choice. Historically, the pension funds, in conjunction with the insurance companies, have and continue to channel the bulk of the local capital to investment managers, and as such, the assets under management (AUM) is highly influenced by the AFP’s specific requirements. However, there has been a recent growth in retail investment, as the Chilean economy continues to steadily grow, resulting in larger base of high wealth individuals and family groups. The increase in wealth has also lead to an increase in private banking services. Until recently, this sector included predominantly local banks and financial services companies, but the last few years has seen the arrival of a handful of foreign companies through acquisitions of local companies, looking to penetrate the local market or build a regional platform. With the growth of the industry, Chile has been trying to brand itself as a financial services centre for Latin America. In spite of the economy’s small size, compared with Brazil and Mexico, international financial services firms and investors have positively endorsed its economic principles and have been encouraged by the strong economic figures and reforms that have continued since the

68 INTERNATIONAL INVESTOR

country was invited to become a member of the OECD in 2010. Along with Brazil, Chile is one of the more mature and experienced markets, with relatively high and solid growth rates. BACKGROUND In 1976, the government approved the mutual fund statute (D.L. Nº 1,328), which was the first formal attempt to create a regulatory framework for this sector. Subsequently, as the country’s capital markets have evolved, this statute has been amended several times, notably following the 1981 introduction of the new retirement private pension fund scheme. This pension system, based on mandatory employee contributions and managed by third parties, was a key driver in the domestic investment industry. The new system generated rapid growth in the domestic capital market, demanding new and more sophisticated investment mechanisms and products. In response, the legislator passed several statutes targeting special investment needs, namely the Foreign Capital Investment Fund Law (18,657) in 1987 and the Private Investment Funds Law (18,815) in 1989. These statutes became the pillars of the investment fund industry in Chile, spurring accelerated growth in the local investment industry. As of 2011, and according to the Chilean securities regulator (SVS), the local asset management industry includes the following participants: 25 asset managers for 503 mutual funds; 13 asset managers for 103 investment funds; and two asset managers for nine foreign capital investment funds (FICE/FICER).

banking & finance focus

REGULATORY FRAMEWORK Investment funds in Chile are divided into public and private investment funds. Public funds are regulated by the Superintendencia de Valores y Seguros (SVS). Their units are registered in the share registry of the SVS and on the stock exchange. Private funds cannot offer their units to the public, and are closed corporations with the investment managers also regulated by the SVS. Industry representation is by way of the Asociación Chilena de Administradoras de Fondos de Inversión (ACAFI), which has 27 members, including the largest local investment administrators. The asset management industry is governed by a highly fragmented and complex set of regulations, which are considered to be hindering Chile’s development as a financial services centre. Therefore, international asset managers seeking to distribute their products in Chile have to overcome several regulatory and tax hurdles. In order to address these issues, the Chilean government is trying to introduce a bill into Congress, which would improve the country’s attractiveness as an asset management centre by introducing a single, clear set of rules. This initiative was started by the Ministry of Finance to create the Administration of Third Party Funds and Individual Portfolios Act and is intended to provide a regulatory framework for the provision of services for individual portfolio management, as well as providing a systematic regulatory framework for the management of funds. This initiative is expected to also help smallmedium enterprises (SMEs) and the venture capital industry gain access to new financing and be able to offer new products and investment alternatives. It would also seek to modernise and systemise the regulations applicable to investment funds and to make adjustments to the tax treatment of foreign investors in mutual funds. This would allow Chile to become an exporter of financial services and fund management and promote the competitiveness and the internationalisation of the local industry, according to OECD recommendations. The act was approved by the Chilean House of Representatives in May 2013, and is currently being discussed at the Senate level. The Chilean investment fund industry was streamlined in 2011 following the implementation of revised regulations applicable to asset managers and investment funds. This focused on the framework applicable to asset managers and investment funds. The bill is called the ‘third party funds and portfolio management statute’ and is commonly referred to as the new ‘Investment Funds Law’. The key features of the bill are that it distinguishes between two types of funds that are subject to supervision and registration with the SVS: mutual funds, which are primarily characterised by the ease of redemption; and investment funds, which do not allow for free will redemption of the investment. Moreover, it sets out separate category of fund, not subject to registration and supervision of the SVS, called private investment funds, which cannot have more than 50 investors. This distinction, based on how an investment is redeemed, acknowledges and follows the traditional distinction between closed-end and open-end funds that is applicable in the U.S. Moreover, since both mutual funds

and investment funds (other than private investment funds) are subject to registration with the SVS, they can also be listed on the local stock exchanges or traded over-the-counter in a secondary market. DISTINCTION BETWEEN TYPES OF MANAGERS The system in Chile distinguishes two types of managers: investment funds management, and portfolio management. If passed, the proposed bill will be the single source of regulations for both types of management activity. As of today, the fund management role is separately regulated by the law applicable to the specific type of fund. The three main categories are: mutual fund managers, regulated under the mutual fund statute (D.L. Nº 1,328); investment funds managers, regulated under the investment fund statute (Law 18,815); and FICE and FICER managers, regulated under the foreign investors fund statute (Law 18,657). Additionally, the Chilean capital markets statute (Law 18,045) has some provisions applicable to fund management. FUND MANAGER REQUIREMENTS Fund managers must be formed as stock corporations, which should be registered and subject to the supervision of the SVS. This is the same requirement currently imposed on asset managers. It is also a requirement, subject to the SVS qualification, that those directly involved in the asset management activity and key decision-makers must be deemed sufficiently qualified for such purposes. DUTY OF CARE There is also a duty of care with which managers must comply. Managers cannot legally delegate the management function, but the bill does allow managers to subcontract with third parties. For example, a US asset manager could set up a local manager, subcontracting services from the head office.

The last few years has seen the arrival of a handful of foreign companies through acquisitions of local companies, looking to penetrate the local market or build a regional platform

EXCHANGE-TRADED PRODUCT FEATURES The bill also preserves some of the necessary features required to issue exchange-traded products, the most commonly known are the ETFs. These are provisions recently introduced to the current mutual fund statute in 2010 (e.g. contributions and redemptions can be paid in kind with securities traded in Chilean or foreign exchanges). TAX TREATMENT From a tax standpoint, under the bill, capital gains on the sale or redemption of the fund quotas continues to have the same tax treatment as stocks in a publicly traded stock corporation. In the case of private investment funds, the proposed tax treatment is the same as the one currently applicable to privately traded stock corporations. Therefore, capital gains taxation would be subject to the requirements and limitations set in the current income tax law. Due to Chile’s two-tier tax system, dividends typically carry a tax credit equivalent to the corporate income tax rate paid upon the profits distributed, so that when an investment fund distributes profits derived from investments subject to this type of taxation, a tax credit would be available to investors under the bill.

CHILE 69

focus banking & finance

1. TOTAL AUM IN PUBLIC INVESTMENT FUNDS IN CHILE 14,000

US$ in millions

12,000 10,000 8,000 6,000 4,000 2,000 0

c De

-0

ar M

cDe

Se p-

Ju n-

Se p-

Ju n-

c De

Se p-

Ju n-

Ju nSe p-

Se p-

c De

Ju n-

Se p-

Ju n-

c De

Se p-

Ju n-

Se p-

Ju n-

c De

Source: ACAFI 2013 (Chilean Association of Venture Capital & Private Equity)

The tie-up between the stock exchanges of Peru, Colombia and Chile should improve liquidity, depth and market characteristics

The tax treatment and exemptions set forth in the current Income Tax Law will continue to apply under the proposed bill, which also grants full tax exemption to non-resident investors on capital gains realised upon redemption, or sale of the quotas, and distributions providing a fund holds at least 80 per cent of its investments in non-Chilean assets or securities and the fund’s investment guidelines state this fact. If these requirements are not met, the gain or distribution is subject to a 10 per cent tax. SVS REGISTRATION THRESHOLD The bill also introduces the concept of ‘portfolio management services and portfolio manager’. When the portfolio manager meets any of the definitions set forth in the statute, it has to register with the SVS and becomes subject to SVS supervision. The level at which the bill requires registration is having more than 500 investors, or managing 50 or more portfolios exceeding US$500,000. OVERVIEW OF THE MARKET PENSION FUNDS The pension fund market has seen significant growth in the past five years, with an increase in AUM of approximately US$50 billion to US$162 billion at the end of December 2012. The market consists of six predominant pension funds and is dominated by four main players, with AFP Provida (recently acquired by MetLife), AFP Habitat, AFP Capital and AFP Cuprum (recently acquired by Principal) holding in 97 per cent of the market share. However, the smallest of the AFPs, AFP Modelo, recorded significant growth over the past three years. The private pension funds are regulated by law, with their compliance supervised by the Superintendencia de Pensiones (SPS), a government regulator. INVESTMENT FUNDS According to ACAFI, funds can be divided into four categories: property investment funds; non-property investment funds; private equity and venture capital; and other investment funds, each with their own subcategory. In December 2012, public investment funds in Chile had approximately US$11.3 billion of AUM, with an increase of over 350 per cent of AUM compared to December 2004 (see fig. 1). Share-based funds still constitute the largest portion of AUM, followed by fixed income and property investment funds (see fig. 2).

70 INTERNATIONAL INVESTOR

2. AUM BY TYPE OF MUTUAL FUND Stock

39.9%

Fixed Income

22.8%

Real Estate

20.1%

Other Funds

Private Equity

12.6%

4.6% Source: AAFM, 2013 (Chilean Association of Mutual Funds)

There are 26 fund administrators which constitute the assets under management in Chile. The largest, Moneda, which includes Chiletech and Toesca, and the second largest, BTG Celfin, manage approximately 51 per cent of the AUM in the industry. They are followed by LarrainVial (including LarrainVial Activos and LarrainVial AGF) who manage 10.8 per cent of AUM. These three main players are followed by a group of smaller fund administrators, which include Compass Group, Independencia and Penta Américas (see fig. 3). In the private equity and venture capital sector in Chile, the Chilean Economic Development Agency (Corfo) provides funds with the opportunity to apply for credits or competitive loans, and as such, approximately 50 per cent of the AUM, equivalent to US$599 million, in the private equity and venture capital sector are from funds with some form of support by Corfo. There are currently 20 venture capital funds and 17 private equity funds in Chile, of which only eight funds do not make use of financial support from Corfo. Furthermore, the majority of private equity funds are feeder funds for master funds administrated by international investment managers, such as Blackstone, KKR, Southern Cross Group and Linzor Capital Partners. PRIVATE BANKING AND WEALTH MANAGEMENT Private banking and wealth management in Chile has traditionally been dominated by the local market players, such as Banchile Wealth Management and Banco BICE private banking. However, there has been in increase in international players such as Credit Suisse, Deutsche Bank and JP Morgan.

banking & finance focus

3. TOP 10 INVESTMENT FUND MANAGERS AND THEIR PARTICIPATION Moneda

4. AUM PER TYPE OF INVESTMENT FUND 20,000

34.1%

17,929

18,000 Celfin Capital

16.8%

5.5%

Independencia

5.1%

Penta Las Americas

4.8%

biillions of CLP

Compass Group

13%

14,000

14%

12,000

17%

16,000

10.8%

Larrain Vial

17,365

20%

10,000

59%

52%

8,000

18,598

18,162

20%

61%

6,000 Banchile

3.6%

Santander

3.3%

Cimenta

3.2%

MBI

4,000 2,000 0

2.4%

2010

Money Market

Bonds

2011 Equity

2012

Source: ACAFI 2013

ROLE OF BANKS IN ASSET AND WEALTH MANAGEMENT Banco Santander is one of the European groups with a strong footprint in the Latin American market. Five of its ten core markets are Brazil, Mexico, Chile, Argentina and Poland, which account for the majority (54 per cent) of its profits. KEY TRENDS AND DEVELOPMENTS International participation in the Chilean asset management industry has increased over the past three years, with the recent majority stake acquisition of AFP Provida (Chile’s largest pension fund) by MetLife in 2013, the purchase of Celfin by Brazil’s BTG Pactual in 2011, Banco Itau acquiring the local Chilean branch offices of HSBC, and Credit Suisse obtaining a brokerdealer license in 2011. Locally, there has also been a shift of life insurers moving into the asset management space, offering unit linked policies, which include investment accounts. For investment funds, although there has been a focus on developing the quality of systems of control, providing an increase in transparency of information

Q3 2013 Others (3%)

Mixed

Source: ACAFI 2013

and market valuation of AUM, the industry has seen a movement of certain fund administrators to locate to other jurisdictions, such as Luxembourg, which provide better conditions for the administrators to compete on international terms. OUTLOOK According a managing partner at Moneda Asset Management, Chile has ‘US$10 billion under management, almost all domestic. We expect that in the next 10 years we will be up to US$25 billion and that US$10 billion will be sourced from foreign investors.’ Brazil is seen as a launch pad for many regional asset management businesses because of its sheer size, but over time, the tie-up between the stock exchanges of Peru, Colombia and Chile should improve liquidity, depth and market characteristics. Latin America is considered an exciting source of new investment for both regional players and asset managers in Europe, and Chile is one of the five key markets. Many asset management firms are looking to develop a regional footprint focused on the Pan Pacific area, namely in Chile, Peru and Colombia.

Latin America is considered an exciting source of new investment for both regional players and asset managers in Europe, and Chile is one of the five key markets

5. WORLD TOTAL NET ASSETS OF MUTUAL FUNDS (US$ IN MILLIONS) Country / Region

2011

2012

Q2 2013

World

23,796,672

26,837,399

27,444,459

Americas

13,530,122

15,139,992

15,744,541

United States

11,627,357

13,045,215

13,641,871

Brazil

1,008,928

1,070,998

1,047,988

Canada

753,606

856,504

878,823

Mexico

92,743

112,201

121,111

Chile

33,425

37,900

35,375

Argentina

6,808

9,185

10,650

Trinidad & Tobago

5,989

6,505

6,598

Costa Rica

1,266

1,484

2,124

Europe

7,220,298

8,230,059

8,406,889

Asia Pacific

2,921,276

3,322,198

3,153,752

Africa

124,976

145,150

139,276 Source: Investment Company Institute, 2013

CHILE 71

sector data energy

ENERGY IN NUMBERS International Investor’s summary of key data and quantitative dynamics of the sector. For more detailed information, please contact International Investor directly.

GENERAL ENERGY STATISTICS

GENERATION BY THE SIC AND THE SING 2000-2011 9.88

70,000

Net imports (Mtoe)

24.85

60,000

Electricity consumption (TWh)*

61.76

Electricity consumption/ population MWh/capita

3.58

CO2 emissions** (Mt CO2)

76.31

CO2/population (t CO2/capita)

4.42

Portion of FDI in electricity sector (incl gas & water)

18.4%

gross generation (GWh)

Energy production million tonnes oil equivalent (Mtoe)

50,000 40,000 30,000 20,000 10,000 0 2000

* Gross production + imports - exports - losses

2001

2002 Wind power

** CO2 emissions from fuel combustion only

2003

2004

Derivatives

2005 Biomass

2006 Coal

2007

Natural Gas

Biomass Coal Wind Hydro Run of River Diesel

SIC 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

40 50 (TWh)*

*Gross production + imports - exports - losses Source: IEA

72 INTERNATIONAL INVESTOR

Apr-13

Apr-12

SING INSTALLED CAPACITY

2001

Oct-12

Source: SNE

INSTALLED GENERATION CAPACITY SIC AND SING 2012

CHILE ELECTRICITY CONSUMPTION 2001-2011

Apr-11

SING (Antofagasta)

Source: CNE 01/04/2013

Oct-11

Apr-10

Oct-10

Apr-09

Oct-09

Apr-08

Oct-08

Apr-07

Oct-07

Apr-06

Oct-06

Apr-05

Oct-05

Apr-04

SIC

Oct-04

Apr-03

Oct-03

Apr-02

Hydro Dam Solar

Oct-02

30%

Apr-01

25%

10 Oct-01

20%

Apr-00

15% capacity

Oct-00

10%

Apr-99

25.82 MW

no further data available

Oct-99

374.01 MW 4.60 MW

Apr-98

316.00 MW

Oct-98

328.00 MW

price in $/KWh (nominal)

technology

396.00 MW

Biogas

2011

91.00 MW

2010

PRICE IN US$ PER KILOWATT HOUR FROM APRIL 1998 TO APRIL 2013 (NOMINAL)

18.50 MW

2009

Source: Energy Ministry, CDEC-SIC and CDEC-SING

Source: International Energy Agency (IEA) 2011

GENERATION PROJECTS UNDER CONSTRUCTION SIC AND SING AS OF APRIL 2013

2008

Hydroelectric

INSTALLED CAPACITY

Technology

Total (MW)

Total (%)

Technology

Total (MW)

Total (%)

Hydro Dam

3393.43

25.45%

Coal

1932.61

46.62%

Natural Gas

2560.70

19.21%

Natural Gas

1831.23

44.17%

Hydro Run of River

2522.90

18.92%

Fuel Oil Nro. 6

177.60

4.28%

Diesel

2403.85

18.03%

Diesel

131.14

3.16%

Coal

1338.63

10.04%

Diesel/Fuel Oil

39.46

0.95%

Coal/Petcoke

561.94

4.21%

Cogeneration

17.50

0.42%

Wind

195.73

1.47%

Hydro Run of River

14.93

0.36% 0.03%

Biomass

193.12

1.45%

Solar

1.35

Fuel Oil Nro. 6

86.00

0.65%

Total installed capacity

4145.82

Petcoke

62.98

0.47%

BioGas

11.80

0.09%

Solar

1.08

0.01%

Total installed capacity

13332.17 Source: CNE

energy overview

ENERGY Decisions must be taken regarding the development and progress of Chile’s energy sector. The urgency of these decisions has to be considered in light of the sector’s inextricable connection to the success of the country’s economy. The issues that envelope the industry impact every citizen and every business.

CLEANER TECHNOLOGIES ON THE RISE All these factors have helped to advance renewable energy deployment, which has been taking off rapidly in 2013. Numerous non-conventional renewable energy (NRCE) projects are currently under development; however, they must overcome difficulties in terms of project finance and avaliable infrastructure.

The Chilean electricity market is divided into four principal electric grids

Chile’s energy sector is reaching a crucial point in its development, which may affect the overall growth of economy; satisfying future electricity provision is the main challenge. Given that the annual growth of electricity demand is likely to be at least 6 per cent until 2020, shortages are predicted. This will lead to higher operational costs for consumers. In terms of industrial energy provision, for Chile’s most important industry, mining, energy costs make up 20 per cent of operational costs and could have a crucial impact on business, especially during periods in which metal prices fall due to lower worldwide economic growth. Energy clearly has a significant impact on industry; billion dollar projects are regularly re-evaluated due to higher associated risks, one of these being the uncertainty of energy availability and future energy costs. Moreover, investors and market players in the generation, transmission and distribution

sectors also evaluate the feasibility of expansion when considering new investment in generation projects. Large scale conventional projects (non-renewable and hydropower greater than 20 megawatt installed capacity) generate public criticism due to their negative impacts, real or percieved, on local communities and the environment. In the past decade, many projects have been rejected due to on-going litigation, despite having previously obtained environmental approval. In terms of hydropower, which represents 44 per cent of installed capacity in the Sistema Interconectado Central (SIC), generation in June 2013 only reached 32 per cent of total energy generated. In comparison to previous years, hydroelectricity has significantly decreased due to a sustained period of drought, which has lasted for several years. This has resulted in higher hourly marginal costs in the SIC, reaching levels above US$300 per megawatt hour.

GENERAL CONTEXT As a result of the enactment of the General Law of Electric Services decree Nº 1/1982, the Chilean power sector was the first in Latin America, and one of the first in the world, to deregulate (1981) and privatise (1986—88) its generation sector, forcing participants to compete with each other. Within this framework, the State only exercises regulation, supervision and control functions, as well as offering recommendations in framework planning. The Chilean electricity market is divided into four principal electric grids that operate independently and are not interconnected. The grids are coordinated by independent entities of mainly technical character, known as Centers for Economic Load Dispatch (CDEC). CDEC members are the companies that own power generation plants, power transport lines, power distribution plants and power distribution lines i.e. companies that generate, transport or distribute electricity. Non-regulated consumers that are directly connected to the transmission lines can also be members of CDEC if they meet certain requirements. The four electric grids which supply the country are: the Sistema Interconectado Norte Grande (SING), the Sistema Interconectado Central (SIC), the Sistema Eléctrico de Aysén (SEA) and the Sistema Eléctrico de Magallanes (SEM). The SING supplies electricity to the northern part of the country which represents 24.5 per cent of installed capacity and the SIC supplies electricity the central zone which

CHILE 73

overview energy

STRENGTHS ■■ Best credit risk rating in Latin America. ■■ GDP growth rate is expected to be around 4.5% in 2013. ■■ Double taxation and trade agreements with a large number of countries in the world. ■■ Generally solid regulatory framework. ■■ Robust structure of governmental institutions ■■ Natural resources for NCRE projects and big potential for conventional hydroelectricity.

OPPORTUNITIES Many investment opportunities regarding generation / transmission / distribution projects. ■■ Many NCRE projects in pipeline without access to finance. ■■ Open market to participate in each particular segment of the sector. ■■ High growth rates in demand and lower expansion in generation than demand growth, high energy prices are predicted, which may generate higher cashflows. ■■ Law project 20/25 approved which aims to achieve 20% of NCRE generation by 2025. ■■

makes up 74.7 per cent of installed capacity (see fig. 1). PAST AND FUTURE Historically, the technologies used to satisfy demand have been hydroelectric, gas, petroluem diesel, and carbon power generation. As Chile has limited sources of fossil fuels, it heavily depends on fossil fuel imports. In the south, the availability of water means that hydropower is the key fuel type; however, this is subject to rainfall. Due to the high cost of gas and LNG, coal fired power plants have become the technology of choice in the SIC and dominated capacity in recent years. In November 1998, following a prolonged drought, the country’s dependence on hydropower caused an energy crisis. The impact of this drought was amplified by the repeated failures of several power plants that should have served as backups to hydroelectric power generation; the considerable delays in commissioning combined cycle natural gas power plants; and the lack of coordination and transparency in the generation sector.

74 INTERNATIONAL INVESTOR

WEAKNESSES ■■ Key industry manufacturing of technology / equipment does not exist as yet. ■■ Lack of professionals and few specialists in the market, competition with mining industry for specialist workforce. ■■ Insufficient infrastructure in terms of existing transmission lines and market expansion. ■■ Asymmetric density of population (and infrastructure) may result in higher costs for additional transmission lines. ■■ English is not universally spoken; Spanish speaking agents are necessary to conduct business. ■■ Environmental permission and community issues play an important role in project advancement. Can lead to litigation (NCRE projects are widely accepted, but require stakeholder engagements). ■■ Uncertainty about future regulation.

THREATS Uncertainty about future growth. Mining sector represents higher production costs at lowered metal prices. ■■ Highly concentrated energy market with few big players, but many players in development of NCRE projects. ■■ Access to transmission lines, time lags, delays to transmission line expansion and capacity constraints. ■■ Local banks conservative in terms of risk perception leading to high capital costs / debt finance. ■■

In the years following the crisis, the participation of natural gas was increased from 9 per cent in the primary energy matrix to 29 per cent, substituting primary energy consumption of carbon, biomass and crude oil. This increase was a direct result of the competitive prices at which natural gas was obtained from Argentina. From 2004, the country registered cuts in the natural gas supply from Argentina, decreasing natural gas power generation. Despite efforts to mitigate this situation, the supply of natural gas was cut further in the following years, which lead to an emergency situation in which around a third of power production had to be covered by diesel based generation. This resulted in significantly higher operational costs. The effects of this situation on Chilean power prices are reflected in its marginal cost, reaching a maximum spot market average of US$338 per megawatt hour in March 2008 and, more recently, an hourly marginal cost in the SIC of US$312 per megawatt hour on June 26 2013. These figures emphasise the

country’s price volatility and high generation costs, and have been affected by the ongoing dry period and consequent decrease in hydropower generation. These events demonstrated the vulnerability of the Chilean energy system, which heavily depends on fossil fuel imports, and the lack of an adequate infrastructure to sustain the national electricity demand. National electricity demand has grown significantly in the past decades, quadrupling between the years 1987−2006. It is expected that this growth in demand will be maintained in the future; an annual growth rate of approximately 6 per cent is predicted until 2020. Figure 2 shows the growth forecast of capacity and energy demand until 2028 for the SIC and SING interconnected systems. ENERGY SHARING Chile has one of the highest energy costs in South America. As a result, the government has started talks on possible energy integration in the region. The plan would include Chile, Peru, Colombia, Bolivia and Ecuador and could reduce Chile’s costs by up to 25 per cent. The project is scheduled to start in 2014, but will involve major investment and the resolution of political issues between countries. The Inter-American Development Bank (IDB) is the responsible agency for the infrastructure and policy studies that will allow the project to advance. The Chilean government is also promoting the possiblity of an interconnection between the SIC and SING systems. MARKET OPERATION Energy consumption is divided into two large customer groups, the regulated and the non-regulated; 90 per cent of customers in the SING and 40 per cent in the SIC are non-regulated. The regulated customers are the consumers with a connected capacity no greater than two megawatts and purchase their electricity from distributors, who in turn purchase it from generators. The price at which the distributors purchase electricity is based on the ‘nodal price’ (which reflects generation and transmission components resulting from distribution company biddings). Regulated rates are established, which depend on customer voltage and size. Non-regulated customers are generally those who consume more than two megawatts; however, regulated customers who consume between 500 kilowatts and two megawatts can opt to be non-regulated customers. These customers are not subject to price regulation and can freely negotiate prices and supply conditions with generating and distribution companies. Thus, the supply price for energy is established through bilateral contracts and/or the spot market.

energy overview

1. CHARACTERISTICS OF CHILEAN ELECTRICITY GRIDS AS BY END OF 2012

Peru

Brazil

Bolivia Interconnected System of the Greater North (SING) Installed capacity — 24.5% Mainly serves mining industry in northern Chile. Almost 100% thermal generation. (Coal=46%; LNG=46%; Oil=8%)

Paraguay 4,599 MW

Central Interconnected System (SIC) Installed capacity — 74.7% Serves 74% of the national demand (92% of population; 76% of PIB) in central Chile. Even distribution between fuel & hydro in current generation portfolio. (Diesel=16%; Coal=17%; LNG=20%; Hydro=42%; Biomass =2.6%)

Argentina

Santiago

Uruguay

14,039 MW

Atlantic Ocean

Aysen (SEA) Installed capacity — 0.3% Serves southern Chile.

50 MW

Falkland Islands

Magallanes (SEM) Installed capacity — 0.5% Serves southern Chile.

101 MW Total installed capacity:

Tierra Del Fuego

18,789 MW Source: Generadoras de Chile A.G.

The market for bilateral contracts aims to provide power supply to distributors and nonregulated customers. These contracts are associated with a specific company and not a specific generation asset. The generating company has to comply with supply obligations using its own capacity dispatched from the CDEC, contracts with third party generators or the spot market. In most PPA situations, the generator is obligated to supply the energy stipulated in the contract, if this amount is not supplied they have to purchase the energy from somewhere else, normally the spot market. This can mean it is risky for projects which cannot count on a substantial energy generation forecast, in these cases lenders will apply risk premium, which increases investment costs and, therefore, the levelised cost of energy.

In Chile, the spot market is accessible to generators only. The price and physical transfer of this exchange are established by the CDECs depending on the hour of the day. In general terms, the spot market is characterised by high price variability. This variability reflects short-term marginal costs resulting from the temporary equilibrium between energy demand and supply. The contract market reflects negotiations between generating companies and large customers or distribution companies, which predict stable and long-term prices. It is important to point out that purchase and sale of energy and capacity between distributors and non-regulated customers is not part of the wholesale market. In Chile, there is no retail market that is operated by commercial companies.

PROJECT REALISATION Public awareness of generation and transmission projects has been increasing in recent years. In 2008, Chile ratified OIT Convention N° 169, which deals specifically with the rights of indigenous people, and affected communities and the public are increasingly concerned about the environmental impacts of mega projects. As a result, the development of hydroelectric projects and coal-fired plant has been delayed. Project delays raise questions about the country’s ability to meet future electricity demand. Even if approved coal-fired plants in the project pipeline meet expected commercial operation dates, the predicted demand will be higher than generation. Bottlenecks will have to be backed-up by costly diesel generation and this will raise electricity prices.

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overview energy

2. ENERGY DEMAND AND CAPACITY GROWTH PREDICTION 35,000 140,000 30,000 120,000 25,000

20,000 80,000 15,000

energy (GWh)

capacity (MW)

100,000

60,000

10,000 40,000

5,000

20,000

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Geothermal

Solar LNG

Wind Carbon

Hydro NCRE Diesel

Big Hydro

Biomass

Run of River

Demand GWh Source: Comisión Nacional de Energía

3. GENERATION PROJECT PIPELINE UNDER QUALIFICATION

APPROVED

Type

Capacity (MW)

Investment (MUS$)

Capacity (MW)

Investment (MUS$)

Wind

2,036

4,089

4,725

10,175

Solar

1,663

6,083

4,376

13,570

Hydro

1,519

2,335

4,774

6,564

Geothermal

120

510

Biomass

311

593

Gas + LNG

792

773

1,469

975

Coal

6,500

11,947

Diesel + Fuel Oil

1,692

1,424

TOTAL

6,038

13,327

17,467

45,758

Source: Servicio de Evaluación Ambiental (SEA)

Figure 3 shows the actual pipeline of generation projects in the SIC and SING, which obtained an approval on environmental impact assessment and those which are still under qualification. NCRE DEPLOYMENT The Chilean government has committed to reducing greenhouse gas emissions and this has encouraged NCRE development in the country. NCRE in Chile relates to wind, solar, biomass, biogas, geothermal, tidal and hydro (less than 20 megawatt capacity). An NCRE law was brought into effect in April 2008, applicable to supply contracts signed after August 2007. The law established obligations for electrical companies that withdraw more than 200 mega-

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watts to sell to distributors or non-regulated customers, requiring them to prove that part of these withdrawals within a calendar year correspond to NCRE generation (owned or contracted). Between 2010 and 2014, 5 per cent of the withdrawals had to correspond to NCRE generation, this will be increased by half a percentage point a year until it reaches 10 per cent in 2024. Recently, a proposal to modify the law has been approved by the senate; it plans to change the quota of renewables required by law to 20 per cent by 2025. NCRE growth has predominantly occurred in hydro, biomass and wind energy. MARKET PLAYERS There are 40 generating Companies in Chile,

the leading ones being: Endesa, Colbún, AES Gener and Duke Energy, a new entrant that arrived in 2012. In the SING, E-CL, a subsidiary of GDF Suez dominates the market. Over the four electricity systems, there are 10 transmission companies operating of which Transelec is the largest and controls most of the SIC. There are about 30 distribution companies operating in Chile. The main distribution companies in the SIC are Chilectra S.A., Compañía General de Electricidad, Compañía Nacional de Fuerza Eléctrica, Emel, Chilquinta und Sociedad Austral de Electricidad S.A. The main companies operating in the SING are Emelari S.A., Eliqsa S.A., Elecda S.A. INVESTMENT CLIMATE The Chilean electricity sector represents opportunities in all segments. However, the rejection of mega projects as a result of legal action, as well as uncertainty about future regulation and volatility of energy prices, has resulted in cautious behaviour towards investment in this area. Difficulty for smaller generators in securing long term PPAs with large industrial clients has meant it has been necessary to lower investment risk and make projects bankable. Ultimately, new ideas such as price stabilization schemes have been developed to guarantee stable revenue flows and, moreover, the government has initiated different activities to find solutions regarding this dilemma. For some recently developed NCRE projects, project finance has been obtained without having a PPA. In the renewables sector, the most active local banks in the renewables sector are BICE, Santander, Corpbanca and BCI. In terms of Foreign financing institutions, the players are the Mitsui Banking Corp, Bank of Tokyo-Mitsubishi UFJ and Credit Agricole. Banks may require application of equator principles and IFC perfomance standards to lower risks during project realization. To value investment, the following parameters are important to include in remuneration / cash flow models: Active Energy: where the buyer pays for the active energy generated at the Sales Point (US$/megawatt hour), the seller assumes all costs until defined sales or injection point Power capacity: where NCRE Generator will be paid by CDEC or offtaker (US$/kilowatts) depending on participation. NCRE Certificates; where buyer mostly purchases certificates that are effectively recognised by the CDEC-SIC (UTM (monthly tax unit)/megawatt hours), if they are not required they can be sold to other participants of CDEC (often included as part of “contract price”, thus depends of contract terms).

energy roundtable

ROUNDTABLE: TRANSFORMING CHILE’S ENERGY SECTOR In order for the Chilean economy to remain on its upward trajectory, the problems that continue to beset the energy industry must be overcome. The following roundtable debate brought together government, industry stakeholders and investors to discuss the developments, challenges and opportunities that may arise during the necessary process of transforming Chile’s energy sector.

AGENDA ■■ ■■

■■

ROUNDTABLE PARTNERS

■■

Economic growth story and industry requirements Chile’s energy matrix ●● Role of fossil fuels and natural gas / LNG ●● Increasing diversity in the matrix Role of renewable energy ●● Hydroelectricity ●● Advantages of hydro ●● Challenges for project development ●● NRCE ●● Long-term contribution ●● The importance of competitiveness ●● Incorporation into the grid ●● Barriers to development Transmission ●● Connectivity constraints: what are the bottlenecks? ●● Short-term ●● Medium-term ●● Moving forward with transmission Attracting investors to Chile’s energy sector ●● Difficulties in project progression ●● Environmental and community opposition ●● Managing stakeholder interests ●● Creating a broad consensus ●● Community participation ●● Public policy instruments ●● Communication strategies Conclusions

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PARTICIPANTS

SERGIO DEL CAMPO Vice Minister Ministry of Energy

Sergio has over 20 years experience in the electricity sector; he has served in senior management positions in various companies including: Electric Guacolda, in Chile; Unión Fenosa Generación in the Dominican Republic; and Hidroeléctrica Piedra del Águila Neuquén, in Argentina. In the public sphere, he was superintendent of education between 1989 and 1990. Sergio holds a degree in business from the Universidad de Concepción and an executive MBA from the Universidad Adolfo Ibáñez.

RODRIGO CASTILLO Executive Director Empresas Eléctricas

Rodrigo is a lawyer, who gained his degree from the Universidad de Chile. He is an expert in the field of regulated markets and is currently a professor at three universities: Universidad Adolfo Ibáñez, Universidad del Desarrollo and the Universidad de Chile. He lectures about economic regulation and regulation theory. Rodrigo is an executive committee member for the Platform for Energy Scenarios: Chile 2030, a body that seeks to contribute to the development of the electric energy vision in Chile.

RENÉ MUGA Chief Executive Officer Generadoras de Chile

Before joining Generadoras de Chile, René was the senior vice president of corporate affairs for LAN Airlines. Prior to this, he was the general manager of the CPC. René has been chief trade negotiator with Europe for the Chilean Ministry of Foreign Affairs, and director of business development at CODELCO. René holds a bachelor’s degree in economics and a master’s degree in international economic relations, both from the Pontificia Universidad Católica de Chile.

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MARCELO TOKMAN Former Minister of Energy

Marcelo Tokman has a Ph.D in economics. He advises and sits on the boards of several companies and NGOs and was the CEO of Vestas South America. As Chile’s first Minister of Energy, he was responsible for creating the Ministry of Energy, the Center of Renewable Energies and the Energy Efficiency Agency. Prior to assuming his post in Chile’s Energy Ministry, Marcelo was head advisor at the Ministry of Finance and head of research at the Budget Office.

CARLOS EUGENIO FINAT DÍAZ Executive Director ACERA

Carlos Eugenio is an electrical engineer from the Universidad de Chile. Before joining ACERA in 2012 as executive director, he has had many executive positions. In 1999, he was apppointed director of operations and wheeling at CDEC-SING. In late 2008, he joined Collahuasi where he served as strategic supply manager, VP (I) administration and services, and energy manager. During this period, he joined the board of the CDECSING and was elected as chairman for the period 2011—2012.

ARTURO ERRÁZURIZ President of the Climate Change Committee British Chilean Chamber of Commerce (BCCC)

Arturo is currently a partner and executive director at Errázuriz & Asociados. In 2009, he assumed the presidency of the climate change committee at the BCCC and he is the board director of the corporate leaders group for Climate Change Chile. Prior to these roles, Auturo was regional director for the Andean region at EcoSecurities. Arturo studied economics at the Pontificia Universidad Católica de Chile and has a MSc in environment and development from the London School of Economics.

energy roundtable

ANDRÉS KUHLMANN JAHN Chief Executive Officer Transelec

Andrés has been the CEO of Transelec S.A. since 2007. He was the CEO of Siemens in Chile between 2001 and 2007 and of Electroandina S.A. from 1997 to 2001. For a period of two years ending in 1996, he was the commercial and operations manager at EDEGEL, an electrical generation company in Peru. Andrés graduated from the Pontificia Universidad Católica de Chile with a degree in civil and industrial engineering. He sits on the several boards, including Fundación San Agustín.

RUDOLF ARANEDA KAUERT Chief Executive Officer GasAtacama

Rudolf’s experience in the energy sector began in 1992, when he became CEO of TransGas / GasChile. He is currently general manager and CEO of GasAtacama. Rudolf has devoted his career to his dream of trade, transport and energy integration in the Southern Cone region of South Amercia. He is an industrial civil engineer with a master’s degree in engineering from the Universidad de Chile and has completed management and energy courses at various other institutions.

GONZALO SALGADO Country Manager Hot Rock Chile

Gonzalo is the country manager for Hot Rock Chile S.A. He has worked as chief of staff in the Chilean Ministry of Energy and as a lawyer for ENAP, the state oil company. For ENAP, he worked in areas such as natural gas, geothermal energy and on new business, overseeing project structuring and financing. He has a master’s degree in law awarded by Universidad de los Andes in conjunction with Northwestern University and an MPA from Columbia University, New York.

JORGE RODRIGUEZ ORTIZ Chief Executive Officer Interchile

PARTICIPANTS

Jorge has a degree in electrical engineering from the Universidad Nacional de Colombia and holds an MBA from Universidad Eafit. He has spent 33 years working for the ISA Group. For the last 14 years, Jorge has been in charge of building electric transmission investment projects in countries where ISA Group has a presence. After having served as director of entrepreneurship at CTEEP in Brazil, he was appointed CEO of Interchile S.A.

JOSÉ IGNACIO ESCOBAR Chief Executive Officer Mainstream Renewable Power

Jose Ignacio has a degree in electrical engineering from the Pontificia Universidad Catolica de Chile and a master’s degree in economic regulation from Universidad Adolfo Ibañez. He has co-founded several companies related to nonconventional renewable energies, including Andes Energy, which incorporated a joint venture company with Mainstream Renewable Power in 2009 to develop, build and operate wind and solar power projects in Chile.

FRANCISCA RIVERO GARAY National Representative Fundación Avina

Francisca has extensive experience in the public sector in the areas of social policy and poverty reduction. As a consultant, she has designed intervention strategies for vulnerable families, groups and communities and worked for international consultancies with multilateral agencies, such as the World Bank. Francisca teaches at the Pontificia Universidad Católica de Chile and is the national representative for the Fundación Avina in Chile.

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roundtable energy

Sergio del Campo, Vice Minister of Energy: Today we will discuss the issues that are central to the development of Chile’s energy sector in the medium and long term. I will begin by providing some background about the country’s economic growth and industry’s energy requirements. Over the last six years, our gross national product has practically doubled. Market growth has averaged around 5.8 per cent and has reached 6 per cent for the last three years. However, the Central Bank is projecting Sergio del Campo Vice Minister Ministry of Energy

The learning curve we have experienced over the last years...has taught us that it is necessary to develop a diversified matrix slightly lower rates for the next two years, around 4 per cent. The country’s energy consumption is still below 4,000 kilowatt hours per capita, far below the average for countries in the OECD. The demand on the country’s two main electricity systems, the Sistema Interconnectado Central (SIC) and Sistema Interconnectado Norte Grande (SING) is approximately 60,000 gigawatt hours per year. By 2025, we project this will increase to around 120,000 gigawatt hours, with an average annual increase of 5.8 per cent. Currently, Chile’s installed energy capacity is made up of 34 per cent hydroelectricity, 26 per cent liquefied natural gas (LNG), 22 per cent coal, and 14 per cent diesel. This represents a substantial change in the country’s energy matrix compared to 1996, when the installed capacity was 6,016 megawatts (made up of 65 per cent hydroelectricity and 24 per cent coal). Today our installed capacity is approximately 17,500 megawatts. Traditionally, 70 per cent of our energy is imported. Let’s start by considering the role that fossil fuels will play in the future of Chile’s electricity market. Within this context, what part can LNG play as a component of the country’s electricity matrix? Marcelo Tokman, former Energy Minister: The learning curve we have experienced over the last years, as a result of droughts and the issues surrounding Argentine

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natural gas supply, has taught us that it is necessary to develop a diversified matrix. Recently, the energy sector has been through different phases; one dominated by hydroelectricity combined with coal; another dominated by gas from one particular supplier; and then a crisis, during which the sector had to adapt. However, in terms of fuel diversification, Chile has now arrived at a more balanced situation. Non-conventional renewable energy (NRCE) participation has risen from less than 2 per cent, in 2007, to more than 7 per cent, with more than 1,050 megawatts operating and another 500 megawatts under construction. These changes are significant and necessary, and have allowed the matrix to be rebalanced. The introduction of LNG, through the Mejillones and Quintero projects, has enabled a more reliable approach to natural gas. Moving forward, from the point of view of lower costs, better advantage should be taken of the LNG supply, load centres need to be secured and expansion should be continued in the area of renewables. Aside from the issue of matrix composition, the greatest problem is related to the difficulties we have been having in approving and executing projects. The situation is worrying, as projects for base load generation are not being developed as predicted. Moreover, we must not allow ourselves to fall into the trap of assuming that we will have access to gas and, subsequently, do nothing with regard to other energy options. There are still some problems with gas, we do not know if new projects will materialise. We have to overcome social and environmental underlying issues that are stopping projects, of all technologies, from being able to start construction. We must do something about these underlying problems to ensure sufficient future generation. Rudolf Araneda Kauert, GasAtacama: When you ask about the role of fossil fuels in the future, we are really talking about the issue of coal versus gas and whether or not, as a country, we take a position on this debate. The evolution of shale gas in the US, which is in the process of approving exports, may play a major role in the development of Chile’s energy sector. Ninety per cent of Chileans would like future development to be based on renewable energies. Technically,

energy roundtable

this is impossible to achieve in the short term, but we shouldn’t just dismiss this goal as unreachable. We must incorporate 20 to 30 per cent renewable energies into the matrix and implement the use of gas on a much larger scale. If the use of fossil fuels and bio carbon fuels continues to grow, incorporation of renewable energy will be significantly restricted. The critical issue for our country is that the value of the energy is not absorbed by the cost. Today, we have an opportunity to access US gas in large volumes that allows for a levelised cost of around US$110 per megawatt hour. The levelised cost of coal would be between US$95 and US$105. So, the cost of central gas would be 10 per cent more than coal, as long as we do not add CO2-related costs, which is no small issue. However, these gas centres would allow for large blocks of renewable energy of between 30 to 50 per cent, a progression that would satisfy the expectations of the majority of the country. Furthermore, with regard to gas, in order to get to a price of US$10.5 to US$12, as opposed to the world market average of US$14 to US$16, we need to reduce the intermediaries and have a direct association with the supplier. Arturo Errázuriz, British Chilean Chamber of Commerce (Britcham): I think Marcelo and Rudolf have been heading in the right direction; Chile has a need for a diversified matrix. Natural gas, through open and combined cycle projects, allows for an almost natural compatibility with renewable energy sources and it also allows us to have a much cleaner generation alternative to coal. The matrix must be studied in order to discover how to mitigate the impacts of ‘dirtier’ generation. In this sense, LNG represents an alternative that is very attractive, as compared to coal. However, and considering that sustainable development is the balance of the economic, social and environmental policies and measures, we cannot do away with any type of generation, but we rather have to see how these technologies can coexist and gradually evolve towards cleaner solutions. Gonzalo Salgado, Hot Rock: The worldwide consensus is that there are two different roads to go down: nonconventional natural gas or coal. Developed countries are

opting for gas and, in my opinion, the developing countries are going to go with coal. Which road will Chile take? The natural gas path brings some commerce issues into play. For example, it could create tension in the commercial relationship between the US and China. One possible problem for China is that the US will start to look at the environmental issue, in terms of CO2 emissions. The US has plenty of gas and that will be a commercial advantage. It will allow them to reduce gas imports in order to motivate the development of shale gas inside the US. Generally, our system is a marginalist system; the price of coal sets the price of energy in Chile. For example, if I want to assure a dispatch from my plant, it will have to be coal or natural gas. This creates a problem because, today, there is no mature spot market developed for natural gas. Therefore, if I want a long-

Marcelo Tokman Former Minister of Energy

We must incorporate 20 to 30 per cent renewable energies into the matrix and implement the use of gas on a much larger scale. term contract and I don’t have assured dispatch, I am running certain risks. If we want to enter the world of gas, we have to ask ourselves what legal and systemic modifications we will have to make to ensure dispatch. Coal has problems that are not considered at the moment of approval. Although it appears to be much less expensive to dispatch energy from a combustion plant, it has intrinsic costs that we, as a community, are not quantifying well. Andrés Kuhlmann, Transelec: Diversifying the matrix also has consequences in the area of transmission. For example, some NRCEs have a great advantage in that they are very even energy producers. Other technologies create increasing challenges as the network grows. Wind and solar power, for example, produce intermittency in transmission. So there is a swing between generation extremes. Development based on natural gas is very attractive as you can place load centres close to consumers. This

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roundtable energy

isn’t true of coal plants because they affect the surrounding environment and must be located far from the population. This has consequences in terms of transmission. One has to take these things into consideration in terms of the development of the grid. There must be a concrete development plan and issues regarding grid connection have to be looked at very early on in the project, so the system can be adapted.

Rudolf Araneda Kauert Chief Executive Officer GasAtacama

...the energy component of our exports will significantly affect their carbon footprint and this, in turn, could affect Chile’s future profitability and competitiveness The country has always failed in this area because we have not prepared the technical side well enough. We have instances in which not all of the system’s requirements are considered or the business plan model does not stipulate the required changes. Carlos Finat, ACERA: I disagree. Gas plants are installed where it is feasible, not where it is most desirable. Gas and coal plants need to be near the ocean due to water issues, and if you are incorporating air refrigeration you run into efficiency problems making them uncompetitive. Therefore, in terms of transmission, which is certainly a tremendous challenge, we are going to have to make it work somehow. The variability of a hydroelectric power plant can be much greater than the variability of NCRE. In this sense, the market has already resolved these issues by forecasting and programming. This has an effect on costs. We need to recognise that this mechanism is much less dependable. Some of the energies that are being incorporated are less dependable, but this has been an issue for hydroelectricity for many years, so it is nothing new. We have to make use of this same technology for development of the system into the future. RAK, GasAtacama: Regarding commerce issues relating to the role of gas; until recently, the US has looked the other way and has tried to ignore the issue of carbon

82 INTERNATIONAL INVESTOR

credits. The US planned their future on coal generation and dismissed the European suggestions of creating trade obstacles related to CO2 emissions. Now, given these developments, it must be very certain that it has a clear competitive advantage. It would not surprise me if the US starts to make an issue of CO2 emissions, when it comes to its commercial relationships. Chile is an exporter of fruit, salmon, wine, and copper and will not be overlooked regarding this issue. We are a relatively small country, so the total emissions are not going to be that high. However, the relevant issue is the carbon footprint of each bottle of wine that competes with Australian or Italian wine, or the carbon footprint of each pound of copper in comparison to Peruvian or Central African copper. From this perspective, the energy component of our exports will significantly affect their carbon footprint and this, in turn, could affect Chile’s future profitability and competitiveness. We have to take this structural change in the US into account. Rodrigo Castillo, Empresas Eléctricas: Ostensibly, at least to me, we are having a discussion on two very different levels. One level has to do with public policy: the goals of public policy and the direction in which we move as a society and a country. The other level relates to short-term financial and economic indicators that are created by a certain model. These indicators give investors certain messages that allow them to make certain decisions in the financial world and in the real world. Thus, when someone makes a strategic point suggesting that a country like Chile should develop infrastructure relating to natural gas, there are important questions that are not being raised. Imagine that, as a society, we were all in agreement about how to progress and the arguments put forward here were accepted in the public domain. The question regarding how this idea or policy would be implemented still remains. In my view, Chile does not have the necessary public policy tools to put the plan into action. Perhaps, in some distant reality, economic incentives could converge and a positive decision could be taken by each of the different investors, but as a long-term public policy strategy discussion, I feel that we simply do not have the tools to have this type of conversation.

roundtable energy

SdC, Vice Minister of Energy: Over the last ten years, the world has changed significantly in terms of energy prices. Chile is an exporting country and, because of this change, we find ourselves struggling to compete with countries that have natural energy resources. NCRE offers an opportunity to redress the balance as their development costs have been falling.

Andrés Kuhlmann Jahn Chief Executive Officer Transelec

We should take advantage of the opportunities that hydroelectricity provides us, as the price of hydroelectricity is much lower than other energies However, depending on the type of NCRE, in terms of their transmission, they have constraints that need to be adequately managed. Nevertheless, solutions have emerged in which NRCE could be incorporated as part of the development of combined cycle plants. So, let’s consider NCREs future participation in Chile’s electricity matrix, addressing in particular, hydroelectricity. By hydroelectricity, I refer to plants of all sizes. MT, former Energy Minister: To jump into the water with hydro; hydroelectricity is Chile’s main energy resource. This is changing, there are advances in other technologies, but we should take advantage of the opportunities that hydroelectricity provides us, as the price of hydroelectricity is much lower than other energies we have been discussing. However, we know there are some problems, we saw the results of the El Nino y La Nina phenomena, which presented a hydrological risk to the matrix. Having a diversified matrix is obviously one solution; another, although more politically complicated, is to move forward with the use of reservoirs, which will help with the problems of accumulation and regulation. Reservoirs are also needed for agricultural activities and, if the predictions about climate change are correct, we are going to become more vulnerable to hydrological cycles. So, the construction of reservoirs will enable us to manage hydroelectricity’s variability. Finally, also politically problematic, is to take advantage of the potential for generation in the south, which is less variable.

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Hydroelectricity has advantages in terms of emissions; it might be even a better solution than gas, but it also may be more difficult regarding other political and economic issues. AE, Britcham: The potential of hydroelectricity up to 40 megawatts is clear and normally accepted, but it would be absurd not to take advantage of projects of 50 megawatts or more. However, over the next 50 years in the central-south regions of Chile, studies suggest we are going to see a drastic reduction in water availability. This has potential solutions. Reservoirs, as Marcelo said, are a possibility; however, this would require adequate public discussions to ensure that the development of these projects present undeniable advantages. Reservoirs may allow us to take advantage of variable marginal costs at different times of the day. Then we could generate when prices are high and pump it up during moments when the energy cost is low, giving the system important flexibility. The key question is, how can we change the current negative perception about these projects? In terms of emissions and climate change, projects like HidroAysén are tremendous opportunities because they offer a large amount of very stable energy, greenhouse gas reductions and also cost reductions at the level of the grid. They make Chile much more competitive as an exporter and as a country. Furthermore, we have to stress that this energy is renewable, which itself is a positive attribute. But we have to understand the transmission effects and the potential for collateral environmental effects. Projects like HidroAysén present a huge challenge in terms of energy transmission and this has to be faced. Francisca Rivero Garay, Fundación Avina: To date, I think that grave mistakes have been made in terms of establishing relationships between communities and hydroelectric projects. For this reason, we see far more litigation surrounding the development of these projects. My understanding is that the relationships have not worked because they generally have had compensation as their basis. Thus, the companies have failed to comprehend the impact of these projects on communities in a broader sense, who have felt abandoned at every stage of the process.

energy roundtable

Moreover, the demands being made of the state in this area are due to Chile’s growing maturity in terms of social involvement. Today, at least in our country, it is not enough just to have a standard, for example in the area of environmental impact, and think that this guarantees social participation. If participation processes are not linked to strategic decisions, the litigation process will continue. When I say that these things are not linked, it is because, according to Chilean law, they are not. The participation process needs to be regulated and institutionalised. Currently, the opinion of the community is considered in the dossier, but nothing more. It would be interesting to increase involvement so the community could be a larger part of the decision-making process. Regarding hydroelectricity, the decisions are rather politically difficult. It is difficult to say in a public forum that hydroelectricity is important in terms of the energy development of our country. It is difficult because there has not been a serious public discussion. When we say hydroelectricity, people think HidroAysén, which is just one little (or one big) part. What about the rest the sector, for example, mini hydro? People don’t know about it. There is a communication process that needs to take place with regard to Hydroelectricity. SdC, Vice Minister of Energy: Ok, let’s move on. How do you evaluate the long-term contributions of NRCE? In your response, please distinguish amongst the different types of energy because this affects the type of plant they have, the contribution they make and their competitiveness. GS, Hot Rock: Geothermal energy has a great advantage among the NCREs in the sense that it is a base load energy and has a high plant capacity factor, around 95 per cent. This makes it rather attractive for complementing other renewables that have lower plant capacity factors. However, development of geothermal, in the long term, will have to deal with the problem of drilling risk and geological risk. Each renewable energy has its own obstacles that must be overcome. In the case of geothermal, a geothermal risk guarantee system has been created. In Germany, an insurance company has offered a drilling

insurance that covers 80 per cent of the cost and this has allowed geothermal to happen there. We are much more ambitious about the future of geothermal in Chile as a result of the development of this system. If the risk guarantee system is offered in our market, and Hot Rock is currently in talks with this company, it would allow for the development of geothermal. In order for this to happen, the insurance company is looking for the support of the State to ensure there will be several projects. Being optimistic, Geothermal could contribute 1,000 megawatts to the system. I doubt it will be more because the top five countries generating geothermal have between 2,000 and 1,000 megawatts, then capacity drops to 500 megawatts. However, within this Chilean matrix that has to meet so many needs, every little bit helps.

Gonzalo Salgado Country Manager Hot Rock Chile

Geothermal energy has a great advantage among the NCREs...it is a base load energy and has a high plant capacity factor José Ignacio Escobar, Mainstream: I think the key issue with NCRE is levelling the cost. The important thing is the cost, the technical issues will resolve themselves. Most countries that incorporate high levels of renewables have similar matrixes to Chile. Ireland set a target of 5 per cent renewable energy, now they have more than 36 per cent and say they want more than 70 per cent combined with thermoelectric. Germany actually wants to achieve 100 per cent renewable energy. The important thing to remember is that each country goes about finding its own technological solutions in terms of variability. By 2030, I think we will see a large increase in the use of renewable energy. The installed capacity, exclusively for renewable energies, will need to be around six to eight gigawatts. I agree that 1,000 megawatts could be contributed by geothermal, but it has a more complicated development process. The last step will be incorporating wind and solar energy. By 2030, they should each be contributing 2 to 2.5 gigawatts. However, these technologies are still on the ground due to the plant factor, the current leveling costs of energy.

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In the future, they will replace more expensive energy and they may even compete with conventional energy costs, without generating external costs. If the regulatory, cost and social issues are all sorted out, Chile could increase its NRCE level significantly from the 6 per cent we have today to percentages that would create real movement in the energy price bubble that consumers are experiencing.

René Muga Chief Executive Officer Generadoras de Chile

The challenge is to find a way to ensure that NCRE can coexist with and complement the base load energy in this country René Muga, Generadoras de Chile: There is no doubt that there has been greater penetration when it comes to NCRE; however, there are still many things to discuss. There is still a lot of misinformation that circulates regarding NCRE. The challenge is to find a way to ensure that NCRE can coexist with and complement the base load energy in this country, which also needs to increase. We need to find a balance within this sector that ensures the development of a competitive energy industry and can, therefore, help sustain the competitiveness of Chilean economy. The differences between one type of generation and another have to be laid out in terms of their cost of investment, energy production and how they contribute to the organised backup needed by a market that demands a diversified production but need increasing amounts of energy, secure and competitive supply. Unfortunately, when we approach this topic, these types of discussions tend to have a lot of passion, but a lack of technical arguments. Congress is a place where debate ought to be based on technical issues rather than passion. It is important that these discussions involve all relevant actors and adequately understand Chile’s energy problems and the options that are available. AK, Transelec: I think the backers of renewable energy projects know that a significant part of their investment will be in transmission. We have to develop these projects and also develop the technological solutions

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that allow them to be incorporated into the grid. The development of the grid is an important consideration. Projects do not develop the grid; the grid is developed according to the regulator’s indications. At the moment, these technologies create effects that we have not seen because this type of technology is not common in our matrix. We have to rectify this. Moreover, some NRCE projects, such as mini hydros, solar parks etc., are located very far from the grid in geographical and voltage injection terms. This is very important to take into consideration. We must have equal access to the grid for these projects; it is absolutely fundamental to their functionality. A mini hydro project is not just the plant; it is also the transmission method that takes the energy to the grid so it can be commercialised. Small companies do not have the economic capacity to take on the social and environmental issues that may arise from this. Therefore, it is obvious that coordination is needed in order that these projects can access secondary transmission systems. Transmission lines interfere with the environment and, currently, there is nothing we can do about that. Our environmental law is designed to qualify projects and not to rank them, thus, we do not have organised information regarding the land through which these lines pass that would make it possible to create the most “environmentally-friendly” design. Developers have to use the information available to make decisions about which project is the best economically, environmentally and socially speaking. But if a project qualifies according to the authorities, that is good enough. It doesn’t matter whether it is the best project or not. This needs to be addressed. RAK, GasAtacama: There has been a continuous fall in the levelised cost of a variety of renewable energies. In the area of photovoltaic energy, fortunately for Chile, the development costs or levelised costs are already at US$90 or less. This is already 10 per cent below the price of coal remembering, of course, a limitation in the availability of works. In the future, it is going to be possible to incorporate these energies, without subsidies, at a percentage level that surpasses the system’s capacity to take them on.

energy roundtable

In the SING, the system operators have indicated the maximum capacity for renewables is around 400 megawatts, but we are going to quickly pass that number and run into the same error that we made with the first installations here. They were bigger than the system could handle. So, it is going to be necessary to limit generation. I think it is possible to produce a relevant and increasing percentage of renewable energy, but we have to prepare ourselves to receive them. The compatibility of the different types of renewable energy with machines that can take this swing at low costs is very interesting. If the development cost continues to go down, and photovoltaic could arrive at US$105 in about three years time, one can imagine centres that take advantage of shale gas from the US and machines that use these energies and create large blocks of renewable energy that can be incorporated at higher percentages. Another point, related to transmission, is that there are many smaller projects in the North. It is a big area and, therefore, it makes sense to continue to try to concentrate on certain areas to take economic advantage of each transmission center. It is a region that allows for incorporation of these energies at levels that optimise the costs of transmission. MT, former Energy Minister: If we want to take advantage of this potential, certain obstacles still need to be eliminated. We have implemented policy instruments that deal with making public information about resources available, pre-investment subsidies, longterm loans and a law that established a mandatory percentage of renewables in new contracts to make large conventional companies take renewable energy seriously. Furthermore, projects for dealing with the issue of explorative risks in geothermal, as well as the issue of concentrating projects in areas that are isolated form the grid, have been proposed. If we want to have faster penetration of renewables, barriers have to be identified and solved. There have been advances in the area of regulation and in the development of support mechanisms that are responsible for the positive results we are seeing in terms of the ongoing project to increase NCRE penetration. I have a positive view of the framework that was

created and the results it is achieving. I think new projects are entering at a reasonable speed, although we must careful not to press to much without eliminating the barriers that they still face. SdC, Vice Minister of Energy: In terms of the transmission sector, What are the restrictions or bottlenecks that don’t allow us to optimise economic dispatch and efficient production of energy in Chile? Where are the main problems that in some way reflect or originate from the reality we are experiencing in this country?

If we want to have faster penetration of renewables, barriers have to be identified and solved

Carlos Eugenio Finat Díaz Executive Director ACERA

AK, Transelec: The issue of transmission was a big problem in 2008—9 when there was significant under investment in the sector. In 2009, at least two major things were achieved in the sector: first, as a result of the earthquake, the safe design of the grid was taken seriously. After the earthquake the grid was tremendously fragile, but by 2010, there was a clear consensus that the grid needs to be safer and investments that are now being presented and approved work towards this. Second, large transmission projects in the Norte Chico, northern SIC and main reinforcement networks in the south were begun. We don’t know when they will be finished, but at least they are being built; we can see light at the end of the tunnel. Possibly by 2018, if investments continue as they have been, we are going to have a good grid. From now until 2017, it is going to be very complicated in terms of the grid. Both from the point of view of supply power to mining clients, but also to connect the wind parks. Right now, there is not enough transmission to connect all of the parks that are being started in that region. Over the medium term, some works are under construction and are close to being finished; however, we have a problem with the ordinance that authorises works to increase capacity. There a huge number of works proposed, including ours, that were not long-term solutions but rather short-term, that have a high rate of return

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for the users, especially for the generators that pay for the transmission system. If it is a five-year project, the return is at two.

Problems regarding new investments in transmission are mostly in the environmental and social areas Jorge Rodriguez Ortiz Chief Executive Officer Interchile

However, there are two big problems with their progress. First, due to the crisis, this type of work is very slow to be authorised. We have at least five works in folders that the transmission approval process does not recognise, but the energy generators recognise. We have proactively approached some energy generators to figure out how we can finance these works. Unfortunately, here it is obvious that the system needs this, but the process doesn’t allow it to be recognised. Second, the approval process that looks at increasing the main network capacity only considers projects that are necessary over the long term. When you have a grid of this type there are solutions that have a component of low equipment but high works. Unfortunately, the law, or tariff recognition, doesn’t recognise the works. So there is no incentive for investment. Jorge Rodriguez Ortiz, InterChile: Problems regarding new investments in transmission are mostly in the environmental and social areas. These are the two variables that have become the main challenges to consider and to overcome. We are now attempting to manage these two aspects to the best of our ability, by approaching the communities ahead of time, for example. However, at some point we are going to feel the effects of these two areas, as are other investors, and there needs to be some proactivity regarding these issues. In terms of connecting small wind and solar centers to the transmission system, I imagine that here in Chile you use the same system as they do in Brazil, where a collection unit groups together the connection of several small generators and the profits are divided up as a percentage of the main network and paid directly to the generators. This structure has been successful, but

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there is more risk for the transmitter who will have the responsibility of making sure that this energy can enter the transmission system. Another issue is that the centers have arrived before the transmission itself. I have just been in Brazil and here generation is coming before transmission. This really needs to be considered so we don’t have to shut down generation projects because of transmission problems. Generally, the transmission system doesn’t take care of these bureaucratic measures and it is getting problematic. The profits for tariffs here in Chile are good. The Chilean model has been a model for many countries including Colombia and other parts of America. I don’t think there are complaints about profits. What I would suggest is, when an investment is made, costs that could be eliminated due to environmental and social issues are explained and determined. I think these issues should receive more attention. RM, Generadoras de Chile: One issue that has to be solved in the very short term is how we group together small projects that can’t solve problems individually, e.g. transmission, social and environmental problems. Today, we don’t have the instruments to find these solutions. The concept of Electric Highway has suggested a solution, but I think we need to act more rapidly. Having said that, I should add that there is light at the end of the tunnel for the main transmission network. If projects move forward as planned, in five years time the network should be reinforced. However, it will depend on the type and difficulty of environmental and social opposition that these projects face. The new concession law, which is being discussed in congress will expedite procedures, ease processes and eliminate the problems where, unfortunately, in many cases, there has been abuse of the law. There are many examples where this abuse is obstructing the speed at which these projects can be developed seriously affecting confidence in and the capacity of transmission. GS, Hot Rock: Regarding Jorge’s comment about the Brazilian model, it is important to emphasise the relationship that exists between the way that the transmission system is designed and the way the designs specifically influence the competitiveness of generation companies.

energy roundtable

In general, transmission has been a sort of agent that follows generation, finding financiers, ways of financing, etc. Part of the conversation that we are having today has to do with the potential that putting together clusters, i.e. moving transmission toward geographic areas that have potential in terms of certain technologies, generally renewable energy technologies of all types.

Chile offers wonderful conditions for investment in the energy sector The State, through public policy tools, can give a sign to the generation sector that will encourage the development of transmission projects. One has to understand that generation can collaborate in creating a message regarding the development of a competitive market, by way of transmission. At least the discussions regarding the Electric Highway Law have been to do with financing transmission projects and the logic of large scale investment, which is vital. SdC, Vice Minister of Energy: Chile offers wonderful conditions for investment in the energy sector; we have clear regulations and one of the healthier financial systems in the world, making financing very competitive for long-term investment projects. Inflation is controlled, the economy is experiencing sustained growth and unemployment is at a historic low. The country shows good economic indicators, has a stable legal system, good institutions, and even between different political parties there is a limited range of economic models, which prevents extreme viewpoints gaining traction. Notwithstanding these advantageous conditions, we are in transition and are behind in terms of attracting investors to the energy sector. I think this brings us to the key issue; what is it that communities are rejecting in the development of new projects not only in Chile, but also all over the world? This relationship with the community is turning into the greatest obstacle in the creation of investment projects. 15 years ago, when we talked about energy projects, the main issue was long-term financing and investment

payback. Then, it was the environmental impact. Now we are seeing the necessity of community participation. What exactly are the people rejecting? FRG, Fundación Avina: I think this is the fundamental question. You mention a series of indicators that highlight Chile’s progress in certain areas; however, we must consider the indicators that are not highlighted. These indicators are, and will continue to be, the sources of rejection if nothing is done. Without doubt, one is inequality. We are not only talking in terms of who has the wealth in our country on an economic level, but also with regard to the transformation of our energy sector. Some large investors don’t consider reinvestment or paying the costs to the territories where the investments are taking place. From the areas that are excluded, you can observe that Chile’s development is going very well, but no form of protection reaches these places. In terms of inequality, social, territorial, economic and environmental concerns, all this has to do with feeling included versus feeling excluded from a process. All of us, including the private sector, have to be ready and open to innovate not just from a technological point of view, but also with regard to how these issues are approached. The private sector tends to make mistakes regarding these matters; they think that this translates into wealth distribution via economic compensation. This is not necessarily what communities are asking for from the private companies or the state, which should protect and safeguard public interests. I think this resistance comes from annoyance, anger, indignation; there are many different expressions. The process is no longer sitting down to talk and taking notes, as it was before. But rather, the state, the private sector, the communities and civil institutions need to make connections with each other. Currently, the connections with communities are fragile and that is why there is so much distrust of institutions, political parties, and the authorities. I think the types of agreement being offered out of date. Communities, the people, want to establish new agreements. No one has the answers. They have to be created by all of us. We have to concern ourselves with it and I don’t think this is what is happening. The responses to

Francisca Rivero Garay National Representative Fundación Avina

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these questions from the communities are a smoothed over, for containment purposes, and the discussion that really needs to take place is ignored.

José Ignacio Escobar Chief Executive Officer Mainstream Renewable Power

CF, ACERA: Regarding attracting investors, I think that you just have to look at the millions of dollars and the number of projects that are in the process of approval or have been approved, and the number of new market players. These are the best indicators that show the sector is attractive for investors. International financial groups and new international energy companies are looking at Chile. There is no lack of interest, just difficulties with carrying projects through.

International financial groups and new international energy companies are looking at Chile There are new concerns in Chile as a result of its development. The problems require a state that is willing to take on some degree of political cost and if, after evaluation, projects meet with requirements, the state should insure that they are approved in the timeframe that has been established. Regarding inequality in distribution: inequality is clear, in terms of generation and transmission projects connecting to grids, when the benefits of the project go beyond the place where they are being carried out and the costs and impact greatly affect the community, I think here it is very legitimate that these communities have opposition. In the Electric Highway Law, the specific design of the transmission line route has to take into account things other than just the most economically efficient way to carry out transmission. The problem behind all this has to do with what Francisca suggested; we have to take advantage of the communities wish to participate. Legally, it is defined where a transmission line is allowed to pass and where not, but if there is no space for conversation or coming to a consensus, resistance will happen everywhere. It is not a technical issue; therefore, it is irrelevant whether you have a map that indicates where you can

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build if the interested parties don’t see that there was a process of participation where their point of view was considered. Without this, we won’t reach the final goal, which is to facilitate the advancement of projects. MT, former Energy Minister: The way that companies approach these projects needs to change. There are some who focus on engineering and construction and other issues, like relationships with communities, seemingly don’t exist. This is no longer a possibility. Addressing environmental concerns and creating a good relationship with the communities is a requisite for the feasibility of the projects. But this does not have to be seen only as a burden. We have to promote the maxim that, if this work is done seriously the resulting project and the longterm relationship will be enriching for the company. Gradually, we are seeing cases in which companies realise that it is not just about meeting requirements, but rather trying to figure out what is behind the people’s concerns. I think there are any number of possible solutions to deal with the social opposition to projects. But we need solutions from a public policy point of view to avoid inefficient individual negotiations per project. We need a system for adequate compensation and to work seriously in land use planning. Both have to be done in a process that considers adequate citizen participation processes so that these solutions are legitimised by the population. RM, Generadoras de Chile: I think there is a great lack of legitimisation in environmental approvals and this impacts the projects because currently people are questioning how the system is designed and works. It probably needs time and effort to make it more legitimate and accepted by all parties. Part of this legitimatisation probably has to do with finding policy instruments that allow different, constructive and stable relationships with the communities. Essentially, when a company is facing the environmental impact assessment of a project, local communities find themselves in a process that they believe will bring nothing but costs. It is very difficult for the investor to change this perception if there has not been

energy roundtable

a dialogue with these communities beforehand. The types of relationships that we need should come from a process where confidence is built in advance and not linked with the environmental impact assessment. Finally, it is clear that the tools to disseminate information need to be improved. We have to find instruments that lend more certainty to a project developer. Information needs to be provided at a very early stage and communities must feel that their concerns have been taken into account and that they have access to information regarding the project in advance. Currently this is not happening in many cases opposition sometimes comes from lack of information and confidence among different parties. RC, Empresas Eléctricas: Rejection of projects takes place whenever two visions are very different. There are projects that are rejected for national, and maybe even universal, issues; there are projects where the only problem is with community relations; and there are projects where both of these factors combine. For now, we have to realise that holding the citizens entirely responsible for submitting environmental impact to the system is something that definitely does not work. It has not been designed to work that way and if we try to give them this responsibility, we are going to fail over and over again. Furthermore, we are going to have to recognise that within the judging criteria for the viability of a project there are elements that are neither environmental, technical, financial nor economic. There are elements that have to with other preferences and, currently, there are no formal processes through which these preferences can be channeled, so they are being expressed through protests, phone calls, etc. While this situation remains, we are not going to be able find an adequate solution. CF, ACERA: I would hate for us to give the impression that the energy situation in Chile is totally negative. In the recent years there has been an investment in renewable energies of more than 1,000 megawatts, which monetarily is close to US$3 billion. There are also about US$6 billion in investments in energy projects that are in the process of enrollment or about to be built.

One may ask what the difference is between projects that, on a monthly basis, comparing energy to energy, can already generate about 15 per cent of what HidroAysén would generate if totally built. Of course, the answer is, their social costs are much lower than those of HidroAysén. The issue of the local costs by way of global benefits has not been sufficiently considered. I think that there is a lack of credibility in terms of the development of some of these projects, including some for which global benefits are not going to be enough in a not very competitive market. If someone says they are going to lower the marginal cost of energy, that’s fine, but what interests me is whether my bill is actually lowered. This is an area that generates serious doubt. In general, smaller projects have a more direct relationship between local benefits and local costs, which makes it easier to resolve problems.

Rodrigo Castillo Executive Director Empresas Eléctricas

If the local communities saw there was unity in our policy, it would be beneficial for everybody AE, BritCham: We should move towards more participation from different organisations in the communities, but, before that, I think we need a big picture framework. There are many issues presented today that are quite clear, the need to diversify the grid, the need for renewable energies. There is a lot said about these things, but in practice little is done. I think it is important we pursue commonly held sensitivities and then encourage politicians from different political parties to come to agreement with an agenda for our country in terms of energy. Our country has no unified agenda. If the local communities saw there was unity in our policy, it would be beneficial for everybody. It terms of compensation, I agree, it is not only the number that is important, but also the participation process. I think that within the creation of these processes there are two things that could help. First, engaging political NGOs and seeking out a political consensus. If people see that an organisation is protesting a particular project, it is extremely damaging.

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Second, the potential of involving academics in the process. When you put the academic world together with the private sector, working with the government, you can foster closeness and engagement with the communities. It would be a very powerful tool. Not only because academics are a bit more objective, but also because they have the existing tools and knowledge that help these relationships.

Arturo Errázuriz President of the Climate Change Committee British Chilean Chamber of Commerce (BCCC)

Security of supply is needed, competitiveness is needed, and clean energies are needed A couple of months ago, I was with professor Chris Lazlo from the Case Western Reserve University. His philosophy was that to succeed in sustainable development, you have to implement methodologies that involve the participation of the different players from the very beginning. Participation is not just speaking with the community, then with the authorities, then with the bank, but rather bringing everyone together at the same table. Although they are not necessarily going to come to agreement, having had this open conversation validates the project, as it validates the process. SdC, Vice Minister of Energy: It is clear that energy has become a major issue for Chile. We hear about it everywhere, in every form of media. Local, regional and national communities have used social networking and, in some instances, taken to the streets to demonstrate against projects. Without a doubt, citizen involvement is experiencing an evolution. Each player that participates in Chile’s development, particularly in the energy sector, has a contribution to make in terms of responsibility. The State has a responsibility to provide a regulatory framework that promotes competitiveness and adequate protection of the environment and the private sector has a responsibility to be proactive in creating long-term and workable relationships with the communities. Our conversation also suggested there are significant opportunities of which we can take advantage, for instance, US shale gas. The State, too, can take a role in

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this. No amount of technology will be too much for a country with severe restrictions in terms of conventional energy resources. There is space for everyone in the area of renewables. Security of supply is needed, competitiveness is needed, and clean energies are needed. Thermoelectric plants in Chile have the same emission standards as those in Europe. The renewables, as well, have to meet with all the requirements suggested by the environmental impact evaluation system. We must take advantage of the potential of hydroelectricity. Given Chile’s scarcity of conventional energies, this is a massive renewable resource that, historically, has made a huge contribution in Chile. It is very important that we consider hydroelectricity part of the country’s long-term production portfolio. In terms of energy, competitiveness matters. The NCRE are increasingly entering the market. We are already at around 1,300 megawatts. There is a significant price chain for these technologies. The price of commodities over the last ten years has created a space for NCREs that will allow for less dependence. We have to find a way to combine thermoelectricity, particularly using natural gas, and NCRE. This formula has worked in other countries and it could work for Chile. The Government needs to be proactive in planning transmission centres. This will guarantee that new types of technology will not put the security of the system at risk. In terms of bottlenecks, these are reducing. There are projects already in process; they should be finished by early 2018. Furthermore, the Concessions Law, which should be approved soon, should help reduce approval times for these types of projects. One of the main themes of this discussion has been the participation of the communities in the development of the projects. We need to have an effective understanding and knowledge of these communities, so we can encourage participation. Given that installation of projects in different communities throughout the country brings these communities extra costs, it would be useful to define clearly the benefits that will be given to communities and that this, ideally, would be established in law. Thank you all very much for participating in this event and for this enriching conversation.

energy interview

more competition, and for that to happen there needs to be more certainty regarding the development of new projects.

IGNACIO CRUZ COLBÚN S.A.

Chief Executive Officer

INTERNATIONAL INVESTOR: What do you believe are the best ways of engaging with the Chilean public? IGNACIO CRUZ: It’s not always easy, not only in the energy sector, but for every company. Today, it is very important to have a good relationship with the society in which you operate. To get to that point, you need to have a dialogue with local communities. This is something we have to promote throughout the country, across all sectors. I think the start of this process should be a system for better wealth distribution. So far, the state has not been very efficient at this, so companies have to involve themselves in this process. What we have seen is that people are not only complaining about wealth distribution, but also power distribution and many other things; people are complaining because there is a problem. This is an important issue in Chile and we need society as a whole to be involved in the solution.

It is very important to have a good relationship with the society in which you operate. To get to that point, you need to have a dialogue with local communities What should the various stakeholders in the energy market do to resolve the current issues in the sector? Investors need more certainty with regard to developing new projects. At the moment, many projects can be exposed to litigation, so there are uncertainties relating to project definition and approval. Consequently, I believe we need to modify the regulation in order to give society and local communities greater involvement in defining these projects. I think that, in the future, we need to develop projects and get the approval of the

CAREER DEFINING MOMENT

It was when I was appointed as General Manager of Minerales de Soro, my first General Manager position. Until that time, I had always worked in finance, it was a very big change. One other moment that had an impacted on me was the first time we had a fatal accident in Minera Los Pelambres, I was General Manager at the time. That was very tough. LESSON IN BUSINESS

Put people at the heart of the business. necessary authorities after we have the support of the communities. You need to develop business that is good for you, but is also good for society. A good example of this approach is our project in Angostura. The company involved the community very early on, before the environmental impact study, regarding how the project was going to progress. We set out what it could do for the people who were going to be affected, and they were given an opportunity to give their opinion. Sometimes, it is not necessary for everyone to agree on every little detail. People just want to be involved, so their opinions and needs are heard; then solutions can be proposed. I think this approach has a significant impact on the success of a project. Communities must have the opportunity to give their opinion and I think the industry is still learning about how to do this properly. Furthermore, I think the whole energy sector, including politicians and the regulatory framework, has to be concerned about how to split the development of projects across the sector, otherwise we will be facing a big problem in the medium term. We need to incentivise the development of new projects. I think it would be good to have more, relatively big, players entering the energy market to increase competition. I’m not saying it is not competitive, but it’s always good to have

How have the past years of drought impacted your strategy for leading the company forward? The past three years were very dry years, and we are going through the fourth now. This has obviously had an impact on Colbún. We have switched to more thermal generation in order to balance the lack of hydro. In 2012, we had approximately 65 per cent thermal generation and 35 per cent hydro, whereas in the past we have had 70 per cent hydro and 30 per cent thermal. We need to give more stability to our cash flow and we are managing that by making this change. We are currently trying to assure the LNG supply for our thermal plants and so we can have much more LNG backing our hydro production. What can you tell us about HidroAysén, the Joint Venture with Endesa? Are you prepared to sell a stake? What we have said is, if the project needs to be redefined in terms of the composition of the shareholders, we are willing to analyse other structures to make this project more feasible. I think it would be good for HidroAysén if more companies participate in the project. It is not that we particularly want to sell, or have a special interest in selling any part of the project. We are very much committed to the development of HidroAysén, we are just looking for the best way to make it feasible. How do you see the development of Non Conventional Renewable Energy progressing? I think there is a natural selection process happening at the moment, in terms of technology and location. There are a lot of renewable projects in the pipeline, many of them with an environmental impact study approved; however, they aren’t being constructed because they haven’t got to the point where they are competitive. They need to be competitive. This natural process means the best of these projects, with the best design, in the best location, will get the go ahead eventually. The others will be out. Furthermore, there needs to be some support for projects that are far from the consumer centres. There may be a lot of potential hydropower up in the mountains. That hydropower needs a transmission line to get to the consumer centre at the lowest cost. In terms of these kinds of transmission lines, it’s improbable you will get the energy at a competitive price without subsidy. So, if you want to pursue much more renewable energy, there will have to be some investment in the platform for that development.

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JORGE RODRÍGUEZ GROSSI EMPRESA ELÉCTRICA GUACOLDA S.A. President

INTERNATIONAL INVESTOR: What events shaped the energy market before and during your time as Energy Minister? JORGE RODRÍGUEZ GROSSI: Before I became Minister for Economy and Energy, the entire electrical system was concentrating on a combined cycle electric production and all the investment in the power system was based on cheap natural gas from Argentina. The main problems in the electrical sector were related to the full payment of the transmission sector; there were many legal arbitrations and litigation with respect to payments, and investors in transmission were quite worried. When I became Minister in 2001, the challenge was to get new legislation to give assurance to investors in transmission that they would recall 100 per cent of their investment, which we did. The new legislation stipulated a methodology to determine the fee that has to be paid in the total transmission system and how that amount is then divided amongst the users. This stopped litigation against the charges.

We ensured we had a certain amount of gas for about three years ... but in 2008, we almost completely stopped importing natural gas from Argentina In March 2004, we received news from Argentina that natural gas was coming to an end. Thus, we had to find a substitute for natural gas and ensure that the private sector would continue to invest in new ‘postnatural gas’ power companies. By maintaining a friendly, diplomatic relationship with the Argentine Government, we ensured we had a certain amount of gas for about three years, mostly for residential consumption,

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It is more a theme than a moment. When I was young, I studied economics because I wanted to collaborate with economic and social development. Then I oriented my activities toward academia and teaching, which I still do. As I got older, I was engaged in governmental positions and finally into managerial and board-level director roles. LESSON IN BUSINESS

I have had to lead large organizations after or during severe crises at least 3 times. Thus, I have learned the value of preventive control. You must work with people you can trust and by means you trust, but that does not mean that you can relax controls or avoid having plan B and C. but in 2008, we almost completely stopped importing natural gas from Argentina. The electrical companies that used natural gas started trying to use diesel. There were technical problems at the beginning, but they succeeded, so we never had a blackout situation. However, the cost of producing electricity had increased enormously, especially during 2007, when the price of oil worldwide shot up exponentially. It was a dramatic change in cost. For two or three years after the initial announcement, the Chilean private sector was confident that Argentina would reverse its decision regarding natural gas. Investors were asking why they were expected to invest in a coal plant when cheap natural gas may again be available. So, we had to prepare new legislation to give assurance to investors that, if they were to invest in power plants that did not use natural gas, they could recoup their investment. Otherwise, we could have got into a severe capacity supply situation. This new legislation was achieved in 2005 by a change in the way electricity was provided to distribution companies. We changed the methodology to obtain PPAs (power pur-

chase agreements) with these companies through competitive bidding processes and establishing long-term contracts. That way, if you won a bidding process, you could have a contract for 10 or 12 years and safely repay your investment, even if cheap natural gas from Argentina had been reinstated. That was the way we diminished political uncertainties in our power market. At the same time, the Government went ahead with an LNG project in Quintero, using a state owned company (ENAP) together with two private companies. The effects were twofold. First, having LNG, and using natural gas again instead of diesel, was very reassuring for all combined site plants. Second, Chile could now import natural gas from anywhere in the world. This meant that, if Argentina had natural gas again, there would be no economic reason for them to sell it cheaply. Thus, we closed the door to any future dependence on Argentinian natural gas. With these two measures, we were able to give space to investors and, at this time, many new investments came to Chile mostly building coal plants, which were the cheapest and could be built quickly. Today, most of the companies in the electricity sector have both Chilean and foreign capital. The foreign investment used to be from the USA or Spain, now Italians are the owners of the main power company, but the Chilean pension funds also own part of the most important electricity companies in Chile: ENDESA, Colbún and AES Gener. KEY CHALLENGES What are the key challenges that are facing Chile’s energy market today? In the middle of the last decade, global warming became a very popular topic and started to affect public opinion. This has provoked new problems and challenges. I am absolutely convinced that, like other emerging countries, Chile has nothing to do with global warming. Not in the past, not in the present. We produce 39 per cent of our electricity using water; we are very friendly to the environment compared to the rest of the world. It is not up to us to lead the way with respect to global warming. However, a large proportion of our population think differently. Many people are against coal electricity production and large dams like HidroAysén. They advocate the use of so-called new renewal or non-conventional renewable energy, but most of them are very expensive and are mostly non-effective in terms of electricity production. I can show you three completely contradictory news articles regarding this topic. One relates to the Chilean population being against global warming; another is a survey suggesting

energy interview

We are very friendly to the environment compared to the rest of the world. It is not up to us to lead the way with respect to global warming

that Chileans rank environmental concerns thirteenth in their list of priorities; and the last says that people are against electricity becoming expensive. If you try to combine all these preferences, you end up doing nothing. So, providing electricity has now become a political issue and it has become more difficult to invest as a result. We prepare investment projects and try to fulfil all our obligations, but when we are ready to invest, we find out there are legal issues with the project and that we may have to spend two more years going through the courts having discussions with lawyers about the project’s feasibility. We need strong political leadership; we need to educate the population and convince people that if they do not want the conventional solutions they will have to pay a lot of money for their electricity. We have to convince people that electricity is absolutely vital for production. In Chile’s case, we need to use water, which we have in abundance. I cannot understand why some people think we should not be using the water we have to produce electricity. It is odd, but in families it seems the only person concerned about cost is the one who pays: the head of family. When you talk about the high cost of electricity, young people say they don’t care, which is probably true because they don’t pay for it! They don’t pay now, but they will in the future. Moreover, they will pay for it in the labour market since high electricity costs directly damages economic growth and employment. I use to talk about these energy problems, but it was not taken very seriously by the political actors. Unfortunately, the crisis we could potentially see in three years from now might be a way of making politicians start worrying about this issue. If we want to be competitive in the world we have to have the cheapest electricity we can get. Chile can’t compete if it has to use very expensive energy. We are far away from all the important world markets. We have to have low cost energy. COMPETITION AND DYNAMICS Do you think more competition is required in the generation market? The generation market in Chile is operated

through a marginal cost system. It tries to imitate a perfect competitive market. This is possible because a central command exists that orders you to produce when you are the cheapest one in the supply chain and to stop production when you become more expensive than others. We legally force companies to be competitive and, if you are very expensive, you will never be despatched. Thus, the production of electricity in our system is, from an economic point of view, perfect. It is ruled by the marginal cost principle and in perfect competition the supply curve is the marginal cost curve. In that sense, we have a perfect power production system. I do not think more entrants into the generation market would have that much effect on the price of energy for two reasons. First, CODELCO, the largest corporate copper producer in Chile, has called for competitive bidding two or three times and they have bought very cheap electricity compared to the market price. But they will never have a price of less than 6 or 7 per cent lower than the average, because it is not possible to sell energy so cheaply. Second, several mining companies have said that they will build their own plants, but that never happens because there are cheaper solutions than providing your own electricity. In the end, they call for competitive bidding and the power company that gets the project is always the cheapest. This comes as a result of competition. We have to compete to get customers. Almost all the clients we have at Guacolda have been obtained through competitive bidding with other power companies. Today we have more than 50 different power companies in Chile. We have three or four very big ones, but if you look at any industrial sector it is the same. This is a country of just 16.5 million with an annual per capita income of US$15,000. We cannot have 20 big companies in any sector; it’s just not possible. What are the crucial dynamics within the transmission sector? When the military government privatised the electrical system they also privatised the transmission system, but transmission was kept under ENDESA, which was part of the old state-owned system. ENDESA had the monopoly of transmission for many years, until the Antitrust Commission decided that transmission should not be in the hands of a power company. We brought in new legislation, which forbids transmission to be in the hands of a power company. Furthermore, we opened up ownership of the transmission business; it became law that any new investment has to be made openly. However, our unique geography means it is not easy to have a great many transmis-

sion systems; it is the same with highways, the entire infrastructure in this country is the same. We have an open system and the government determines the fees. The same applies in distribution: the government determines the fees. There, we have a noncompetitive situation, which is the most efficient solution from an economic point of view, with a state determined fee, the optimal economic solution. When I look at the Chilean electrical system, I see a very efficient model. The problems that we have now are not economic, but political. There are a lot of people keen to invest in all sectors. We do not face safety provisions. If we are not able to go ahead with investment, it is due to political problems not economic ones. The system from an economic point of view is working very well.

There are no legal or economic obstacles preventing investors from getting into this sector, nor into any other economic sector in Chile Do you have any advice for investors who are looking for opportunities in the Chilean energy market? Over the coming years, Chile will need around 800 megawatts per year to keep the electrical market in equilibrium. That energy could come from any investor. Chile is very open in that sense; it is a matter of knowing how. If you know about electricity in the United States, in England, in France, or in Japan, you could get into this system very easily. There are no obstacles to get into the system. Obviously, the easiest way to invest would be to buy part of a company; then you get the human resources and support immediately. Insiders in all industries naturally have an advantage, but there are no legal or economic obstacles preventing investors from getting into this sector, nor into any other economic sector in Chile. You have to have the right to produce, you have to have the money to invest and you have to respect the legislation, but that’s all there is to it. Anyone who knows how to produce electricity and has money to invest can come to Chile, and that is what is happening today.

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the amount of Solar PV that can be deployed in Chile. At the moment, from the general market perception, we are oversizing the possibilities, which is quite normal and happens in every market, but we need to be very realistic in terms of grid connections that are present in the market. Furthermore, this is a completely free market without subsidies. This does not happen anywhere else in the world and is a key difference between the Chilean market and others. We need to be conscious about the speed of the market when signing long term contracts as this is the key driver for market growth.

PABLO BURGOS SOLARPACK

Chief Executive Officer

INTERNATIONAL INVESTOR: What are the most important features of the project agreement between Solarpack and, the mining company, Collahuasi? PABLO BURGOS: It is important because it is the first agreement of this size between a renewable energy generator and a big consumer, in this case from the mining industry, the major electricity consumers in northern Chile. It is also the first agreement of its kind in the SING (Sistema Interconectado Norte Grande), between a generator and a consumer, that adapts precisely to the characteristics of renewable energy, specifically Solar PV (Photovoltaic), which is intermittent and not manageable. This is significant because it means that consumers in this area will be partly supplied with energy from an intermittent energy source. Furthermore, the agreement is a clear demonstration of the competitiveness of Solar PV at this moment, particularly in northern Chile. The Collahuasi tendering process was not limited to one technology; any kind of technology could have been chosen. The fact that Solar PV signed the contract indicates that it is more competitive than other renewable energy sources in this part of the country, specifically wind or hydroelectricity. What differentiates Solarpack from the competition in terms of the services you provide? What differentiates Solarpack from our competitors is that we are extremely focused on our technology, Solar PV. Not all renewable energy companies are similarly focused. We also stand out because of our agility and speed in terms of developing our projects. We are not a big company, which can have its disadvantages, but one key advantage of our size is that we can move quickly. We are able to identify opportunities quickly. We develop all our projects from scratch, all in-house. We have not bought a single

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It was the decision to start-up Solarpack in 2005. The thrill of growing a new business and setting up a corporate culture and values. To be able to start operations at an international level are experiences and responsibilities that have been derived from that very special moment. LESSON IN BUSINESS

Be persistent in what you do, have faith in what you are pursuing, but at the same time watch out for the signals that highlight your path is not correct. Be honest and build honest teams. project in Chile, Spain or in any of the other countries where we have operations. Does Solarpack have the ability to obtain all the necessary permits before the construction of a project? Yes, we do all the permitting ourselves before construction starts. The first thing that we address on a project is the permitting issues. We select locations which we consider to be optimal for the projects and manage the complete permitting process in-house: environmental permits, land related permits, interconnection permits, and all the other minor permits involved in a project like this. It is a key value chain part of the project management that we provide. SOLAR PV DEVELOPMENT How would you best describe Solarpackâ&#x20AC;&#x2122;s development plans in Chile? How big is the pipeline of projects? We are not very keen on big pipelines, nor are we particularly worried about quantity of projects. We want to fully execute every project that we start to develop. We focus on having a really good selection of projects rather than developing a large number. We also feel we need to be realistic, particularly in the northern grid system, about

What are the advantages of Solar PV and how can the Government support its development? Solar PV has a big advantage and big value for the electricity sector in that it can be deployed almost everywhere in the northern part of Chile. We do not have to be at the seaside, like thermal generation facilities, nor do we have to be in a remote location, like wind generation facilities. We can build beside existing infrastructure and this can help level generation and consumption throughout the grid. In the Northern grid, there is a highly concentrated area of generation at the seaside, where the thermal facilities are located, and there is also a very concentrated consumer area where the mines are, which is at higher altitudes up in the Andes. The beauty of Solar PV is that it can help change this imbalance. Importantly, we do not need to build new infrastructure to connect our projects; we can use current infrastructure. The problem is that access to the existing infrastructure is not well regulated in Chile. It would be very helpful if access to infrastructure was organised in a better way for renewable providers, this would help to improve grid stability. Is the Chilean energy market moving towards the use of cleaner, thermotype technologies, such as gas, working together with renewable technologies? From the experience in other countries, like Germany or Spain, where a big base of renewable energy is already in place, it is not necessary for gas generators to be allied and work jointly with solar generators. The grid system has to be optimised and balanced so that both technologies can work simultaneously and the grid system is stable. The key point here is that the government, together with the CDECs (despatch centres), must work to improve the grid and ultimately achieve a grid where you can produce a large part of the energy through renewables when

energyâ&#x20AC;&#x192; interview

â&#x20AC;&#x2030;There is a lot of confidence in spot prices not falling below a certain point, which has proved to be enough for our technology to be financed and comfortable

you have the resource available and, when that is not available, you have a good base of gas fired plants in order to guarantee the power in the system. This can be done efficiently from an economic point of view. PROJECT FINANCE In terms of financing projects, how important is it to have a Power Purchase Agreement (PPA) for the project to get investment? It depends on the type of PPA, there are many different types. Under certain PPAs you are required to undertake market risk. There have already been situations in Chile, that investors in these kind of projects do not want to see repeated, in which some types of PPAs have proved to be problematic because the renewable energy operator is exposed to significant market risk. However, there is no need to sign these types of PPA. Renewable intermittent sources have a role to play in a certain percentage of the energy supply and they should be given the responsibility of supplying energy, but they should not be required to supply power. This is something they cannot do until we start to have storage technologies in place.

In terms of wind and solar projects selling into the spot market, what about projects that can get financing without a PPA and then compete with conventional power price-wise? This is a very interesting process and it is proof that investors are really thinking that energy prices are fairly resistant. I doubt that energy will drop significantly in price, at least in the Chilean market. Thus, there is a lot of confidence in spot prices not falling below a certain point, which has proved to be enough for our technology to be financed and comfortable. Also, equity investors are looking at the spot market as an excellent opportunity for outsiders. As in every free market, when the prices go up you can be sure there will be a lot of capacity sought in a short period of time and then the prices will come down again, this will certainly be the case in Chile. However, in a long-term renewable energy project you can benefit from up-sides at certain times in the long life of the asset and this is attractive to investors. For banks, as I said, the market price in Chile has proved to be a transparent process and they are confident that prices will not drop from a level that is sufficient for them to be confident in financing long-term projects. How aggressive do you have to be in terms of attracting the equity financing you need? We are not aggressively dropping asset prices, but we do have to work on it to an extent because our business model is to develop and build our plants to keep our minority stake, and as we are not an IPP (Independent Power Producer), we want to attract investors to our projects who want to have an investment as IPP in the long term.

There is a clear interest in investing in these kinds of projects. However, in terms of our initial projects, we have been focused on financing or raising the debt first, building the project, and then attracting investors to the equity of the projects for the long term. What type of investors are looking at the equity of these projects at the moment? Is it longer term investors, like pension funds, or is it more strategic, short-term investors? Institutional investors, like pension funds etc., are still not in the game. In Europe, some asset managers have invested in these types of assets, but this has not happened in Chile as yet. I am sure it will come. When these investments prove to be a good proposition, these types of investors will slowly come to the table. The investment community attracted to this type of project is basically industrial investors, such as generators or private equity investors. With regard to these type of investors, we have experience of both Chilean and foreign investors that are interested in the equity of these projects. Are lenders requiring a higher proportion of equity in order to lend on spot market projects at the moment? From our preliminary discussions about this, we are not in a process with a mandate to finance spot market projects, so I am not speaking about our experience, but in general I think this would be the case. It is our conclusion from the project cash flows, when you simulate P90 scenarios with the spot market they would of course go lower in the yearly cash flows compared to a PPA project, which are more stable in terms of cash flows.

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energy. However, that is compensated because the impact that the drought has on prices is far greater than the impact on water. It all depends on how you design your project. You have to design it with a higher load capacity, and banks have to look at each project. In my opinion, hydro projects are constructed more rapidly when you have all the permissions. My experience in terms of financing of hydro projects from Chilean banks was that there was no availability in 2006, moving to full availability by 2011. Our first project was a 19 megawatt plant, the second had a 6 megawatt capacity and the last one was a 14 megawatt plant.

CARL WEBER HIDROMAULE S.A.

Chief Executive Officer

INTERNATIONAL INVESTOR: Please provide us with a snapshot of the company and your activities? CARL WEBER: Hidromaule started in 2006 as a start-up company. It was formed by Italian and Chilean investors, who owned 53 and 47 per cent of the company respectively. The Chilean investors were mainly professionals who had very little capital; the idea of starting this entrepreneurial venture was so we could look for banks that could provide us with project finance schemes. We had enough capital to start with the first of the three projects, but as a pure project finance scheme, and not providing any other guarantees to the bank. That was important at the time. We started with one company and developed very quickly, so we had the company up and running within about two years.

The experience in this country over the last few years shows that it is best for banks and investors to stay with spot prices We have three run-of-river projects, and in all three we team up with a local irrigation association called Asociación Canal Maule, which is the largest in the country. They have more than 3,000 km of irrigation channels, which provide many interesting spots that have potential. We developed a scheme in partnership with the association whereby we paid them a royalty for their water. So, they run their business and we run our business, and we pay for whatever water they can provide us. That has been a very good model for both parties. PROJECT FINANCE How has the financing environment for hydroelectric projects evolved? Financing has evolved very positively for hydro

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About eight years ago, I decided to quit as COO of Colbún and to start up this company, which was a big risk and a big challenge. We didn’t know how it would work out, but happily the story turned out very well, so today we have about 40 megawatts in three plants and very interesting EBITDA generation. LESSON IN BUSINESS

You have to have cash! projects in Chile. During our first project in 2006, the banks here had no appetite for hydro projects with a project finance scheme. We had to look outside Chile for funding and we obtained it from the Corporación Financiera Internacional. During the financial crisis of 2008 things got even more complicated; however, by 2010 the climate was a little better and, with the help of the German banking group KfW, we set up a financing line. Some other banks came into this scheme, primarily Banco BICE, who took a large share of the finances. We could then finance our second project with this combination of international and local financing. We signed our last project with BCI (Banco de Crédito e Inversiones) in 2011, which was a pure project finance scheme. So, within approximately five years, the banking industry in Chile set themselves up in such a way that they could come into this market. As far as investors and lenders are concerned, that relates more closely to spot prices and the dilemma of selling spot or selling with a Power Purchase Agreement (PPA). The experience in this country over the last few years shows that it is best for banks and investors to stay with spot. More recently, the impact of the drought has meant that prices in the market have skyrocketed, which investors like. When there is a drought and you are talking about hydro, obviously you have less material to produce

If we are talking about investors looking at this market, what do they need to understand about the associated risk of projects with PPAs as opposed to those without? In terms of hydro projects, but also for wind and solar projects, banks have to understand that in the hours when you are not producing and you have a PPA, you have to go to the market and buy the energy to resell it. The problem is that if spot prices are too high, you are running at a loss for those hours. Therefore, you have to account for the fact that you will lose money during this time. Having a PPA puts more risk into the project. Traditionally, a project finance scheme stipulates that you must have an EPC (engineering, procurement and construction) contract to have a PPA, as well as all other necessary guarantees in place. Furthermore, you have to turn all the assets over to the banks so that if something turns sour, they take over the project. Banks look at the PPA in a positive light because they see it as a form of safeguard, but this is only the case in markets that are very stable. It does not work very well when you have a hydro market that is about 50 per cent of the energy and, when there is a drought, it drops to 30 per cent, which then has an impact on spot prices. Many projects face a lot of problems because they forecast a probability of producing energy under certain climate conditions. This can create problems for many companies if the predicted climate conditions are wrongly forecast. For example, during the past four years we have faced a drought here in Chile. Sometimes, having a PPA doesn’t just cause you to think about how nice it would be to sell spot when the prices are high, because when you have to buy energy during the hours in which you are not producing, it has a big effect on the balance sheet. I think the banks understand the risks here. Thus, there are many thousands of megawatts that have environmental approval, many wind

energy interview

farms in the northern grid and many photovoltaic projects have approval, but they are not being invested in because the banks are not lending. So there is an issue related to how this problem can be overcome. Have you been able to successfully hedge these risks against? You can hedge some things, but it is difficult when the difference is so big. Today, in Chile, the long-term prices are around US$80 or US$90 per megawatt hour and the spot price is US$260. Thus, you can work out the relevant sums. If for four hours a day you make a loss of $180, for those four hours in which you make a loss, you need eight hours to compensate that loss. Therefore, there are 12 hours during which you are earning nothing. If you have designed your plant to have a load factor of 50 per cent and you are left with a plant that has a load factor of 25 per cent, you lose 25 per cent on the commercial side. That is dangerous.

There are many thousands of megawatts that have environmental approval, many wind farms in the northern grid and many photovoltaic projects have approval, but they are not being invested in because the banks are not lending Could you elaborate on Hidromaule’s value proposition and how you differentiate yourselves in the market? Since the beginning, we had the difference between spot price and PPAs, and, in terms of our commercial area, we maintain our philosophy of selling spot. Of course, this has a lot to do with energy prices around the world because a thermal unit has a price in Chile, in Britain, in the Gulf of Mexico, and elsewhere in the world. A thermal unit is aimed to produce an amount of energy and the difference should only be transportation cost. At the beginning of 2000, we had a contract with Argentinean gas, which was fixed at a very low limit, and Chile had a couple of years of very low energy prices. In terms of Chile’s energy matrix, it has hydro, it has no coal and it has no oil, and so it was difficult to understand why we had such low energy prices. The reason for the low prices was due to the impact that the contract with Argentina had on spot prices. The marginal unit, the one that fixes the price, was totally distorted as a result. We looked at what was happening in Argentina and decided that the situation was

not sustainable. We knew, at some point, that we would face a scarcity of energy in Chile, which would mean that the marginal unit would then be oil and not subsidised natural gas from Argentina, because it would have run out. That was in our business forecast; we hit the point, and decided to build this project, targeting our objective to sell at spot price. If you look at the next four years, there are no big projects in the pipeline and Chile is growing at 5-6 per cent per year in the energy sector, which means that you should stay selling spot. Apart from drought-related risk, what would be the biggest challenges for your business going forward? The biggest risk in this industry is technology breakthrough, for example, if the ability to produce energy from hydrogen is developed. Also, our benchmark today is oil prices, and oil production every year is less and less. This will have an impact on spot prices. Moreover, we have these enormous reserves of shale gas in the US, which may produce a change, but it will not happen very quickly. The US have only issued two export permits at this moment, so it will take some time for them to adjust from being an import industry to becoming an export industry. Furthermore, a lot of plants must be built if Chile wants to profit from these developments in the US, which gives a window of opportunity to stay here and play the same game we have been playing for the last couple of years. RELULATORY EFFICIENCY Can you tell us more about the impact of water regulation on the hydro project pipeline, what needs to be done to create a more efficient and attractive environment for project development? Water regulation has not been changed for a couple of years. The only recent change is that you have to pay a patent if you don’t use the water. This is good for hydro project developers because speculators, who may own lots of water rights, have to decide quickly what to do in order to put them into production and not speculate with the titles. The problem for developers of mini hydro projects and small-size hydro projects is not with regulation related to water itself; it is more with the environmental regulation. When you have a water right, it has a specification of how much water you have to leave in the river as an ecological flow. That is standard all over the world. In Chile, the water authorities used the Swiss law as an example, and put the figure they used in the water rights title.

There are no big projects in the pipeline and Chile is growing at 5-6 per cent per year in the energy sector, which means that you should stay selling spot

In recent years, the environmental authorities have come with a new scheme that is not strictly law but it is used in practice. Now, when you apply for an environmental permit, you have another discussion about what the ecological flow is, which is very complicated. This puts a big question mark over the water rights of small size projects, many of which are then rendered unfeasible. My opinion is that these discussions should be had much earlier, not in the environmental feasibility analysis. What are the other problems relating to the regulatory framework in the energy sector? The problems in the regulatory area are important and relate mainly to the fact that we have not invested in generating projects. A lot has been done in the last three years in terms of competitive energy projects that have come to the market. As far as coal projects are concerned, in the last year 3 new projects have contributed 1,000 megawatts to the grid. Yet, these projects have not had an impact on the spot price because there is another component in this matrix, which is that transmission has not been up to the challenge. Transmission has faced many changes. There were amendments to the Electricity Law a couple of years ago, the Short Law I and Short Law II, which were aimed at transmission. They provided for exemptions in transmission charges for new renewable energy sources and simplified the legal procedures for projects below nine megawatts. What is surprising is that, after having passed these Laws, the investment in transmission has not been adequate in terms of what the country needs. We hope that there will be more new investment in transmission because that is a big part of the problem right now.

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interview energy

RUDOLF ARANEDA KAUERT GASATACAMA S.A.

Chief Executive Officer

INTERNATIONAL INVESTOR: What were findings of the study your company commissioned, which investigated the Chilean public’s preferences towards new types of energy generation? RUDOLF ARANEDA KAUERT: We estimate that Chile will require around 8000 megawatts of additional capacity by 2020 and a further 15,000 by 2030. We wanted to understand the increasing resistance to the development of new power plants in Chile, in order to decide how we can expand the energy sector in a way that is acceptable for all parties. So we commissioned a study. It consisted of 2,500 one to one interviews, a number of focus groups, and we employed specialist companies to carry out the analysis of the results. The study found that around 90 per cent of Chileans would prefer the development of power generation to be based on solar and wind energy; that approximately 60 per cent of the people don’t want coal to be the basis of development; and that 76 per cent of the Chileans reject the use nuclear power as an option, as opposed to 11 per cent who support it. Interestingly, the study also suggested that 80 per cent of Chileans accept that the country needs to double or triple the total amount of power it generates today. They accept this notion, but they want future development to be based mainly on renewable and clean energy. Thus, it is very important to find ways to include renewable energy in growing percentages in a manner that allows us to serve power demand in cost competitive terms. Given these findings, and that renewable technologies are starting to emerge as competitive alternative to conventional energies, what role will gas play in Chile’s future energy market? There are many key factors that will dictate the role renewables and gas will play in Chile’s future energy market, for example, cost,

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When Argentinian gas stopped, by law we could not pass on the resulting increase in cost to our customers. We were serving all the cities in northern Chile, and we were close to bankruptcy. I had meetings with the CEOs whose mining company’s account for 85 per cent of total energy demand in northern Chile and we reached an agreement to share the losses. The company survived, and there was continuity of power supply to all residential users and the mining companies, which were able to obtain additional profits exceeding their essential contribution to this solution. LESSON IN BUSINESS

The most sustainable and personally rewarding way to make profit is the one that is consistent with the country’s interests. demand, access, public perception, regulation and many more. Given the findings of our study and the potential access to shale gas from the US, I think they could both be very important. As fracking and horizontal drilling technology has developed, the cost has been reduced to a fraction of what it cost before it has allowed gas prices in the US to decouple from oil prices and fluctuate around one quarter of gas prices in Europe and Asia. Therefore, US shale gas provides an opportunity to access gas at a price that is reasonably competitive with new developments based on coal. If this opportunity is realised, and power plants based on gas are developed in Chile using cutting edge technology, the inclusion of a significantly large percentage of renewables is feasible. This is because, in order for renewables to be included, you need equipment that gives the flexibility to provide power during the hours in which there is no sun or wind. Only gas plants and hydroelectric plants with water storage capacity provide the response time

and the ability to step in and out of production in a cost-competitive manner. In Chile, we have a high presence of industrial activities and the mining sector operates continuously. On a consumption graph, our energy demand looks significantly flatter than most other countries; we need to maintain consistent base load of power. Importantly, the output of gas combined with renewables complies with the shape of the Chilean demand. Furthermore, considering that the development cost of photovoltaic energy in Chile is currently lower than US$100 per megawatt hour due to high solar radiation read-outs. In the next three to five years, the development cost of renewable energy could drop to US$75 per megawatt hour and equal the cost of regasified LNG delivered to the gas plant. Thus, one could envision sites where you could have capacities of several thousand megawatts with this combination, making it possible to include 25 to 40 per cent of renewables at an overall cost of US$110 per megawatt hour. This will enable Chile to serve this predicted demand of more than 20,000 megawatts by 2030. Then, there is the issue of public perception. Currently, there is less active resistance to gas facilities than other options; the maximum level of opposition is about 40 per cent. Consequently, convincing the Chilean public that this particular option is preferable may be an easier task. Another key factor is access to price competitive gas. Interestingly, Chile is one of the few countries that has a free trade agreement with the US. Theoretically, this should facilitate our access. However, the terminals must receive the export and construction permits from the US government and we need to aggregate sufficient demand. In Chile, the Chilean government did not legislate for open access to the existing LNG receiving terminals. Therefore, the main power generators and gas distributors control the two LNG receiving terminals, making it difficult for their competitors. In my view, not providing open access to these terminals was a strategic mistake. As a result of this, other companies who also want gas are developing additional terminals, impeding the benefit of economies of scale. In a small country like Chile, everybody should have access and everybody should benefit from roll-in tariffs i.e. the more users in an existing infrastructure, the lower the tariff. This can only happen with proper regulation. What is GasAtacama doing to work around the access problem? We are developing another infrastructure, a floating terminal. We have hired the top company in the world, Golar LNG, to develop a floating, LNG receiving, storage and

energyâ&#x20AC;&#x192; interview

re-gasification unit. Which is, basically, a specialised LNG transport ship that has all the re-gasification plant on top of it. This technology was developed six years ago, but there was a permitting issue and so it has only been fully accepted in the last four years. Now, it is available and proven. I predict it will be dominant technology in most of these small markets, like the Chilean market. In ultra-large markets, it is more economic to develop the onshore terminals. The advantage of these offshore terminals is that the CAPEX significantly less than what is needed for onshore terminals. The terminal in central Chile cost US$1.1 billion and the terminal in northern Chile cost US$800 million, ours will cost US$350 million.

It is very important to find ways to include renewable energy in growing percentages in a manner that allows us to serve power demand in cost competitive terms Furthermore, there is a high risk of a major earthquake in the future, which will also probably cause a tsunami. Another advantage of these floating devices is that they will not be affected by a tsunami. So we have an option that is cheaper and safer. We are developing a Floating Storage Regasification Unit (FSRU) as a solution because it provides us with the opportunity to grow. If we reach an agreement with one US export terminal to get access to LNG at a reasonable tolling fee charged on top of US gas price, then we have a competitive option on the table. We will then offer a power purchase agreement to the mines. It might be slightly more expensive than coal, but it is close enough to become a viable option for them and it is a cleaner and a more efficient choice. We have several mines that are interested, but they need to see the agreement with a US export terminal with permits and at the proper price. They also need to see a price competitive LNG transport agreement and that Panama has finished the canal expansion, so LNG carriers can pass through. The canal expansion will be ready by mid 2015. A lot of things need to happen, but you need to work with a long-term vision and you need to push for it. We will get there. If the decisions you mentioned, regarding access to US gas, do not have favourable outcomes, what are the other options? According to the US Energy Information Agency, there is shale gas in many other countries besides the US. China has shale gas, some

European countries have it, South America has huge amounts in Argentina, Uruguay, Paraguay, Bolivia and, potentially, in the south of Chile. However, despite having the recoverable shale gas reserves, you also need the technology, you need a lot of money, you need the teams, the equipment, the know-how; this alone may take ten years. Moreover, you need proper regulation and a reliable framework that allows investors to consider whether it is reasonable to invest large amounts of money. Thus, I think shale gas in this region will not be developed on a relevant scale during this decade, but it will rather happen from the mid-20s onwards. As transporting gas using pipelines from neighbouring countries is significantly cheaper than bringing it from further afield, converting it into LNG and regasifying it later, I think LNG receiving terminals can serve as a back-up to reduce the political risk associated with reliance on critical supply from neighbouring countries. This would permit Chile, and its neighbours, to benefit from existing and new connecting gas pipelines, as well as from price-competitive regional gas. Also, in 25 years from now, I would suggest that the development costs of renewables will be low enough and we will have found ways to combine different renewable energies and store them, either in newly-developed batteries, extracting hydrogen from sea water or pumping sea water. Consequently, we will be able to generate continuous power through renewable energy in a cost-competitive manner. This is technically feasible today, but it is too expensive. So, a transition involving gas allows this country to arrive at a future that is fully aligned with the preference of the people, at a reasonable cost, and with a significantly lower carbon footprint, giving its exports a sustainable competitive edge. What can be done by the Government to help make your vision a reality and how can it ensure Chileâ&#x20AC;&#x2122;s energy sector develops efficiently? First, it is important we have total clarification from the Government regarding where future developments are viable in terms of environmental and development concerns. This will reduce the conflict with communities and inspire investor confidence. We need to have a consultation with the public. We should invite the communities to have their say and allow them to give arguments regarding which sites should remain protected. There are valid reasons why we should keep some parts of the country free of large power plants and mega-industries, and once these decisions have been made we can move forward. I would guess that no less than 80 per cent

of the countryâ&#x20AC;&#x2122;s seaside can be developed without major conflict, but the rest should be protected. We need to assure people that any new generation capacity will be subject to strict environmental regulations that are as comprehensive as those that are applicable in Europe or Japan. This will diminish the perception that the decisions are made in an opaque fashion and reduce a lot of tension between the companies, the Government and the local communities. Second, development of new fuel receiving and storage terminals should be facilitated and all the fuel receiving terminals should be open access, allowing power generators to import fuel from wherever it is cheapest. The most important impact on the price of power is the cost of fuel, and Chile is an importer of all conventional fuels, with the exception of the renewable ones. The regulations should allow whoever sells the cheapest oil, the cheapest coal, or the cheapest gas access to our market. Third, a company should be commissioned, once non-conflictive sites are selected, to obtain the necessary environmental permits and approvals to develop new power plants, transmission systems and fuel receiving terminals. Thus, investors and companies immediately know what options are available. Then, by means of an open bidding process, in which everybody knows the situation, whoever wants to develop a power plant at these sites and will provide the cheapest energy, will win the bid. Potential companies who want to enter the Chilean market should get all this support. Then, when they arrive, they will have a site, a permit, and customers willing to sign long term commitments. They just have to put up the money and begin; then we will have proper completion of projects, proper competition and lower prices. In this reality, one factor that could determine the outcome of the bidding process could be the percentage of renewables included in the proposal. Then, the inclusion of a large percentage of these cheap renewable energies would be necessary for bidders to compete. At this point, we would have a solution that does not require subsidy and is fully aligned with the preferences of the majority of Chileans. This is a realisable scenario in the future of the energy sector in Chile. We have an exceptionally high level of solar radiation and good geothermal, sea stream and wind generation potential. If we combine wind, solar, and gas, then bide our time until we have cheap gas in the region and cheaper renewable technology, we can tell the people that we have a solution. They need to be patient, it will not be in one year, but it can happen.

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need for investment, but also directly reduces greenhouse gas emissions.

GREG HOLLAND

BRITISH CHILEAN CHAMBER OF COMMERCE Managing Director

INTERNATIONAL INVESTOR: How important is this particular period in the development of Chile’s energy market? GREG HOLLAND: Chile has arrived at a point of inflection; if the current rate of economic growth is not accompanied by an equivalent growth in electricity supply capability, energy supply shortages are a real possibility as early as 2015. This situation is now pressuring the decision makers to quickly decide on how to address the problem. There is a real danger that decisions made now will focus on the short-term needs of security of supply and price and not on the mid to longer term imperatives of autonomy, community and environmental impact. I see four potential options for Chile: one, decide to address the immediate issues with diesel, coal, and gas-fuelled generation, which means “go dirty”; two, “go green” and put huge effort into renewable energy sources such as hydro, geothermal, wind and solar, which are all locally present in plentiful supply; three, “go wrong” continue debating the problems of environmental approvals and indigenous property rights and take no action; and four, “go right”, which is a sensible combination of the previous three, combined with energy efficiency. The government produced a comprehensive National Energy Strategy in 2012. It has all the right components of renewables, energy efficiency, hydro etc. and addresses the network issues, the market pricing issues and even talks about sensible regional solutions. The problem is, it doesn’t seem to have gone anywhere. They put a lot of effort into coming up with a good plan, but things need to happen. Investors need to be given confidence to invest in renewables and people need to be encouraged to take a realistic position. Could you give us your view on the SIC and SING connection issue? Chile has two principal yet unconnected electricity networks. Currently, there is a reason-

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In 1998, I enrolled on a program at Cambridge University called “Business in the Environment”. Instead of just focusing on environment, we spent the majority of the time talking about social issues and communities, which influenced my thinking regarding the importance of inclusivity. It radically changed my thinking and way of doing things. LESSON IN BUSINESS

In a big company, you know where you stand and fit; when you have a problem there is someone to help. In a takeover, merger or sale situation, all that substance and security evaporates. You have to work more independently, define your own values and loyalties, and continue trying to do your best to deliver. After experiencing this situation you work more independently and, if you don’t compromise teamworking skills, much more effectively. able amount of spare capacity in the Sistema Interconectado del Norte Grande (SING) and very little spare capacity in the Sistema Interconectado Central (SIC). If the two were connected, there would be more options to manage the peaks and allow maintenance to be carried out when necessary. To use a simple British term, it is a no-brainer. Moreover, it would solve some of the infrastructure access problems for renewable energy. Renewables like solar and wind can only provide intermittent power, but if there is a more flexible conventional installed capacity on tap, as a result of joining up the networks, supply can be managed more effectively. The sensible thing to do is join them up and, at the same time, make the networks more efficient, more intelligent, and ensure proper access for renewables. Energy efficiency still has great potential to reduce energy consumption in Chile. It keeps disappearing off the agenda because of the focus on creating more power and generation capacity, but efficiency not only reduces the

You can’t talk about energy in Chile without talking about water, what are the problems that Chile faces regarding to this issue? Climate change is happening, global warming is happening, this issue will continue to seriously affect water supplies. Chile has had 10 years of the driest weather on record. The last three years have been officially classified as drought; the reservoirs are at record low levels, some are completely dry. Another drought year will be disastrous. There will be less hydroelectricity and it will put huge demands on the other sources, prices will rocket. The last time it rained hard for two days the electricity prices dropped five per cent overnight because installed hydro is the cheapest form of electricity production. However, as climate change accelerates there will be less rainfall in parts of Chile and the investment put into the central region’s hydro capacity will consistently under produce. How can the issues related to community involvement in energy projects be solved? Chile is one of the few nations that have signed up to Convention 169, which protects indigenous and tribal people’s rights. This has given more opportunity to those communities in the areas affected by major projects to object and the result is that many of the previously approved environmental permissions have been put aside in the high court. My view is that, if companies really take their ‘triple bottom line’ seriously i.e. profits versus environmental versus social issues, then the issues affecting local communities would have already been taken into consideration earlier in the process. One important issue that has arisen from this debate is the need to define specific areas where major conventional power plants can be located, so that the inevitable impact on the environment and communities can be localised and contained. Clearly, capital cost and, therefore, unit price may be higher by not building in the optimum location, but this will be greatly offset by avoiding the current delays and uncertainties created by the permitting process. To be fair though, many of the bigger companies are trying very hard to do the right thing. They are putting great effort into their sustainability agendas and it is difficult to see how these businesses can do more without the arrival of new technology or without affecting production. Yet, there is a whole mass of other commerce that doesn’t even know what sustainability means and where there is untapped potential to become more efficient, more responsible and, ultimately, more successful.

energy interview

FRANCISCO ALLIENDE GRUPO SAESA

Chief Executive Officer

INTERNATIONAL INVESTOR: What do you believe are the biggest challenges facing the energy industry today? FRANCISCO ALLIENDE: There is a lack of investment in new generation and transmission projects. If we want more generation capacity, there has to be more investment in transmission. The reason we don’t have more generation investment is because of environmental and community concerns. The challenge is to define what we want in terms of the energy matrix; environmental impact; foreign energy dependency; and the best way to take advantage of the potential of hydroelectric, wind, geothermic generation etc. So, there is a big discussion. We need to be sure that we have a long-term plan that ensures the country has competitive energy prices. This requires investment. How do you think industry, Government and the environmentalists can come to an agreement about these concerns? There needs to be a lot of dialogue. I think it is really a political discussion more than a technical one. Many people would like to have the majority of new generation capacity based on renewable energy. It is true that the investment level for renewables is going down, but almost all these energies will require back up. We need to be honest about this if we want to invest in renewable energy. We require a lot of energy and we don’t have a lot of new projects; the country requires a solution. We need to be sure that proposed projects will be developed. Confidence in environmental regulations and a considered approach to the way companies work with local communities is key to the long-term solution. At SAESA, we have experience that shows when you work with the community you can end up with a very good project.

CAREER DEFINING MOMENT

In 2012, I became the CEO of SAESA and I needed to make big changes. I changed two third of the management team, and after these changes the year 2012 was a much better year for this company. It was a big risk, but it worked. LESSON IN BUSINESS

Do not give second chances. It sounds very brutal, but if something is not working, then change things straightaway. Don’t provide second opportunities. Alberta Investment Management Company acquired a 50 per cent stake in SAESA in 2011, how has this change in ownership influenced your strategy? Now, we are a company that has a long-term view. We want to be an important player in the industry, but also good citizens in the country. For the owners, the key issue is the relationship with the country and with our customers. In general, we have increased our investments almost three times since the Canadians acquired their stake in the company. We are making investments in quality of service, in new lines, growth and new solutions. We want to be a strategic partner for the country and we want to invest. We are in all the energy chains in terms of generation and, in almost all those sectors, we are trying to play an active role in finding solutions for the country. The owners are in this for more than just a good return. In your opinion, what is the most exciting growth area for SAESA? We are a transmission and distribution company. Almost 90 per cent of our business is related with transmission. Chile requires a lot of investment in transmission not only to connect the new projects, but also to improve the standards of the actual network. There are good opportunities and big challenges; it

is something that has a reasonable risk profile, and our owners like this challenge. The key opportunities in transmission are in the construction of new lines. In Chile, transmission has three different branches and we are involved in all three; trunktransmission, the trunk-system, which sends energy in both directions and is regulated; sub-transmission, which deals with the connection from the trunk to the distribution areas, which is also regulated; and the third branch is additional sub-transmission. Additional sub-transmission lines connect new generation facilities to the trunktransmission system and this branch is not regulated. It is a private line business in which new energy generation capacity links up with the transmission system. The fact it is a private agreement is important in terms of revenues for those who invest. It is a key area for us. Our concession area has opportunities for hydroelectricity, some geothermic, and wind projects. So, companies develop projects that have to be connected and we develop the best way to connect them. In Puyehue and Rupanco, almost 12 runof-river projects were developed. Previously, these projects would have been connected with three or four different lines. We found a unique solution to connect them with only one main line and other small lines. Fewer lines meant this method was cheaper and it also reduced the environmental impact. Thus, the generators knew they had a cheaper solution, the environmental impact was lower than the original plan, we defined the layout with the community early on in the project and we developed the project in such a way that we can increase generation in the area by more than 100 per cent and connect new generation to the same line. In sum, we did a good job and everybody was happy. We considered the long-term solutions and were able to discuss the returns beforehand to be sure that the long-term solution was better. These solutions are better for the country and we are working in a way that promotes our business. Is there ambition to expand outside and move into other projects outside of the concession zone that you are in at the moment? Yes. We like to invest in transmission and distribution, but we are also able to analyse opportunities in generation, in the case that our participation is required to develop a project, to obtain the financing. We are able to help with something that is not our core business in order to ensure it will be developed, but this is something additional.

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interview energy

ANDRÉS KUHLMANN JAHN TRANSELEC S.A.

Chief Executive Officer

INTERNATIONAL INVESTOR: What are your views on the proposed interconnection between the Sistema Interconectado Central (SIC) and the Sistema Interconectado del Norte Grande (SING)? ANDRÉS KUHLMANN JAHN: This has been a topic of discussion for a long time. It may seem strange to have two separate systems; however, for geographical reasons, this is the reality. Very few people live in the area where the SING is situated. South of Antofagasta there is not another city for 400 Kilometres, so the reason is not related to providing residential energy. Electrically speaking, the SING is very weak, it is not a system in itself; it is a line system connected to some points with a little interconnected system. However, 90 per cent of the energy generated in the SING goes to the mining sector, which is clearly important for Chile. The real interconnected system is the SIC, which supplies the majority of the population and the rest of the country’s industry. The majority of power generated in the SIC comes from hydroelectric generation, whereas in the SING it is thermal generation. When Chile was importing Argentine gas, the reason for interconnection was that the gas from northern Argentina was cheaper than from the south and the SING had an overcapacity. Today, it is important to connect the systems for different reasons, for example, restrictions in adding new generation capacity to the SIC; the lack of back-up power for mining purposes in the north; and to supply the population in the south. Can you talk about the impact of the proposed Carretera Electrica (electrical highway) law on the transmission market? The principle of the law is good in that the state defines the route of the transmission lines. This will not only conceptually speed up projects, but it will also legitimise them. Thus, it will bring an important consensus,

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In my opinion, to be a complete company executive you have to have lived abroad. The very reason I am in the electrical sector is because of my decision to leave the country. The first company that offered me a position outside of Chile was Endesa, and I took it. LESSON IN BUSINESS

Your progress in business relies on the relationships with others, so you have to make a concerted effort to be in contact with people, both inside and outside your company. Furthermore, in order to achieve personal professional satisfaction, your goals have to be totally aligned with the success of your business. socially and environmentally. The state has to define the best route in the interests of the country, not in the interests of a private party. The law only covers the transmission lines belonging to the central trunk system, as well as some carefully chosen lateral lines, which is an important advantage of the project. These particular transfer lines are designed in order to develop duration poles for NonConventional Renewable Energy (NCRE) generation projects. If done responsibly, the planning of the transmission system should enable a long-term strategy. As the State defines the route and ensures the project is environmental and socially feasible, the company that wins the bid will find it easier to finalise all the environmental work and build the line. However, the law is not in place yet; it is being discussed in Congress. Moreover, many NCRE’s are having difficulties in their development due to transmission costs. For example, some renewable projects that are feasible because they are close to the particular resource are running into problems because they are not close to the transmission line. Thus, you end up with a situation where the transmission cost for these renewables kills the project. Fortunately, Congress is starting to understand this.

INVESTMENT OPPORTUNITIES What is Transelec’s position on new investors? Transelec holds 90 per cent of the transmission system, but the transmission market is open, anybody can enter the market. This is proven by the fact that Transelec has not won the biggest bids and that, recently, two new companies made large investments in the transmission sector in Chile. As for bigger projects, we are always open to invite or consider investors and presumably this will become a bigger requirement in the near future. The interconnection project, for example, will require an investment of US$850 million. Theoretically, we can afford it alone and we will try to approach it from a project finance basis. We have the capacity to fund the equity with our shareholders, but there is always an open door for third parties that are willing to accept slightly lower returns than our shareholders. Financing is the key to developing this infrastructure project because this is up-front spending and the recovery of the principal will be in 30 years or so. This makes it a perfect match for project financing structures. Would you say there is a crisis in the energy sector? For me, it is a crisis and it began many years ago. The problems are centred on the difficulty in carry out projects, both in generation and transmission. In transmission, it is marginally more promising and we have two very important bills in Congress: the Concesiones de Electricas (electrical concessions law) and the Carretera Electrica (electrical highway law). The first is the most urgent because it makes the approval process much easier and means that permits will be issued. We have convinced the authorities to plan longer term and this has meant projects are going ahead and we are catching up. In generation, the problem is worse because the government has not produced a framework that structures project approval. For the benefit of the country, projects have to be delivered as soon as possible. If the country does not have an efficient transmission sector, the price of energy will rise and this is an important influence on the economic growth of the country. In this country, the main success story is our macro-economic figures. However, due to the recent strength of copper and the mining sector, the appreciation of the peso has affected our competitiveness. Chile is a small country; it is totally open and export-focused. We have to ensure the competitiveness of our export products; thus, the price of energy is key. We need lower energy prices in order to be competitive in the international market.

energy focus

With its previous reliance on Argentinean gas, Chile is now equipping itself to receive gas imports from further afield

FOCUS: THE FUTURE OF THE LNG MARKET Chile has to make important decisions regarding its energy matrix; one option is to increase the participation of natural gas. There are many benefits to this eventuality, but the role it will play in Chile’s energy future depends on several factors. GENERAL OVERVIEW Chile is currently going through a severe energy crisis. The current electricity supply cannot cope with demand and, as a consequence, prices are very high. The major industry players in generation (both conventional and renewable), transmission and distribution have all voiced concerns about the situation. Furthermore, the gravity of the situation is clearly demonstrated by the political debate that surrounded the 2013 presidential and parliamentary elections. Chile is a net importer of energy. By 2012, almost three quarters of the country’s energy came from imported sources, almost double the amount imported in 1988 (see fig. 1). With average marginal costs in the Sistema Interconectado Central (SIC) reaching almost US$250 per megawatt hour in June 2013, energy prices in Chile are expensive, among the highest in Latin America and above the OECD average. Furthermore, the carbon emission indexes are high, which is caused in part by an energy mix that is still very dependent on coal. During the last decade, the country has been active in introducing regulation regarding its energy industry, especially from an environmental point of view, seeking to reduce the carbon footprint associated with its exports. In this context, the role of alternative energy sources, LNG included, is crucial. Chile’s relationship with natural gas has had some defining moments, particularly when, in 2004, the Argentine government issued a ruling that forced their

gas suppliers to cater to internal demand before complying with foreign contractual commitments. Thus, gas dispatches to Chile from Argentina started reducing until they ceased completely. Moreover, at that point, Chile did not have LNG terminals. Chilean industries had relied on Argentine gas almost exclusively since 1997. Before the cuts began, Chile imported more than 90 per cent of its natural gas from Argentina and heavily depended on the resource for purposes of electricity generation. The Argentine gas crisis ensured an important lesson was learnt in Chile regarding reliance on one source for gas imports. This lesson, combined with the significant growth of the worldwide LNG market, which grew by approximately 50 per cent in the period of 2006−2011, created an important opportunity for the Chilean 1. IMPORTED ENERGY 80 70 60 50 40 30 20 10 0

1988

1998

2012 Source: The World Bank

CHILE 105

focus energy

STRENGTHS ■■ There are many LNG-exporting countries, including the recent shale gas revolution in the U.S. ■■ Chile has signed many Free Trade Agreements, including some with countries that export LNG. ■■ Producing energy by means of natural gas has less environmental impact and reduces the carbon footprint of Chilean exports. ■■ The LNG industry has entered a consolidation stage worldwide. ■■ The development of gas infrastructure (1997 to 2004) means some initial investments have been already made. ■■ Most Chilean industries are technically prepared to receive gas.

The development of shale gas and tight gas industries in the U.S. may provide interesting investment opportunities

OPPORTUNITIES ■■ Fast growth in the internal electricity demand. It is projected that 100,000 gigawatt hours more will be required between 2012 and 2020. ■■ Current high energy prices means there is the opportunity and the will to diversify the energy matrix. ■■ The development of the shale gas and tight gas industries in the U.S. may provide interesting investment opportunites. ■■ Chile may modify its technical standards regulation in order to open markets and lower costs. ■■ Mining companies, both private and state-owned, represent a huge market for gas-produced electricity. ■■ Peru is Chile’s nearest LNG exporter and is not currently selling LNG to Chile, but with the Pacific Alliance in place, this could change. ■■ The Panama Canal expansion could result in less expensive routes to bring LNG from the Gulf of Mexico and other regions to Chile.

economy that was seized upon by the government with timely sponorship initiatives. The two GNL regasification terminals currently operating in Chile are joint investments between foreign partners and state-owned companies. The terminal in Quintero (GNLC), which has supplied natural gas to the central region since 2009, was built with the participation of the state-owned oil company ENAP and the terminal in Mejillones (GNLM), which has supplied natural gas to the northern regions since 2010, is partly owned by the state-owned copper company CODELCO. These two projects together represent an investment of more than US$1.6 billion, excluding the expansions that are now under construction. One of these expansions, at the Quintero LNG terminal, is a project to expand the regasification capacity of the terminal from 10 million cubic metres per day to 15 million cubic metres per day. The additional LNG regasification capacity is expected to come on stream during the first half of 2014 and will cost of around US$300 million. Chilean LNG terminals operate using both gas sales agreements (GSAs) and terminal use agreements (TUAs). The latter contract type, employed by GNLM and under which the client is responsible for importing

106 INTERNATIONAL INVESTOR

WEAKNESSES ■■ Chilean ports and regasification terminals are located far from the main international LNG trade circuits, resulting in higher prices. ■■ In the internal market, in the short-term, coal-based generation is still more competitive. ■■ Chile is a relatively small market; hence, it has a little purchasing volume. ■■ There are not many stakeholders large enough to require deliveries in volumes of the size arriving in LNG tankers.

THREATS Chile does not produce LNG, so it depends on imports. ■■ Legal issues could hinder the development of the natural gas facilities, as has happened with other large energy projects, which have been opposed by local communities and environmental NGOs. ■■

the LNG and delivering it to the terminal, is likely to gain greater prevelance over the next years as the industry continues to develop. FUTURE DEVELOPMENT Ostensibly, Chilean industry will once again have to rely on natural gas to generate electricity. There are many positives to this development; besides the environmental advantages of natural gas, it will help Chile to achieve a degree of energy independence. Regarding future development, there are already some projects to build gas-based thermoelectric power plants, but there are two main issues that should be thoroughly considered: LNG SUPPLY AND MARKET POWER All the main LNG exporters from which Chile is currently importing: Qatar, Yemen, Trinidad and Tobago, Egypt, Nigeria, Equatorial Guinea, and others, are located in the northern hemisphere or countries from which the cargoes must travel long distances; thus, the high transport costs are reflected in the price of these imports. However, this problem may be partially solved once the expansion to the Panama Canal becomes operational in 2015.

energyâ&#x20AC;&#x192; focus

In the short term, there are other import alternatives for Chile. These may be importing LNG from Peru in the context of the Pacific Alliance formed by Chile and Peru, together with Colombia and Mexico, and the impact of the recent discoveries of shale gas in the U.S., a country with whom Chile as a free trade agreement, which could provide a very interesting opportunity for the country. However, in the context of the global LNG market, Chile is relatively small. Therefore, in order to bring LNG to Chile at competitive prices, the country must increase its demand for natural gas and, in all likelyhood, it may be necessary for industry players to group together to obtain more comptitive natural gas contracts. A recent study, by the Chilean thinktank Libertad y Desarrollo, suggested this would require plaintiffs to bring together at least 3,500 megawatts of installed capacity. AVAILABILITY AND DISTRIBUTION In order to increase demand for natural gas, it is necessary to guarantee that LNG will reach all corners of the country and ensure availability is facilitated for all industries and economic sectors. Chile already possesses a certain amount of infrastructure that will enable this aim to be realised, namely the different pipelines that were built to import gas from Argentina. Still, significant further investment in infrastructure is needed to ensure that LNG can be distributed throughout the country and is a competitive alternative to other energy sources; increasing the pipeline infrastructure costs money and takes time. LNG players and related industries are starting to implement and consider new ways of delivering LNG in the near future. Transportation throughout the country on the road network via trucks and transportation by means of small vessels along the Chilean coast are methods that are becoming more widespread. This development allows for greater flexibility in the transportation and delivery of the product and, at the same time, makes natural gas available to small and medium-sized enterprises that normally would not have access to small quantities of LNG. In 2011, GNLC started to operate a truck yard and is delivering LNG in trucks as a complementary service for its clients with contracted capacity. GNLM is also developing a project to operate a truck yard, which has been approved by the respective environmental authorities. In addition to this, some companies are looking at the possiblilty of installing floating storage and regasification units (FSRUs) off the coast of Chile. These units in general provide a faster return on capital, as the outlay is less and they can be constructed in a shorter time frame. The technology may provide an interesting avenue for the development of the Chilean gas market. In 2012, GasAtacama, a Chilean gas company, submitted an environmental impact assessment regarding a floating terminal that is to be situated in the bay of Mejillones. The US$350 million project can receive and store up to 170,000 cubic metres of LNG and produce up to 10 million cubic metres of natural gas per day. It has been reported it will offer at least 500 megawatts to various mining projects in the north of Chile. The project is expected to commence operations in late 2015 or 2016.

Natural gas is poised to play a bigger role in generation

If this infrastructure development and organisation continues, natural gas could become into a very important energy resource for Chile. CONCLUSION Strategic decisions will have to be made with respect to the development of Chileâ&#x20AC;&#x2122;s electricity market. The goal is to achieve some degree of energy independence, ensure economic competitiveness and lower the current electricity prices. It is likely natural gas will become an important industry in Chile because of the economic, geopolitical and environmental benefits. Chile was the third largest importer of natural gas in Latin America in 2011 and the country is an attractive LNG market for a number of reasons: it has low levels of natural gas reserves and relies heavily on significant volumes of gas imports to meet domestic demand; seasonal increase in demand for natural gas in Chile runs counter to the demand in Northern Hemisphere markets; and, due to the difficulties developing large hydro projects and the perinneal problems with drought, the southern region of Chile is a potential gas demand centre that is currently underserved. Furthermore, opportunities are avaliable because of the suitable conditions that Chile, as a country, presents to investors. Chile is a good country in which to invest, not only because of its economic and political stability, but also due to the responsible legislation that regulates foreign investments and an independent judiciary that guarantees the application of the rule of law. Moreover, there is a well developed legal industry and solid and transparent institutions. All these factors make Chile an attractive place to do business in any field, and the energy sector in particular represents an excellent opportunity for investors.

It is likely natural gas will become an important industry in Chile because of the economic, geopolitical and environmental benefits

â&#x17E;Ľ This feature was produced in conjunction with Arteaga, Gorziglia & Cia Ltda

CHILE 107

projects energy

INVESTMENT OPPORTUNITIES International Investor’s snapshot of public and private projects available for investment in the sector. For more information on investment opportunities, please contact International Investor directly.

41 MW WIND FARMS

US$75m

ESTIMATED INVESTMENT

MEASUREMENT TOWERS

Unit 1: US$75m ESTIMATED INVESTMENT

Unit 2: US$450m ESTIMATED INVESTMENT

Bío-Bío & Araucanía REGION

EXPLORATION STUDIES OF WIND POTENTIAL Description: After opening a subsidiary in Chile to develop and exploit renewable energy sources, Torsa Chile S.A. will invest in exploration during 2013/2014. To this end, it will establish an office in Santiago, install four measurement towers on the coast of Chile and carry out studies for the construction of 41 megawatts wind farms in different parts of the country. Proponent: Private Project coordinator(s): Torsa Chile S.A. Location: To be defined Area/capacity: To be defined Estimated investment: Up to US$75 million Starting date: During 2013/2014 Contact: Torsa Chile S.A.: José Manuel Domínguez, Legal Representative, jmdominguez@dolm.cl, tel: +56 2 2334 3714 Source: Manufacturers’ Association (SOFOFA)

TOLHUACA I GEOTHERMAL PLANT Description: Project for the construction of Chile’s first geothermal plant. The plant would have a capacity of 70 megawatts with the option of future expansions depending on availability of the resource. The first exploration stage has been completed and two production wells with a depth of some 2,500 metres have been drilled. The Tol-4 well has a capacity of between 12 and 14 megawatts. The technical/economic feasibility of installing Unit 1 of the plant with an output of 12.5 megawatts, in parallel to drilling the additional wells required for the 70 megawatt capacity Unit 2, is being evaluated. Proponent: Private Project coordinator(s): MRP Geotermia Chile Ltda. (Holding) and MRP Geotermia Curacautín Ltda Location: Tolhuaca Volcano, Curacautín and Quilaco municipal districts, on the border between the Bío-Bío and Araucanía Regions Estimated investment: Unit 1, US$75 million; Unit 2, US$450 million Contact: MRP Geotermia Chile Ltda: Cristián Sandoval, Head of Communications, cristian.sandoval@geotermia.cl, tel: +56 2 2656 4700 Source: Manufacturers’ Association (SOFOFA)

DISCLAIMER: This information is sourced from the Chilean Foreign Investment Committee (CIEChile) and provided by parties interested in its publication. CIEChile has not carried out any due diligence or any form of study to evaluate the projects and, therefore, assumes no responsibility for the information provided. Recipients are advised to conduct their own research into the viability of specific projects.

108 INTERNATIONAL INVESTOR

energy projects

15−20 years DURATION

Wave energy TYPE OF PROJECT

Santiago & Valparaíso REGION

WILEFKO WAVE ENERGY PROJECT Description: A wave energy project at the research and development (R&D) stage that will generate clean electricity by extracting kinetic energy from breaking sea waves. The commercial objective is to satisfy industrial and mining demand in Chile. Proponent: Private Project coordinator(s): Innovo, Centro de Innovación y Transferencia Tecnológica, Universidad de Santiago de Chile Location: The project’s design and development will take place in the Santiago municipal district of the Santiago Metropolitan Region and field tests in the Concón municipal district of the Valparaíso Region Area/capacity: To be defined depending on maritime concessions Starting date: Stage 1 began on 15 March 2011; Stage 2 is being implemented Duration: 15−20 years Contact: Eduardo Egaña, Founder & CEO, eduardo.egana@wilefko.com, tel: +56 9 9884 1349; Claudio Sala, Business Relations Manager, claudio.Sala@wilefko.com, tel: +56 9 6728 9794 Source: Innovo

24 months DURATION

US$7m

INFRASTRUCTURE INVESTMENT

Valparaíso REGION

JVA SOUTH PACIFIC ENERGY WAVE ENERGY PROJECT Description: The present system of energy generation is based on two specific concepts. In the first stage, it implemented the first concept known as CONVERTER, a motor that was officially patented in Chile and has patent applications in 38 countries. The second stage involves analysis of the method for harnessing wave energy, known as CAPTURER, with the development of a synergic anti-capsize boat model that captures great power and is protected by an invention patent. These two concepts brought together in a single system, free of atmospheric, corrosive and galvanic current threats, along with other factors, simulates a boat that, in its interior, generates energy. The project aims to manufacture and test prototypes in Chile for certification and the subsequent international marketing of the new technology. Proponent: Private Location: Valparaíso municipal district, Valparaíso Region Area/capacity: To be defined Estimated investment: US$7,000,000 Duration: 24 months Source / Project coordinator(s) / contact: JVA South Pacific Energy: Juan Torres Zamora, General Manager, jva.spe3@gmail.com, tel: +56 9 9335 1651

CHILE 109

mining overview

MINING Decreasing mineral grades, uncertainty in demand, the availability of skilled labour, high energy costs and water access are weighing down on the industry and reducing margins. Although cost cutting is on the agenda, it seems productivity, not austerity, will be key to keeping operations sustainable.

THE BACKBONE OF THE ECONOMY spread. These factors increased the demand for copper to new highs. Foreign investors starting arriving in Chile and with them came a number of important technological breakthroughs, such as the flotation process and large-scale open pit mining, which allowed for the exploitation of low grade deposits in a cost efficient manner.

Chile produces over a third of the global copper output

HISTORICAL OVERVIEW Chile has had strong ties to the mining industry since the 16th century when the Spanish conquistadores, following previous exploits in Mexico and Peru, set foot in the region looking for precious metals. Five centuries later, mining is the most internationally competitive industry in Chile and one of the primary drivers of development. Throughout modern history Chile has experienced periods of mining that have varied in intensity, but it was not until the 1830s that government took a more active role in terms of defining and designing an initial strategy focused on extractive activities. This early governmental work, specifically related to the mining industry, set the foundation for Chile’s current infrastructure in terms of its highways, railroads and port facilities in order to expedite access to international markets. As a result, by the end of the decade, Chile became one of the world’s top copper producers.

On the non-metallic side, the Atacama Desert is abundant in nitrates and phosphates, which form part of the base substances used in fertiliser production and used by the world’s leading agricultural producers. Following the War of the Pacific, the demand for Chilean caliche (the local word for nitrate) grew significantly driven by low production costs and a seemingly endless supply. In the early 1900s, demand for nitrates once again spiked as it became a base material for manufacturing explosives. By then, mining contributed 40 per cent of Chile’s GDP and collected taxes amounting to one third of total nitrate exports. However, this boom was short lived as synthetic alternatives that could be used to manufacture explosives were invented in 1918. Copper then replaced nitrates as the principal mining product as industrialisation spread across the globe after the end of World War I and the use of electricity became wide-

REDEFINING THE MODEL Political and social instability in Chile during the 1970s led to the nationalisation of the copper industry, which in turn gave birth to Codelco (Corporación Nacional del Cobre de Chile), currently the world’s largest copper producer. Chile was not able to re-enter the global scene as an important mining destination until the 1990s. Even though a significant portion of Chile’s current mining legislation was enacted during the 1970s (e.g. foreign investment contracts, updated mining code, tax benefits, etc.), most world class deposits discovered from this period onwards were not developed until Chile returned to democracy in 1990 and a new wave of foreign investment began. While Codelco has remained state-owned since its creation, over the past 30 years the private sector has increased its participation and has contributed to the consolidation of the industry, increasing production by more than 20 times. In 1980, production from the private sector amounted to approximately 160,000 tons of copper, equivalent to 15 per cent of that year’s total production. At present, private sector copper production amounts to approximately 3.5 million tons out of a total of 5.3 million tons, a remarkable 66 per cent. In the next two decades, it is predicted that 70 per cent of the committed investment will come from the private sector. ADVANTAGES…BESIDES RESERVES Recent estimates have suggested Chile holds close to 30 per cent of global copper

CHILE 111

overview mining

STRENGTHS ■■ Leader in the diversified mining industry: ●● 1st in copper (32 per cent of world production in 2012) ●● 1st in natural nitrates (100 per cent of world production in 2012) ●● 1st in iodine (58 per cent of world production in 2012) ●● 1st in lithium (45 per cent of world production in 2012) ●● 3rd in molybdenum (15 per cent of world production in 2012) ●● 6th in silver (5 per cent of world production in 2012) ■■ Substantial mineral reserves (approx. 30 per cent of world’s copper reserves) ■■ Favourable business environment for mining operations and investments ■■ Proximity of production sites to transport and shipping infrastructure ■■ Good quality of workforce

OPPORTUNITIES World demand for minerals is expected to increase ■■ Opportunities for new exploration projects ■■ Opportunities to increase productivity through the optimisation of production processes and implementation of new technologies ■■

reserves. In addition, Chile currently represents one of the most internationally-focused and open economies in all of Latin America. It was recently ranked as a middle to upper income economy by the World Bank and was the first South American country to join the OECD in May 2010. According to the Global Competitiveness Report, Chile ranks 30th in the world and 1st in Latin America, the report recognised Chile as a leading nation in human development, competitiveness, income per capita, globalisation, economic freedom and low perception of corruption. These factors, coupled with a stable public policy environment, heavily oriented to investment and development, represent an attractive value proposition for long-term investors. This is supported by the constant inbound flow of foreign investors looking to either establish operations in the Chile, increase their existing footprint or use the country as platform to branch out to the region. In the mining sector, Chile grants a natural entrance to Peru, Argentina and even Ecuador. Likewise, Chile has excellent relationships with the mining sectors in Mexico, Colombia and Brazil.

112 INTERNATIONAL INVESTOR

WEAKNESSES ■■ Decreasing mineral head grades in ageing deposits ■■ High dependence on demand for minerals from China ■■ Availability challenges related to skilled labour force ■■ High costs of energy ■■ Challenges related to water access

THREATS Changes to environmental regulations ■■ Additional increases in costs of energy, water and labour force ■■ Increased threat of litigation based conflict resolution ■■ Resource nationalism ■■ Decreased access to financing for juniors ■■ Decrease in global competitiveness for mining investments (Fraser Institute Survey: 7th in 2009-2010 and 23rd in 2012-2013) ■■

Copper is not Chile’s only resource: gold, zinc, iron ore, nitrates, iodine and molybdenum all benefit from the economies of scale provided by copper mining. Chile’s geography can accommodate an extensive and robust logistics infrastructure, including railroads, highways and port facilities. Moreover, the presence of hub cities allow for the channelling of the ever-increasing amounts of required staff and ancillary services. The skilled workforce is another distinctive advantage; however, this also has concomitant difficulites related to challenges of talent retention. CONTRIBUTION TO CHILE’S ECONOMY Although production, sales and revenue tend to be the focus of media attention when it comes to mining, there are other drivers that are just as important. In the period between 2006−2011, almost 25 per cent of Chile’s revenue came from mining, representing US$62 billion. Furthermore, during the same period, the industry contributed 16.4 per cent of the country’s GDP and 64 per cent of Chile’s total exports. One sector of the economy that has

reaped huge benefits from mining is seaborne transport; more than 50 per cent of total cargo hauled relates to mining and mining related products. However, there are a number of other areas that have enjoyed unparalleled success on the back of the mining sector, including air traffic (domestic flights have increased by tenfold in the last two decades), hoteling, services and utilities. When comparing average salaries to other industrial sectors in Chile, the mining industry currently has the highest average salary. A ‘mining job’ pays (including production bonuses and other benefits) on average 1.96 times more than a similar position in a non-mining sector. This fact has become controversial in the past few years as mining companies have become over reliant on high commodity prices, making production the priority and not paying sufficient attention to productivity. However, now as companies face backwardation scenarios, increasing costs and decreasing margins, the high salaries in the mining sector have attracted criticism from media, politicians and the general public. However, mining companies have found it increasingly difficult to negotiate with labour unions regarding the reduction of benefit packages and the curtailing of bonus schemes. Nevertheless, remuneration packages in Chile exceed those offered in most developed mining countries in the world and, within South America, labour costs in Chile significantly higher than those in the other mining countries. THE CHALLENGES The huge pipeline of mining investment slated for the next two decades engenders a number of significant challenges many of which are related to energy, water and human resources. ENERGY Today, Chile faces dire scenarios regarding current and future energy generation capabilities not only to fuel the new developments and expansions, but also to mitigate the spiralling costs currently being faced by the industry. In recent years, Chile has had a number of energy projects rejected or delayed due, in part, to the involvement of stakeholders that are more aware of and sensitive to environmental and social issues. However, the root cause of their rejection is not the involvement of stakeholders, but rather the lack of a clear political roadmap and the necessary policy framework to foster development energy generation in Chile. Both the authorities and the industry currently project a need for, at least, an additional 2,000 megawatts in the next ten years in both the Sistema Interconectado Central

overview mining

(SIC) and Sistema Interconectado del Norte Grande (SING), Chile’s two major energy distribution networks. Chile’s current megawatt per hour cost is the most expensive in the region and one of the highest in all mining countries. This is a huge disadvantage for the Chilean mining sector given that energy represents approximately 20 per cent of the cash production cost. WATER Northern Chile hosts the vast majority of the large mining operations and is also where the Atacama Desert, one of the driest spots on Earth, is located. Traditionally, the communities in this area have competed for water with the big mining companies and, in many cases, this has resulted in conflict. The mining industry has always maintained that it uses water in an efficient manner and, in fact, only uses a fraction of water consumed by the agriculture industry. Nevertheless, mining companies have undertaken significant efforts to implement new technologies in order to achieve a more efficient water management. Several large mines in Chile have already begun to use seawater, both desalinated and raw, in their processes as a permanent solution. This tends to be a more expensive option, but the benefits are a constant and endless supply. Mining in high altitude presents its own set of problems; however, one particular issue has managed to stand out in recent years, that being: the impact of mining on glaciers and ice bodies. Barrick Gold, the Canadian-based company, recently had to cease activities at its Pascua Lama Project on the Chilean side. The ceasation was due to a Court order demanding increased monitoring and mitigation actions regarding water damage and non-compliance with certain aspects stipulated in the project’s environmental declaration, one of them being ice bodies. Similarly, other large players, both state-owned and private sector, are currently re-evaluating their higher altitude development or expansion projects due to their proximity to glaciers. SUSTAINABILITY Regarding sustainability, the industry is facing mounting pressure from increasingly active stakeholders to commit to and implement measures in this area. The need to build trust among stakeholders, whether they are governments, environmentalists, communities or others, is growing in importance as the social licenses needed to operate are become increasingly difficult to keep or obtain. Annual reporting on sustainability has helped in this regard, but it is not enough. Active and permanent stakeholders are now

114 INTERNATIONAL INVESTOR

1. GLOBAL DISTRIBUTION OF TOP 40 MINES (TRADITIONAL VS. EMERGING MARKETS) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

2003

2004

2005

2006

2007

Traditional Markets

2008

2009

Emerging Markets

2010

2011

2012 Source: PwC

a basic requirement and mining companies must be intelligent in conveying their commitment to actions focused on improving and protecting the social, environmental and economic legacy in the communities within which they operate. In many cases, it is also difficult to determine which issues genuinely impact strategy versus specific actions. Additionally, such information is not always reported on a timely basis. Stakeholders are no longer satisfied by publications issued by the mining companies and now have access to multiple sources and social networks. Thus, inconsistencies and discrepancies are not tolerated.

Likewise, female representation in boardrooms is also an issue. Countries with the highest proportion of female boardroom representation, such as South Africa, India, Russia and the United States have, on average,a 25 per cent female board composition. However, companies from Chile, Brazil, Peru, Mexico, and China have the lowest female representation on boards with an average of less than 2 per cent. With countries across the globe recognising the benefits of having women sitting on boards and diversity policies becoming commonplace, the number of female directors across all industries, including mining, is expected to increase.

HUMAN RESOURCES Any mining company may choose to automate processes in order to improve efficiency, but no matter how extensive the effort, the availability of skilled and experienced labour will always be a key resource to any mining project regardless of location. The industry is currently experiencing a strong deficit of professionals and experienced technicians, especially in remote mining locations. Whereas copper production has more than tripled over the last 20 years, the breadth and depth of workforce has not increased in line with this rise. There have been some initiatives that have been put in place to overcome this deficit. Some initiatives involve mining companies encouraging and sponsoring universities and technical colleges to offer mining-specific programs in order to promote the field of study and increase the number of skilled workers. Another involves a serious effort to increase the number of women participating in the traditionally male-dominated environment. At present, of the 250,000 strong workforce in the mining industry, only 20,000 are women. Through various co-operation programs, Chile expects to double that figure in the next three years.

TIGHTER EQUITY AND DEBT The era of cheap and easy access to financing is over. Until recently, mining companies had open and diversified access to financing markets, both debt and equity. However, the scenario has changed dramatically in 2013: commodity prices have stalled, and even decreased, as cost inflation continues, there has been increasing pressure from social groups and an increased risk of nationalisation. This has all contributed to a growing, negative sentiment in the mining sector. Global investors are now shifting preferences to other industry sectors or even preferring fixed income investments, rather than taking equity stakes in the mining sectors. Junior mining companies have largely been shunned. Even mid-caps and majors are facing extremely challenging financing options, which has forced them to adopted more non-conventional funding sources (normally available to juniors both in traditional and emerging markets) such as bonds, debt convertible into shares, future sales, off take and streaming agreements. The mining sector has proven itself to be a resilient sector time and time again. However, the debt crisis, severe austerity measures and the related impact on credit supply will con-

mining overview

2. COMPOSITION OF THE GLOBAL COPPER SUPPLY (IN THOUSANDS OF METRIC TONS) 25,000 23,000 21,000 19,000 17,000 15,000 13,000 11,000 2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Base production of mine copper

Projects under construction

Probable projects

Secondary refinements (scrap)

Highly probable projects

Potential projects

2016

2017

Reopenings Source: Cesco - Centre for Studies of Copper and Mining

tinue to undermine the growth prospects in the coming years. Moreover, the current macroeconomic situation will undoubtedly impact the development of the project pipeline, with many projects being delayed, rescaled and even abandoned. Investors no longer have unbridled confidence in the sector and their priorities have changed. THE OUTLOOK FOR THE SECTOR Emerging and developing markets have become the world’s growth engine. This is clearly evident in the mining sector with emerging markets not only playing a major role in supply, but also in demand. However, for mining, the market that matters most is China. The Chinese government is focusing on reducing risks in its economy and making it more sustainable following a political leadership transition in 2012. While the outlook for the Chinese economy looks cautiously optimistic, miners should not ignore the potential for further declines in real growth rates. Since mid-2012, the industry has witnessed significant changes as companies struggle to contain costs and China’s growth estimates have come up short for the first time in a decade. Chasing volumes and risky investments has now turned into spending discipline and maximising productivity on currently active mines. Analysts have been second guessing new production estimates on an almost monthly basis since early last year, which has resulted in a 23 per cent decrease in the 10-year forecast for new copper production. Figure 2 illustrates the composition of global copper supply, it clearly shows the lack of new projects.

Demand fundamentals were almost a certainty until 2012, which essentially indicated that there was a healthy correlation with supply. However, following the uncertainty in Chinese demand combined with Asia’s projected growth, there is a growing consensus that there will be excess production over the next few years. The priority regarding organic and inorganic growth has been replaced by an awareness of the need for discipline and rational behaviour. This realisation within the industry instigated a discussion regarding governance and management style, triggering a wave of changes at the leadership level. The scale of CEO replacement in the mining sector since is unprecedented, with 50 per cent of the CEOs in the top mining majors changing since April 2012. Chile has exceeded this mark with changes at most of the larger mines. The shareholders are demanding higher returns and a reduction in the growth agenda; thus, management has a new mandate. They clearly understand the expectations of their shareholders and are working hard meet these expectations. This is likely to mean that there will be an increased focus on maximising returns from existing operations and on ensuring that shareholders see these returns through increased dividends. The practice of cost cutting has often been seen in the industry, but now productivity, not austerity, seems to be the key to keeping operations sustainable. The view that the position on the cost curve was a secondary consideration after maximizing output held the industry in good stead over recent years, but is not a strategy to which many CEOs are currently adhering.

Many of the new CEOs are inheriting recent acquisitions and a pipeline of ongoing investments in capital projects. The cost blow outs on the capital projects have raised the bar of shareholders’ expectations and CEOs understand this requirement. Management has been charged with reassessing the economics and risk analysis of their projects. This does not mean that the CEOs believe that 'manage what we have' is the correct strategy, rather the question is how best to manage assets and investment through the current cycle. Minimal resources are being invested in finding greenfield discoveries as pressure mounts regarding shareholder returns. Mining companies with cash on their balance sheets will be looking to invest in distressed or underdeveloped assets, probably outside Chile. Here, they are likely to come face to face with Chinese investors. The events that occur in the next few years will have serious ramifications for the next 10 years of the industry. The mining sector in Chile is entering a period of uncertainty. Investors are likely to be a lot more selective during the next cycle and a large proportion of Chile’s projected investment in the mining sector (over US$100 million according to authorities) may be delayed, reduced or even abandoned. During the last 30 years, the development of the mining sector in Chile has largely been independent of the political changes in the country. This no longer holds true; politicians are increasingly looking to the mining sector for additional resources to fund rapidly increasing social expenditure. Major tax reforms in traditional mining countries such as Australia, South Africa and Brazil have paved the way for similar discussions in Chile. Future governments will need to find a balance between ensuring that all stakeholders are sufficiently rewarded, without putting at risk the potential offered by Chile’s leading industry. This is no small task in an industry with a 20-year investment cycle that is measured on its annual contribution and returns.

CHILE 115

sector data mining

MINING IN NUMBERS International Investor’s summary of key data and quantitative dynamics of the sector. For more detailed information, please contact International Investor directly.

GENERAL MINING STATISTICS Total mining exports 2012 (US$ in millions)

47,076

Chile's share of world copper production 2012

31.8%

China's share of world copper consumption

43.0%

Mining GDP as a proportion of total GDP 2012

13.0%

Mining exports as a proportion of total exports 2013*

56.9%

Copper exports 2012 (US$ in millions)

42,745

Copper production 2013 (Kilo Tonnes)**

3,747

Nominal copper price per pound 2013 (US$, LME)

3.3307

FDI in mining sector 1974-2012 (US$ in millions)***

30,900

FDI in mining sector as a proportion of total FDI 2009-2012

50.1%

FDI mining sector 2012 (US$ in millions) ***

2,838

Direct and indirect employees in the mining sector 2012

917,000

Proportion of global investment in mining exploration 2012

5.0%

Mining operations using open pit method

90.0%

* as of September 2013 ** Production Chile to August *** Under Decree-Law 600 Source: Central Bank of Chile, World Metal Statistics, Cochilco, Instituto Nacional de Estadísticas

CHILE’S PRODUCTION AND RESERVES 2012 Production

Participation in Ranking in Global global production global production reserves

Copper (x 1000 Tonne)

5,434

32%

Molybdenum (Tonne)

35,090

13%

21%

Gold (kg)

49,936

Silver (kg)

1,194,521

14% Source: Cochilco

INVESTMENT COST PER UNIT OF PRODUCTION OF COPPER 2003-2011* 25 20,523

US$ in thousands/tonne

20 15,596 14,252

13,582

10,250

7,982 6,666

4,515

2003

5,153

2004

2005

2006

2007

2008

2009

2010

2011

* Defined as CAPEX current project portfolio each year divided by estimated production of such portfolio Source: MBChile

116 INTERNATIONAL INVESTOR

mining sector data

SHARE OF MINING GDP PER REGION 2012

COPPER PRICE DYNAMICS 500

62.7%

Antofagasta 47.7%

450

Tarapacá

46.7%

400 US$ cents per pound

Atacama

40.9%

Coquimbo 24.7%

O'Higgins

20.7%

Magallanes

14.0% 9.0%

200 150

120 104.3

150

112.6

x 1000 tonnes

US$ in billions

66.9

60 43.2

50.0

29.7

62.1

0 2010

2011

2012

Jul/13

120.3

41.9

2009

Oct/13

134.3

2008

Apr/13

Jan/13

Jul/12

Oct/12

Apr/12

Jan/12

COPPER EXPORT DESTINATIONS 2012

120

Jul/11

Source: OECD Economic Surveys Chile 2013, Cochilco

100

Oct/11

SPOT price

Long-term price assumed in the budget Source: Central Bank of Chile

EVOLUTION OF PROJECT PORTFOLIO 2008-2013

Apr/11

Jan/11

Jul/10

Jul/09

Oct/10

Apr/10

Araucania

Jan/10

Oct/09

De Los Rios

Apr/09

De Los Lagos

Jan/09

0.1%

Jul/08

Bio Bió

Oct/08

0.5%

Apr/08

Metropolitana

Jan/08

1.0%

Jan/07

Maule

Jul/07

100

5.9%

Aysén

250

Oct/07

Arica-Parinacota

300

Apr/07

Valparaíso

350

20.8

China

Belgium

2013

Australia

South Korea

12.8

10.0

Netherlands

Canada

3.0

2.6

India

United States

Others

*Total of copper export in 2012 was 407.8

Source: Cochilco

GENERAL MINING EXPORTS 2004-2012 2004

2005

2006

2007

2008

2009

2010

2011

2012

Copper cathodes

8,709

10,673

17,938

20,560

19,261

17,240

23,932

26,028

22,070

Copper concentrate

5,492

7,642

12,496

14,683

9,837

9,866

13,685

14,304

16,605

Copper total

15,397

19,923

34,069

39,204

31,755

29,695

41,170

44,438

42,722

Iron

161

308

328

402

593

534

1,182

1,614

1,348

Silver

156

172

326

536

380

314

382

691

622

Gold

318

351

530

577

763

910

1,041

1,459

1,635

Molybdenum concentrate

525

1,033

880

1,432

447

144

228

310

Lithium carbonate

123

189

219

113

174

204

247

Sea and table salt

121

113

150

103

Total

16,701

21,972

36,438

42,445

34,294

31,877

44,360

48,865

46,986

* US$ in millions, Free on Board (Fob), provisional figures Source: Sonami, Central Bank of Chile

CHILE 117

business intelligence mining

A LEADER IN LOCAL AND GLOBAL MINING CONSULTING With a high level of national and international prestige, SRK Consulting Chile S.A. delivers comprehensive services in geosciences, mining and environment

Leapfrog

SRK offers an integrated, independent, long-term approach, combined with a highly-skilled team capable of identifying risks and opportunities in the all areas of the mining business

118 INTERNATIONAL INVESTOR

SRK CONSULTING SRK Consulting is an international consulting and engineering company founded in South Africa in 1974. Its internationally recognised independence, based on the quality of its reports, its high expertise and the experience of its professionals makes it a point of reference for the mining industry, investors and international banking. The Santiago office, established in 1994, has more than 140 permanent staff, including Professional Qualified Persons (QPs). SRK offers a multidisciplinary team of specialists in one company, capable of running projects: from exploration, resource estimation and NI43-101 reports to profile and feasibility studies and due diligence for mining; economic evaluations; mine planning and scheduling; slope optimisation for open pit operations; design and numerical modelling for underground excavations; foundations and comprehensive studies of hydrogeology; environmental geochemistry; and mine closure. SRK offers an integrated, independent, longterm approach, combined with a highly-skilled team capable of identifying risks and opportunities in the all areas of the mining business. The global company has about 1,800 professionals, engineers and scientists in 44 offices over six continents. By forming working teams for specific projects, SRK employs professionals from its other offices with international experts and experienced consultants to deliver a targeted and specialised service to its customers. The firm maintains a close contact with some universities and research organisations, which ensures that its staff maintain the highest level of professionalism and are at the forefront of the technological field. Moreover, this means that SRK has access to specialists in a range of academic fields that can contribute to projects when they are required. SRK Chile has ISO 9001:2008 certification in Quality Management. This certification, as well as SRK’s overall commitment to excellence, provides the necessary assurances to its clients that the service provided meets international standards in design and project management.

HUMAN CAPITAL SRK Consulting’s reputation is also built on the talent of its people. The company’s working environment and also its work vision attract and fulfil hard-working professionals all over the world, which helps to make the company an exceptional global consulting provider. Its professionals publish technical documents regularly and many of SRK’s professionals are recognised international experts. In all types of ground and climate, SRK’s professionals are willing and able to add value to clients’ projects with an integrated, independent and qualified perspective. SRK Santiago has a staff of more than 140 permanent consultants. The principal members of the team have more than 20 years of experience in consulting and engineering, and senior members of staff have over 10 years experience. Supporting this foundation of expertise, there is a team of engineers, scientists and consultants, as well as technical support that includes mining development and design through software, graphic assistance, animation and full capacity of GIS and 3D modelling. INFRASTRUCTURE SRK’s Santiago office is located in the heart of the city’s financial district and occupies 2,500 square metres, providing a comfortable and ample work space to its professionals and clients, as well as quick access to the principal business centres of Santiago.

mining business intelligence

AREAS OF BUSINESS SRK Consulting Chile connects the needs of the mining industry. Therefore, it has the multidisciplinary and integrated professional and technological resources, which can provide services in the following areas of business: GEOTECHNICS AND ENGINEERING ■■ Site investigations ■■ Pit slope engineering ■■ Tunnel and underground excavation engineering ■■ Tunnel engineering and TBM ■■ Waste rock dump design ■■ Heap leach analysis ■■ Tailings dam engineering ■■ Foundation engineering ■■ Instrumentation & monitoring ■■ Construction quality assurance ■■ Seismic analysis ■■ Risk analysis ■■ Geomechanical accident assessment (rockburst, collapses etc.) ■■ Numerical modelling (2D and 3D) ■■ Characterisation and modelling of partially saturated soils

■■ ■■ ■■ ■■ ■■

Hydrochemistry and geochemistry Hydrology Hydraulic engineering Legal assistance Acid drainage control (ARD)

ENVIRONMENT ■■ Environmental legal services ■■ Base line studies ■■ Environmental appropriateness studies ■■ Environmental impact assessment ■■ Specific or complementary studies ■■ Environmental audits ■■ Sectorial permitting ■■ Due Diligence ■■ Environmental engineering ■■ Closure plans

MINING ■■ Open-pit mine design ■■ Selection and design of underground exploration methods ■■ Production planning ■■ Equipment fleet calculation ■■ Operation cost and investment on mine estimates ■■ Operational diagnosis ■■ Project assessment ■■ Due Diligence & technical assessment ■■ Peer assessment ■■ Reports NI 43-101 GEOLOGY ■■ Assistance in greenfield and brownfield exploration ■■ Geological mapping at the regional, district or local level ■■ Resource estimate ■■ Geological-geotechnical-structural mapping ■■ Mine geology assistance ■■ Geological and geophysical compilation, integration and interpretation ■■ Data management & SIG ■■ Satellite image processing and analysis ■■ Due Diligence & audits ■■ Reports NI 43-101 HYDROGEOLOGY ■■ Mine drainage ■■ Water supply ■■ Water rights ■■ Numerical modelling ■■ Underground water contamination ■■ Tailings management ■■ Dump and heap management ■■ Hydrogeology and the environment

ALEJANDRO PALMA General Manager

apalma@srk.cl

SRK CONSULTING (CHILE) S. A. Av. Vitacura 2939, Piso 5, Las Condes, Santiago, Chile T: +56 2 2489 0800 F: +56 2 2489 0801 www.srk.cl

CHILE 119

Bringing large scale, competitive and sustainable wind and solar projects to the mining sector in Chile.

Negrete wind farm (33MW), Chile

Av. Apoquindo 4700, Piso 10째, Las Condes, Santiago, Chile. Tel: +56 (2) 25923100

www.mainstreamrp.com

mining roundtable

ROUNDTABLE: EVOLUTION OF THE MINING SECTOR China’s economic growth has fueled a mining boom. But with cost pressures on all sides and speculation that the copper price ‘super cycle’ may be coming to an end, miners must innovate and evolve in a changing world. Increasing productivity and fostering better community relations will be key.

AGENDA ■■

■■

Energy: outlook and strategies ●● A national agreement on energy ●● The development of the electricity system ●● Factors hindering progress ●● National Energy Strategy 2012−2030 ●● Long-term strategy ●● The mining industry: finding its own solutions Stakeholder engagement: approaches ●● Building relationships ●● Defining community compensation ●● The role of government Human capital: challenges ●● Mitigating growing labour costs ●● Productivity ●● Investment in training and education ●● Industry ●● Government ●● Attracting a new generation of miners Industry development: participation ●● Development programs ●● The mining services sector ●● State involvement ●● Innovation Exploration: changes ●● Future investment

CHILE 121

roundtable mining

PARTICIPANTS

FRANCISCO ORREGO Vice Minister Ministry of Mining

Francisco is a lawyer and graduated from the law school at the Universidad Católica of Chile. He did his postgraduate studies at Harvard Law School. He has worked in several law firms, and as a director at both private and public companies in telecommunications, insurance, financial, investment, construction and real estate sectors. Francisco is a founder of the Fundación Pro Bono and its first president. He has served as vice minister since October 2012.

THOMAS KELLER LIPPOLD Chief Executive Officer Codelco

Thomas has a business management degree from Universidad Adolfo Ibáñez and an MBA from the University of Chicago. He became Codelco CEO in June 2012. He has 30 years of professional experience, and has mainly worked in finance (Shell Group, London; Forestal Santa Fe S.A.; and Ultragas Group), and general management for the natural resources sector, for example, at Compañía Minera Doña Inés de Collahuasi. He has also been division general manager at Cencosud.

JUAN EDUARDO ERRÁZURIZ Executive Chairman Sigdo Koppers

Juan Eduardo is an entrepreneur and a civil engineer from the Universidad Católica of Chile. He is the partner, chairman and CEO of Sigdo Koppers and the affiliate companies of the group such as: Magotteaux (Belgium), ENAEX, Britanite (Brazil). Juan Eduardo is counselor of the Federation of Chilean Industry, and of the Chilean Chamber of Construction. He is a member of the Latin America Business Council. He is the chairman of the Chile-Peru Committee and of the Chile-Spain Foundation.

122 INTERNATIONAL INVESTOR

DIEGO HERNÁNDEZ Chief Executive Officer Antofagasta Minerals

Diego holds a Civil Mining Engineer degree from the University of Chile and is a graduate of the Ecole Nationale Supérieure des Mines, Paris. From 2010 to 2012, Diego was the executive president of Codelco. From 2004 to 2010, he was president of BHP Billliton Base Metals and executive director of Vale do Rio Doce from 2001 to 2004. Previously, Diego was CEO of Cia Minera Doña Inés de Collahuasi Compañía Minera and of Mantos Blancos.

JORGE GÓMEZ Chief Executive Officer Collahuasi

Jorge has over 20 years experience in the design, construction and management of copper and precious metals mines. He has served at senior management positions in various companies including Pelambres (AMSA Group), AMSA Corporate and Codelco-Chile. Jorge has also been director of the University of La Serena and has given lectures at various seminars in Chile, Argentina and Perú. He is a mining engineer, and currently CEO at Compañía Minera Doña Inés de Collahuasi S.C.M.

PABLO ACHURRA FONTAINE President Aramark South America

Pablo is a civil industrial engineer from the Pontificia Universidad Católica de Chile. He joined Aramark in 2007, after holding many senior executive positions in marketing, sales and operations at a national and international level, for example, at Carozzi, Unilever and the Dutch company DSM. Currently, Pablo is responsible for leading the growth of Aramark South America's operations, particularly in Argentina, Chile, Colombia and Peru.

mining roundtable

SEBASTIÁN RIÓS Chief Executive Officer Pucobre

Sebastián is the CEO of Pucobre, a mining company with a market cap of US$800 million. He studied industrial engineering at the Catholic University in Santiago and in 2011 participated at the Stanford Executive Program (Stanford University, USA). Sebastián has worked 24 years in the mining area. At first he worked at SQM, a leader of inorganic chemicals (iodine, lithium, potassium nitrate), and in several managerial positions in Belgium, USA and Chile. In 2002 he joined Pucobre.

ALEJANDRO PALMA Chief Executive Officer SRK Consulting

Alejandro is a construction engineer with a master in civil engineering, geotechnical engineering and infrastructure, from the University of Hannover. He has 29 years of experience and is a member of MAusIMM, MSAIMM, ASCE and the Registro Público de Personas Competentes en Recursos y Reservas in Chile. He has been general manager and board director of SRK Consulting Chile since 2003, board director of SRK Consulting (Global) since 2006 and vice president SRK Argentina since 2009.

JEFFREY DAWES President Komatsu Holding Latin America

PARTICIPANTS

Born in Australia, Jeff studied metallurgy, and then completed a PhD in mining engineering. He came to Chile in 1985 as a consultant. In 1998, Jeff joined Komatsu as GM Mining, and was appointed president in 2003. He was given the additional responsibility of president of the Komatsu Latin America (except Brazil) in 2009. Under his direction, Komatsu has acquired three Komatsu distributors in Peru, Colombia and Panama, and has purchased a dump body manufacturer in Chile.

JOSÉ IGNACIO ESCOBAR Chief Executive Officer Mainstream Renewable Power Chile

ROUNDTABLE PARTNERS

CHILE 123

roundtable mining

Francisco Orrego Vice Minister Ministry of Mining

Francisco Orrego, Ministry of Mining: Mining is Chile’s leading economic activity; the country has the largest copper reserves in the world with nearly 28 per cent of total known reserves. The industry is considered by many to be the development engine for the country. This is reflected in a series of indicators: we lead the world in copper production with 32 per cent of world production; mining represents 59 per cent of Chile’s total exports, while copper alone represents 54 per cent, according to 2013 Central Bank figures; direct employment in the mining industry represents almost 3 per cent of total national employment. Moreover, for every direct mining employee there are usually three indirect employees; thus, employment in the sector is close to 12 per cent of the national total. I would like to start the discussion by addressing the critical challenges related to energy. We are facing a projected 68 per cent increase in energy demand from now until 2020. There has been a suggestion that some kind of a national agreement can be reached regarding how to solve these energy provision issues. Is this agreement possible? What factors have been hindering progress? Finally, what are the key elements that would foster the development of the Chilean electricity system? Juan Eduardo Errázuriz, Sigdo Koppers: Consecutive governments have attempted to use state policy to reach an agreement, but it has not yet been successful. Their policy frameworks could all be characterised as rather negative; this has fostered stagnation and encouraged communities and politicians alike to attack the energy sector. One of the key problems is that there are too few competitors and, thus, there is little competition in the market and no clear incentives for potential entrants. Consequently, without these incentives for new companies to enter, we are unlikely to see a reduction in the high energy prices and, in order to solve the issues relating to the postponement of mining investments, energy price reductions are vital. However, under the framework of the Pacific Alliance, the Chilean Peruvian Business Council is pushing very hard for electrical integration with Peru, which could be an interesting and useful eventuality and would provide a greater incentive to enter the sector.

124 INTERNATIONAL INVESTOR

Diego Hernández, Antofagasta Minerals: The proposed interconnection between the country’s two main electrical systems, the Sistema Interconectado Central (SIC) and the Sistema Interconectado Norte Grande (SING), could be a short-term solution because the SING has more capacity and could address the shortfall in the SIC. However, this will not solve the long-term problem, as we need better, countrywide distribution. One argument for the interconnection is that, as less people live in the area surrounding the SING, from an environmental point of view, it is easier to locate generating plants in this area. If the project went ahead, power plants in the southern part of the SING area could supply energy to the central region. However, currently there is no incentive for these plants to be constructed. The reality for the industry is that any large mining project in the region of US$4 billion will require 150 to 200 megawatts of energy. At the moment, this is not available from the SIC and, until projects can obtain a signed energy supply contract, investment decisions will not be taken. Jorge Gómez, Collahuasi: First, it is important to note that, in terms of the interconnection, there is an issue regarding transmission. Moreover, the interconnection would be more advantageous if blocks of conventional energy generation continued to be created. I am referring to hydroelectric projects in the south and also exploring the potential of LNG in the north. It is hard to believe that we have all of this potential for energy and yet we are suffering these electricity prices. Another issue interfering in the construction of new projects is the territorial management issue. Until the communities affected by these projects receive some type of uniform benefits or compensation, it is going to be difficult to get projects through the legal system and into development. Thomas Keller Lippold, Codelco: In terms of impact on the industry, a number of projects that planned to receive supply from the SIC are currently being delayed because there are no contracts that can supply them with competitively priced power. I think many stakeholders have a role to play here.

roundtable mining

First, a territorial management strategy should be defined at a governmental and national level that would make it easier to execute projects. It would almost certainly include compensation for the communities; this should be a key element of the national agreement.

A territorial management strategy should be defined at a governmental and national level that would make it easier to execute projects Thomas Keller Lippold Chief Executive Officer Codelco

Second, the government should use such a national agreement to make decisions regarding the energy matrix for the country. This should be an opportunity to question ingrained paradigms, like the insistence that we must depolarise the matrix or the idea that hydroelectric generation units of over 30 or 35 megawatts do not qualify as ‘unconventional renewable energy sources’. FO, Ministry of Mining: The Ministry of Energy published a National Energy Strategy in 2012, which set out a set of pillars that identified medium and long-term progress. What do you think of this strategy? Could it replace the national agreement we are discussing? JEE, Sigdo Koppers: It is hard for me to reconcile the goal stated in the strategy of increasing participation of non-conventional renewable energy in the matrix to 25 per cent by the year 2025. What we need is a non-polluting, yet competitive matrix, but the strategy considers unnecessary taxes on some generation types. The only concern should be that they are non-polluting and competitive. For example, as Thomas highlighted, they are defining hydroelectric plants with a capacity greater than 30 megawatts as ‘conventional’ and taxing it accordingly. I think the connection between the SIC and SING and the definition of the minimum and maximum energy requirements for the country are both reasonable strategies. As for community issues, there have been good bills in congress that have not passed, hence there are no laws in place. This leaves the judges in a situation where they have to make their own, at times questionable, interpretations. There are many practical issues that are not being properly addressed at present.

126 INTERNATIONAL INVESTOR

Alejandro Palma, SRK Consulting: It is difficult to understand why this issue of territory management has not previously been resolved. In 2013, a website was launched to bring together different economic actors from the Antofagasta region to discuss and define potential land use by sector. But, from the point of view of engineers working in the region, this issue has already been resolved for quite some time. There are many clusters of mining companies in Antofagasta and they should be able to define land use in the sector at a cluster level based on the precedent already approved by authorities. Jeffrey Dawes, Komatsu: This territory issue is largely a political problem, which judges are being called upon to resolve. They are not the appropriate party to be doing so. For Chile, the energy issue is a disaster. Electricity is being generated for about US$0.20 per kilowatt hour, it should be being generated for US$0.09. The short-term, stopgap measures have been just that and, in terms of the medium or long-term discussion, there is a strategy, but it is not being acted upon. There are many examples of projects that have gone through environmental impact studies only to have the project delayed or abandoned because they cannot source the necessary energy. DH, Antofagasta Minerals: The energy model worked for a long time, but, for various reasons, this is no longer the case; the number of stakeholders has increased and the system was not built to accommodate them. The model needs to be rethought, but there is not much incentive to change it. The status quo is advantageous for the energy generators who currently have something resembling a monopoly; thus, it is very difficult to attract new investors to the sector. Currently, the energy shortage issue is only significantly affecting businesses and large investors. In 2014, it could start to affect consumers, then the problem will become a national issue and that will be the catalyst for action. Electricity bills will rise and other unavoidable factors will crop up. For example, the Santiago Metro will have to renew its energy contract and, as electricity is already a significant cost for the system, this will be reflected by a price increase. Unfortunately, it will take these kinds of problems to bring us closer to a solution.

mining roundtable

José Ignacio Escobar, Mainstream: As a new market actor in the energy sector, I think we can bring an interesting perspective to this discussion. We specialise in renewable power generation and have succeeded in breaking into the market after nine years of developing wind and solar projects. During this long process, and as a result of our experiences, we have come up with some ideas that embody the key issues relating to the causes behind our current predicament i.e. the crisis and why neither the government or the market have been able to resolve the situation.

The energy problem is serious and affects everyone and every industry; companies are being crippled by this issue With regards to the crisis, the main cause is the disconnect between what the population wants and what it will accept. For example, many communities want the nation to develop, but they do not want to be directly affected by the physical development. Thus, it is even more important to have clarity regarding community compensation and this is hindered by a lack of understanding about what is important to these communities. As the compensation issue has not been dealt with, even medium-size energy projects face such a negative reaction from communities that they are abandoned. Then, there is the dissemination of information. The energy sector has not been talking about this for 30 years; it has become of public issue in the last four. Previously, no one really understood the issues and the information given in the media was more complicated than necessary. This lack of information, clarity and transparency has led to mistrust and, consequently, created suspicion and the need for answers. Unhelpful comparisons are another issue. We need to contrast our progress with countries that are on the same development path, for example, South Africa, Brazil, Mexico or Peru, as opposed to fully developed nations. These economies, that are competing for our export markets, are making a concerted effort to encourage a matrix that their economies can sustain in the long term because they realise it will directly affect their competitiveness.

So, this analysis brings us to the conclusion that the market itself has not been able to solve the crisis and the admission that we are essentially relying on a 40 year old law to regulate the market and form a more competitive and sustainable matrix. It is impossible to create new solutions for the energy sector using the same old rules. Moreover, the short-term laws that have attempted to fix these issues have not addressed the root of the problem. Currently, three companies undertake 96 per cent of all generation; the obstacles to entering the market are almost insurmountable. The market is not dynamic; in order to buy fuel or energy you must enter into bilateral contracts with a generator causing a long-term obstacle that is very difficult to break. By law, everyone must be contracted and the contracts have already been signed. Furthermore, the supply and demand margin is so narrow that conventional generators cannot sell electricity at competitive prices. We have more efficient and economic generation methods, but we are always working at our limit and have to tap into expensive, inefficient coal and combined-cycle power plants, which are far more expensive and have high cost externalities.

Juan Eduardo Errázuriz Executive Chairman Sigdo Koppers

JEE, Sigdo Koppers: Politicians and communities say that energy issues are only the problem of industry when, in fact, it is an enormous social problem. Until we are able to reframe the discussion in this way, moving forward is going to be very difficult. We conducted an analysis on the basis that 50 per cent of the mining projects on file came to fruition. We found that just in taxes, the state revenues from these investments would exceed those that would result from the currently mooted tax reform. This would provide money for housing, health and education programs. The energy problem is serious and affects everyone and every industry; companies are being crippled by this issue. Problems in the mining sector heavily affect Chilean society; profit margins are very small and, therefore, our contribution in terms of taxes is reduced. Something has to be done. AP, SRK Consulting: The most problematic issue for the political world is timing and this really has to do

CHILE 127

roundtable mining

Diego Hernández Chief Executive Officer Antofagasta Minerals

with transmission. According to analyses we have done internally and with Transelec, a transmission company, there will no available space in the transmission system for new generation projects until 2018, when the transmission projects currently underway are completed. Thus, while there may be generation projects ready, they will not have any effect on prices in areas like the Norte Chico and some parts of the SIC until they can connect to the grid. Similarly, if hydroelectric projects are given the go ahead, they will take six to eight years to come online. The next six to eight years, until 2020, should be used to lay a foundation, so new projects can proceed more rapidly later on. Consequently, smaller, more focused, projects distributed throughout the country could be an interesting solution in the short term. FO, Ministry of Mining: It seems that some mining companies are taking matters into their own hands. How is the mining industry finding its own solutions to these problems in the energy generation sector? TKL, Codelco: The mining industry suffers from the lack of competition in the power generation market. At Codelco, we are promoting a power supply project, the main objective of which is to increase competition. Clearly, the entrance barriers to the market are one reason for this lack of competition and perhaps the most important of such barriers are the uncertainty regarding environmental permits and that of securing sufficient offtake contracts. Our initiative at Codelco intends to address this matter by removing these risk factors. As part of our Mejillones project, we, as a company, are ensuring projects progress to a stage where they can obtain regulatory and environmental permits. This dramatically reduces the uncertainty for investors. Moreover, it creates the conditions in which market actors, new or otherwise, can make a competitive offer. DH, Antofagasta Minerals: Larger mining companies can proceed in this way, but the model can only really be applied to large energy projects. If a project has a demand of less than 40 megawatts, it is impossible to get off the ground alone. It would require more participants and that takes time and organisation.

128 INTERNATIONAL INVESTOR

The other alternative to advance energy projects is by participating through equity purchase and helping with project financing and obtaining a power purchase agreement. However, this option is capital intensive and diverts resources from mining investment. JEE, Sigdo Koppers: There is a serious problem. I am not usually an advocate of state intervention, but, in this case, the state needs to act. The model must ensure that new actors can enter the market. Clearly, the problem of territory management plays a part here and there have been mistakes made in this area, but issues must be dealt with on a case-by-case basis. The process of working with communities has to be correctly managed before the beginning of every environmental impact study and continue throughout the project and after it finishes. We still have a lot to learn. FO, Ministry of Mining: Let’s dig slightly deeper into the issues surrounding community involvement and move the focus to mining projects. There seems to be a tension between business and community groups, which is manifest in a false dichotomy between communities, who believe they are being unduly affected by business interests, and businesses, which feel communities paralyse vital projects and only see the negatives. What strategies can be used to break the tension or foster trusting relationships? As a member of the industry, how would you appraise or even criticise the approach of mining industry in this regard? Sebastián Ríos, Pucobre: Communities have valid questions related to the compensation they will receive for having their lives disrupted. Mining projects have been active regarding this area, but issues related to community contribution should not be left for the company alone to decide, it needs to be incorporated into the project design and, for some projects, the active participation of authorities and local stakeholders. Within the framework of the project, it must be stipulated what the community will receive in terms of positive benefits and other community development considerations. These issues need to be addressed and resolved considering the local stakeholder´s forum, which will, in turn, foster local support.

roundtable mining

Jorge Gómez Chief Executive Officer Collahuasi

The importance of addressing this problem is manifest in the tendency of communities to see the mining industry as one, organic whole and not as separate entities; the industry’s reputation is, in a certain way, collective. Thus, the actions of one market player can influence the whole industry. Furthermore, the government has made little progress regarding local tax legislation, which is an issue that needs to be addressed at a national level. Mining companies can meet all their requirements, but it is not entirely the industry’s responsibility and needs some orchestration from government and industry participants. TKL, Codelco: The community relationship issue is the biggest challenge that the mining industry faces worldwide. It is not just an issue in Chile. However, precisely because communities are asking questions about the benefit they will receive from a project, their questions are legitimate. Nevertheless, it is imperative that both sides adopt a balanced and reasonable approach. In order to facilitate this, we have to return to this idea of territorial management to define the levels of compensation and close this issue. Defining clear criteria for compensation is key. JG, Collahuasi: Over the last 20 years, Chilean society has become better educated, better informed and there is more opportunity for participation. Our industry depends on good strategy and, while Chile has moved on, the challenges we are facing remain; they should have already been solved. One thing is certain, no project in Chile, whatever the industry, can move forward with out considering the community and sustainability issues. However, the state should also take on some of the responsibility for this, for example, how the ILO Convention No. 169 regarding indigenous rights will be implemented in Chile, in terms of actual regulation, is still unclear two years after it was adopted. Pablo Achurra Fontaine, Aramark South America: Working with communities must go beyond defining the amount of resources that should be allocated; it has much more to do with attitude and the way a community is approached. This perspective is gradually being adopted in the mining sector.

130 INTERNATIONAL INVESTOR

If it only becomes a question of resources, the amount will always increase. It cannot just be another equation on the balance book; bridges must be built through community interaction. If you use local, manual labour, for example, it is much easier to talk about that than project details using industry terminology. When you make a good connection with a community, large monetary investments are less necessary.

No project in Chile, whatever the industry, can move forward with out considering the community and sustainability issues A case in point is our program Alimenta Tu Vida, which we have implemented in several communities, that educates and supports the community to adopt a healthy lifestyle by organising community walks in the desert, for example. The initiative is financed by local mines in part; it does not take a lot of resources, but it allows for important interaction and creates a forum for communication. The important issue is how to interact with communities on a daily basis. FO, Ministry of Mining: I would like to highlight an important issue. While the state can provide the mechanisms through which communities and private companies can communicate, its success depends on the company. The government cannot regulate for successful dialogue. Furthermore, it must be accepted that judicial solutions will never remove all uncertainty about processes as delicate as these, but they can provide a framework with standards that can allow both parties to move forward and ensure that judicial decisions can be reached more quickly and are adequate. The government is introducing the Regulating System for Environmental Impact, which will come into effect in December 2013 and will require better-designed and elucidated environmental impact studies. Regarding the implementation of ILO convention No. 169, regulation stemming from the Indigenous Consultation forum that followed the adoption of the convention is about to be released. Both these measures should reduce policy uncertainty from a legal perspective.

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Clearly, this regulation will present new challenges to industry, but we have already seen examples of the mining sector adapting and taking ownership of new standards, regarding health and safety, for instance. The reality is, as citizens become more informed and more involved, the public administration must reflect this actuality. Industry must try to create opportunities and structures to help this transition run smoothly. DH, Antofagasta Minerals: Indubitably, we should be able to see development and progress in regions that receive more income due to mining activities in the area. It is up to the state to ensure the resources provided by mining companies are distributed fairly and sensibly at a municipal level. Private companies cannot take on this role. The problem here is related to the centralised nature of national resource distribution, when you are trying to determine need from the centre, it can result in oversight. Notwithstanding, the progress made regarding community issues is clear. We are moving past the idea that all conflict must be dealt with in a legal forum. The industry anticipates issues and allows the space for negotiation and to create trusting relationships. Furthermore, many companies are working to generate social capital independent of the reputational capital they seek. In terms of large community projects, like Calama Plus or CREO Antofagasta, the most important aspect of these development initiatives is that they bring in as many actors as possible on a voluntarily basis, from both the public and private sector, and ensure that there is not one patron who participates to enhance their reputation. This is positive; this is progress. PAF, Aramark South America: When I was young everyone knew the importance of copper for the development of the country; it was part of the national consciousness. It seems this has been forgotten. Society seems to be in permanent conflict with the industry. Yet, this can change through conversation and interaction. There is tension, but this can be mitigated through involvement and public relations initiatives. It could be argued that some mining companies are hiding behind the environmental issue to escape the community issue. You can make tangible changes re-

garding environmental issues, but the community issue is more complex and difficult. One benefit of tackling the latter is that it may lessen the problem of human capital in that, if you have a positive impact on a community, more people are likely to be attracted to the area. In this sense, companies need to work with local development institutions, which have far more knowledge about the particular community than central government. FO, Ministry of Mining: That point brings us quite smoothly onto the issue of human capital. If all the projects currently planned are realised, the industry will need approximately 38,000 new workers in the coming years. This is a huge challenge, not just logistically, but also in terms of training the workforce. Simultaneously, the industry has to mitigate the growing percentage of its total operating costs that are represented by labour, which, combined with the fall in productivity, is becoming problematic. How are these challenges being addressed by the industry?

Pablo Achurra Fontaine President Aramark South America

â&#x20AC;&#x2030;Society seems to be in permanent conflict with the industry. Yet, this can change through conversation and interaction DH, Antofagasta Minerals: While there would be a lack of qualified personnel if all planned projects were developed immediately, some projects have been delayed and, thus, things will normalise. More importantly, the industry has lost productivity, mainly due to the lack of focus on working practices. Productivity has not been the primary objective because commodity prices have been high and production has been paramount. Things have changed and improving productivity is now the key issue. In order to improve productivity we need to train the workforce, but this must be done thoughtfully. The education profile of the country, and particularly mining workers, has changed and this illustrates an important point regarding productivity. The new generation of mining professionals have a far more comprehensive education compared to the older generation, who have a less extensive education, but vast experience.

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Although experience is an extremely valuable quality, in our current predicament, it may not be the best quality to approach to the operational changes required. I do not think we are reaping the full benefit of the human resources this country has formed.

â&#x20AC;&#x2030;The commodity boom has put a lot of strain on the systemâ&#x20AC;Śbut the quality of labour in the country will improve with time Jeffrey Dawes President Komatsu Holding Latin America

Furthermore, industry must take a serious interest in training. Although there are good initiatives, we need to have closer contact with the process and ensure that this idea of dual education, practical and theoretical training, is promoted and supervised by industry leaders. We should also favour local workers, training people from mining regions so they are qualified to do the particular job. Bringing in short-term workers from other regions results in less commitment to the job and less productivity. AP, SRK Consulting: The mining industry understands what is required. I would like to know what the government is doing to incentivise the formation and retention of human capital in terms of high-level, public sector decision makers because the number of projects on file is enormous. In the engineering segment, we are working hard to satisfy the needs of our clients, but if the government does not have an adequate and technically qualified workforce to support, approve and review projects during the project approval process, it will limit our business and the progress of the industry. This issue is directly related to the development of the country. We have so many opportunities at the moment in terms of investment and progress. They should not be missed. FO, Ministry of Mining: The government is supporting development in three main areas. In conjunction with the National Training and Employment Service (SENCE), we are actively seeking to increase female in employment in the mining sector. So far, 2,000 women have been trained and a further 4,000 will be educated at various institutions recognised by the mining industry in 2014.

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The Ministry of Mining has increased the number technical high schools throughout Chile that offer specialised mining courses from 16 to 32. Moreover, the amount of technical programs available has risen drastically from 5 in 2009, to 77 in 2012. The government, as a whole, has been creating Centres of Excellence in partnership with successful foreign companies. Although, most are currently focused on innovation, this could easily be switched to training, and specifically, mining. TKL, Codelco: In terms of human capital, Chile has enjoyed a competitive advantage due to our history in the industry and concomitant expertise; it has been one of the reasons why the country has been so successful in attracting foreign investors to the sector. However, over the past few years, we have lost our competitive edge in this area and it is, at least in part, due to the fact that the industry was unprepared to respond to the increase in demand for specialised labour. There has been a lack of supply and labour costs have increased significantly as a result. Yet, many companies are making concerted efforts with regard to training and education and, the market is normalising. It is absolutely correct for the industry to be directly liaising with technical institutions to ensure they are producing potential employees with the right skills. In four years, we will be in a significantly stronger position and human capital will again be a competitive advantage for the country. JD, Komatsu: From the perspective of the suppliers, I think part of our role is to prepare technical people for the industry. Certainly, many mining supply companies, including Komatsu, have invested enormous amounts of capital in training centres. The commodity boom has put a lot of strain on the system, in terms of a lack of skilled labour, but the quality of labour in the country will improve with time. In 2012, Komatsu hired 2,000 new employees and, currently, 3,000 of our employees are 30 or younger. It takes time for the new generation to gain the knowledge, experience and confidence needed to excel. Productivity will increase synchronously. However, there is problem in terms of human capital, which is related to job prestige. In Australia, being a

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mining technician is a position that is socially respected; they are important people in the community. In Chile, it is rather different and only a little higher in the hierarchy than a labourer. As an industry, we have to make these jobs more attractive. PAF, Aramark South America: I agree with Jeffery, service companies and suppliers are entry portal for potential industry employees. In the service sector, people can begin with no qualifications and we train them, get them qualified and initiate them into the mining world. One issue I would like to raise has to do with life on a mining camp. Four years ago, there was a pressure to address the quality of life issues in camps, but as the focus is now squarely on productivity it has been marginalised. It is an extremely important issue and has a bearing on productivity. Working inside a mine is tough; you are away from you family for days, working 12-hour shifts. So, if your camp does not provide a comfortable place to sleep or you are sharing a room with three other people and the bathrooms are falling apart, it is not nice. Those who construct the mine live under other standards and this is an uncomfortable situation for the mining sector. It creates tension.

â&#x20AC;&#x2030;Most segments in the mining sector have invested a lot of money in training When you bring people into the mine to work in difficult conditions, this has an effect on their degree of productivity. Everyone here has worked in the mining world and knows that mining camps can be rather unpleasant. Within this context, people can react poorly and it can become a serious issue. That being said, circumstances have improved somewhat and there has been a huge investment; the cost of mining camps has increased incredibly. However, it would certainly help if the camp construction market was more competitive. Another point, regarding productivity, is that service companies, like Aramark, can address these issues to an extent by redesigning jobs to increase the productive of each task. Even for mundane activities, like entering

and leaving the mine. Additionally, the development of the area surrounding the work camp is something we are investigating. Previously, the mining company decided how everything was going to be and established the way to work; the suppliers arrived and had to adapt to it, rather than working together to establish the most productive way of working. Due to the rise in the cost of manual labour, there is greater emphasis put on the supplier working with the client to make activity design more efficient. JG, Collahuasi: All things being considered, I think working in the mining sector is quite an attractive proposition. Of course, average salaries are significantly higher, but I do not think this is the only agreeable factor. There are far more people now who are willing to dedicate themselves to the mining industry than there were 15 years ago. This is due to the reasons we have discussed: better training, better working conditions. The industry has many challenges, but it is facing them and becoming better for it. It is becoming more aware of its responsibility to society and society is becoming more willing to engage with the industry.

Alejandro Palma Chief Executive Officer SRK Consulting

AP, SRK Consulting: We also view employment in the industry as quite an attractive proposition. For some professionals, the shift pattern, for example, seven days on and seven off, works. Moreover, I have experienced camp life for nearly 30 years and the standard has improved greatly due to greater awareness about its operational importance. Regarding training, in my area of expertise, engineering and consulting, we have made a tremendous effort to train our workers and this has had a direct impact on our productivity and the productivity of our clients. We have been providing Chilean workers with a set of skills that only foreign workers had previously. Most segments in the mining sector have invested a lot of money in training and retaining their employees. We recognise the necessity to carry out this training and the results are starting to have a positive impact here. JEE, Sigdo Koppers: In my opinion, the mining sector has excellent initiatives in this area, which are spear-

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headed by several major mining companies. The program for the Development of World Class Mining Suppliers is fantastic and it will generate huge savings in terms of productivity costs. Sidgo Koppers has been participating in several of these mining clusters and, in the long term, the benefit will translate into much more than just increased revenue.

We should encourage...the use of the country as a kind of industrial park, with local companies providing the necessary services FO, Ministry of Mining: The program Juan Eduardo mentioned, for the Development of World Class Mining Suppliers, and others aim to promote development in the industry. Let’s move the discussion on to consider the industry’s development with specific reference to participation, adding value, innovation and exploration. How do you see the relationship between mining companies and suppliers? How do you think we can encourage participation in these programs? How can the mining company suppliers can add value or move up the service chain? I would also like to hear your views on the role of the government in ensuring that the businesses involved in these programs, direct mining, supplier or service companies, can continue to add value to the chain? DH, Antofagasta Minerals: In terms of developing mining supply companies, we have an advantage in developing the service industry because we have scale. It is important we capitalise on this and it is already possible to see international businesses that locate to Chile to carry out engineering services We should encourage and promote the use of the country as a kind of industrial park, with local companies providing the necessary services, because this will foster the development of the industry. At the moment, we are not taking full advantage of this excellent opportunity. Regarding participation in the development programs, when there are clear examples of how these programs produce positive results more companies will want to join. The incentives need to be showcased

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because we have a problem in that there needs to be a clearer communication effort relating to companies that have done well with in the program development, so the potential participants can see what they might be able to achieve. JD, Komatsu: Komatsu is participating in this development process and, as an international supply company, our contribution not only benefits the other participants, but it also benefits us. We facilitate technology transfer and share our quality control systems and knowledge with local suppliers to whom we subcontract work. Clearly, we benefit economically from this process, but it also allows the company to fulfil its obligation to the country, in terms of social responsibility. We do not want to be viewed as a company that enters the market, exploits the opportunity and exits leaving nothing. We contribute to the development of communities and to the mining industry in Chile by ensuring our expertise remains here. I can give many examples of companies to which we have contributed and helped grow. In some instances, they even become our competitors, but if we can’t compete with them, we should not be in this business. SR, Pucobre: Regarding state involvement in these programs, when Corfo, the economic development agency, announces a particular fund it would be useful if its target area and industry was made more explicit. Sometimes, it can be rather complicated to find and apply for certain funds if you do not have the experience with these application processes. In the mining industry there is a great deal of connectivity and information and knowledge moves quickly. There would be significant interest in targeted funds to encourage applied innovation from the entire industry, suppliers included. JD, Komatsu: There is a possibility that this process may work better if the process was reversed. The strategy could be to talk with the mining companies and identify specific problems, which it is in the interest of the country and the industry to solve. Then, supply the funds and invite applications from institutions or universities to resolve those specific problems. That will have a direct benefit for the industry in the short and medium-term.

mining roundtable

SR, Pucobre: That is an interesting idea. If we had a bidding process that aimed at improving some particular matter in the mining industry via the innovation process, perhaps the winner might be a supplier that has the technology and can apply it. At a governmental level, innovation is currently a key policy for the country. The Ministry of Mining should promote these policies and programs to industry, so they are fully informed and can take advantage of them. JG, Collahuasi: I am not really an advocate of state intervention. We need to think about what we can do as an industry to add value and I think it has a great deal to do with improving our management abilities. The two or three most common elements in creating value are related to improving the operational margin, which comes as a result of improving own processes. Innovation plays a part in this too. We have to analyse what is urgent and important. Following this analysis, one can identify in the elements in the value chain that must be outsourced to a third party. In this country, contrary to 20 years ago, the third party services are competitive, first rate and with rational prices. For this reason, one has to have a much more stable approach with the service suppliers with a medium or long-term view.

We are certainly seeing innovation address problems related to productivity PAF, Aramark South America: The important issue is how to articulate information, ideas, and policy to other stakeholders within the framework of the state, for example, congress, local governments and NGOs. The industry has made significant investment in improving its public image and I think the state has to continue to develop the industry’s image through communication. After all, mines are still the main income for the country. This can be achieved if the state ensures that all the necessary social actors are integrated and informed. Thus, progress will become less of a problem. Through the mining clusters, through programs that look to add value and through education they have to foster a body of market actors that can take decisions, so that when

the government participates and facilitates discussion they can successfully act on the outcomes. FO, Ministry of Mining: A topic that is very related to development in the industry is innovation. I would like to hear about this important area and whether you see innovation as a tool that can effectively improve productivity issues in mining companies and the value chain as a whole? There is a suggestion that it has been difficult to attract investment in innovation or development in Chile, why do you think this is the case? What has caused the Chilean mining industry to designate so few resources to innovation?

Sebastián Riόs Chief Executive Officer Pucobre

JD, Komatsu: Innovation is an area in which there is still much to do. Productivity can be improved but the bigger change can only be achieved through innovation. Automation is a long-term solution that will solve many issues related to productivity and safety. If we reduce the amount of people, that reduces the amount of camps and suppliers needed. It is a cyclical process. We have been involved in this area, but we encountered a slight problem in that, when we developed a project in Chile with Codelco in 2004 related to innovation, many of the benefits of that project went to Australia when Rio Tinto took advantage of the innovation, and as such the benefits did not remain in Chile. However, we are committed to innovation and will continue to develop these kinds of projects in Chile and elsewhere in the world. TKL, Codelco: We are certainly seeing innovation address problems related to productivity. Importantly, innovation is vital for all areas of business; it does not necessarily have to be technological, the crucial and defining factor is that it solves a problem. For instance, it can provide improvements in productivity for day-to-day administrative activities. The potential for increasing our competitiveness through innovation related to productivity and administration is huge. SR, Pucobre: In terms of innovation in medium-sized companies, at Pucobre, we have carried out a variety of programs related to cost improvements, but this

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José Ignacio Escobar Chief Executive Officer Mainstream Renewable Power Chile

does not seem be the norm in the industry. The government has made a good amount of funds available for these kinds of projects, but it is used infrequently, this should not be the case. We try to make both small operative improvements by adapting existing technology and its implementation at the technical and operative levels; and also make broader changes with continuous improvement teams working to change processes in a plant or the mine. These initiatives are very helpful, when the cost of manual labour could be between 25 and 30 per cent of the cost of the production costs. These teams can help us achieve perhaps 10−15 per cent more in net productivity.

If mining companies became more involved in the area of energy innovation, they could have a profound effect and, moreover, break up the traditional supplier − client roles These improvements have to be made with the current employees and, because enabling change through training can be very difficult, we have to change the way the company works. There is a lot of enthusiasm for this opportunity within our workforce. Regarding the lack of investment, it should be noted that the actual amount of mining investment for new projects is unclear, as, statistically, the true spend is difficult to calculate. There is more money spent on innovation than the figures suggest. In general, Chilean mines seem to be a little distant from innovation in comparison to international mining companies, which tend to carry out large innovation and development programs. Actually, there are many different initiatives within the Chilean mining industry that are working quite well, especially the development of mining clusters. They are delivering results and, as the smaller companies are often not very focused on innovation, it is very useful for this effort that the international companies are involved. Finally, I expect that the end of the high price cycle will have a positive influence on innovation. It will force

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the industry to consider productivity issues and come up with new initiatives that look at adding value in all areas, including the support, back office and service areas. JG, Collahuasi: It is an interesting topic because one of the two key aspects of any business model, regardless of its type, is to understand the part innovation plays in your overall strategy. There are different approaches, some companies internalise the process, others do not, in any case, it is the connection with third-party businesses who specialise in this area that is essential, as they are vanguard and provide a platform for communicating progress. The responsibility of the mining sector here could be to create a space that allows for the implementation of technological developments at an industrial level, thus generating incentives for this work to be undertaken. JIE, Mainstream: From an energy sector perspective, in terms of innovation, there are several things that would allow the mining industry to achieve better energy prices and the capacity they would like to contract for medium-size demands. Mining companies need to look for new business and contract methods that involve new technologies and new players. I think there is a space to innovate regarding contracts to make them more flexible and allow the incorporation of more sustainable, nondispatchable technologies. Another option is to promote the role of the suppliers and to find suppliers that bridge the gap between supply and demand to resolve issues, such as weaknesses in generation. Moreover, mining companies could try to find smaller block contract models. Larger mines and larger generation projects are decreasing in popularity, as they have both become more problematic. Both Collahuasi and Antofagasta Minerals consolidated their solar energy producers, while creating and looking for business structures that generate more competition due to smaller contract sizes. Finally, if mining companies became more involved in the area of energy innovation, they could have a profound effect and, moreover, break up the traditional supplier − client roles. This is an area of innovation that directly affects competition in the mining sector;

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it can create better prices and is a way to kick-start more investment in the energy sector. FO, Ministry of Mining: Finally, I would like to briefly discuss to the issue of exploration. There has been a move towards brownfield development over greenfield and a preference for investment in major mining companies over juniors. What are the factors that are hindering investment in exploration? SR, Pucobre: One factor that has seriously affected exploration, from a regulatory point of view, is the number of permits necessary to start an exploration campaign has increased. This has just come into effect and, even for small exploration campaigns, there are more permits needed and, in some cases, participation from authorities and from communities has to begin before the program is underway. It has certainly become more difficult with the new legislation. I believe it is going to cause some delays because we have to ask for the permits and they will take a few months.

Chile is the most important country in Latin America for mining and will be for a long time, but we also direct distribution in Peru, Colombia, Panama and, maybe in the future, in Mexico, which is the new priority for mining companies. We are anticipating where mines will be in ten years time. Brownfield expansions will continue in Chile, but we are looking for greenfield projects in other countries. An important factor is the cost of copper in Chile, compared with Peru and Mexico. We have to think about where copper will be cheapest in ten years from now. Suffice to say; when Chile can be more competitive, it will once again receive exploration investments because the exploration platform here is very good.

â&#x20AC;&#x2030;Chile is the most important country in Latin America for mining and will be for a long time

JG, Collahuasi: I recently read an article that appraised the logic of investing in exploration in Chile. It stated that we had significantly dropped in the ranking as an exploration destination. I agree with SebastiĂĄn that the new regulations have caused some uncertainty, but I think the copper cycle is the biggest factor that has had and will continue to affect exploration. The cycle also means that new projects will have to deal with taking on a higher level of uncertainty. Thus, expanding an area that already produces is much easier and involves much less risk. I think we need to create some kind of initiative to promote and incentivise new exploration because, currently, when companies are looking to create a new project, internally or via a third party, come to evaluate the feasibility and potential they have to consider everything we have discussed today.

AP, SRK Consulting: There is also the issue of benchmarking and you can look back at the period of instability in the Canadian mining industry, when mining activity significantly decreased. Then, it was easier to operate in other places. For example, there are projects that we cannot do in Chile at the moment, but they can be undertaken in Canada, where there is much lighter regulation and greater competitiveness. One must have a very long-term view, so this industry can develop over time. However, there are other countries creating a more flexible framework to facilitate the forward progress of mining projects. If the mining services sector sees an opportunity in one of these places, it will not be a difficult decision to try and capitalise on that opportunity. Engineers, suppliers and services are always assessing where the future mining projects are going to occur; Chile needs to ensure that it remains at the forefront of the industry.

JD, Komatsu: Exploration directly influences our business strategy. We observe where mining companies are exploring as an indication of the likely location of future mining projects and where it will be valuable to have a physical presence.

FO, Ministry of Mining: I think we have now covered the key areas of the agenda. The opportunity to discuss important issues with a degree of informality and transparency is always extremely useful and I would like to thank all of you for participating in this event.

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INDUSTRIAL CHALLLENGES ON THE HORIZON Mining companies are entering a phase of demand uncertainty, when the issues related to energy, water supply, human capital and community engagement are a priority and need to be addessed

Implementing long-term strategies to generate a trained and skilled workforce is a key objective for Chilean mining companies

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WATER AND ENERGY INDUSTRIAL ENERGY Industrial energy use accounts for nearly one third of global energy consumption. While emerging economies have seen significant growth in energy consumption related to industrial processes and operations, developed countries have not. Thus, it is vitally important to identify the energy consumption of key industrial manufacturing processes. While processes vary greatly by company, location and products, the International Energy Agency has produced global estimates of the energy consumption breakdown. Approximately 15 per cent of energy is consumed for feedstock, 20 per cent for process energy, 15 per cent for motor drive systems at 100−400 degrees centigrade, 15 per cent for low-temperature heat, and the remainder for other uses such as lighting and transportation. Increasing competition for energy and the importance of cost minimisation have made sustainable energy initiatives a growing trend within industry. It is vital that the private sector is fully engaged and committed to successfully achieving the ambitious objectives that the sustainable energy initiatives set out. With the right level of support, coordination and action, the power of industry can be unleashed to ensure universal energy access, dramatically improving the energy efficiency of business operations, increasing the use of renewable energy and developing more sustainable products and services. There are five priority actions the industrial manufacturing industry can implement to become more energy efficient and advance their business opportunities in a sustainable energy market, these being: increasing the use of combined heat and power and distributed renewable power generation at manufacturing facilities; improving the energy efficiency of operational processes; incorporating more energy-efficient design into core product streams and exploring the practical use of new and emerging technologies; empowering employees to cut energy consumption through

behavioural changes and continuous improvement programs; and increasing cross-industry collaboration and partnerships with academic institutions and policy makers to drive innovation and technological breakthroughs. CHILE’S NATIONAL ENERGY STRATEGY Energy companies are negotiating a complicated and evolving landscape that requires fresh approaches. Although each segment of the industry has its unique challenges, all share some common issues. All segments are seeing growing skill and talent shortages, all are facing cost pressures and all are experiencing the need to invest in new technologies. These factors are driven by ever-growing global competition and, moreover, companies are now facing new challenges related to differentiating between and prioritising core and non-core operations. Chile has solar, geothermal, wind, minihydro, ocean and biomass/biogas resources, yet these technologies currently only make up a small percentage of the national electricity production. Thus, the Chilean Energy Strategy 2012−2030 is a step forward in the development of a sustainable energy sector. The strategy aims to reduce energy consumption, increase renewables in the energy matrix and make Chile’s electricity sector cleaner, more secure and more cost-effective in the long term. Although Chile is moving in the right direction, some issues still must be resolved, private companies will need to be part of an evolution in the sector that will involve large capital investment, new business models and the development of new technologies and tools. ENERGY AND MINING Mining companies are big energy consumers and, given current energy prices, they are evaluating how to reduce and monitor energy consumption. The implementation of intelligent technologies can help. In particular, there is an increasing interest in remote control and advanced technologies that help energy and resource optimisation.

mining business intelligence

WATER Water management is another critical issue not only in Chile, but also in the entire world. The expansion in mining and oil and gas production, which has been intensified by the shale gas boom in recent years, has given rise to concerns about the impact of operations on water resources. The pressure to increase efficiencies is high, as industry demand for water grows. The movement and disposal of produced water is also a part of the debate on the environmental impact of mining and energy production. In this regard, water efficiency improvements have been made by adopting new technologies, more efficient processes, incorporating reuse and recycling, and by finding alternative sources of water. However, existing regulations to protect water resources are also affected by the greater intensity of water, energy and infrastructure. This is driving significant uncertainty in the global regulatory landscape, which is continuously adapting to the evolution of industry. From the perspective of mining companies, the volumes of water required make water management a central activity. Operators are faced with a number of options regarding the sourcing of water and the disposal of wastewater from disposal in underground injection wells to reuse in further operations or recycling to clean freshwater. These choices are generally informed by local regulatory frameworks, the characteristics of the returned water in different regions and cost effectiveness. This landscape is constantly evolving as market players explore the most effective water management options available to them.

COMMUNITY ISSUES The concept and application of ‘license to operate’ is under scrutiny as nations emphasise the importance of environment and health and safety issues. Non-governmental organisations, as well as socially conscious stakeholders and governments, are advocating stronger social rights for local communities. As a result, mining projects have grown in complexity. Permits are taking longer to obtain, resulting in project delays, increasing costs, and escalating frustrations among local communities and investors. Aspects of rehabilitation and mine closure, as well as the cost of contributing to the economic development of districts in which mines operate, are important long-term issues. To build a reputation as a trusted developer, mining companies will need to provide more than capital. High-performance organisations grasp the full range of issues: risk and compliance management, efficient use of energy and water, as well as innovation in areas, such as green supply chains, and transferring skills to local workers. There is a need to maintain continuity in relationships to gain permission and access to develop local resources. The industry leaders will also need to manage the rising expectations of governments that rely on taxes obtained from mining production and exports. HUMAN CAPITAL Concerns about the challenges related to an aging workforce are not confined to Chile. The worldwide demand for a specialised workforce is increasing and graduate enrolment in mining engineering has been dwindling. Additionally, high rates of human capital turnover erode consistency and quality, and

undermine the execution of long-term programs to improve performance. According to a recent study by Accenture, lack of manpower is affecting the ability of mining companies to execute capital projects. Barrick South America, a leading gold mining company, recently announced the cost of its Pascua-Lama project jumped from US$3.6 billion to US$5 billion due to labour costs. Replenishing the workforce with qualified talent will remain an immense challenge. Thus, implementing long-term strategies to generate a trained and skilled workforce is a key objective for Chilean mining companies. Talent management, workforce planning and aligning human resources to corporate priorities are essential for maintaining competitive advantage in a market with a contracting labour pool. Defining specific skills for critical functions related to the main value chain and stimulating the development of more robust training programs are ways in which this challenge can be overcome. Additionally, becoming an employer of choice is an important step towards addressing the human capital problem. This can be achieved by making efforts to retain workers, improving employees work conditions, leading the way in terms of health and safety and convincing people they can have a promising future in the mining industry. Accenture recommends certain strategies to foster the development of quality human capital in the Chilean mining industry, these being: to differentiate the employee value proposition, improve retention through engagement policies, such as a more challenging and interesting working environment, share participation, flexibility and opportunities to travel, and encouraging collaboration and establishing improved processes to develop and diversify talent.

RICARDO CERDÁN

Country Managing Director

+56 2 2337 7100

ricardo.m.cerdan@accenture.com

ACCENTURE Rosario Norte 532, Piso 6, Las Condes, Santiago, Chile +56 2 2337 7100 www.accenture.com/cl-es

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THOMAS KELLER LIPPOLD CODELCO

Chief Executive Officer

INTERNATIONAL INVESTOR: Please explain briefly the company’s structure and its relationship with the state. THOMAS KELLER LIPPOLD: Codelco was formed in the 1970s after the nationalisation process of the mining companies. It is the largest copper producer in the world and owns and operates eight divisions: Radomiro Tomic, Chuquicamata, Ministro Hales, Gabriela Mistral, Salvador, Andina, El Teniente and Ventanas. In addition, we have a project development unit that is headquartered in Santiago. Codelco is 100 per cent owned by the State of Chile and is the country’s largest single corporation in terms of its overall contribution to the fiscal income. Although mining is not a labour intensive activity, we are an important employer with 18,000 direct employees, 35,000 contractors and 25,000 employees that work at present on our large projects. Could you describe the state of the copper market today? On the demand side, copper has not been exempt from the macroeconomic developments worldwide, although it has suffered less than other commodities. Considering the extent of the global economic retrenchment, copper demand has behaved rather well. In the last few years, we have seen a decline in demand in Europe, rather stagnant demand in the U.S., but very healthy growth in the Far East, especially from China. We take encouragement from the development in China; this year, China’s refined copper consumption continued to grow at higher rates than expected. Also, demand is recovering in the US and it appears that we have reached the bottom in Europe. At the same time, the supply side continues to struggle to meet the increase in demand and there are challenges that copper producers must overcome to keep pace. Many challenges are related to increased complexities in securing environmental and regulatory ap-

CAREER DEFINING MOMENT

When I received a call from Diego Hernández after he became the CEO of Codelco in 2010, which not only provided me with a unique opportunity to work for Chile’s largest company, but also to return to the mining industry after an absence of nearly four years. LESSON IN BUSINESS

Underperforming or bad employees are the exception; it is normally the bosses that are not providing employees with the right environment to perform. Every human being wants to have fun working and make a difference. People are intrinsically motivated. So, don’t spend too much time trying to motivate people, but concentrate on avoiding behaviours that demotivate them. provals. Moreover, as mines are being located in more remote zones, infrastructure requirements are increased, which, in turn, increases the cost of new projects. Additionally, there is the challenge of developing mines with much lower ore grades than in the past. I therefore believe that, notwithstanding the volatility witnessed recently, the combination of demand and supply factors will continue to put pressure on copper prices. How important are structural projects to your future business? In the next few years, some of our largest existing operations are reaching the end of their economic lifetimes. The ore-bodies themselves, however, still hold vast and very attractive reserves that we will develop through an extensive investment program. We have five structural mining projects in different stages of development. Three are under construction and two have just completed their feasibility studies and are going through the environmental approval process. Thus, these initiatives will shape Codelco´s future over the coming decades. This is perhaps best illustrated by the project currently underway

at Chuquicamata, with its transition from an open pit mine operation to underground mining. It used to be the largest copper mine in the world; today, mainly due to a decrease in ore grade, it only produces half the amount of copper per year it produced a few decades ago. Soon, it will no longer be profitable to operate an open pit method because of the reduction in ore grade, the increase in the stripping ratio, and the impact of the everincreasing pit size on transportation costs. However, Chuquicamata’s ore body is very rich and has reserves for over 50 years. It cannot be further developed using the open pit method, so we have to go underground. Similarly at El Teniente, the largest underground copper mine in the world, starting in 2017, the available ore reserves at the current level of exploitation will start to deplete. In order to avoid a drop in production and project operations, we are developing a new mine level 300 metres below the existing level to take advantage of this very attractive ore body. This is a US$3.5 billion project currently under construction and involves developing completely new infrastructure. At present, we are commissioning the US$3 billion greenfield Ministro Hales project in the north of Chile and expect to have the first commercial production by the beginning of 2014. What is the most important challenge the industry must address? Perhaps the single most important challenge relates to the increased complexity in dealing with environmental issues and community relationships. To adequately respond to a more demanding society and empowered local communities requires a more professional and proactive approach. At Codelco, we implemented the Proyecto Estructual de Medio Ambiente y Comunidades (PEMAC), a high-level initiative, the first objective of which is to address the 92 vulnerabilities in environmental and community related matters that we identified in the initial phase of this project by 2014. This recognises that our ability to develop new projects depends on designing our projects responsibly, as well as managing our existing operations to high standards. Another important challenge relates to the lower than historical ore grades that will be mined in the future, and the resultant higher operating costs. In the 1990s and early 2000s, we used to ore grades above one per cent. That is a very rare occurrence now. Thus, to deliver adequate returns on our investments, we have to develop projects that incorporate much higher standards in terms of operational efficiency. We are working on improving the productivity of our staff and will take full advantage of automation to help achieve this objective.

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interview mining

DIEGO HERNÁNDEZ ANTOFAGASTA MINERALS Chief Executive Officer

INTERNATIONAL INVESTOR: Could you tell us about Antofagasta Minerals’ performance and the current state of the mining industry? DIEGO HERNÁNDEZ: In August 2013, we released our operations report for the first half of the year. Currently, we are moving forward in line with our budget and the operational forecasts that were set out at the beginning of 2013. As long as there are no surprises, we should achieve our copper production target of 700,000 tons as well as our by-product production target. Our business has been slightly affected as a result of a lower copper price and the lower price of by-products, such as molybdenum or gold, but, overall, we are quite happy. In January 2013, we announced that our costs had increased. This has mainly been due to the fact that Los Pelambres, our main mine, is now exposed to a marginal cost power price structure. That has increased the cost per pound of copper by around US$0.15 at Pelambres and by US$0.10 on average across Antofagasta Minerals’ total operations.

Our labour costs are higher and, consequently, we need to invest a great deal of effort into the way we manage our mines and ensure we improve our working practices In terms of the market, the copper price has remained at the expected level. We do not expect big changes in terms of supply and demand or the price of copper. There may be a small oversupply by the end of 2013 and we also expect a small oversupply in 2014 and in 2015. If there is an oversupply in 2014, it will be due to new mines coming into operation; however, there is always some uncertainty as

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CAREER DEFINING MOMENT

I have had a long career, but early on when I had only one year of experience I received an offer to be in charge of a medium-sized mine. I took the challenge and I think that was what really triggered it all. LESSON IN BUSINESS

I think that you are always learning. to whether all new projects will meet their commissioning plans. Moreover, China has used a large proportion of its inventory and we expect them to replenish that during the first half of next year. The main issue for the copper mining industry in Chile is that we have certainly lost competitiveness. This is due many factors: lower ore grades, which, although they are not exclusive to Chile, mean we need to do more in order to produce the same amount; the high cost of power, which we hope will not be a long-term issue, but depends on how certain power projects evolve; and the increased cost of labour in the past years without a concomitant improvement in productivity. Overall, our labour costs are higher and, consequently, we need to invest a great deal of effort into the way we manage our mines and ensure we improve our working practices. Furthermore, mining operations also have to contend with permitting issues and lawsuits from NGOs, which adds a degree of unpredictability to some projects. We are working on improving the relationships with communities and authorities. We have seen a lot of delays on projects, which is not necessarily bad because that helps to create a tighter supply/demand equation in the medium term. What can you tell us about the program for developing world-class mining suppliers? The Programa Proveedores de Clase Mundial en la Minería is an initiative that’s progressing

well, with BHP Billiton and Codelco still acting as the main drivers of the program. For any country that produces commodities and raw materials there is always the question whether it is a blessing or a curse. Historically, it was thought that we should have a more integrated value chain, adding as much value to the product as possible. Over the last 20 years, this did not make sense from an economic point of view because the smelting and refining industry has built an overcapacity and margins have been on the mining side, not downstream. So, instead of trying to add value on the copper value chain, you can add value on the services and equipment the industry needs, what we call the mining cluster. The idea of the initiative was to actively encourage and support the development these kinds of companies in Chile, so they become world class and can export their services and products worldwide. Chile has a huge mining output and operation, so there is a huge opportunity for these companies of which we are not taking advantage. With increased globalisation you have countries and regions that have specialised in terms of what they produce. Many countries in the southern hemisphere have moved towards natural resources. In the northern hemisphere, natural resource production has reduced, particularly in Europe. That means traditional companies working for the mining industry have disappeared from developed countries, so there is room to replace them. It is a win-win situation because this reality will help the development of Chile and it will help the mining industry, due to a more competitive mining services industry. The idea was to try to take this opportunity and inspire the development of this area by looking at the success of the mining cluster in Australia, which is probably its second or third largest market in terms of export value after iron ore and coking coal. I think the market is worth around US$6 billion per year. In Chile, it is very small, around US$150 million per year. How does this initiative support and develop Chile’s aspiring service companies? We aim to give them the opportunity to succeed. Previously, those companies were competing on equal conditions with established international companies. If they were lucky, and good enough, they could win a contract; however, what they need is continuity and the space to develop their product. It is vitally important that these companies have a very well-defined contract for the right amount of time, so they can go through the whole cycle and create a marketable product. Moreover, we realised that, rather than managing them from a procurement point of view, we should

mining interview

manage from a social responsibility point of view. That is the difference. The program supplies support to improve management practices and provides consultants that help the companies improve their organisation. We have many successful cases and once it works, those examples are appealing to other companies. We connected this process with applied innovation. A number of the industry’s problems were selected, such as improving water recovery, and this was then taken to market to find a company interested in finding the solution. The company was then given a suitable contract that provided the space within which to work. How energy prices are affecting your business strategy? We are not in the power business and we do not particularly want to invest in power. However, because of its cost and lack of availability, we certainly need to foster the execution of new energy projects. One way to do this is to participate as shareholders. In general, we do not run the projects directly, but we are minority partners and participate with equity. Furthermore, we put in place a Power Purchase Agreement (PPA), which allows us to have access to power at a reasonable cost and that helps the project find financing.

The industry has been doing things the same way for too long; this needs to change In general terms, what is still unclear, however, is the energy matrix the country actually wants. There is a lot of enthusiasm for renewable energies and, of course, this is a good compliment to other technologies, but it will not solve the problem. There is not a national agreement between all the stakeholders on what the country should do. I think we need to speed up that discussion. What do you think about the potential of shale gas? Gas could be one of the components of the matrix, whether it will be shale gas or not, we will see. There is a problem as it is not yet clear, in terms of the international market, whether the LNG price will be directly related to the price of oil or if it will be related to the U.S. domestic market price. If it continues to be related to oil price, then it is less attractive as a long-term solution. Moreover, in order for the price to decouple from the oil price you need a long-term contract for which you need large scale purchases.

In Chile, we do not have the required scale. It has been suggested that if you put all the consumers together, eventually you could reach the scale, but I do not see that happening. The energy issue aside, what is the next biggest challenge for mining industry? As far as I am concerned, the industry has been doing things the same way for too long; this needs to change. It is a challenge we need to overcome in both projects and operations, but it is particularly clear in projects. Our approach to project studies and execution has been the same since the early 1990s. First you do the exploration, then some conceptual studies. If something interesting is found, an engineering contractor is hired, usually an engineering, procurement and construction management (EPCM) contractor, to do the feasibility studies. When you are ready to take the investment decision, based on these feasibility studies, you also hire an engineering company to be the EPCM contractor during execution. Then you go ahead with the project. This model was quite successful until 2005 and we saw a lot of big projects come in on time and within budget. Since then, project costs have tripled in nominal terms. This has been due to the high demand for equipment and services brought about by a long period of high commodity prices. Due to the high commodity prices, the number of projects grew and operation costs rise, production was prioritised because if you produce more, you have better financial results. If, as a result of this high demand, your costs increase, it is not so much of an issue because it is better to produce more during these periods. As a consequence of this, the industry has reached a stage where it is no longer financially disciplined. Investors realised this fairly quickly and, at the same time, the cycle of high prices is diminishing. The loss in financial discipline led to some bad decisions being made, regarding high cost acquisitions, for example, and this, combined with the fall in commodity prices, caused the mood of the industry to change completely. Companies no longer want to invest because they have financial restrictions and investors do not want investment by mining companies to continue at the same pace. Now, we need to come back and look at our margins, protect our margins and stop transferring margins to the other stakeholders. That requires a new approach, which, for us, is a big challenge. We need to review our working practices and review our decision-making systems to ensure that we get better results. Better in terms of cost, both in projects and

Chile produces one third of the world’s copper, it will continue to produce a substantial amount and continue to be the number one copper producer

cash costs, so we can protect our margins and go through these periods of lower commodity prices productively and efficiently. The process we have been using in projects is not valid anymore, it is not giving the results that we need. The change required is like a cultural change within industry and, as always, cultural changes are difficult. Has this process started already? The process started very early in 2012, when investors began questioning investment decisions. As a result of that, you saw changes in the strategies of the major mining companies. Moreover, CEOs began to be replaced by a new generation of CEOs with a different remit. Interestingly, the new CEOs are all from the industry, the expectation from investors is that we improve our working practices and the people that are now in charge know the industry and, more than likely, have previous experience of low price cycles. Finally, why Chile as an investment destination? In terms of copper mining, Chile produces one third of the world’s copper, it will continue to produce a substantial amount and continue to be the number one copper producer. If you want to invest in copper mining, Chile is the place to be.

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interview mining

JUAN EDUARDO ERRÁZURIZ SIGDO KOPPERS

Executive Chairman

INTERNATIONAL INVESTOR: For readers who are unfamiliar with Sigdo Koppers, can you please provide us with a brief overview of the organisation? JUAN EDUARDO ERRÁZURIZ: Sigdo Koppers S.A. has defined as its strategic aim to be an integral service and product supplier for the mining industry. Therefore, the company is strongly committed to the mining area of development and innovation. The company, through its different subsidiaries, actively takes part in mining industry, contributing to industry activities with large project construction, mineral removal, processing, freight, and even product exportation to the main markets. Through its subsidiaries, the group is present in all of the many value chain stages that are part of the mining productive circle. This allows our company to add value to Chilean mining, helping to ensuring that it keeps its place on the world stage, with a large offering that guarantees the highest security and latest technology standards. Given the volume and magnitude of mining projects, it is evident that mining activites require suppliers that efficently assist in the processes and meet client needs in such way that they can contribute with added value, efficiency and innovation. For our company, it is crucial to become partners with our clients in productive development. This is the main concern of every Sidgo Koppers subsidiary. Through our subsidiary network, we have established a value chain that allows us to ensure we can deliver a service at a global standard. The challenge is to consolidate our position as a global mining and industry services supplier, according to our business model. That is what we have defined as the company’s core business: to be a leader company in the delivery of mining and industry services, which is a goal on which each of our subsidiaries, in each of their different spheres, is focused.

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CAREER DEFINING MOMENT

When I purchased Sigdo Koppers back in 1974, along with 11 other partners: Ramón Aboitiz, Norman Hansen, Mario Santander, Naoshi Matsumoto, Eduardo Frei, Gonzalo Rojas, Jorge Elgueta, Héctor Campos, Julio Diestre, Gustavo and Horacio Pavez. That was the most defining moment in my professional and business career. LESSON IN BUSINESS

In all my years as a business man, I believe that the most important definition is to understand that, as decisive as results may be, it is even more relevant to consider the connection with your collaborators and your contribution to community. We will be successful as long as we consider all these factors. I believe entrepreneurs and companies must be proactive in social contribution. With pressure on the copper price due to lower demand and with the market entering a brown field development phase, what steps are you taking to adapt to these changing conditions? During the 2013−2015 period, Sigdo Koppers has considered investing around US$500 million in the organic development of its companies. This projection is still maintained, but we are obviously permanently monitoring what happens with international markets and, with regard to some opportunities, investments could phase out for a few months, but the investment focus is still the same. How can a service company like Sigdo Koppers make a difference in the development of sustainable mining communities? By definition, entrepreneurs and companies must demonstrate, promote and lead in the area of ethical behaviour with regard to society and be proactive in their social contribution. Moreover, as well as the contribution to economic growth, entrepreneurs have

a big responsibility in overcoming poverty and inequality and must assist in the development of communities, while still accomplishing their formal activities. It is also the duty of corporations to create the conditions within which communities can appreciate each different projects fulfilment. There is a lot that companies can do to reach this aim. They have to be in tune in with people’s feelings, to understand their fears and provide adequate information. Only together, by building trust in each other, can we find the best solutions for the country’s issues. In addition, it very relevant to generate and develop services and products that use natural resources in an efficient manner, that way you can ensure adequate community and business development. This is one of our main challenges at Sigdo Koppers and we have already addressed this challenge in our companies. Enaex, one of our subsidiaries that specialises in explosives and blasting agents, was recently recognised for its innovations in this area. Also, it is one of our main concerns to train our workers to ensure their development in accordance with productive needs. For that purpose, Sigdo Koppers built a Technology Educational Centre in Talcahuano, which offers high quality technical education to over 1,200 young people. Certainly, we hold that every company should identify in which field it can make a social contribution, where its knowledge and experience adds value. Can you elaborate further on the importance of Chile’s trade agreements, in terms of Sigdo Koppers businesses, and tell us about the company’s global strategy outside of Chile? Alliances, such as the Pacific Alliance, and commercial treaties with other countries, such as the one recently signed with Thailand, are, without doubt, very important. From a global point of view, it is good to be part of these groups because public policies are discussed in those meetings and different points of view are shared about the best way to improve in all matters. Contributions from a number of distinct parties and different points of view are always productive. Additionally, for a global company such as Sigdo Koppers, commercial treaties are a very important tool to compete and gain access to new markets. We are currently focusing our growth in Chile, Peru, Colombia and Brazil, countries in which we already operate. However, we are careful that we keep a trained eye out for any opportunities that other countries may offer, given that our companies also operate in other markets such as Europe, the Asia-Pacific countries and South Africa. We are also confident that, in the medium term, Argentina should restart its growth route.

mining business intelligence

WATER RIGHTS IN MINING PROJECTS Mining extraction methods usually require flowing water in large quantities. Thus, access to water is of major concern to mining projects and certain legislative issues must be considered accordingly.

ANRÍQUEZ NOVOA ABOGADOS http://www.anriqueznovoa.cl/wp/

LAURA NOVOA Lead Partner

+56 2 2228 2013

DEVELOPMENT OF WATER LEGISLATION In 1855, Chile’s civil code declared public domain on the adjacent sea, rivers, and all waters running in natural beds and lakes of major importance, adding that the use and enjoyment for navigation or irrigation should be subject to special regulations. Several changes to the civil system were made until, in 1955, the first Chilean Water Code (Código de Aguas) was enacted as the first systematic set of rules applicable to water fluids. Under this code the authority granted to a petitioner an administrative permit called a merced to make use of certain amount of water in a predefined site, for certain specific purposes selected from a list of prioritised options: drinkable water, domestic purposes, sewage, railways, power, factories and industries. Mining was not mentioned and therefore was included in ‘others’. The degree of legal security of the merced was low as the intention at that time was not to create favorable conditions for investment. Water required by large copper mining companies was obtained from mercedes granted by the President of the Republic. In 1979, prior to Constitution of 1980, deep changes were introduced in water rights, now defined as a right to use water (derecho de aprovechamiento). The intention was to introduce them into the market economy. Soon thereafter, the Constitution of 1980 declared that holders of water rights will have a property right on them and not just an administrative permit. It gave holders guarantees and protection granted by law to the private property. A new water code was enacted in 1981 based on the liberal economic principles

established during the military regime; the water right evolved from being an administrative permit to become a constitutionally protected property right. CURRENT LEGISLATION The code deals only with the right to use and consume fresh water; classification of rights to use water are called Derechos de Aprovechamiento. Within the code there are different types of water rights according to the origin, consumption, periodicity, and use of the waters. Therefore, it is possible to obtain rights to use surface or underground waters; for the water to be consumed or returned after use; for permanent use or only when there is suffcient water flow; and for daily or intermittent use. KEY CHARACTERISTICS OF DERECHOS DE APROVECHAMIENTO ■■ It is recognised as a right on waters not on the land. ■■ It is a right in rem that can be invoked against any third party. ■■ It is subject to the same registration system as is applicable to real estate. ■■ It is not linked to any specific purpose. ■■ It only applies to fluid water and it is measured in volume per a time unit. ■■ It can be transferred between parties or inherited in case of death of the holder. ■■ It does not have a specific duration. ■■ It cannot be revoked by the authority. ■■ The holder cannot be compelled to abandon his right by the authority without a proper expropriation and compensation. ■■ It has no cost for the holder, but the lack of use is subject to an annual patent payment. Mining companies are allowed to use any water resources that appear in their exploration activities for mining-related purposes. The right to use the water found while carrying out mining operations belongs to the mine owner by law, as long as ownership is maintained and to the extent needed for its exploitation. Mining companies are able

to exercise this water right without buying rights from third parties or requesting specific authorisation of the Chilean water authority. The Supreme Court has recently confirmed this position. IMPORTANT ISSUES FOR INVESTORS The incorporation of water rights into the free market has been and is currently criticised in several circles and by many politicians and individuals who think that putting water rights under the protection of a private property right neccesarily denies its condition as a national asset for public use. The current system has permitted large enterprises to acquire water rights in huge quantities that they do not use, in the context of water scarcity. This situation was addressed in 2009 by imposing a patent for holders who do not use water rights. This was deemed by many to be an unsatisfactory solution. Throughout the country, but especially in the north, the aquifers are over exploited and new, interested parties cannot request more water rights. Also, due to several drought seasons the authority established zones of water shortage and limitations on the existing rights. The changes introduced in the Chilean water legislation prove that this matter is highly influenced by economic policies, which can result in dramatic changes in policy. Environmental considerations during the environmental impact study process may affect the use of water rights in a mining project that is deemed to affect the preservation of an aquifer or produce pollution. In these cases, the environmental authority has restricted the exercise of the right to use fresh waters and promotes the use of sea water instead. The interests of indigenous communities that live in valleys affected by a project must also be considered. The International Labour Organization Convention No. 169 orders the protection of indigenous communities’ rights relating to natural resources.

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interview mining

SEBASTIÁN RÍOS PUCOBRE

Chief Executive Officer

INTERNATIONAL INVESTOR: What are Pucobre’s main operations and how do you differeniate yourself from the competition? SEBASTIÁN RÍOS: Pucobre is the largest midsize mining company in Chile. We have over 20 years of experience producing copper concentrate and cathodes in our Atacama operations, where we produce close to 40,000 tons of copper and 15,000 ounces of gold per year. In addition to this, we are currently completing a feasibility study for our El Espino project, which could potentially double our production of copper. Pucobre is a publicly traded company listed on the Santiago Stock Exchange and owned by a group of successful Chilean businessmen. In all of our operations we put a strong emphasis on safety and operational excellence. During the last 3 years, Pucobre has had safety figures comparable with the best mining companies in Chile and the industry worldwide. We have a developed a safety model that has allowed us to mobilise the entire organisation towards establishing a real safety culture. We are also in the process of implementing an operational excellence model, which will help us improve our productivity and efficiency, based on the TPM continuous improvement methodology developed in Japan. Another differentiating factor is our ability to quickly react to changes in the mining environment. We have a lean organisation with quick decision-making ability and an experienced management team with a proven track record. What do you think about the trend towards brownfield development projects? A mining company has to grow in order to survive, this includes both brownfield and greenfield projects. Clearly, with the capital cost escalations and the permitting complexities that we have seen in recent years, the industry has shifted towards the development of projects with less risk, which tend to be brownfield.

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CAREER DEFINING MOMENT

After 13 years working for a multi-national mining company, I was offered the opportunity to work for Pucobre, a local mining company looking to professionalise its organisation and build a long-term growth plan. I found highly-engaged employees and committed shareholders, which resulted in our goals being successfully achieved. The key to a company’s success is the people that manage the day-to-day operations. LESSON IN BUSINESS

Always maintain a long-term view, despite the shortterm volatility of the markets. I learned this lesson after the 2008—2009 financial crisis. For Pucobre, instead of a problem, the crisis generated an interesting opportunity to acquire a majority stake in the El Espino project, which could become as large as our current operation in Atacama. Over its 20-year life, Pucobre has had a history of strong profitable growth. In our Atacama operations we initially started with one mine that sold ore to a third party and we grew throughout the years transforming that mining operation into a complete mining organisation with several mines and both a flotation and SX-EW plant. We are concentrated on growing our company through the development of profitable and robust projects whether they are brownfield, like our Atacama project, or greenfield, like the El Espino project. Our focus has been on developing projects that are profitable through copper and raw material prices cycles. We have positive long-term view on the copper market and our shareholders support the company’s investment and growth plans. What are the main challenges you will face in terms of project development and how will you deal with these challenges? The development of mining projects has become increasingly complex in the cur-

rent environment where escalating capital costs, sourcing strategic supplies, access to skilled labor and fulfilling community expectations, amongst other things, have become major challenges. In terms of our El Espino project, we are currently in the environmental approval process and finishing a feasibility study. Here, the main challenges are obtaining an adequate power supply, finding the qualified labor needed to operate the project, which, ideally, will come from the local community, and executing the construction and start-up phase as planned. These are common challenges for all companies developing projects in Chile, not just mining projects. Having said that, in the current environment, given the reduction of exploration and development activities, we have seen numerous opportunities arise. We have been able to access better engineering talent at more attractive prices than in previous years. Additionally, we are also seeing lead times decrease and significant opportunities related to the sourcing of key components and equipment. With regard to our financing needs for the El Espino project, we have several options both on a project level and at a company level. These include project finance, by-product streaming, retained earnings from our current operations, debt at a Pucobre level or a potential capital increase from our current shareholders. We are working to make sure that all of these options are available to us. For example, the feasibility study has been planned to meet bankability requirements so that, if needed, we can access project finance funding. We have pursued a conservative financial strategy maintaining a strong balance sheet, so that we are well positioned to develop growth opportunities. What are your views on the current environment in mining exploration and the junior community? The mining exploration and junior market has been hit particularly hard since the beginning of 2012. This has mainly been due to the limited availability of funds. Nevertheless, this situation opens up the interesting possibility of exploring associations and the joint development of projects with junior companies. At the same time, the decrease in exploration activities has led to significant reductions in exploration and drilling costs, which, consequently, reduces the costs in our own exploration programs. In recent years, the Chilean government has encouraged explorations and drilling activities by providing funds to mining companies. With time, these efforts should bring new prospects and opportunities to the market.

miningâ&#x20AC;&#x192; interview

PABLO ACHURRA FONTAINE

ARAMARK SOUTH AMERICA President

INTERNATIONAL INVESTOR: How is Aramark positioned in South America? PABLO ACHURRA FONTAINE: We are a global services company with 250,000 employees worldwide and sales of over US$13 billion. We mainly provide facility services such as catering, maintenance and hospitality. Within South America, we are based in Chile and have a presence in Peru, Colombia and Argentina, but we are also providing food services for the FIFA World Cup in Brazil, as we have experience catering to large sporting events. Our focus in the southern cone region is related to the mining sector. It is the fastest developing sector and it is where we have our core competencies. With more than 11,000 people working specifically in mining, we are one of the largest employers within the sector. We consider ourselves part of the mining value chain because we take care of the mining workers during the whole period they are on site. Could you tell us about the services you provide to the mining sector? Most of the services we provide to our clients are provided through people. Our employees provide a comprehensive catering service in the camps and in the mines themselves. For example, in one of the largest underground mines in the world we have 13 underground canteens, so we are not only providing food, but we take care of the logistics and, importantly, we create the right kind of environment, even under very harsh circumstances. We take care of camp facilities, from hospitality to hygiene to simple maintenance, like changing light bulbs. We also do water treatment plants, such as sewage treatment plants; whatever happens in the camp, we take care of it. Safety for the mining community is the most important thing; it is the key benchmark. So, whatever we do, we ensure we have the highest safety standards; for us it is a core

CAREER DEFINING MOMENT

Early in my career, I was product manager for personal care products in a large multinational. I have a engineering background and, after a conversation with the HR director about my real interests, he sent me to work in the salmon business in the South. I had told him I liked food. Ever since, I have been involved and had a passion for food; it has been a common theme throughout my career. LESSON IN BUSINESS

Be balanced. The hardest thing for a manager is to strike a balance between the various responsibilities: environmental, ethical, profit-making, sustainability, the list goes on. value, we are the best business people in the people business. Our employees are our most important asset and, therefore, we make taking care of them a priority. How is Aramark bridging the gap between mining companies and local communities? We think that, through our business practices and values, we are bridging the gap between the community and the mining company. Many jobs in a mine are quite technical or specialised and, thus, for the local community, it can be quite difficult to find a job, as you need to have a licence to work in the mine. We work with the communities to provide the raft of support jobs that are necessary. Accordingly, we begin training members of the community, one or two months before they start, about working practices, safety standards, hygiene standards, then they can work with us to ensure the mine operates effectively. Our policy with regard to communities is based on hiring local people, buying local produce and activating the local culture. Moreover, it is not just a question of purchasing local products; it is a question of working together and integrating with the community. Our model is that we intervene in

communities: we talk with them, we advise them, and we make contact with different organisations that ensure the right kinds of working standards are used. These measures mean we can purchase the products that the communities produce and ensure that these practices will continue in the future. This is another area where we add value. We have been working with communities for a long time, we know how to create these lasting bonds by fostering a transparent working environment. This makes it easier for us speak with communities about different issues. We are very serious about representation on the part of the community because we need their commitment. There has been some social unrest related to the Chilean mining sector; one small spark can ignite big problems. Therefore, we have tried to raise awareness in communities about the need for a mutually beneficial agreement. So, we create bridges over which the two parties can communicate. We have achieved this in the past and, in some cases, we have been asked to take the lead in these matters. We are a people company in everything we do, so people is what we specialise in. There is a fundamental need for collaboration regarding community issues, especially in mining communities. How important is the issue of productivity in terms of the services you provide? There is a lot of pressure from our clients to improve productivity. The reason being, every person working or living in a mining environment represents a significant operational cost. Thus, the mining companies are analysing every process so they can measure efficiency. In the past, the ratio of mine to service workers has been one to three, now it is one to five and some miners want a greater ratio. It depends on how you can build up service processes. Many are very labour intensive and, as a result, the trend is towards automation. To increase productivity you must understand the service well and, also, the KPIs that govern the service, so the stakeholders can see you are working efficiently. Furthermore, productivity in a mining camp relies on the services interacting with each other to create a common theme, that being, quality of life. This is how we create value for the client, not only from the cost point of view, but also from the related programs and services we provide that create the right environment for productivity to flourish. From the quality of the food to nutritional advice to lifestyle and wellbeing management, if you do not provide the services in a holistic manner and understand the balance between service and cost, it can have a dramatic effect on the productivity of a mining project.

CHILE 147

interview mining

copper mining is still going strong in Chile. For example, in the business area of loading and hauling, we see new products being introduced with more advanced and automated technology.

MARK BAKER SANDVIK CHILE Country Manager

INTERNATIONAL INVESTOR: Could you give us a bit of background on the company and the different products and services Sandvik provides? MARK BAKER: In 2012, Sandvik celebrated its 150th anniversary, demonstrating our company as one of long establishment in the industry. Sandvik is made up of five business areas: Construction, Machining Solutions, Materials Technology, Venture and Mining and has a presence in over 130 countries around the world. Sandvik Mining, one of the five business areas, also consists of multiple product areas and provides services related to applications and processes in the mining industry value chain. These include underground and surface mining drilling; underground loading and hauling; crushing and screening; materials handling; customer services; and rock tools. We have also recently launched a new product area, by the name of coal, and are currently working on developing an extensive corresponding product and service offering.

The strategy is to have a product offering that is aligned with the customer value chain, from the exploration stage up through communition The strategy is to have a product offering that is aligned with the customer value chain, from the exploration stage up through communition. Each of the current product areas have been created to fit the needs our customers. As a result, our true value lies in our vast knowledge of mining processes and how well we have tailored our equipment and our services to meet those needs, which effectively reduces customers’ costs. We are also world leaders in terms of equipment and product development. Sandvik

148 INTERNATIONAL INVESTOR

CAREER DEFINING MOMENT

It has only been one year, but I think my decision to walk away from a global product management position to take on a sales and country management position here in Chile will be my career defining moment. My career focus has always been on product development and product management. The opportunity to develop the skills associated with the commercial side of the business was very intriguing and has given me a different perspective on the customer’s needs. LESSON IN BUSINESS

Never lose focus on your customers. It is vital to stay engaged with them and insure a profound knowledge of their needs in order to meet their expectations. By understanding their application and how your products or services can optimise safety and productivity, you will become a true partner in their operation. has more than 8,000 patents and 2,700 employees working in R&D. We are an engineering company that stands out for its aggressive development of new products and engineering solutions regardless of which business areas we are talking about. How do you cope with the focus on productivity within the industry? The mining industry is currently in a slowdown; however, this situation lends itself to more opportunities for suppliers, such as Sandvik. The reason being, our customers are dedicating more resources and efforts towards reducing costs and improving their profitability levels. The demand for different minerals in commodities is still quite strong, but what we are seeing now is a reduction in investment and, particularly, capital expenditure. This is based on shareholders and what they want as value from their returns, but for us, the development of products used in

What about underground mining developments for mining companies themselves, are we going to see a trend? No, not necessarily because each mining style has its challenges, whether it is surface or underground. In Chile, there are some interesting cases of underground mining developments. For example, Chuquicamata is a very large, open pit mine that has been in operation for over 70 years. It is now going underground because they have exhausted all their resources on the surface. The numbers indicate that globally, perhaps 60 to 70 per cent of the investments in mining still go to surface mining. Obviously, that could change depending on the returns, the economics and the evaluations. At the moment, the majority of investments on a global level are going towards surface mining operations; here in Chile the tendency is more evenly split between underground and surface mining and there are many large projects currently underway. These projects will insure that the country remains as the largest copper producer in the world for the next decade. Chile remains as a very attractive investment location for international investors. With regards to safety measures, has the approach of the mining industry to safety changed? Today, it is not so much about processes and procedures anymore, which is a first phase of improving safety standards and which are well established in the industry. Now, it is about continuously evolving the culture; ensuring people become more conscientious about safety in general and changing their perspective from reactive to proactive. That is what we are driving towards, a culture shift in the industry. The global mining industry, including in Chile, is focusing on eliminating fatalities. This is rather difficult because human error is still human error and miners can be exposed to high risk situations with extremely dangerous consequences; however, it vital to achieve the goal of zero fatalities. For Sandvik, safety is our highest priority. It takes precedence over all other aspects of our business. Our goal is to achieve ‘Zero Harm’ for our employees and to the environment. If we consider the diversity of cultures in our global organisation, this is a very ambitious objective, but one which we are continuously advancing towards.

mining interview

Local manufacturing, assembly, and maintenance requires developing a local supply chain that is reliable and that can meet the quality expectations of our customers

On a different note, what about financing? Through Sandvik Credit, we work with our customers to evaluate options that best meet their financing needs. It is a tool that we use to help develop with certain clientele who have that requirement and we are certainly willing to work with anybody when it comes to financing. We offer competitive rates and our mining expertise is very applicable, as is our familiarity with the product offering and the development of products. We certainly have the capability of being involved in the project phases: greenfield, pre-feasibility, feasibility, and execution. Increasingly, many of our customers are en-

gineering companies and, as such, we work with them to develop solutions relating to the best mining methods, the best equipment sizing for their productivity needs and mine layout and design. It is an area to which we dedicate significant resources and time because, if the design achieves its goal first, it facilitates better returns, better profitability and better productivity. Do you work with some local suppliers? We are somewhat unique for a mining supply company located in Chile in that we manufacture some products in country. Even though we import the majority of our equipment, we have an assembly centre on site for exploration-drilling machines, for the domestic and export market, and we manufacture rock tools in Santiago. We also have workshops in Santiago and Antofagasta for equipment maintenance and rebuilds. This is an important asset, especially in a down market, because, instead of acquiring new equipment, customers are interested in rebuilding and extending the life cycle of previous purchases. Local manufacturing, assembly, and maintenance requires developing a local supply chain that is reliable and that can meet the

quality expectations of our customers. Our quality standards are global, and regardless of where a factory sits, they remain at the highest level. With a lack of skilled workers in the industry, does Sandvik have an internal educational system? There is the Sandvik International Mining School (SIMS), where you have the opportunity to earn what is equivalent to a Bachelor’s in Mining Engineering, established upon the foundation of four of the world’s most renowned mining schools. It is a programme during which students attend courses in different universities around the world. Locally, we have a two-year apprenticeship programme where students develop technical expertise associated with our equipment and service offering. This year, the class consists of four women and four men. We are proud of being able to integrate women into our apprenticeship programme and into mining, not just for administrative roles, but also technical roles.

How can you increase botH safety and your production rate? tHis way! Join the movement towards The Future of Mining. It´s This Way: mining.sandvik.com AV. EDUARDO FREI MONTALVA 9990, QUILICURA, SANTIAGO, CHILE - TEL:56 2 26760200

Sin título-1 1

15-10-2013 14:50:51 CHILE 149

business intelligence mining

LEADING THE WAY IN MINI HYDRO Hidromaule have established a number of run-of-river power plants that provide clean, stable, safe and sustainable energy to the national grid

Central Providencia

Hidromaule Group operations contribute to a sustainable development, making a direct and positive impact on local stakeholders in the area

150 INTERNATIONAL INVESTOR

HIDROMAULE S.A. Hidromaule Group is a conglomerate pioneer in the non-conventional renewable energy generation in Chile. Since its beginnings in 2005, the founder company of Italian origin, Sorgent.e, has believed in sustainability as a fundamental principle in order to generate electrical energy. According to this vision, Hidromaule Group saw the potential of using irrigation channels to provide the water for producing energy, particularly in in Chile’s VII region of Maule. Our plans were realised thanks to a strategic agreement with Asociación de Canalistas del Maule (ACM), an association of about 2,200 irrigators from the area. The agreement allowed the use of the irrigation waters to generate electrical energy using the natural course of the irrigation channels and the natural height differences of the terrain. At the same time, this particular generation method minimises the negative impact on the environment and, due to the fact that after the electricity has been generated the waters are returned to the same irrigation system, the final destination of all the water used remains unchanged. Currently, Hidromaule has developed three run-of-river projects: Lircay, Mariposas and Providencia, totaling 41 megawatts of installed capacity. In order to operate the scheme fairly and sustainably, Hidromaule and ACM signed a long-term water use agreement, establishing annual payments from Hidromaule to ACM, allowing the association to cover a relevant part of its operational costs and maintenance investments along its irrigation system. In this manner, Hidromaule Group operations contribute to a sustainable development, making a direct and positive impact on local stakeholders in the area. It also provides a positive environmental impact with the production of clean and renewable energy for the national energy grid, qualifying as nonconventional renewable energy generation as recognised by laws relating to Chilean law. The operation also qualifed under the Clean

Development Mechanism and Verified Carbon Standard emission reduction project development schemes. PROJECTS LIRCAY RUN-OF-RIVER PROJECT Lircay Run-of-River Power Plant was the first project that was developed by Hidromaule, it started its commercial operation in October 2008 and is located in San Clemente commune, VII Región del Maule. More specifically, in the first section of the Norte Bajo Canal. It is from this canal that the power plant captures the water it needs in order to produce electrical energy. Lircay has an installed capacity of 20 megawatts and generates an average of 130 gigawatt hours per year, which is supplied to the Sistema Interconectado Central (SIC). Its design, with well-proven and reliable technologies from the electrical market, consists of a water intake, a three kilometre long open channel with a capacity of 25 cubic metres per second, a pressure penstock, a power house with two horizontal axis Francis turbines of 9.7 megawatts each, and a 6.6/66 kilovolt substation. Moreover, it has a 27 kilometre long transmission line in order to supply the electrical energy generated to the SIC grid through the existing Maule substation. Lircay is registered under the Clean Development Mechanism, in accordence with the United Nations Framework Convention on Climate Change (UNFCCC), and contributes to the environment with an emission reduction of 53,000 tons of CO2 per year. MARIPOSAS RUN-OF-RIVER PROJECT Mariposas Run-of-River Power Plant started its commercial operation in March 2011 and is located about ten kilometres south of the Lircay Run-of-River Power Plant in the San Clemente commune, VII Región del Maule. Mariposas has an installed capacity of 6.3 megawatts and generates an average of 40 gigawatt hours per year that contributes to the SIC grid.

mining business intelligence

Its design consists of a water intake with a capacity of 20 cubic metres per second, a pressure penstock, a power house with a vertical Compact axial Turbine, a 6.3 megawatt Alconza synchronous generator and a 6.6/66 kilovolt substation. It has a seven kilometre long transmission line, which connects Mariposas to the SIC grid through the existing Lircay substation. Mariposas is registered under the Verified Carbon Standard, which allows the generation of environment emission reduction certificates. The project contributes to the environment with an emission reduction of about 21,000 tons of CO2 per year. PROVIDENCIA RUN-OF-RIVER PROJECT Providencia Run-of-River Power Plant is the Hidromaule’s third run-of-river project, it started its commercial operation in March 28th of 2013. This project is located at about 10 km north of the Lircay Run-of-River Power Plant in the San Clemente commune, VII Región del Maule. It has an installed capacity of 14.2 megawatts and generates an average of 60 gigawatt hours per year to the SIC grid. The design of Providencia considers a water intake of 28 cubic metres per second in terms of capacity, a pressure penstock, a

Central Lircay

Central Mariposas

power house with two Andritz/Vatech horizontal axis Francis turbines, two Indar generators of 7.1 megawatts each, and a 6.6/66 kilovolt substation with nine kilometre long transmission line, which connects the Providencia plant to the SIC grid through the existing Lircay substation. Providencia is registered under the Clean Development Mechanism scheme, according to the UNFCCC, and the project contributes to the environment with an emission reduction of 37,000 tons of CO2 per year.

ered significant benefits to agriculture in the area, providing an additional income to the association and optimising the management and efficiency of the irrigation channels in the area. Hidromaule projects also make a global contribution to the environment and is making close to 111 tonnes of CO2 equivalent in emission reductions per year.

SUSTAINABLE ENERGY CONTRIBUTION Hidromaule group contributes to the Sistema Interconectado Central with clean, stable, safe and sustainable non-conventional renewable energy, producing an average of 230 gigawatt hours per year. All the energy produced by the run-of-river power plants is currently sold to the spot market, but could suit any direct industrial client in the system perfectly. Without a doubt, the characteristics of Hidromaule projects deliver a new development and growth standard for the future of Chile. Besides the contribution of clean and efficient energy to the grid, the innovative agreement between Hidromaule and the Asociación de Canalistas del Maule has deliv-

CARL WEBER

Chief Executive Officer

cweber@hidromaule.cl

HIDROMAULE S.A. Av. Presidente Kennedy 5757, Of. 802, Torre Oriente, Las Condes, Santiago de Chile +56 2 2963 5200 www.hidromaule.cl

CHILE 151

interview mining

I think there is room for public private partnerships and concessions. Proposals for new hospitals and privatisations are on the books. Private investors are looking for good opportunities and some of the big name retailers are getting involved, but it is still quite early.

RICARDO CERDÁN ACCENTURE

Country Managing Director

INTERNATIONAL INVESTOR: What differentiates Accenture regarding the service it can provide to the natural resources sector and what experience most distinguishes Accenture in this market? RICARDO CERDÁN: We work with all of the large diversified miners, as well as with many of the leading niche commodity players. Our experience includes helping merged mining companies in realising planned deal value, implementing global strategies to standardise processes and systems, working with mining companies to implement global operating models and helping management achieve operational excellence. Moreover, we have experience catering to global companies in the natural resources sector in Chile, such as Anglo American, Rio Tinto and Vale. We have experience in our five operating groups in Chile: communications, media and technology; health and public services; financial services; products and resources, which includes energy, mining, metals, forest products and utilities. Today, the financial sector is the most developed in Chile. There is a lot of work in this area and we are providing services to these companies related to repositioning their technology platforms. The finance sector typically requires technology and systems integration or technology consulting. There is also space for a larger degree of management consulting and helping companies develop new models. How has the retail sector in Chile developed? The Chilean retail model has been very successful. One aspect of its successful implementation has been the diversity of products. You see very big companies with supermarkets, department stores, home improvement stores and construction material warehouses. People like being able to find everything they need in one place. Most multinational retail companies have failed in Chile and that is

152 INTERNATIONAL INVESTOR

CAREER DEFINING MOMENT

Once I finished my studies in industrial engineering, I decided to specialise and gain experience by working for a consulting firm. That decision defined my professional development. Changing my client base and areas of collaboration frequently has been key to continuing my education and deepening of my knowledge as an engineer. LESSON IN BUSINESS

I have two most important lessons. First, you have to be organised because your work and client base is always changing. Second, you must be proactive; study and learn in order to always be one step ahead of your clients needs, so you always have something valuable to offer them. because these local companies have such a strong position in the market. Currently, these companies are exploring new countries in the region like Peru, Argentina, Brazil and Colombia. They are making a lot of progress in those markets and are transforming into very large multinational companies. However, for the time being they are focused on the region, not beyond it. Brazil is an enormous market, Colombia is very strong, and Peru is an important emerging market. What are your observations regarding public and private health sector growth? There is a lot of room for improvement in the area of health. The private sector is making large investments and developing more hospitals, more clinics and this means more available beds. Nevertheless, these services are still very expensive for most people. The role of the public sector is very important and it needs to develop more quickly. Unfortunately, it is being held back by other priorities in terms of investments. In the aftermath of the 2010 earthquake, public sector funding priorities had to be drastically reconsidered. Public health still has a period of development ahead.

What do you think is the best strategy for community engagement in Chile? Timing is the key. Projects do not tend to share environmental and social issues with the communities from day one. The companies should try to involve the communities and convince them of the value the project is going to have for their community and not impose projects on a particular community. This is a problem throughout the world, not just in Chile or Peru. For capital projects the different fronts need to be approached in parallel. In order to prevent situations like those that have occurred in the past and ensure projects do not engender a negative reaction from the community involved, effort regarding environmental and social issues from the outset is key. The perils of not adopting this approach are clearly for all to see, for example, in Pascua Lama, an investment of millions of dollars has been made and the environmental issues are still under discussion. It should move beyond acceptance, companies must find a way to get the communities behind the projects. However, Chile has had some positive experiences; for instance, the Escondida project has drastically improved the city of Antofagasta in the last decade. Generally, there is a lot of negative publicity about the projects regarding pollution and contamination of the water, for example. However, it is important to also promote the positive effects of projects, such as community growth, community development and employment opportunities. Is that something that you focus on in your mining services practice? We are currently working with mining companies on projects related to system integration, automation and outsourcing, among others. Accenture can count on a specific practice in automation that brings industry knowledge, global reach and automation, technology and change management experience to deliver solutions at the core of our clients’ production processes. Accenture is also developing an environmental consultation area at a global level. We have not yet debuted these services in Chile. We have a methodology and point of view, and have discussed them, but there is no demand for these types of projects currently. I think this will change because, internationally, we have a solid track record in this area.

mining projects

17,032

HECTARES EXTENSION

Atacama REGION

173m – 304m

TONNES ESTIMATED IRON RESERVES

1m tonnes/year INCREASED PRODUCTION

US$2,500m

ESTIMATED INVESTMENT

Tarapacá

BOQUERÓN CHAÑAR IRON DEPOSITS Description: Chile’s Production Development Agency (CORFO) offers properties for mining that are registered and have been surveyed. The two mining properties, Chañar I al 4.25 and El Paico 1 al 1980, are owned by CORFO and are close to Vallenar, Copiapó and Huasco with a total of 3,414 titles. Both properties contain important iron reserves, estimated to reach between 173 million and 304 million tonnes, at a depth of 400−700 metres. Proponent: Public Project coordinator(s): Economic Development Agency (CORFO) Location: Boquerón Chañar III, Atacama Region Extension: 17,032 hectares Estimated investment: Under analysis Starting date: First half of 2013 Duration: Transfer of concession Type of concession: Transfer of total area acquisition option or another method Source and contact: CORFO: Leonardo Valenzuela, lvalenzuela@corfo.cl, tel: +56 2 2449 7006

MINERA DOÑA INÉS DE COLLAHUASI PHASE II EXPANSION Description: Project to double the current production of Minera Doña Inés de Collahuasi, located in the Iquique and Pica district of the Tamarugal Province, from 535,000 tonnes per year to 1 million tonnes per year. Phase I, which began in 2010, will mean a 20 per cent increase in the company’s current capacity. Proponent: Public Project owner(s): Anglo American, Xstrata plc and Mitsui & Co Location: Tarapacá Region Extension: Not yet available Starting date: 2012−2015 Estimated investment: US$2,500 million Stage of development: Project under consideration Source and contact: Chile’s Manufacturers’ Association SOFOFA: Francisco Ovalle, fovalle@sofofa.cl, tel: +56 2 3913113

REGION

CHILE 153

projects mining

US$1,000m

ESTIMATED INVESTMENT

Atacama REGION

30%

EL VOLCÁN GOLD DEPOSIT Description: Megaproject for gold production at the high-potential El Volcán mine where recent explorations have shown reserves to be 30 per cent higher than initially estimated Proponent: Private Project owner(s): Andina Minerals Location: Copiapó, Atacama Region Extension: The El Volcán mine will occupy an area of approximately 3,000 hectares where all the project’s installations will be located, including the processing plant, offices, sterile dumps and the casts that have been designed Estimated investment: US$1,000 million Starting date: 2010−2011 Stage of development: Project under consideration Source and contact: Chile’s Manufacturers’ Association SOFOFA: Francisco Ovalle, fovalle@sofofa.cl, tel: +56 2 3913113

HIGHER RESERVES OF GOLD

Most mining in Chile is concentrated to the Norte Grande region

154 INTERNATIONAL INVESTOR

agribusiness overview

AGRIBUSINESS The Chilean agriculture industry encompasses a broad range different activities due to the country’s diverse geographic, climate and geological conditions. Chilean agribusiness has played a key role in the county’s economic success making an important contribution via rapid export growth.

A PILLAR OF ECONOMIC DEVELOPMENT The Chilean agricultural exports during 2011 and 2012 detailed by sector (excluding forestry) are shown in fig. 1.

Chile has a long viticultural history for a New World wine region dating to the 16th century

GENERAL CONTEXT After a long development period in which agriculture played a rather secondary role, since the 1980s the industry has consolidated a successful policy of internationalisation. This occurred in the context of a development strategy based on the complete openness of the country’s economy and in the regulation of the productive activities on the basis of their comparative advantages. As a result of these transformations, the agro-food industry has gradually become one of the pillars of the economic development of the country and of many of its industries are already internationally significant: fruits, vegetables, wine, seed, dairy and meat, along with forestry sector, are all examples of this development and of each industry successfully positioning itself in its particular market. Chile has important natural advantages and uses its great diversity in terms of agro-ecosystems and soil diversity to its ad-

vantage. Due to these geographic features, the country is able to diversify and differentiate its product offering. Chile has an agricultural area covering almost one third of the country´s continental area, including 8.5 million hectares of livestock capacity, 11.6 million hectares of forest capacity and 5.1 million arable or cultivable hectares, including 1.8 million irrigated hectares, 1.3 million potentially irrigable hectares and 2.0 million hectares of drylands. Additionally, Chile has globally recognised agricultural sanitary conditions, which are upheld through the application of a strict and efficient policy regarding plant and animal health. Furthermore, due to its geography, the country has a natural isolated border: the Pacific Ocean to the west, the Andes to the east, the Atacama Desert to the north and the ice fields to the south. Chile is one of the few nations free of diseases and plagues, such as the fruit fly.

THE FRUIT INDUSTRY In terms of its fruit industry, Chile is a leader in the Southern Hemisphere in the export of fresh fruit and the industry is one of the most important economic sectors. The industry is also considered to be one of the most important in terms of the economic development of Chile, generating an important source of jobs and investment. The fruit industry in Chile is accommodates over 14,000 producers, more than 60 processing companies, hundreds of refrigeration chambers, packing stations and satellite packing stations in orchards. The export sector includes around 7,800 producers and more than 600 exporting companies. The industry generates more than 450,000 direct jobs, which includes permanent and seasonal jobs, and indirectly employs more than one million people in positions that relate to goods and services totalling about 1.5 million employment positions. This activity is based on a planting surface of more than 300,000 hectares (excluding wine grapes). With regard to geographical distribution, the fruit activity is developed from the extreme north of Chile to the Region of Los Lagos in the south. Activity is more strongly focused in the regions in the centre-south of the country, between the region of Valparaiso and the region of Maule, where more than 80 per cent of the planted surface is located. The main species that are exported as fresh fruit are: Grapes (excluding wine grapes), Apples, Kiwi, Blueberries, Avocados, Cherries, Plums and Pears. Due to the board nature of the agriculture sector, this overview will now concentrate on two important sub-sectors that contribute to the country’s economic growth, these being: the forestry and wine industries.

CHILE 155

overview agribusiness

1. AGRICULTURAL EXPORTS 2011-2012 (US$ IN MILLIONS, FOB)

2. 2013 WINE PRODUCTION PER TYPE WITH DESIGNATION OF ORIGIN (DO)

Products

2011

2012

Part. IN 2012 (%)

Var. 12/11 (%)

Agriculture (non forest)

9,051

9,408

51.2

0.8

Cabertnet Sauvignon

Fruits

5,447

5,490

16.8

Sauvignon Blanc

Wine

1,696

1,798

4.4

21.3

Seeds

386

469

2.7

-5,7

Vegetables

308

290

12.7

12.2

Chardonnay

8.7%

Others

1,214

1,361

12.2

1.7

Carménere

8.4%

Livestock

1,285

1,307

3.7

Meat

928

963

1.8

-1.2

Dairy

194

192

0.2

-23.7

Moscatel de Alejandría

Wool, skin and leather

1.2

-2.4

Pinot Noir

2.4%

Others

134

130

Total agriculture (non forest)

10,336

10,715

País - Mission

1.7%

Total Chilean exports

81,411

78,813

100

3.7

Others

3.7

Wine producers have taken advantage of the particular climate and soil conditions found in the grape-growing valleys of Chile and, guided by the specialists, have carefully selected the right varieties for each region. For many years, Chilean wineries have been at the forefront of the expansion in the country’s exports and have contributed to reinforce Chile’s image as a provider of quality agricultural products, thus opening a path for the export of other Chilean agricultural products. Wine production in Chile dates from the 16th century with the arrival of the Spanish conquistadors and missionaries, who planted the first grapevines in the central zone of the country. However, the greatest development in this sector has taken place in the last 30 years, with the incorporation of the new investors and the creation of countless new vineyards. This investment activity has been driven by the consistent growth in worldwide demand and interest in Chile wine product, the opening of new markets and the ease with which the products can be exported. The sector is dominated by a group of large producers, led by the companies Concha y Toro, Santa Rita and Viña San Pedro. There are around 300 exporters, but the top 10 reach volumes exceeding 50 per cent of the total exports of the product.

160 US$ in millions

140 120 100 80 60 Jan

Feb

Mar

Apr

May 2010

156 INTERNATIONAL INVESTOR

Jun 2011

Jul 2012

Aug 2013

Sep

Oct

Nov

11.9%

Syrah

3. VALUE OF WINE EXPORT WITH DO

13.5%

Merlot

Source: PwC

THE WINE INDUSTRY The Chilean wine industry has developed a great deal with an increase not only in actors, vineyards and wine produced and sold in the local and international market, but also with a significant increase in the quality of the wine produced. This has enabled the sector to assume a better position in international markets. Currently, wine grape production is a very dynamic sector of Chile´s economy in terms of productivity, exports and employment creation. Chile has one of the finest terroirs worldwide, with 14 wine making regions from the Elqui Valley, in the north of the country, to the valleys of the Bio Bío region, in the south. The country offers a great variety of types of soil and climate to produce a wide range of wines. These natural advantages have given the local wine industry a strong foundation from which to face the productive and marketing challenges imposed by foreign markets. The dynamism in this part of the industry can also be seen in the incorporation of new varieties of grape (see fig. 2), the development of products of greater quality, and the marketing of products in new and specialised markets. Chilean vineyards have increasingly specialised in high quality wines, which have become the base of the industry’s production for export.

33.3%

Dec Source: PwC

7.4% 1.6%

7.8% Source: SAG

According to 2012 figures, Chile is the fifth largest exporter worldwide after Italy, Spain, France and Australia, with a market share hovering around 8 per cent. According to figures given by the industrial association, Wines of Chile, which represents approximately 100 local companies, including the largest exporters in the country, wine exports exceeded US$1.6 billion annually (see fig. 3), with volumes higher than 700 million litres. In contrast to the export figures, wine consumption in Chile has been decreasing as a consequence of the greater access of consumers to other alcoholic beverages, such as beer and rum, the variety and consumption of which have increased significantly. Accordingly, in the Wines of Chile Strategic Plan 2020, the industry body aims to increase the local sales to US$840 million and double exports to US$3 billion in the period up to 2020. This would transform Chile into the main wine exporter in the Southern Hemisphere. The challenge in terms of the establishment of plantations aims at reaching a surface of 160,000 hectares by exploring new terroirs. In relation to grapevine stocks, they are expected to continue being led by Cabernet Sauvignon, with a significant increase of Carménère and development of Syrah and Pinot Noir in coastal and cold zones. With regard to white grapevine stocks, the leader will continue to be Sauvignon Blanc, given the sales volume shown in the United Kingdom. WINE INDUSTRY: CHALLENGES The challenges of the Chilean wine industry relate to improving both its competitive positioning and price structure, as well as dealing with the high cost of energy, low exchange rates, scarce labour and the necessity to improve logistical access to markets in complex geographic locations.

overview agribusiness

Chile has built its reputation on the basis of the high quality wine production at low prices; consequently, such perception needs to be changed in order to improve the industry’s margins. The industry also faces a strong competition, particularly from Argentina, a neighbouring country that has managed to position its wine very well in the U.S. market. An important factor in the loss of competitiveness relates to the high cost of energy in Chile, which strongly increases the production costs. According to the industry’s data, this cost represents approximately 20 per cent of the total production costs, which increases in the wine harvest season. It should be emphasised that, given the structure of the energy matrix in the country, a significant reduction in the energy cost is not foreseen in the medium term. Consequently, the market actors must establish energy savings and optimisation plans in order to increase their rate of return. Furthermore, the scarcity of farm labour is a phenomenon that has become more apparent since 2010. This reality is the result of an increasing pattern of worker migration to the north of the country to find employment in the mining sector. These workers are lured by better employment conditions and higher salaries offered by both the domestic and foreign companies. Additionally, due to the fact that around two thirds of the wine produced in Chile is for the export market and that the industry’s costs are predominantly incurred in Chilean pesos and income is predominantly in dollars, vineyards are highly exposed to the exchange rate risk. This has been slightly mitigated since May 2013, as a result of the dollar strengthening against the peso. THE FORESTRY INDUSTRY Although forestry has always been a part of Chile’s economic activity, the forestry development laws enacted in the 1970s boosted the industries activity substantially. The legal framework established the provision of government subsidies to landowners who focused their activities on forestry in order to develop and establish the plantation of exotic species, such as Pinus radiata, Eucalyptus globulus and Eucalyptus nitens. The aim of this framework was to energise the country’s economy through the production and sale of forestry products at local and international level. Moreover, it looked to generate new employment in rural areas and recover or improve lands from the erosion process caused by deforestation. It also legislated for the reduction of exploitation of Chile’s native forests, which was a recurrent activity among companies and small forest owners at the time.

158 INTERNATIONAL INVESTOR

STRENGTHS ■■ Politic and economic stability of the country ■■ Strong institutionalisation and grouping of main actors (companies, governments, universities, etc.) ■■ Specialisation in the sector ■■ Worldwide recognition to its potential, growth and product quality ■■ Increase of technology use in the different processes of forest cultivation, harvest and production of goods ■■ Genetic improvements for optimisation of plantations and product improvement ■■ Low plague presence ■■ Fast growth of plantations due to climatic and geographic factors and soil quality

OPPORTUNITIES ■■ Chance of promoting establishment of new plantations in eroded soils or not previously forested, based on new laws related to forestry development (approx. 700,000 hectares of land available) ■■ International certifications and traceability for opening to new markets and differentiation. ■■ Increase in forest use of biomass for power generation ■■ Sale of carbon credits

Currently, native forests are not used to meet demand, which is covered by the pine and eucalyptus plantations. The areas of native forests exceeds that of forestry plantations by a factor of six and are protected by law in public and private areas. Therefore, the commercial exploitation of native forest is minimal and viable only after the presentation and approval of a management plan made by the National Forestry Service (CONAF), the government body that regulates forestry. While the world shows alarming rates of deforestation, Chile has managed to increase the forest surface of both native and exotic forests. The vegetation registry showed that between 1997 and 2011, forests increased by over one million hectares, helping to fight the negative effects of climate change. The Chilean forestry industry is based on renewable resources, since it is related to the establishment of new, fast-growing exotic species (non-native) and the industry is second in terms of the country’s income generation, after mining. The main product of the Chilean forestry export is cellulose. In addition, there are different products for multiple uses in national and foreign markets, such as mouldings, chipboards, frames for doors and windows, furniture, sawn timber, wooden boards and

WEAKNESSES Need to improve establishment of roads, harbours and logistics ■■ High cost of land purchases ■■ High cost of freights ■■ No availability of significant land surfaces (hectares) ■■

THREATS Increase of plagues such as Sirex, pine shoot moth (in Radiate Pine) and eucalyptus snout beetle, among others ■■ High costs of energy and oil ■■ Stagnation of global demand ■■ Global decrease in the consumption of paper ●● Contraction in the demand as a result of International financial crises ●● Pluviometry changes ■■

veneers, building components, woodchips, newspaper and wood in pieces. Chile currently exports over 400 wood products from plantations, thanks to a solid and dynamic forestry activity, which has reached many difficult markets, earning global respect and recognition. There are also approximately 1,000 companies that export forestry products with different levels of development (see fig. 4). Three of these companies form part of the largest forestry companies worldwide, namely Celulosa Arauco y Constitución S.A., Empresas CMPC S.A., and Masisa S.A., which own a combined forest equity of 2 million hectares. The industry creates about 130,000 direct jobs and a similar figure of indirect jobs in the forestry and harvest sectors, primary and secondary industries and services. In many rural areas of the country, forestry is the main source of income for the local inhabitants and, moreover, it is the main engine of development for areas that located close to forestry exploitation zones, especially in the centre-south region of Chile. During the last 15 years, the forestry industry has seen a significant increase in the value of its exports (see fig. 5), currently producing approximately 13 per cent of the value of the country’s total exports. The U.S., China and Japan are the most important export markets (see fig. 6).

agribusiness overview

4. EXPORTERS OF FOREST PRODUCTS 2012 (as a share of total exports - US$5,389 million) 28.1%

Cel. Arauco y Const. (-12.5%) 19.3%

CMPC Celulosa (-11.8%) 9.1%

Aserr. Arauco (7.2%)

5. EVOLUTION OF CHILEAN FOREST PRODUCTS (US$ in billions - FOB) 1990

0.86

1991

0.91 1.13 1.21

6.4%

1993

Paneles Arauco (-28.7)

5.9%

1994

CMPC Maderas (0.7%)

5.1%

Masisa (16.1%)

3.7%

Astillas Exp. (16.6%)

1.5%

Comaco (-18.6%)

1.3%

Pap. Rio Vergara (-29.5%)

1.3%

For. del Sur (17.5%)

1.2%

Cons. Maderero (-19.1%)

1.2%

Woodgrain Chile (1.2%)

0.8%

Papeles Norske Skog (-10.7%)

0.8%

Anchile (-19.8%)

0.7%

Volterra (9.4%)

0.6%

Procter & Gamble (5.6%)

0.6%

Forestal Tromen (81.7%)

0.6%

Pap. Cordillera (-26.9%)

0.5%

Masonite (13.9%)

0.5%

Others (-18%)

2.37

2003 2004 2005 2006

10.7%

2011

Variation 2012/2011 Considers merger with Inforsa

2012 Source: PwC

In order to maintain its success, the Chilean forestry sector has been forced to operate dynamically, which is evidenced by the number of investments made each year in different areas, such as silviculture, equipment and production plants, among others. Since the forestry development law expired at the end of 2012, a new law is currently being debated in the Chilean parliament, which is expected to take effect in 2013 or 2014. The main objective of the new law is to recover degraded and eroded soils through monetary incentives to small and medium landowners for the establishment of exotic plantations, whether for commercial or environmental purposes. Unlike the previous forestry development law, this new proposal incorporates economic incentives to maintain native forests, as well as measures to work together with indigenous communities. With this framework, Chile’s forestry industry hopes to maintain its position as a world leader in the sector, aiming to improve soils of low quality and productivity, to expand its vegetation and contribute to increased carbon sequestration, which will, to some extent, help to combat climate change. FORESTRY INDUSTRY: CHALLENGES The Chilean forestry industry must face a

4.3%

Peru (9.9%) Colombia (-9.8%)

1.63

Argentina (-18%)

2.37

Taiwan (-18.4%)

2.21

France (-19.9%)

2.30

Germany (-8%)

2.52 3.40 3.50 3.89 4.95

2008

2010

4.9%

Italy (-30.8%)

2007

2009

5.6%

Mexico (-9%)

2.00

2002

5.8%

C.Southern (-9%)

1.85

1.92

2001

6.0%

Holland (-2.9%)

1.56

1998

2000

9.6%

Japan (-3.4%)

1997

1999

11.1%

EE.UU (-4.6%)

1995 1996

19.2%

China (-3.0%)

1992

Cartulinas CMPC (1.1%)

6. MARKETS FOR CHILEAN FOREST PRODUCTS 2012 (share of total exports - US$5,389 million)

5.45 4.16 4.95 5.91 5.39 Source: Instituto Forestal (INFOR)

series of challenges, mainly relating to internal factors, in order to ensure it can maintain its competitive level with other market players worldwide. In their short- and medium-term plans, some of the main economic groups with an interest in the industry, such as the Arauco group and CMPC, have developed and currently maintain forest and productive plant investments for the production of cellulose, tissue or chips outside of Chile, chiefly in Brazil, Uruguay and Colombia. These decisions are related to growth expectations certain markets, soil availability, low prices of land purchase, low prices of energy and the economic and political conditions of the particular countries, which make the investments attractive. Furthermore, and more specifically related to energy, given the structure of the Chile’s energy mix, the cost of energy has become a critical factor in some subsectors of the forestry industry, and the sharp rise in prices has caused several businesses to cease operations. Thus, as a result of these high prices, combined with the unfavourable comparison with energy costs in other South American countries, the industry has been developing new initiatives for self-generated power, chiefly through the use of forest waste

3.3% 3.0% 2.6% 2.5% 2.0%

Venezuela (-26.1%)

1.9%

Australia (-2.9%)

1.8%

UK (0.5%)

1.5%

Ecuador (6.7%)

1.2%

Canada (20.7%)

1.2%

Brazil (-13.4%)

1.2%

Spain (-40.6%)

1.0%

Others (-11.2%)

10.3%

Variation 2012/2011 Source: PwC

or ‘biomass’, which in certain cases has enabled the sale of surplus energy production to the Chile’s central electricity grid. Accordingly, a new business opportunity has been presented, with certain foreign investors taking an interest. Investment is now being made by establishing forest plantations of poplars, which attain very fast growth in high-quality soils, in the southern regions of the country for the generation of forest biomass. This biomass is then being sold to power generation plants in order to contribute to the matrix. Additionally, as part of the profitability structure of power generation projects relying on forest biomass, the possibility to sell carbon credits has already benefited several local investors who have established these type of plants in the central-southern zone of the country. Lastly, in relation to soil availability, although government organisations estimate that there is approximately one million hectares of sustainable land for forest use, which is ready to be planted, it is currently difficult to gain access to significant areas of land. For this reason, a decrease in the purchase rate of soils by the main players in the local market has been observed. Thus, there has been a rise in the soil purchase prices in the last five years.

CHILE 159

focus agribusiness

Atlantic salmon farming started on an experimental level in the 1960s but became an industry in Chile in the 1990s

FOCUS: CHILEAN SALMON INDUSTRY The Chilean salmon industry is one of the country’s key industries exporting to over 100 countries, with total exports of US$3 billion in 2012 and good long-term growth projections CHILEAN AQUACULTURE With its vast, 4,000 kilometre long coastline, running from the north to the south of the country and the favourable and various climate conditions in its different regions, the geographical features of Chile have positioned the country as an important actor in the aquaculture sector worldwide, especially regarding the cultivation and export of salmonids. Aquaculture activities in Chile cover a wide variety of species. Depending on the geographic zone, these activities relate to the cultivation and production of scallops, mussels, oysters, algae, salmon and trout, among others. This is combined with other extractive activities throughout the country, such as the fishing of mackerel, hake, sardines and anchovies and the catching of molluscs and algae, which all together constitute the productive activities related to the use of marine resources. While most of these activities have been attracting attention and increasing their production volumes to supply markets for human and animal consumption at a local and global level, there is no doubt that the industry with the largest development, positioning in international markets and growth projections is the salmon industry. SALMON INDUSTRY The global salmon sector has witnessed large farming consolidation during the last 15 years. The main focus of this consolidation has been related to: growth in feed and farming, developing value added products, investing in

160 INTERNATIONAL INVESTOR

R&D as an important part of value creation, and looking for new functional feeds to secure fish health and a competitive industry cost structure. The industry is widely viewed as having strong, positive fundamentals due to the need to feed a growing population, efficient energy retention and low resource usage characteristics. The first steps in the development of salmon production in Chile took place during the first half of the 20th century. However, from the 1970s onwards, and after the creation of state bodies for the development and support of the aquaculture activities, the first cultivations with productive, commercial means took place, achieving the first harvest in 1981 with a volume of 80 tons. By 1989, Chile was able to enter the group of cultivated salmon exporter countries, with a production of 10,000 tons and a market share of 4 per cent. In 1986, the Chilean Salmon and Trout Producers Association, now called SalmonChile, was created, with the purpose of improving production quality and promoting Chilean salmon in the international markets. It established the basic requirements for processing plants and production processes and encouraged the incorporation of higher technology in the different production stages. Thereafter, the Chilean salmon industry entered a period of consistent growth, until it was able to position itself as the second biggest salmon industry in the world after Norway, harvesting over 700,000 tons per year, with significant growth projections. To date, the Chilean salmon industry is one of the country’s key industries with total exports of US$3 billion in 2012 (Pacific Salmon, Coho Salmon, Trout) and

agribusiness focus

STRENGTHS ■■ Political and economic stability of the country ■■ Increased regulation to allow stability and growth of geographic zones with possibilities of production growth ■■ Geographic features, good quality of water and ocean currents ■■ High-quality water streams for development of fresh water projects ■■ Experience in the industry, qualified labour, additional services available

OPPORTUNITIES ■■ Increasing demand of salmon worldwide and incorporation of new markets such as Brazil, Russia and China ■■ Reduction in growth of the main producer at global level (Norway) ■■ Development of fresh water activities for local egg production

important long-term growth projections. The Chilean salmon industry has important competitive advantages and exports to over 100 countries, with the key export markets being the U.S., Japan and Brazil. DIFFICULTIES AND CONSOLIDATION The industry has experienced a strong comeback since the difficult period following the outbreak and spread of the ISA virus in June 2007. This period put a huge financial strain on many industry participants and saw some players exit the industry. A direct consequence of this development was the reorganisation and restructuring of the sector including further consolidation, entry of new international sector actors and massive capital injections through various private and public offerings of shares. In 2011, the industry emerged from the ISA crisis highly indebted to the banking sector, over US$2.4 billion, after a US$400 million loss provision, and now has very tight covenants and restrictions in its credit agreements The industry consolidation in Chile has been gaining speed since 2011, following a similar pattern to that which occurred in Norway, where the number of industry participants decreased from over 80 in 1995 to slightly over 20 currently. In Chile, this industry consolidation has meant that the number of companies representing 80 per cent of the total production has decreased greatly since 1997 and stands at 16 companies as of 2012. These consolidated companies require scale, a strong and diversified asset base, high asset utilisation, and strong market reach and breadth. This post-ISA virus period has seen a number of mergers and acquisitions by local and foreign companies. In 2012, the acquisition of Cultivos Marinos Chiloé S.A. by the Norwegian company Cermaq ASA, one of the main players of the industry worldwide, through its subsidiary Mainstream Chile, means that the Chilean company will contribute between 50 and 60 per cent of Cermaq’s total production of salmonids. The new company that resulted from the merger between two local, mediumsized companies, Trusal S.A. and Salmones Pacific Star

WEAKNESSES ■■ Need to incorporate new regulations to ensure stability ■■ Industry affected by recent sanitary issues ■■ High level of debt at the company level ■■ Distance to the main export markets is larger than its competitors ■■ High energy and fuel costs in the country

THREATS Increase of health problems such ISA virus, SRS, Caligus, among others ■■ Fluctuation of prices at international level ■■ Stagnation of global demand ■■ Increase in production costs, mainly due to sanitary issues and increase in fish feed cost ■■

S.A. in 2013 could produce almost 10 per cent of the capacity of the local industry. Furthermore, and also in 2013, EWOS Group, a company with a presence in Chile that is engaged in the manufacture and marketing of fish food, which is also part of the Cermaq Group, has been sold to a private equity group, meaning that Cermaq will concentrate on its farming activities in Norway, Canada and Chile. Additionally, once the problems regarding sanitary issues were overcome, and as a way of obtaining capital to face the expected growth of the sector, two significant companies within the industry were listed in the stock market: Australis Seafood S.A. and Aquachile S.A. Thus, the number of listed companies trading securities locally amounted to seven, these being: Aquachile, Australis, Multiexport, Camanchaca, Blumar, Invertec and Agrosuper. GLOBAL SALMON PRODUCTION Global production of Atlantic salmon, trout and Coho salmon grew by 66 per cent between 2003 and 2012 (see fig. 1), corresponding to an annual growth rate of 5.8 per cent. Global production is expected to remain stable over the next three years (see fig. 2). Although a sudden and unexpected rebound in Chilean production in 2012 coincided with abnormally high Norwegian output to create a decrease in salmon market prices, during 2013 market prices have increased by around 35 per cent. While the global demand for salmonids will likely maintain the uptrend, the supply is expected to remain at the same level or grow at a very moderate pace over the next three years. CHILEAN SALMONIDS EXPORTS In 2012, Japan and USA represent 67 per cent of Chilean salmonid exports (see fig. 6). The European Union, the third main mature market, is dominated by local producers: Norway, UK, Faroe Islands and Ireland. Brazil is a local and rapidly growing destination market. Chile launched an aggressive marketing cam-

CHILE 161

focus agribusiness

1. GLOBAL PRODUCTION OF ATLANTIC SALMON, TROUT AND COHO SALMON PRODUCTION (KTONNES, WFE) +66% 2,472

2,500 2,000 1,500

1,491

1,554

1,594

1,648

2003

2004

2005

2006

+17%

2,106

1,832

1,901

1,871

1,854

2007

2008

2009

2010

1,000 500 0

Norway

Chile

Canada

Faroe Islands

2011

2012

Other Source: Kontali, Subpesca, PwC

2. ANNUAL PRODUCTION GROWTH ESTIMATES 2012-2015

CAGR Estimates

Norway

Chile

Canada

Faroe Islands

Other

Total

1.5%

-5.1%

2.6%

1.6%

5.1%

4.9%

-0.1% Source: PwC

Local industry has shown a marked development in the last few years, incorporating cuttingedge technology in the different stages of the productive processes

paign in 2011 under the brand ‘Salmón de Chile’. The initiative, promoted and financed by ProChile, a government body, and SalmonChile is an example of collaboration the public and private sectors. The project is part of an effort to build the Chilean salmon brand worldwide, but is specifically aimed at promoting salmon consumption in the Brazilian market. Russia is the second fastest growing and promising market, which grew 35 per cent in 2012, representing around 10 per cent of Chilean trout exports. However, Russia, along with China, remains marginal in terms of Chilean exports and the two countries are primarily targeted by the largest producers. In terms of competitor differentiation, Chile distinguishes itself from Norway by exporting a more elaborate product than whole and headed and gutted fishes (see fig. 5). GLOBAL INDUSTRY STRUCTURE During the last 15 years, the entire salmon farming industry has been moving towards consolidation (see fig. 7). The industry tends to be more fragmented in Norway than in Chile, due to decentralised structures and local ownership imposed by the Norwegian government. In Chile, the government put fewer demands on ownership structures to foster growth. The increase in the number of players making up 80 per cent of the volume in Chile is explained by the major reduction in output connected to the ISA crisis. The sector is expected to gradually revert to fewer players. REGULATORY CHANGE As a result of the sanitary problems that the salmon industry in Chile has endured since 2007, the national authority (Subsecretaría de Pesca y Acuicultura) has worked on establishing new requirements and regulations, which are aimed at giving stability to the industry to ensure its consolidation, future growth and

162 INTERNATIONAL INVESTOR

development. Accordingly, various measures have been implemented to this end. There has been a stipulated increase in the supervision of fish farms to determine compliance with regulations and timely identification of diseases and sanitary problems. Restrictions have been placed on the smoltification process in fresh water, and furthermore, there have been restrictions placed on the importing of roes in order to drive the growth of the fresh water activity in the country. Areas for fish-fattening centres in seawater have been demarcated, thus limiting their concentration in zones of higher sanitary risk. A recess time has been stipulated in seawater fish farms between one fattening process and the next and offshore concessions have been relocated to avoid a concentration of biomass and the spread of disease. There has also been a decrease in the biomass density in the fish-fattening centres in seawater. TECHNOLOGY, RESEARCH AND INNOVATION In relation to technological developments, local industry has shown a marked development in the last few years, incorporating cutting-edge technology in the different stages of the productive processes, both in fresh water (roes, alevins and smolt) and sea water (fattening), harvest processes and processes in productive plants, using the same standards as Norwegian companies. In terms of research and development, improvements have been chiefly aimed at the control of sanitary problems caused by viruses, bacteria and parasites, but particularly the ISA virus, SRS and Caligus; all the through the development of new vaccines and drugs. In terms of innovation, the Chilean salmon industry in association with local mining companies have incorporated copper material for the construction of fattening cages in sea water, due to the antibacterial

agribusiness focus

3. EXPORTS BY SPECIES 2012 (US$, FOB)

5. EXPORTS BY PRODUCT 2012 (US$, FOB)

35%

Atlantic salmon

50%

Headed & Gutted (H/G)

21% Coho salmon

45%

Fillet

41%

22%

31%

Whole fish

19%

13% 4%

Portion

44% 37%

Trout

Other

31%

2012

2011

2010

Source: SalmonChile (Intesal)

6. EXPORTS BY COUNTRY 2012 (US$, FOB)

39%

Japan

142 228

USA

84 Coho salmon

Source: SalmonChile (Intesal)

4. EXPORTS BY SPECIES 2012 (KTONNES) Atlantic salmon

28%

Brazil

113

11%

Latin America (excl. Brazil)

119 127

5% 4%

131

Trout

2012

2011

2010

200

150

100

13%

Other

141 250

Source: SalmonChile (Intesal)

7. NUMBER OF PLAYERS PRODUCING 80% OF SALMONIDS PER COUNTRY 80 70 60

After an almost crippling ISA virus crisis, a recovery and an ensuing period of substantial losses in 2012, the industry faces important strategic and financial challenges

40 31

35 28

24 18

10 0

Norway 1997

2000

16 16 11

Chile 2003

2006

UK 2009

8 3

Canada

Faroe Islands

2012 Source: Companies, Kontaly analyses

power of the copper mineral. Although there are no statistics yet, regarding changes in the productivity index due to this development, it is expected that it can make improvements in the processes associated with a decrease in the bacteria that are present in the fish farms and zones. OUTLOOK After an almost crippling ISA virus crisis, a recovery and an ensuing period of substantial losses in 2012, the industry faces important strategic and financial chal-

lenges as it looks to capture its very attractive longterm growth potential. The projections for the industry expect further consolidated in the sector, regulations that strongly reduce the sanitary risks and reasonable growth in production, which does not have negative effects on prices and continues in step with the growth in salmon demand worldwide. The opening of new markets, such as China and Russia, and the increase in demand in Brazil, represents good prospects for Chile’s salmon and trout production, and for Chile’s salmon export sector in general.

CHILE 163

interview agribusiness

President

long-term financing at international market rates. But as I mentioned before, Chile’s agricultural market is dominated by smaller players, so the strict policies that these banks have for guarantees and minimum borrowing amounts limits the access to this type of financing for the vast the majority of farmers. In this sense, there is huge potential for developing this market, given that the Chilean farmers, and Chilean’s in general, are very responsible in relation to debt repayments and are very good borrowers.

INTERNATIONAL INVESTOR: What is the main reason why investors should look at this sector, and what challenges should they be aware of? PATRICIO CRESPO URETA: Chile’s agricultural sector is the most open in the world, competing without tariff barriers and subsidies of any kind. Farmers have made enormous efforts to create a space for themselves in existing global markets with high quality products that are consistent over time. Ownership structures are fairly small in Chile and there is no culture of working associatively, making economies of scale difficult. Our central competitive advantage is due to our position in the Southern Hemisphere, which translates to a seasonal cycle opposite to those of consumer markets in the Northern Hemisphere. So, during winter periods when those markets cease production, we are able to supply fresh vegetables and fruits.

Currently, 80 per cent of the water from the mountains flows into the ocean. Is it fair to say that work needs to be done fully capitalise on this resource? The state did fall behind in terms of the investment needed for the development of the necessary water infrastructure, which is required by the private sector in agriculture, as well as in mining and other industries. Our current reservoir capacity is about 4,000 million cubic meters and approximately 100,000 million cubic metres flows into the sea each year. So, this factor is putting the brakes on the level of development possible. Again, this means that Chile has a lot of room for improving and for taking advantage of our hydro resources, both in terms of constructing more regulated reservoirs with hydroelectric generation centres, as well as modernising the management criteria of large underground resources. We estimate that we could multiply by four the surface area being irrigated, so instead of 1.4 million hectares of irrigated arable land you could have 5.6 million hectares, roughly equal to size of the State of California.

PATRICIO CRESPO URETA SOCIEDAD NACIONAL DE AGRICULTURA (SNA)

Chile’s agricultural sector is the most open in the world, competing without tariff barriers and subsidies of any kind The potential for productivity is very high, with high quality, world-class production at low costs, due to favourable natural conditions of both the soil and climate. This explains the wide presence of our products all over the globe. For many products, we are world leaders. The accelerated development that Chile has experienced in recent years has resulted in a migration of unskilled labourers to the city to work in areas such as construction and, the skilled workforce are being attracted to mining and business arenas. This translates to a high cost of labour and means that some crops and types of fruit are not commercially viable anymore for operations based on the

164 INTERNATIONAL INVESTOR

CAREER DEFINING MOMENT

It was when I was 22 years of age and I ran for public office at a municipality. I was already diligent politician at that age and wanted to defend the values of freedom and democracy. I realised that was a privileged and had a responsibility to devote my time to others. LESSON IN BUSINESS

To be a good actor in the business world you have to believe in yourself and have no fear. The potential is there if you let your creativity flourish. Be audacious, courageous, and believe in yourself. use of hired manual labourers. In some instances, there is no manual labour available at any price. So we are experiencing restrictions on human capital that is qualitative as well as quantitative. This is turn presents opportunities, and has strengthened and accelerated the transformation of the sector through the mechanisation of processes, the introduction of state-of-the-art technology, and in some instances, a change in fruit varieties and the way in which orchards are operated. But there are restrictions in sourcing finance that is compatible with the maturation of investments, both in incorporating technology and in orchard conversion. What options currently exist for financing agriculture? Domestic banks generally lack the specialisation of an agriculture bank and, thus, are limited in their involvement. Most mid-sized producers resort to short-term credit facilities offered by banks and also make use of consumer credit offered by suppliers. However, these credit facilities without exception are subject to very high interest rates. The small producers have access to state funding via INDAP, an aid organisation. Large producers can access more specialised banks, such as Rabobank, which provides

Finally, what initiatives have been put in place to create a more sustainable sector? Policy emphasis is around the issue of environmental care, particularly when it comes to treatment of irrigation water. In this area, Chile is way ahead of many other comparable markets; currently, 95 per cent of our wastewater is sanitised. But, in general, a lot of these measures are driven by international consumers of our products. The demands markets that receive our exports have placed on us have led to an environmentally friendly culture in our agricultural sector.

agribusiness interview

RONALD BOWN FERNÁNDEZ

CHILEAN FRUIT EXPORTERS ASSOCIATION (ASOEX) President

INTERNATIONAL INVESTOR: Could you explain what the main areas of operations are of ASOEX? How do you go about safeguarding the interests of your members and promoting their interests? RONALD BOWN FERNÁNDEZ: The Chilean Fruit Exporters Association is a private notfor-profit trade organisation whose members represent 96 per cent of the volume of fresh fruit exported from Chile and more than 65 per cent of the fruit production. Our main objective is to facilitate the export of fruits from Chile across the globe and uphold the interests of our members and the sector as a whole. Our main areas of operation include: export promotion programs, management of phytosanitary agreements, administration of private phytosanitary inspection sites and the stimulation of independent research, development and innovation. We also work towards other aims: the promotion of industry worker training programs, contribution to the transparency of information within the sector, and the generation of studies, market analysis and technical information. Furthermore, in terms of market-based activities that I would also define as main areas of operation, we create of domestic and international synergies, organise technical and commercial seminars to update our growers and exporters on key market issues, and contribute towards the international harmonisation of standards and the promotion of sustainable practices. We safeguard the interests of our members by focusing on what is best for Chilean fresh fruit. We do not focus on the particular interests of any exporter or grower in particular, but rather we look out for the well being of the industry, without discrimination. We defend free and open competition and, above all, do not interfere in any commercial issues, but rather provide our members with a platform from which to address the important issues, which we confront as an industry.

CAREER DEFINING MOMENT

Almost 30 years ago, I had to make a particular decision about my career. I was offered the opportunity to head the South American marketing operations of a multinational company in Miami or stay in Chile and reposition the Chilean Fruit Exporters Association (ASOEX). I chose the latter and, due to that decision, I have had the privilege of presiding over this institution with the help of its dedicated team of professionals. LESSON IN BUSINESS

Listen, listen and listen. There is always time to listen to options and alternatives to become better informed before making a decision that may have relevant consequences. Could you talk a little bit about how the labour market is changing in the industry and the importance of good labour practices? The Chilean fruit industry has developed a unique sustainability model that includes those aspects related to food safety, protection of the environment and corporate social responsibility. This last aspect entails having care and respect for our industry’s workers, who are at the centre of our practices. Chile has experienced important levels of economic growth over the past few years that has brought about labour shortages in the industry, due to various associated factors. This is demonstrated by the migration of the younger work force, with higher salary expectations, from rural to urban areas in search of better salaries. In this context, we believe it to be of fundamental importance to retain our workers by keeping them satisfied and interested in the roles they undertake. A good example one of the labour initiatives we have developed is our Good Labour Practices manual, which is a complete practical guide for our exporters and growers. It outlines the policies, measures and initiatives that are

aimed at improving labour relationships and processes for the benefit of our workers. Additionally, for over 12 years, the industry has also addressed issues related to labour through an entity called Agrocap. The main function of this entity is to provide technical support to member companies, primarily through the promotion, organisation and supervision of training and technical assistance in relation to the development of the industry’s labour force. For example, Agrocap is developing specific training programs for temporary workers in order to provide more social mobility and additional income in the off season, when Chilean fruit is not in its peak production period. Agrocap has also developed the Certification of Labour Competences program, which aims to officially recognise the experience of those workers that have contributed to the development of our industry. How does the Chilean industry differentiate itself from other fruit producing countries? Where are the avenues of expansion? The Chilean fresh fruit industry is characterised by privileged natural conditions, rich and fertile soils and a temperate Mediterranean climate that provides for a long and reliable season of fresh fruit. We have a long and serious reputation as one of the world’s leading exporters of temperate produce and we are currently positioned as the largest exporter of fresh fruit in the Southern hemisphere, as well as being the number one exporter of table grapes, plums and blueberries in the world. In general, the industry has free and open competition amongst its participants. Each company is free to make their own decision in regards to their market development and product strategy. As a trade entity, we help the industry maintain its distinctiveness by providing key information in order to support the decision making process of our exporters and growers, hence facilitating the export process of Chilean fresh fruit across the globe. In terms of future expansion, our industry currently exports to more than one hundred different destinations across the globe, though there are still many untapped opportunities for our exports in Eastern and Central Europe, and South East Asia, among others. In order to further expand Chile’s fresh fruit exports and better develop the strategy we have created over the last few years, different product specific committees, which focus on developing specific action plans catering for the needs and objectives of producers of certain species of fruits, such as cherries, kiwis, citrus and blueberries, have been drawn up. We believe this will guide our expansion and enable the industry to keep growing.

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interview agribusiness

MARÍA EUGENIA WAGNER SALMON CHILE President

INTERNATIONAL INVESTOR: Can you please provide us with a brief overview of the organisation? What is your contribution to the salmon industry both locally and globally? MARÍA EUGENIA WAGNER: Salmon-farming is Chile’s third largest export sector, behind the mining and forestry industries. SalmonChile A.G. is an association that represents salmon suppliers and producers in Chile. It has been in existence for 28 years and has a presence in La Araucania, Los Lagos, Aysen and Metropolitan Regions. The union is an example of high-quality representation for the salmon industry in Chile and abroad.

As with all productive activities, we must permanently move towards greater sustainability, in step with what science discovers and society demands In the South of Chile, the Salmon industry is an extremely important activity for the overall economy of the region and is a large employer in the area. In terms of labour figures, the industry currently provides over 34,000 direct jobs, a historic high in the area. This is reflected in the low unemployment rate and high economic dynamism in significant salmon communes, such as Puerto Montt, Calbuco and Puerto Aysen. Recently, the association has been focused on strengthing its operations based on the strategic pillars proposed by SalmonChile. The pillars seek to enable the association to approach all the opportunities and externalities that the industry is facing in a better way. The objectives of the strategic pillars proposal aims toward fortifing the productive model through efficient regulation; having a more powerful presence in markets; encour-

166 INTERNATIONAL INVESTOR

CAREER DEFINING MOMENT

My career-defining moments were when I accepted the role as under-secretary of the treasury during the Lagos Administration and when I ran an NGO related to social responsability matters. These roles have allowed me to understand the real meaning of the ‘common wealth’ and the benefit that this brings to the development of the people, industry and the country. LESSON IN BUSINESS

The most important lesson is to know how to listen, in order that you can generate the necessary cohesion to move forward in the short term and the sense of purpose to achieve long-term objectives. aging research and development work through Intesal, a Technical Institute that coordinates various research programs, monitoring and activity tracking; and consolidating links with communities that surround the industry in its divergent and distant territories. Salmon farming has been affected ISA and Salmonid Rickettsial Septicemia, which have devastated salmon populations. How has the industry learnt to deal with these types of diseases? Without doubt we have learnt from past experience and, in fact, we have learnt to coexist with these pathologies. Proof of this eventuality is that we have been able to detect and control two cases of ISA in 2013 in time to mitigate any serious effects on the industry. In case of Salmonid Rickettsial Septicemia, this disease only exists in Chile. The illness is produced by a intracellular bacteria. Today, this pathology is looked after permanently by the authorities and companies are controlling it through the implementation of vaccine programs and the use of antibacterial agents. What role do you think government should play in the salmon industry? Government role is, and has been, very im-

portant for the salmon industry. We have worked for many years in conjunction with the government to configure better regulation and a new productive model that protects the sanitary and environmental activity and fortifies Chile’s competitive edge in the industry. Consequently, we have consolidated Chile’s reputation as a sustainable salmon producer. The current model has strong oversight from the state that guarantees sanitary, labour and environmental regulation compliance from all companies operating in the sector. Furthermore, in order to ensure the industries sustainability, participants must fulfill the stringent quality, environmental care and labour protection standards, which are demanded by the markets. Our industry is being certified under the highest standards, which is what allows our product to reach the most demanding consumers in places like the United States, Japan and Europe. Please tell us your views on the role of outside investors and the role of research and development as part of a sustainable salmon industry? Local salmon farming must continue to include science and technology in its processes, as well as engaging in permanent dialogue with the communities within which the industry operates. As with all productive activities, we must permanently move towards greater sustainability, in step with what science discovers and society demands. In that sense, it is still necessary to make improvements in all aspects of the value chain. The most important being energy efficiency and the discharges into the aquatic environment. It is in these aspects through which salmon-farming, at global level, must still look for alternatives to improve its environmental impact. Other important aspects to consider are the challenges related to logistical support, which must react and operate in isolated areas and sometimes under unfavourable climate conditions. The industry has implemented a systematic program of work through alliances with different national and international universities and this allows us to carry our important theoretical and applied research in significant areas, such as vaccine effictiveness and disease epidemiology.

agribusiness interview

eties like Pinot noir and Syrah, and aromatics such as Riesling, Viognier and Gewürztraminer are an important part of what Chile has to offer. Also, sparkling and late harvest wines are becoming increasingly popular. Our main market is the UK, but countries such as Netherlands, Finland, Japan, Canada and Ireland are also very relevant markets for our company.

ADOLFO HURTADO CONO SUR

Chief Executive Officer and Chief Wine Maker

INTERNATIONAL INVESTOR: Please begin by giving a brief overview of Cono Sur and its operations? ADOLFO HURTADO: Our winery was founded in 1993, we are 20 years old as of 2013. The property is owned by Concha y Toro; however, it is maintained as a completely independent operation. It was founded with the vision of producing premium, expressive and innovative wines conveying the spirit of the New World. There are three fundamental pillars that have characterised our philosophy and success from the very beginning: innovation, quality and caring for the environment. As an example of our innovation strategy, Cono Sur Vineyards & Winery was the first in Chile to produce Viognier. Moreover, we are the largest Gewürztraminer producer in South America and we are the only winery in Chile to have a Riesling with origins in the Bío Bío Valley. Most importantly, however, we are possibly the largest Pinot noir producer in the world. Those examples of innovation, along with the undisputed quality of our wines, have transformed us into the second largest exporter of Chilean wines. Could you elaborate on your innovation policy in terms of enhancing value and consumer loyalty? The cornerstone of Cono Sur is innovation. Cono Sur has diversified and enriched its fruit sources, and we are constantly searching for the areas that will best express the potential of each grape variety. We have more than 1,500 hectares planted, ranging from the Limarí to the Bío Bío Valleys, which are the northernmost and southernmost frontiers of Chilean viticulture, so we take full advantage of the great climate conditions and diverse terroirs that Chile provides and we produce more than 17 different grape varieties We also are pioneers in producing premium Pinot noir. The winery was founded around the oldest Pinot noir vineyards and is deeply

CAREER DEFINING MOMENT

Both sides of my family have always been linked to the countryside, my mother is from the Colchagua Valley and my father is from Casablanca, thus I see this as my career defining moment as ever since I was I child, I knew that I wanted to be an agronomist and, over time, I realised that I also wanted to be a winemaker. LESSON IN BUSINESS

If you want to be in wine, you must understand that wine is a calling, a passion. You have to give it all you have, but the rewards are great. If you cannot do that, it may be best that you try something else. committed to this variety. In 1999, we created a project to make the best Pinot noir in Chile, we incorporated time-honoured French winemaking techniques and we worked with the renowned winemaker Martin Prieur from Burgundy. He helped us to select the best Chilean terroirs and advised us on optimum vineyard management and winemaking. In 2013, we also launched Cono Sur’s first global campaign called Celebrate Southplicity that involves seven of our brands at a corporate level. This campaign aims to strengthen Cono Sur´s image as a New World winery according to the brand’s values; it shows the Cono Sur lifestyle, which is sophisticated, yet easy going and simple at the same time. Globally, what consumer trends have you observed and which markets will be key to the future growth of your business? We are extremely pleased with the sales results and growth; we have a compound annual growth rate of 12.8 per cent in the last five years. From a global perspective, I feel that Chilean wine is headed in the right direction and that consumers are open to buying more of our expensive and premium wines. Chile is no longer perceived as only a producer of good price-quality wines. New vari-

Please explain how your policies relating to sustainable agriculture, integrated vineyard management and carbon footprint reduction are realised in your business strategy? In each process, from products to services, Cono Sur Winery is dedicated to always demanding high quality standards and we strive to implement an integrated management system throughout the entire organisation, which includes commitments to sustainability, managing our carbon footprint and considering the environment. We have become pioneers here in Chile with respect to our sustainability and environmental policies, due to our organic vineyard management, ISO certifications, carbon neutral certifications, use of ultra-light bottles and Fairtrade wine production. Drinks Business Magazine also named us Green Company of the Year. In 2000, we began our organic viticulture project with 40 hectares in our Chimbarongo vineyards in the Colchagua Valley. In 2003, after the necessary three-year transition period, we produced our first wine, a Cabernet Sauvignon / Carménère, made from organically grown grapes, certified by BCS Öko-Garantie GmbH. Since then, 260 more hectares of different varieties have been added to the organic program. In July 2007, Cono Sur became the first winery in the world to obtain CarbonNeutral® delivery status, which is renewed annually. This means that the CO2 emissions from the maritime shipping of the wines are measured and compensated through the purchase of Carbon Bonds on international projects that have reduced Greenhouse Gas Emissions. In 2010, Cono Sur became the first winery in South America and third in the world to measure the carbon footprint under the ISO 14.064:2006 standards, and was awarded the CarboNZero certification from the Certified Emissions Measurement and Reduction Scheme (CEMARS™), recognised in the top 50 export markets. Cono Sur is dedicated to complying with its integrated management policy, which includes commitments related to the implementation of labour legislation, occupational health and safety, workplace management, compliance with the code of self-conduct, and other codes we voluntarily observe.

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interviewâ&#x20AC;&#x192; agribusiness

CORMA

How important is the development of infrastructure to the industry? Infrastructure development is very important to the industry because, unlike energy costs and exchange rates, we can control and improve infrastructure. We can reduce basic transport cost very significantly, somewhere between 30 to 50 per cent of the current cost, by developing quality railways and increasing their load limit. Furthermore, currently, we cannot transport more than 45 tons per truck on highways in Chile, whilst most of our competitors transport more than 62 tons per truck.

INTERNATIONAL INVESTOR: How do you promote the interests of the forestry industry? FERNANDO RAGA: Corma is an association founded 60 years ago by the sawmilling industry. We have around 130 associated companies including the countryâ&#x20AC;&#x2122;s three most important forestry companies: Arauco, CMPC and Masisa, as well as a number of smaller lumber producers. Our job is to represent the opinion of the sector as a whole. We reach out to people through the media, however, we are currently concentrating more on political leaders and industrial associations. We work with a very good government agency called Instituto Forestal (INFOR), which produces reports and information. Focusing on domestic operations, we generate internal operational statistics, such as the number of labour accidents, and we provide industry support. We bring together companies when it is advantageous to do so, on forest fire prevention campaigns, for example. Finally, we organise a trade fair called Expocorma every two years, which is well attended by service and machinery suppliers from the US, Canada and northern Europe.

Could you elaborate on the role that sustainability has played in the forest industry? In Chile, we have about 2.6 million hectares of plantations and about 13.6 million hectares of native forest. About 70 per cent of our plantations in the country are currently certified with the highest standard certifications. I would say that Chile has one of the most demanding certification processes in the world. While it takes six months for a forest to get certified in Brazil, in Chile it can take more than four years because our political and environmental NGOs are much more demanding. Much of our forest is in the hands of thousands of small farm owners, which is means it is very difficult to put together and certify. Regarding energy generated from biomass, the situation in Chile is different than in Europe because we do not have a system of incentives and penalties. In Chile, we consider market conditions only. The sector tries to use waste materials to produce energy. The larger integrated companies use the biomass obtained from their own plantations. Paper producers are net users of energy and pulp producers are net producers of energy. So if you produce pulp and paper you use the extra energy for paper. CMPC, a producer of both pulp and paper, cannot cover all the energy requirements for paper production with pulp. Arauco, which is not a paper producer, sell their energy to other users.

FERNANDO RAGA President

How important are SMEs in the forestry industry and what are their main challenges? In Chile, SMEs employ the majority of workers in the forestry sector, therefore, they are very important. Even though the three large companies are responsible for 70 or 80 per cent of exports, the sector consists of much more than that, including technology providers and producers of seedlings. Many of the log-producing SMEs are not encountering problems because they have a big market and a good price for wood. The only segment that is expressing concern is the sawmillers, who must purchase logs. In Chile, we have two main groups of species, the most important is the Radiata Pine

168 INTERNATIONAL INVESTOR

CAREER DEFINING MOMENT

When I entered the forestry industry in 1980, the economic analysis applied to the forestry sector was quite weak. As an industrial engineer, I saw this as an opportunity and an interesting field to develop. Many people began to take note of my work, so I stayed in the industry. LESSON IN BUSINESS

In business and in life, you cannot trust short cuts; you have to see the broader picture. which has long fibres, is long burning and is suitable for sawmilling. We also have two main species of Eucalyptus used to produce pulp for export. As it is more profitable for foresters to produce Eucalyptus, pine production is not growing adequately. Many of the small plantation pine farmers are switching to Eucalyptus, so production is decreasing significantly. Companies will have to plant more pine. We made an analysis; supply is the main problem, worsened by the high cost of energy. It is hard for SMEs to compete with industrial size sawmills, so we are trying to help these kinds of SMEs by encouraging the government to create a fund in order to increase forestation with Radiata Pine. Big companies can guarantee purchases at market price with a certain minimum, eliminating risk of volume or price. We could also close the difference with carbon credits. If we plant pine for social reasons, the difference in profitability generates additional business for pine farmers. However, we cannot sustain all SMEs with in this way because in Chile most of the good quality land is already planted. We can plant 10,000 or 20,000 more hectares and that is all. SMEs are grouping together to export. We have have seen an example of this in the Maule region where six SMEs are acting as a group to export to China and the U.S.

What are the different avenues of expansion for the industry? It is important to continue with the forestation program in all the areas that are suitable; meaning areas without native forest. We also need to increase productivity by improving the skills of the people and increasing competitiveness aspects like infrastructure. Additionally, some new generation products are redefining the sector, such as Nanocellulose. So, for the future, innovation and technology are other important considerations.

agribusiness interview

ANÍBAL ARIZTÍA REYES SERVICIO AGRÍCOLA Y GANADERO (SAG) National Director

INTERNATIONAL INVESTOR: What are the most important operations that SAG oversees? ANÍBAL ARIZTÍA REYES: SAG is a government agriculture agency that works to preserve the health of Chile’s flora and fauna, and whose main objectives are to prevent animal and plant diseases from entering the country and to eradicate those that have entered. Chile has strong natural borders, but they are breeched by passengers arriving by plane and by trucks entering the country with seeds and animal products. To date, we have a good track and record and have been very successful: Chile is the only Latin American country to be free of the European moth and the only one to be free of foot and mouth disease without having to resort to a vaccinebased means of control. Technically, we are very proficient and have developed long-term programs for eradicating pests with the application of biological control.

A combination of consolidation and the use of modern technology and farming techniques could be adopted to increase competitiveness Chile exports around US$ 14 billion per year of agricultural products (including forestry), so it is imperative that we stay in close contact with our equivalent government agencies in other countries. We certify that all products coming from Chile are free of antibiotic and medicine residues, pesticides and disease. How can the agribusiness sector increase its competitiveness? The fact remains that in Chile there are almost two million small producers with ten or twenty hectare farms. It is still a very atomised industry and by modern day farming methods these farmers are inefficient. So

CAREER DEFINING MOMENT

There have been two distinct moments. The first was when I graduated university and I was working for the government of the time while studying a post-graduate course. One day the chairman of the lumber company Arauco called me and I made a 180-degree turn and went to work for the private sector. The second was years later, when I got a call from the government to take up this position at SAG, which brought me back into the public sector. LESSON IN BUSINESS

In business, determination is most important. If you believe in a project, you must make a decision and put your best efforts into going forward, regardless of the problems you face. clearly a combination of consolidation and the use of modern technology and farming techniques could be adopted by these farmers to increase their competitiveness. It is an opportunity; it is a big opportunity and unless it is seized upon and the status quo perpetuates then it will hold back in the development of the agribusiness sector. When I started in 2000, the dollar exchange rate was around 800 Chilean pesos, now it is around 500. This has led to problems in the industry because it is no longer as profitable as it once was. I believe Chilean companies should learn from what companies in other countries, like Australia, have done in the same situation, and form joint ventures or associations (or consolidate). However, when it comes to agriculture, there is plenty of family tradition and pride wrapped up in the land, and Chileans generally like to control their companies. Even the biggest, non-agricultural sector companies in Chile have high percentages of local control. Hence, there are good opportunities in Chile, but given this cultural phenomenon they require some work and local assistance to realise.

What developments have you implemented in the wine industry? Chile is a very old wine producing country and we were very much influenced by the European culture of wine production. In Chile, we are not as strongly regulated, but in certain areas, regulation has held back development. But that is changing, and these changes are creating new opportunities in the market, for example, in relation alcohol content. Due of Chile’s climate, we generally produce wines in the 14 to 15 per cent range and cannot successfully create a product with a lower alcohol content than this without adding water to dilute the wine. Up until recently this process was illegal. However, we have made changes here in order to allow a measureable percentage of water into the wine because in all wine-producing countries except the US, consumption of wine with a high alcohol content is trending downwards. We expect this trend to continue, and so in order to remain competitive we have adapted. How will SAG evolve in the near future? We will continue to be the agency present at the farms and throughout the production chain for products going abroad, certifying the food safety standards for the countries that require them. The big difference is that now we are concerning ourselves much more with food safety standards and quality assurance systems. Previously, this work fell to the Ministry of Health. We are currently working with Congress on expanding the agencies brief to implement standards and systems throughout the production chain. So producers and the manufactures of sub products would also held responsible in meeting standards. This will be important as Chilean industry develops further along the value chain.

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projects agribusiness

6 million litres WINE CELLAR CAPACITY

50 hectares

ORGANIC VINEYARD AREA

Santiago REGION

442 hectares TOTAL AREA

US$38m SALE PRICE

O’Higgins REGION

SALE OF WINE CELLAR AND/OR ORGANIC VINEYARD Description: A wine cellar and organic vineyard for sale. The wine cellar is constructed out of stainless steel and epoxy cement and is equipped with high-quality French-Italian technology for the wine production process, including receipt of grapes, crushing and storage. The vineyards are located in the Maipo Valley, an hour from the wine cellar. They have water available for drip irrigation and are planted with red grape varieties. The wine cellar and vineyards have Organic and Fair for Life certification from IMO Switzerland and Fairtrade certification from Fairtrade International. Proponent: Private Project coordinator(s): Vitivinícola y Comercial Teillery Ltda Location: Isla de Maipo municipal district, Santiago Region Area/capacity: The wine cellar has a capacity of 6 million litres and the organic vineyard has an area of 50 hectares Estimated investment: The wine cellar and the vineyards are for sale at US$8,300,000 and US$2,660,000, respectively Starting date: 2013 Source and contact: Teillery: Solange Teillery, Sales Director, solange@teillery.cl, tel: +56 2 2817 2297

PREMIUM MINERAL WATER Description: Regional agricultural company seeking to sell or let a premium mineral water bottling plant with an annual production capacity of 204,000,000 litres in both bottled and bulk form. The plant, located in Chanqueahue in the Rengo municipal district of the O´Higgins Region, has a total area of 442 hectares. Proponent: Private Project coordinator(s): Agrícola Fundo El Rincón Limitada Location: Chanqueahue, Rengo municipal district, O’Higgins Region Area/capacity: The plant has a total area of 442 hectares and storage capacity for a total annual output of 204,000,000 litres Estimated investment: The sale price is US$38,000,000 and the annual rent for a period of 30 years is US$2,000,000. In both cases, the cost of water withdrawal and construction of the plant represents an additional US$3,500,000. Starting date: To be defined Source and contact: Agrícola Fundo El Rincón Limitada: Francisco Martínez Valenzuela, General Manager, fmartinez@viverosbroteverde.com, tel: +56 72 680 129; Jaime Manríquez Nanjarí, Executive Director, jaime@oteceleva.cl, tel: +56 2 2249 8451 / +56 9 7438 2235, www.camgroup.cl/aguas

170 INTERNATIONAL INVESTOR

agribusiness projects

8.6 million

LITRES/DAY EXTRACTION CAPACTIY

US$1.5m

ESTIMATED INVESTMENT

WATER RIGHTS FOR PRODUCTION OF BOTTLED MINERAL WATER Description: Water rights on Lake Pintos Concha in the Los Lagos Region for their subsequent commercial use to sell bottled mineral water. The lake is located on private property and is fed by numerous springs and snow runoffs. Extraction capacity reaches 8.6 million litres per day. Proponent: Private, individual Location: Hornopirén, Hualaihué municipal district, Los Lagos Region Area/capacity: 6 hectares of land and a flow of 100 litres/second Estimated investment: US$1,500,000 Starting date: When acquired by interested party Source and contact: Alfredo Stanke, alfredolodge@hotmail.com, tel: +56 9 9419 3957

Los Lagos REGION

200 tonnes PER SEASON

US$400k to US$800k ESTIMATED INVESTMENT

Valparaíso

WALNUT PRODUCTION AND PROCESSING Description: Agricultural company seeking foreign capital to produce, process (cracking, selection and calibration) and export walnuts. At present, the company also markets walnut oil, chili pepper, merquén, smoked sea salt and processed nuts (hand cracked). It has a network of clients in different overseas countries and, in penetrating these markets, has received support from ProChile. Proponent: Private Project coordinator(s): Agrícola y Comercial San Juan Location: Valparaíso Region Area/capacity: 200 tonnes/season Estimated investment: US$400,000-US$800,000 Starting date: Pending injection of capital Source and contact: Agrícola y Comercial San Juan, Juan Luis Villate, agricom.sanjuan@gmail.com, tel :+56 9 9277 3669

REGION

CHILE 171

projects agribusiness

600kg/month PRODUCTION CAPACITY

US$300k − US$500k ESTIMATED INVESTMENT

Arica y Parinacota REGION

100 items

OF EQUIPMENT PER MONTH

US$1m

TOTAL OR PARTIAL SALE

Los Lagos REGION

INDUSTRIAL PROCESSING OF CAMELID FIBERS Description: Fibras Andinas is Chile’s first industrial processor of camelid fibers. It produces ultra-fine llama wools for hand knitting sought by a growing market of high-end knitters in the U.S. and Europe. The commercial platform is located in Colorado, permitting direct supply of retailers and end users in the U.S. on the basis of a highmargin premium model with volumes in line with a current production capacity of 600 kilograms per month. Scale-up plans are geared to the production of high-end garments with a high yield, the development of thermal insulators using natural fibers, in-house production of high-quality raw materials and ecotourism. Financing is sought either in the form of borrowing or the sale of a partial stake. Proponent: Private Project coordinator(s): Fibras Andinas Chile S.A. Location: Industrial Tax Free Zone, Arica y Parinacota Region Area/capacity: 600 kg/month Estimated investment: Approximately US$300,000 to US$500,000 Starting date: Pending injection of capital Source and contact: Fibras Andinas Chile S.A.: Jorge Antonio del Carpio, jorgedelcarpio@fibrasandinas.com, tel: +56 58 327 132

LED ELECTRONIC PRODUCTS FOR THE SALMON INDUSTRY Description: A regional company that develops, produces and markets electronic products with LED technology for the salmon farming industry. The company has developed and installed lighting with LED technology for each photoperiod application in both freshwater and the sea, with energy savings of up to 90 per cent. The system generates comparative advantages thanks to the efficient use of energy and the proper stimulation of the fishes’ biological processes which, in the case of Pacific salmon, makes it possible to delay maturity and accelerate growth, bringing forward the fattening period by two months. This reduces operating and sanitary costs and increases the number of months per year the product can be supplied. Proponent: Private Project coordinator(s): ProChile in the Los Lagos Region Location: Puerto Montt municipal district, Los Lagos Region Area/capacity: A total of 100 items of equipment per month Estimated investment: US$1,000,000 for total or partial sale Starting date: Pending injection of capital Source and contact: ProChile Los Lagos: Marcelo Sobarzo, Director, msobarzo@prochile.gob.cl, tel: +56 65 260 969

172 INTERNATIONAL INVESTOR

agribusiness projects

12,000 tonnes

PRODUCTION CAPACITY PER YEAR

US$3m

IN FINANCING OR THROUGH SALE

Los Lagos REGION

PRODUCER OF VEGETABLE PROTEINS Description: A company that markets agricultural, forestry and seafood products is seeking to develop a new project in Chile related to the extraction of byproducts, such as proteins and magnesium sulfate, from shellfish juice. Since it involves proteins, the project represents a global opportunity due to a rapid trend towards the use of claims related to ‘high protein level’. There has been intense activity in the registering of patents related to the creation of alternative proteins other than those of dairy and meat origin in order to cover the protein gap that will result from the greater demand of the growing world population. The company has several mussel farming centres with the capacity to produce 12,000 tonnes of raw material per year and fixed assets of US$1 million. Initiative: Private Project coordinator(s): ProChile in the Los Lagos Region Location: Castro municipal district, Los Lagos Region Area/capacity: 12,000 tonnes/year Estimated investment: Approximately US$3,000,000 in financing or through sale Starting date: Pending capital injection Source and contact: ProChile Los Lagos: Marcelo Sobarzo, Director, msobarzo@prochile.gob.cl, tel: +56 65 260 969

Organic vineyard in Casablanca Valley

CHILE 173

OUR PASSENGERS’ PREFERENCE IS OUR BEST AWARD

CHOSEN FOR 5 CONSECUTIVE YEARS AS THE TWO BEST AIRLINES IN SOUTH AMERICA.

transport & logistics overview

TRANSPORT & LOGISTICS Chile's growing economy requires solid growth in infrastructure investment, even in the wake of the recent infrastructurerebuilding period that followed the 2010 earthquake. Road building will remain the main focus, but it is expected that railways and ports will also require a large amount of investment.

INFRASTRUCTURE CHALLENGES AND PERSPECTIVES IN CHILE

Port of Valparaiso

GEOGRAPHY, ECONOMY AND INFRASTRUCTURE Despite its complicated geography, Chile has been able to develop its infrastructure to allow for the exploitation of its mineral wealth in the north, the connection of its densely populated areas and agricultural development in the central valley to important global economies, and the integration of areas rich in forestry in the southern region. Nevertheless, like other economies in Latin America, Chile has been negotiating the difficult path between the need to invest in infrastructure and the need to improve social services. As a result, the country was one of the first in the region to actively attract private capital to infrastructure investments. After a period of recovery following the major earthquake in 2010, the challenge for Chile is to ensure investment in infrastructure is increased to keep pace with the growth of the economy. The failure to achieve this

balance has been an issue for many Latin American countries and has led to bottlenecks and economic inefficiency. Chile’s geography is very diverse, the country is long and narrow and this poses a number of challenges for infrastructure development. The territory stretches 4,270 kilometres from north to south and encompasses a variety of landscapes. About 80 per cent of its territory consists of mountainous regions and Chile is located along a highly seismic and volcanic area. This presents a further problem to infrastructure development, as demonstrated by the 8.8 degree 2010 earthquake, which affected 12.8 million of the countries inhabitants in a 630 kilometre area and caused US$30 billion in damages, equivalent to 18 per cent of the country’s GDP. It damaged 1,554 kilometres of highway, 212 bridges, 9 airports, 28 fishing communities, 73 hospitals, 748 water systems and 75 per cent of

the sewage network. According to the country’s president, Sebastian Piñera, 99.1 per cent of the affected infrastructure has been restored and the reconstruction will be complete by March 2014. Since this major seismic event, the Chilean economy has grown 5.2 per cent, created 428,000 employment positions and recovered its investment capacity. The Chilean economy is mainly focused on the export of minerals, pulp and agricultural products; roughly 95 per cent of the country’s foreign trade is operated through its ports. Copper mining still represents the largest sector in terms of production and is the Chile’s main source of income. The Escondida mine is the largest copper mine in the world, producing over 5 per cent of global supplies. Overall, Chile produces a third of the world’s copper. This level of production requires a reliable and broad transport system to connect the mines with the ports that export the product worldwide. INFRASTRUCTURE SUMMARY PORT Chile’s ports are spread along its coastline and can be divided into 3 subsets: privately owned and operated (see fig.1); state-owned and operated (see fig.2); privately owned, but open for public use (see fig.3). The most important public ports are the San Antonio and Valparaiso Ports. They represented 54 per cent of all cargo moved through state-owned ports in 2008. RAIL The protracted nature of the country and consequent isolation of many Chilean cities was a contributing factor in the development of a rail system in the first half of the 20th century. However, during the 1950s, the railways began to suffer from strong competition from trucks and buses, leading to the system’s virtual bankruptcy in the 1970s, surviving only on government subsidy. In the 1990s,

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overview transport & logistics

STRENGTHS ■■ Market-friendly policies and stable institutions in infrastructure sector ■■ Attractive legal and regulatory framework for infrastructure concessions ■■ Favourable business environment for infrastructure investment and operations

WEAKNESSES ■■ Geography challenges − adverse landscapes, long and narrow ■■ Risk of seismic events ■■ Government budgetary restrictions ■■ High insurance premium in infrastructure assets after 2010 earthquake

THREATS Changes to environmental regulations ■■ Competition with other Latam countries − Brazil, Argentina, Colombia ■■ Fluctuation in global commodities demand − uncertainty over China's growth ■■ Social unrest − putting more pressure to expand social services ■■

OPPORTUNITIES Growing economy − 5−6% GDP growth ■■ Infrastructure for increased mobility ■■ Strong pipeline of attractive infrastructure projects ■■

reforms managed to revitalise the freight transport by transferring the operations to the private sector, but the passenger services disappeared. The rail network is currently expanding to an extent, with the southern network being the most active; some companies use the northern rail network to transport cargo. However, as the lines are not all connected, this presents a problem to companies aiming to transport cargo over long distances. ROAD Chile has 81,000 kilometres of roads, out of which, 17,000 kilometres are paved. As a consequence of its challenging geography, Chile has one of the lowest road densities in the region. Despite this, around 3,000 kilometres of highways, called autopistas, have been built in Chile in the past decade, which are currently under private concessions. AIR Chile is globally connected to the most impor-

tant cities in the world by air transport, with over 220 direct flights per week leaving the Santiago airport to cities in Argentina, Mexico, the U.S., Europe and New Zealand. There are 11 other airports in the country, which play an important role in the movement of passengers and cargo. THE INVESTMENT MODEL − ATTRACTING PRIVATE CAPITAL Chile has been one of the leading nations to successfully attract private capital for infrastructure investments in Latin America. During the last decades of the 20th century, infrastructure investments did not follow Chile’s economic growth, creating bottlenecks for producers that depended on roads, ports and airports to commercialise their goods. When democracy was re-established in 1990s, the government was put under a lot of pressure to improve and expand social services whilst, at the same time, improve Chile’s competitiveness in global markets, both were expected with a limited budget.

The government recognised the need to associate with private investors through long-term concessions to operate specific services. With the support of Inter-American Development Bank (IDB), the Ministry of Public Works designed the legal and regulatory framework for infrastructure concessions, incorporating the lessons learned from other countries that implemented similar infrastructure policies. The first concession program was launched in the mid-1990s with several public tenders open to national and international companies. The first priority of the government was to reconstruct the main road infrastructure in the country. Route 5, a 1,500 kilometre highway from La Serena in the North to Puerto Montt in the South, connected 78 per cent of the industrial production and 94 per cent of the agriculture production. The magnitude of the project required it to be divided into eight concessions averaging 200 kilometres each, with a total of $2.3 billion invested. During the same period, the government authorised concessions of several other highways. Moreover, legislation related to airports was expanded or adjusted, due to the growing demand from the perishable goods (e.g. fresh fruits and salmon) industry and from increased passenger flows. Concession contracts to remodel and operate eight of the main airports were signed with private companies for periods varying from 8.5 to 16.5 years, among them a US$220 million concession to build new terminals at Comodoro Arturo Merino Benítez International Airport in Santiago. There are several reasons for the success of the concession program in Chile. First, the stability and technical competency of the institutions that manage the concession programs, which have, as far as possible, avoided political interference and encouraged private investment. Second, a sophisticated system to manage the inherent risks related to long-

1. PRIVATELY OWNED PORTS Port

Total Cargo Moved (2011) Metric Tons

Total Cargo Moved (2012) Metric Tons

Primary Types of Loaded Cargo (2012)

Primary Types of Unloaded Cargo (2012)

Quintero

11,268,145

13,112,862

N/A

Fuel

Patillos

5,506,336

4,504,574

Salt

N/A

Huasco

3,958,551

4,206,899

Metallurgy/Minerals

Fuel

Patache

1,793,282

1,954,007

Metallurgy/Minerals

Chemicals / Fuel

Guayacan

867,595

1,806,821

Salt, Metallurgy/Minerals

N/A

Caleta Coloso

1,581,991

1,519,448

Metallurgy/Minerals

N/A

T.P. San Vicente

4,571,632

1,344,801

N/A

Fuel

Pelambres - Los Vilos

1,139,556

883,874

Metallurgy/Minerals

N/A

Caleta Michilla

531,502

527,722

Metallurgy/Minerals

Chemicals

Cabo Negro

457,703

356,315

Pulp, Fruits, Fish, Wood

N/A

Chañaral

65,986

76,244

Metallic Copper / Metallurgy/Minerals

N/A

Bahia Gregorio

N/A

N/A Source: Camara Maritima Y Portuaria de Chile A.G

176 INTERNATIONAL INVESTOR

transport & logisticsâ&#x20AC;&#x192; overview

2. STATE OWNED PORTS Port

Total Cargo Moved (2011) Metric Tons

Total Cargo Moved (2012) Metric Tons

Primary Types of Loaded Cargo (2012)

Primary Types of Unloaded Cargo (2012)

San Antonio

11,392,263

12,374,674

Fruits/Vegetables, Metallic Copper, Metallurgy/Minerals

Cereals/Chemical Products/Metals/ Others

Valparaiso

8,457,122

8,543,261

Fruits/Vegetables, Metallic Copper, Metallurgy/Minerals

Metals/Plastics/Other

San Vicente

5,097,922

6,563,566

Wood, Paper

Fuel

Antofagasta

3,040,411

3,773,217

Metallic Copper/Metallurgy/Minerals

Fuel/Vehicles/Others

Iquique

3,692,869

3,495,963

Metallic Copper/Metallurgy/ Minerals, Salt

Fuel/Textile/Vehicles/Others

Arica

2,243,430

2,258,629

Fishmeal, Mettlurgy/Minerals

Fuel/Metals/Others

Coquimbo

688,483

1,095,287

Fruits/Vegetables, Metallurgy/Minerals

Fuel/Chemicals

Punta Arenas

140,072

284,325

Metallic Copper, Niter/Fertilizer

Metals

Talcahuano

4,443

107,551

Seafood

Fuel/Chemicals

Puerto Montt

472,733

47,456

Other

Fertilizer/Cereals/Chemicals

Chacabuco

10,386

N/A

N/A Source: Camara Maritima Y Portuaria de Chile A.G

term infrastructure investment was implemented, including minimum income generation guarantees, mechanisms to manage exchange rate risks and bond issues to cover construction costs. Risks were also allocated to the party more qualified to manage them, e.g. construction risks to the concessionaire and private property expropriation prior to construction to the government. Third, the Chilean government prioritised public participation in the concession program through public consultation and conflict resolution forums, allowing objections and influence in the final project design even if it delayed the construction for several years. The transport sector will continue to rely on both government and private investment. The Build-Operate-Transfer concession programmes will ensure a lower risk to the private investor and that these companies

will see a good return on their investment. Concessions have been very successful in Chile and, going forward, it is expected that a considerable number of privately owned companies will continue to be interested. One example of a concession that sparked significant interest from foreign companies is the Agua Negra road tunnel. The tunnel links Chile and Argentina through two 13.9 kilometre one-way tunnels, connecting the San Juan province in Argentina with the Coquimbo region in Chile, and already has interest from 23 companies in 6 different countries. The US$1 billion project bid is scheduled to take place in the first quarter of 2014. Currently, Chile is also adapting its concession model to serve an even broader spectrum of infrastructure needs. Different ministries are executing or preparing concession programs of water and sewage services,

railroads, urban and interurban transportation (including buses and electric cars), irrigation systems, ports, hospitals and prisons. Even with Chileâ&#x20AC;&#x2122;s challenging geography, the growing economy allied with an attractive investment environment will ensure solid growth in the sector. INVESTMENT IN INFRASTRUCTURE REGIONAL Analysts predict that Latin America, as a region, needs to invest US$185 billion per year in infrastructure to support its economic growth. Currently, infrastructure investments correspond to 2.1 per cent of regional GDP, totalling US$511 billion until 2015. This amount is only sufficient to operate and maintain existing infrastructure, without increasing the competitiveness of the region. Most of the infrastructure investment is in

3. PORTS OPEN FOR PUBLIC SERVICE (WITH PRIVATE ADMINISTRATION) Port

Total Cargo Moved (2011) Metric Tons

Total Cargo Moved (2012) Metric Tons

Primary Types of Loaded Cargo (2012)

Primary Types of Unloaded Cargo (2012)

Ventanas

4,590,622

5,458,366

Metallic Copper Metallurgy/ Minerals

Fuel/Cereals/Others

Puerto de Coronel S.A.

3,808,223

4,757,031

Wood, Paper

Fuel/Others

Mejillones

4,795,880

4,700,000

Metallurgy/Minerals

Chemicals

Lirquen

5,867,474

4,064,691

Wood, Paper

Fertilizer/Fuel/Others

Tocopilla

3,266,516

3,764,303

Niter/Fertilizer

Fuel

Caldera

2,998,902

3,454,271

Metallurgy/Minerals

Fuel

Puerto Angamos

2,031,624

3,007,969

Metallic Copper Metallurgy/ Minerals /Niter

Fuel/Chemicals/Metals/Plastic

Cabo Frowards Coronel

2,162,439

2,510,047

Wood, Paper

Fuel/Chemical Products

Frowards Calbuco

1,046,089

1,604,294

Wood

Others

Muelle CAP

1,056,242

1,183,812

N/A

Metals

Oxiquim QTO.

432,094

1,026,463

N/A

Chemicals

Corral

634,135

707,434

Wood

N/A

Oxiquim CCP.

131,998

350,484

N/A

Penco

489,827

49,318

Fishmeal/Others

Fertilizer/Fuel/Others

Jureles

N/A

Fuel/Others Source: Camara Maritima Y Portuaria de Chile A.G

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overview transport & logistics

4. MAJOR INFRASTRUCTURE PROJECTS 14,171

US$ in millions

15,000 12,000 9,000

7,581

6,000 3,000 0

1,357

2,292

Airports (7)

Ports (18)

Rail (10)

() number of projects

Roads & Bridges (36)

Source: BMI Key Project Database

transportation, mainly in highways (40 per cent), energy generation and transmission (25 per cent) and telecommunications. CHILE Chile’s growing economy, combined with the recent infrastructure-rebuilding period following the 2010 earthquake, requires a solid growth in infrastructure investment. Road building will remain as the main focus, but it is expected that railways and ports will also receive a large amount of investment. The pipeline of infrastructure projects in the transport sector is around US$25 billion (see fig. 4) and consists of greenfield and brownfield projects. Most of those resources will be allocated to the improvement of freight transportation, mainly related to the mining industry, which will aim to improve the freight transport for new mines and support an increase in volume from existing mines. The traffic at Chilean ports is expected to increase by 6 per cent per year, which will lead to overcapacity by 2025; the port system will only improve if all the projects in the pipeline are fulfilled in time. Moreover, the Panama Canal expansion will result in larger ships arriving in Chilean ports. In order to improve the capacity, Chile’s ports will need US$600 million to US$1 billion in infrastructure upgrades before 2020. The government has announced an investment of US$1.8 billion in ports infrastructure, including offering the concessions to run eight out of ten of the country’s public ports. Valparaiso Port has been the recipient of a particularly large investment, which includes the expansion of Terminal 1, construction works in Terminal 2 and the expansion of the South Access junction. The goal is to double the port’s transfer capacity and invest a sum of US$723 million. The Spanish company OHL won a 30-year concession to build and run Terminal 2 at Valparaiso Port. The company will invest US$350 million and the government is hoping to secure further investment to reach a target of U$507mn. Those investments will make Valparaiso the country’s largest port. Further

178 INTERNATIONAL INVESTOR

investments in the port system will be made in the construction of a new port in Quintero, focused on serving the country’s V region, which is scheduled to start operations by 2025. One possible threat to the investment in the ports is commodity prices, especially copper, which have been falling. The Chinese economy is slowing down and Chile will likely be affected, since it has strong commercial relationship with China. Another possible threat is an increase in the number of port strikes, which has had a very negative effect on the countries export-based economy, as the goods are unable to leave the facilities. In terms of the rail network, the Aconcagua Bi-oceanic Corridor project, a 52 kilometre railway tunnel that will require an estimated US$3 billion investment in the first phase and connect Chile’s V region with Argentina’s Mendoza province, is currently on hold due to Chile’s concerns about the potential benefits of the project. Additionally, the Santiago – Valparaiso high-speed rail link, an investment estimated at US$635 million, is still in its planning stages. However, investments in this area will be largely focused on Santiago’s metro system. The expansion of Santiago metro system will add two new lines and 28 new stations to the grid and will bring the total length of the network to 200 kilometres. Metro, the company that operates the line, will finance the construction with a total investment of US$900 million, while the government’s development agency will invest US$500 million in the project. There is further US$1.36 billion of financing that is required to finish the project, which is currently unallocated. Regarding roads, and particularly relating to Santiago’s urban mobility, a US$940 million project to build a 9.3 kilometre underground expressway in the city is being considered, increasing the road capacity from 3,000 to 8,000 vehicles per hour. The economic proposals for the concession will be announced in early 2014.

➥ This feature was produced in conjunction with Booz & Company

transport & logistics interview

position in the region and in virtually all of its business centres.

IGNACIO CUETO LAN AIRLINES

Chief Executive Officer

INTERNATIONAL INVESTOR: What has been the trajectory of LAN in Chile and in the region and what has been the key to its success? IGNACIO CUETO: LAN Airlines has a long and important history in Chile, Argentina, Peru, Ecuador and more recently in Colombia. Additionally, thanks to the merger with TAM, we are now in Brazil, the largest country in South America and the entrance and exit to Europe. Since June 2012, LAN has formed part of LATAM Group, one of the most important airline groups in the world and in South America, giving passengers unrivalled connectivity. There is no other group of airlines in the region that offers more flights to as many destinations. Moreover, we are a key driver for economic and social development in the countries in which we operate. The key to our success has been many years of experience and hard work, which is always motivated by the same goal: to transport millions of passengers to their destinations and to connect South America with the world and vice versa. In terms of our cargo customers, due to our strong network of destinations and tailored services we are able to take our customers shipments to where they need to go. We are successful in this market because we have learned how to listen to our customers’ needs and, therefore, we can match up to their expectations. One of the key elements of the LATAM business model is the combination of passenger and cargo business, especially on long-haul routes. The ability to transport cargo in the belly space of passenger aircraft allows the company to reduce the load factor of the flight, giving LATAM a competitive advantage. Today, cargo accounts for about 20 per cent of our total revenues, positioning LATAM among the airlines with greater cargo revenue contribution.

CAREER DEFINING MOMENT

When we bought LAN in 1994, we realised that we could do something really big and we never ceased to believe in this dream of creating the biggest airline in South America. LESSON IN BUSINESS

The best lesson I received in business is to assemble a team of high performers, with the commitment to constantly push the limits of what is possible. What is LAN’s relationship with its investors? The relationship we have with our investors is extremely important for business continuity. Due to the trust our investors have placed in us, we are competing in the big league of global aviation. While it has certainly not been easy, we are now in a transition period and we hope to make significant progress on synergies, which will lay the groundwork for continuing with solid load factors and a significant improvement in operating results for 2014. How do you evaluate the merger process so far? The airlines that are part of the group have worked to provide the best network of destinations in South America, for the benefit of all our passengers. In terms of connectivity, we now can offer around 135 destinations in 22 countries and we can transport cargo to 144 destinations in 27 countries. This positions us as the largest airline holding in the region, with 60 per cent of the market share in the South American routes we operate. Due to various external factors to which the industry is exposed, the merger has not been easy, but there has been progress on important matters for passengers, cargo customers and shareholders. For example, Oneworld been chosen for global alliance. As a result of this decision, LATAM Group will join 11 other members and will take a leading

In terms of your business, what is to come for the company and the merger with TAM going forward? The company will continue with its plan for growth and development, hand-in-hand with new technologies and programs that will help it to be more efficient and to able to deliver greater benefits to the communities it serves. In 2013, significant progress in matters related to the merger synergies was expected, especially in the international passenger area. Moreover, the cargo area is progressing to achieve the expected synergies and to be able to deliver greater coverage, generating greater efficiencies. The international cargo business is already operating in an integrated manner, and domestic operations in Brazil have increased, thanks to the capacity of TAM passenger aircraft on these routes. The domestic business in Brazil, one of the continent’s largest, accounted for 33 per cent of the traffic of the company during 2012, so we are working to achieve greater efficiencies in this market and to improve the product and efficiency on international routes from Brazil. Could you elaborate on the progress in your international passenger business? Europe has not been able to fully recover from the financial crisis yet, which has directly affected passenger demand, particularly to South America. Thus, we have restructured our fleet in order to provide the capacity needed to transport our passengers to and from the continent. To do this we are using more efficient aircraft like the Boeing 767 and the newly integrated Boeing 787 Dreamliner, a model we have started flying to destinations such as Buenos Aires, Lima, Los Angeles and Madrid. These aircraft, besides being more efficient and friendlier to the environment, offer passengers a better travel experience, with more comfortable cabins and better entertainment on board. In terms of the U.S., this market has increased its capacity, creating more competition in the region. Here we have made significant progress through TAM, with entrance into the Oneworld group and approval of a codeshare agreement with American Airlines. Both the U.S. and Europe are strategically important markets for LATAM Group. Together, LAN and TAM are positioned second in the airline industry in terms of the transportation of passengers between South America and the United States, and third between South America and Europe. In 2012, we brought approximately three million passengers to the region from the U.S. and nearly two million passengers to the region from Europe.

CHILE 179

interview transport & logistics

open to establishing alliances as a means of continuing our growth.

JAVIER BITAR SAAM GROUP

Chief Executive Officer

INTERNATIONAL INVESTOR: Please outline SAAM’s main operations? JAVIER BITAR: SAAM was founded in the 1960s; it is dedicated to maritime logistics. We have three distinct business units and each division is almost a third of the EBITDA. We are a port terminal operator, the No. 1 terminal operator in South America, and we have 11 ports today. Seven are in Chile, one is in Ecuador and we recently opened one in Colombia. We also operate ports in Mazatlan, Mexico and in Port Everglades, Florida. The second business unit is tugboats. We do harbour towage, offshore towage, and terminal towage. We are the fourth largest worldwide fleet and the leaders in Latin America, with operations in 11 countries. The third unit is logistics. It started off as providing logistics to the terminals and the shipping companies, but it has grown towards the exporters/importers. It is logistics associated with trade, we do not operate intracountry land shipping. This operation grew as the terminals grew. The shipping lines need a place to put their empty containers, so we created depots; exporters need distribution centres for dealing with the ports, so we set up a distribution centre and so on and so forth. What has been the key in terms of obtaining these strategic concessions across Latin America? We have been terminal operators for a long time. The Chilean law allowed multiple operators to operate in a certain terminal. So, we had our customers and when their ships came, we took care of them. We became very experienced operators in this business and, therefore, we had detailed knowledge of the machinery and detailed knowledge of how to train our staff. We knew the intricate details of the business, and that is a fundamental component of success. When concessions became available, this detailed

180 INTERNATIONAL INVESTOR

CAREER DEFINING MOMENT

When I finished my studies in mathematical engineering, I made a decision to go and learn about business. I was invited to join a consulting company in California and it allowed me to see the world, work, meet different people and learn about different industries. It taught me to be flexible and open in the way I work. LESSON IN BUSINESS

I think you need to dream big. That is what gives me strength, passion and commitment. Yet, if you are not able to execute your strategies, you won’t ever attain your dreams and to do this you need to be surrounded by good people. knowledge allowed us to understand the economies that were needed and the possibilities that could be achieved. We belonged to CSAV and we knew we would have their volumes at the beginning, so that allowed us to be very precise in terms of how we made our bids. Another advantage, especially in the big concessions in Chile, is that we have created strategic alliances with companies who have international experience, know-how and access to other networks. In San Antonio and San Vicente, we are 50/50 partners with SSA Marine, a large operator from the US. We know Chile, but we don’t know everything, so we brought in a partner and this has helped us. What role will these strategic alliances play in your growth model? I think they will be important. The world is a very large place and there are many opportunities of which we, as a company, can take advantage. In order to capitalise on these opportunities, you need good funding and you need the know-how, both of the industry itself and the location in which you are operating. Each country is different, each culture is different; you need to know how to move and to manage work relationships. We are very

As CEO of SAAM, what can we expect of your stewardship going forward? The Board has asked me to further the progress that SAAM has been making and to keep on the current growth path. In the last few years, SAAM has grown by about 11 per cent each year (in terms of EBITDA it has been about 12 per cent). To achieve this, we have to strive to find ways to be more efficient in our business practices and ensure that our excellent standard of customer service is maintained. Furthermore, we must be persistent in looking for new opportunities within our three business areas. Our main focus will be on the Americas. Brazil has recently passed a new law that will create a large number of opportunities for the construction of new ports. Moreover, some old concessions are expiring and will be available for tender. This is definitely a direction in which we will be looking. Which different avenues is SAAM exploring in order to fund the expansion? First, we have a very strong balance sheet. Our level of debt is relatively low compared with our results, so we have space to get funding from creditors. The group is very prudent in the way that it manages all its businesses. We take risks, but they are measured and the Board likes to have them contained. Nevertheless, we have space to grow within those boundaries. Joint ventures and alliances could be other avenues to explore if we need to fund expansion. Another option is that, as we are publicly listed company, we may issue new shares. How is SAAM going to take advantage of the Pacific Alliance? We used to be a subsidiary of CSAV, but since March of last year we are an open company on the Chilean Stock Exchange, meaning that investment can be made in our company. Today, around 10 per cent of SAAM is owned by foreign investors, but we would like that to increase. We have the backing of our board and shareholders to be open to new resources in order to fund our growth. We are open to investors coming in and participating in our company. We want to explore, for example, private port opportunities with companies that need to import or export their products to Latin America. Where we operate the ports we can create alliances, and we can operate depots in the logistics area. There are many different areas we can explore; however, I think most of the growth will come from countries within the Pacific Alliance.

transport & logisticsâ&#x20AC;&#x192; focus

A BRT system would help avoid the congestion of increased private car use

FOCUS: BUS RAPID TRANSIT Santiago is falling victim to the vicious circle of public transport, a Bus Rapid Transport system may provide the solution and investment in environmentally friendly bus fleets could be an interesting opportunity CONTEXT The public transport system of Santiago has experienced a positive evolution since operations started in 2005. Concession contracts have been modified several times in order to build further and stronger commitments to service from the operators. These modifications have also provided incentives for operators to undertake fleet renovation, take units that do not comply with the new Transantiago standard off the streets and introduce new technologies with lower emission levels. The Transantiago design considers the operation of two different kinds of transport services. These being: a Local / Feeder service, which is designed to provide a solution for consumers with local transport needs and access from homes to long distance transport axes; and a Trunk / Long Distance service, which is designed to provide a solution for passengers wanting to make long trips and connect suburban areas to downtown. Local services are provided by small and mediumsize buses. Long Distance services are provided by medium to large-size buses and also by the subway system, Metro. All Long Distance services have a life cycle (evolution), they begin as simple bus service, which then consolidates with different services into a segregated corridor with dedicated infrastructure. Finally, if feasible and there is a highly concentrated demand, the Metro network will be incorporated into the system. Transantiago has a fare system that allows changes between different services within a two-hour window,

fare integration between buses and Metro and a separate, low-cost fare for students and senior citizens. The system requires a subsidy of around US$735 million per year, 50 per cent of which allows the service to offer the student fare; the rest is spent on operational support. Transantiago started operation with almost 5,000 buses, 50 per cent of which met the new standards and euro III emission standards. This has evolved into a fleet of 6,500 buses, of which 1 per cent meet Euro II emission standards, 89 per cent meet Euro III standards and 10 per cent meet Euro V standards. The fleet renovation is nearing completion and the authorities are preparing a new standard, based on the segregated corridor system. This will require buses specifically designed for dual operation, on standard streets and in segregated corridors, with doors on both sides and at least Euro V emission levels. The maximum operative life for diesel-powered buses is 10 years; Transantiago has a fleet with an average age of 4.6 years old. This means that at least 2,000 buses must be replaced in the period up to 2017, considering the age distribution (see fig. 2). THE PROBLEM... In terms of transport infrastructure, cities or metropolitan areas within countries that experience a sustained period of income growth are presented with problem, known as the vicious circle of public transport. When people have more resources available to solve their mobility needs, they start to consider the private vehicle

CHILE 181

focus transport & logistics

Item

Bus

Private Car

Passengers per vehicle

1.6

Fuel Consumption (km/L)

2.5

Vehicle Operations

22,198

1,068,285

Kilometres Operated (Km)

421,764

20,297,414

Litres of Fuel Consumed

168,706

2,029,741

Fuel Cost (US$/L)

1.15

1.50

Total Fuel Cost (US$)

194,012

3,044,612

Difference per Day (US$)

2,850,600

Difference per Year (US$)

1,040,469,178 Source: Transport Ministry

A BRT system would help avoid the effects of congestion generated from increased use of private cars and significantly reduce public transport trip times

as a more interesting possibility, as it has attractive characteristics like comfort, privacy and freedom. This raises congestion levels. Thus, while the cost of public transport remains the same, the reduction of users produces higher fees or the need for additional public subsidies to the system. These conditions cause the transfer of more users from the public transport system to private cars. In the long term, the public transport system requires huge subsidies, it is underused and the authorities, due to increased use of private cars, must absorb the cost of maintaining the infrastructure. …THE SOLUTION Big cities can break this vicious circle with a large public transport investment program, making it more attractive and able to retain the users. A Bus Rapid Transit (BRT) system offers a solution to this problem and requires a smaller amount of public infrastructure, compared with what is needed to build or extend a subway or tram system. Moreover, BRT systems can be implemented within a considerable shorter construction period, compared to subway projects, for instance, which usually take approximately eight years to come into operation from the date they are announced. A BRT system would help avoid the effects of congestion generated from increased use of private cars and significantly reduce public transport trip times. BRT uses specific and dedicated infrastructure to segregate public transport from the general traffic and ensures users have a safe and comfortable interchange between services, while providing high capacity buses and regulated frequencies between buses on the corridors. IMPORTANCE FOR THE DEVELOPMENT OF SANTIAGO Santiago represents approximately 35 per cent of the country´s population and the inhabitants of the city make almost 12 million trips per day. The evolution of the means by which Santiaguinos transport themselves around the city is a clear symptom that the vicious circle has already started. In 1991, Santiago had 5.5 million trips per day and 71 per cent were on public transport; in 2006, there were 10.5 million trips per day and only 55 per cent were on public transport. In the same period, from 1991 to 2006, the average travel time on public transport went from 44 minutes to 49 minutes. Moreover, the construction of urban highways produced the opposite effect in terms of private

182 INTERNATIONAL INVESTOR

2. DISTRIBUTION OF FLEET AGE 1,400 1,200 number of buses

1. FUEL COST: BUSES VS. PRIVATE CARS (AVG. SANTIAGO, 2006)

1,000 800 600 400 200 0

1 2 3 4 5 6 7 Years of Use (Transantiago Standard Buses)

Source: Registry of Urban Buses November 2013, Metropolitan Region

transport, which went from an average trip time of 27 minutes in 1991 to 25 minutes in 2006, reinforcing the diagnosis of the vicious circle. From an economic perspective, if the only factor taken into account is fuel consumption, if the same percentage of trips taken using public transport in 1991 (71 per cent) were taken using public transport in 2006 (which was actually 55 per cent), the cost reduction for the whole economy would have been approximately US$1 billion dollars (see fig. 1). SUPPORT FOR GREENER TECHNOLOGY The mechanisms and incentives established to promote and support investment in the public transport system of Santiago are based on a risk sharing management system by the state and operator. Investments in fixed assets (buses) are protected by the ability to assign the quality of ‘good subject for concession’ to the fleet. This allows the authority, upon contract end, to set the condition for the entrant to take over the fleet and the funding associated with it. Furthermore, the contracts provide mechanisms to encourage fleet renovation with better emission levels. If the renovations are carried out with technologies that reduce the emissions, those reductions are transformed into an extension of the contract term. Transantiago considers two payments methods to operators, one based on kilometres operated and the other based on number of transported passengers. The first is related to the operational cost of different kinds of buses. Transantiago recognises low emission technologies (compressed natural gas (CNG), hybrid and electrical) with a higher payment per kilometre operated. OPPORTUNITY FOR INVESTMENT Transantiago system is expected to introduce new technologies like CNG or hybrid engines in order to reduce the transport systems contribution to the air quality contamination and noise pollution. It is also expected that authorities will require more complete fleet management systems to inform users and to make the system more understandable. After all adjustments are made to the original design, Transantiago will be an efficient transport system. It will likely become the example for other Chilean cities, which are beginning to show problems of both congestion and pollution.

➥ This feature was produced in conjunction with Scania

transport & logistics Interview

ANGEL CABRERA

EMPRESA PORTUARIA IQUIQUE President

INTERNATIONAL INVESTOR: Please describe the business of Iquique port today? ANGEL CABRERA: Iquique port is focused mainly on imported goods that come in from Asia destined for Bolivia. Most of that merchandise is consumer goods, such as cars, electronics and clothes. Almost 65 per cent of the merchandise that goes through the port has Bolivia as its destination. That merchandise goes through the Zona Franca de la ciudad de Iquique (ZOFRI), which is kind of a free-trade zone. So, Bolivia is our key business partner. We also manage merchandise that goes to the north of Chile, Paraguay, the north of Argentina and the south of Peru. Fifteen per cent of the merchandise that goes through the port is for the export market, which is mainly mining products that are related to the Chilean copper mining industry. We hope that in the near future we also will be managing some of the soya exports from Bolivia.

CAREER DEFINING MOMENT

Apart from my role at the port, my main activity is as an economic consultant here in Chile. That is my full-time job. In that area, the key moment was when I went to study at Harvard University and when I came back, I met with one of my professors here in Chile and he gave me the opportunity to work with on macro economic analysis and forecasting. LESSON IN BUSINESS

Be patient and mediate decisions. Do not to make impulsive decisions.

Our forecast regarding the merchandise that goes through the port is that it will increase from its current three million tons per year to approximately six million tons in the next 20 years

How resilient do you feel your predictions and projections are about the expansion of copper production to accommodate for maybe a negative trend in China’s growth? I would say it is very resilient because we are talking about large-scale projects. All of those projects are profitable with prices of copper around 300 cents per pound. We have an expert committee that makes forecasts for the government, which is predicting an average price for copper of 304 cents per pound. We are using the long-term copper price, the same model that the copper companies use to model their own copper pricing structures. So, if that forecast is accurate and the price is around 300, all the main projects are profitable. In summary, our projections are pretty resilient because we are using this long-term, 20 to 30 year projection.

What do you think are the main drivers for the growth of Iquique port? I would say there are three main drivers. The first is the growth of consumption demand in Bolivia, our core business today. The second is the expansion of the copper production in the region near the port of Iquique and the third is new products that should come from Bolivia using the new road, the bi-oceanic highway. This new road should generate a lot of exports from Bolivia, especially soya.

What is happening in Bolivia that our readers should know about? In the last four to six years, the Bolivian economy has been growing at rates in the region of 4 to 5 per cent, which is a lot higher than the historical growth rate in Bolivia. The Bolivian economy is doing relatively well because the informal economy has been growing very fast. International institutions are forecasting growth in the next ten years of between 3 to 4 per cent. What we see as

a risk, however, is a political one. Chile has a very delicate political situation with Bolivia because of the war in 1879, which resulted in Bolivia having no access to the sea. Thus, we have a diplomatic conflict with Bolivia and they have threatened to deviate the whole commerce to Peru and forbid the commerce through Iquique, Arica and Antofagasta. However, it is not a very credible threat as it would be more economically damaging to Bolivia than Chile. There have been discussions between the two countries and some declarations of intentions about investment in roads in the south of Peru that will eventually connect the Ilo Port with La Paz. Thus, there is some business risk that some commerce could be deviated to the South of Peru. However, I think the risk is much larger for Arica than Iquique because of its geographical situation. Could you please give us a brief overview of the expansion of Iquique Port? We are working on two projects. One small project, around US$150 million, and one large project around US$400 million. Both are designed in order to be able to work with new vessels, the Post-Panamax, which has a capacity of at least 12,000 TEUs. Our forecast regarding the merchandise that goes through the port is that it will increase from its current three million tons per year to approximately six million tons in the next 20 years. These projects have been initiated in order to meet two targets: first, to accommodate the expansion of mining activity and, second, to renovate and technically update the port in order to work with the new vessels, which is a technical necessity as the naval industry is changing and the size of the vessels are increasing. What will be the impact of this investment on the future growth for the region and the country? I think for the regions it is absolutely imperative. Without this expansion, Iquique has no future because of at least 50 per cent of GDP in the region is related to international trade that comes through the port. If the port is not updated and becomes obsolete, the region is almost dead. The other main driver in the region is mining as they need a place from which they can export their product. They have other alternatives, but I think Iquique port will be important for the development of mining activity in the region. Ultimately though the port is crucial to the region as a whole, I think it is extremely important for Paraguay, Argentina and especially Bolivia.

CHILE 183

interview transport & logistics

ÁLVARO BRUNET

CÁMARA MARÍTIMA Y PORTUARIA DE CHILE A.G. Chairman of the Board

INTERNATIONAL INVESTOR: For our readers who are not familiar with the Cámara Maritime y Portuaria de Chile, could you explain what its role is within the ports and shipping industry? ÁLVARO BRUNET: The Cámara Marítima y Portuaria de Chile is a private organisation that has been funded for 70 years by private businesspeople related to the maritime port sector in Chile with the object of proposing to local, regional and national authorities the necessary laws and measures to keep our ports efficient, economically viable and secure. The work we undertake is not easy because, unfortunately, there is not much public awareness of the importance of having efficient ports and shipping services. More than 90 per cent of our total volume of exports is transported via the ocean. This need for port efficiency is even more relevant if we consider our small internal market that obligates us to grow by moving out into external markets. The chamber’s role is to guide public opinion, to promote and consolidate changes contributed by the authorities and users, and to provide the technical knowledge related to the industry, which is a product of years of experience. Our port model has offered important advantages to the users of the Chilean ports: lower tariffs, extremely high profits, high security standards and significant competition amongst ports. In fact, our ports have welldeserved international prestige. What do you believe the major challenges and opportunities for investors are in port infrastructure? What should the government’s role be in this regard? Private investment and management have been the pillars of our port development. In the period from 1990 to 2012, more than US$4 billion was invested. Such investment needs to continue in order to meet increasing demand.

184 INTERNATIONAL INVESTOR

CAREER DEFINING MOMENT

To have been part of a container handling company in Chile since its inception in 1983. The first inland terminal for containers in the country. LESSON IN BUSINESS

As in any industry, everything is cyclical and one has to persevere to achieve success and results. In the central region of our country, we need to create new artificially sheltered waters for new container terminals within the next decade. Without doubt, this will be the most important port project in many years and preliminary estimates value it at around US$3 billion. This situation presents the government with at least two important challenges: first, in our opinion, it is likely that the first part of this project will require an investment by the state. The current legal norms do not consider this situation expressly and should be reviewed, particularly regarding current concession rights and private operators in the region that will be affected by a state investment. We conducted an analysis of the problem and submitted to the government solutions that can serve as a basis for these new norms. The second challenge has to do with the location of the new port project. Since the cities of Valparaiso and San Antonio are contending over it, we hope that the final decision is based on technical and economic factors like the costs of environmental issues, seismic security, connectivity and logistics, and not based on political factors. What do you believe are the most important considerations for developing its existing ports in order to handle the everincreasing demand? Our ports are recognised worldwide for being efficient, safe and economical. However, we are not resting on our laurels.

The model is facing the following unresolved issues that could lead to a loss of competitiveness and must be addressed: there are normative problems for investments in new sheltered waters; there is a lack of definition regarding how much planning is necessary and what degree of automation the 10 stateowned port companies should be given; there is an absence of a legally valid, equitable and consensual model to establish and develop our ports; and there are a lack of concrete plans for the interconnectivity of ports, particularly regarding highway and railway access. Furthermore, a variety of services or controls that the law grants state agencies do not allow for the efficiency that a competitive world necessitates. There are also substantial fees, as in the case of lighthouses and beacons, which discriminate against the shipping sector and its users. Finally, the growing numbers of illegal labour strikes, with disastrous effects for the country, require solutions in each port. These should include discussions, but it should also be a requirement to respect public order and the rights of the workers who will not be benefitted by the strike, something that is always the authorities’ responsibility. For each of these issues, the chamber has written and submitted possible solutions to the respective authorities. The Ministry of Transport is publishing a port development plan this year. What do you believe is the key to successful development plan for Chile’s ports and their respective concessions? We believe that all of the problems I have highlighted in this interview clearly point to the lack of a port policy and should be an integral part of a larger transport and infrastructure policy. Policy of this sort requires the participation of authorities from many areas, including public works, defence, interior, finance, economy and others, but it is clear that it should be guided and promoted from a transport and logistics perspective. We have publically acknowledged the importance of the current government’s decision to transform the port program into a logistics program. We also recognise the value that Pedro Pablo Errázuriz, the current Minister for Transport and Logisitics, has placed on the Comisión Asesora en Materias Marítimas y Portuarias (Advisory Commission on Ports and Maritime Affairs) and the ministry’s willingness to work towards agreement upon a transport policy. If the port development plan for state ports that the government has announced is the first step towards an integrated policy, it would be a substantial contribution.

transport & logistics projects

Road 180 EXPANSION

US$248m

ESTIMATED INVESTMENT

Bío-Bío & Araucanía REGION

19 km

AREA / CAPACITY

US$111m

ESTIMATED INVESTMENT

Santiago REGION

NAHUELBUTA HIGHWAY Description: Expansion of the existing Road 180 between the town of Huequén (Araucanía Region) and the city of Los Ángeles (Bío-Bío Region), providing a direct connection between five municipal districts. The project will expand the route to two lanes in each direction, with transversal grade-separated intersections, improving safety, lighting and road sign standards. Proponent: Public Project coordinator(s): Ministry of Public Works (MOP) Location: Bío-Bío and Araucanía Regions Area/capacity: 56 km Estimated investment: US$248 million; the concession holder will receive income from tolls Starting date: 2013−2014 Duration: To be defined Type of concession: To be defined Source and contact: Rodolfo Guerrero, Chief of Staff, Concessions Department, rodolfo.guerrero@mop.gov.cl, tel: +56 2 2449 7009; Rigoberto García, Coordinator of International Relations, rigoberto.garcia@mop.gov.cl, tel: +56 2 2449 3205

SANTIAGO-LAMPA HIGHWAY Description: Construction of a new urban highway to improve connectivity in northwestern Santiago. The project will link the Cerro Navia, Renca and Quilicura municipal districts between the Costanera Norte and Américo Vespucio Highways before continuing in an intercity segment to connect the west of the city with the town of Lampa. The highway will have two lanes in each direction and its purpose is to integrate different sectors of the capital into the city’s highway network. Proponent: Public Project coordinator(s): Ministry of Public Works (MOP) Location: City of Santiago, Santiago Region Area/capacity: 19 km Estimated investment: US$111 million Starting date: 2013 Duration: To be defined Type of concession: To be defined Source and contact: Same as project above

CHILE 185

projects transport & logistics

80 to 100 km/h DESIGN SPEED

US$1,978m

ESTIMATED INVESTMENT

Santiago REGION

36 km

APPROXIMATE AREA / CAPACITY

US$145m

ESTIMATED INVESTMENT

O’Higgins

COSTANERA CENTRAL HIGHWAY Description: The construction of a 19.3 kilometre highway that will run from Isabel Riquelme, through Zanjón de la Aguada and Av. La Florida, to Las Vizcachas in Puente Alto municipality. The objective is to decongest Santiago’s southeastern districts. It will have three lanes in each direction and no non-grade-separated intersections, complying with the highest safety standards. The project involves an underground solution, combining an open trench, a closed trench and, possibly, a tunnel, with a design speed of between 80 and 100 kilometres per hour; a public transport lane on Avenida La Florida; and pedestrian connectivity with transversal surface crossings. Location: City of Santiago, Santiago Region Area/capacity: 20 km Estimated investment: US$1,978 million Starting date: 2013−2014 Duration: To be defined Type of concession: To be defined Source and contact: Rodolfo Guerrero, Chief of Staff, Concessions Department, rodolfo.guerrero@mop.gov.cl, tel: +56 2 2449 7009; Rigoberto García, Coordinator of International Relations, rigoberto.garcia@mop.gov.cl, tel: +56 2 2449 3205

SAN FERNANDO-SANTA CRUZ ROAD Description: Construction of a new two-lane road linking the San Fernando and Santa Cruz municipal districts in the O’Higgins Region, including intersections, bridges, return points, pedestrian overpasses, service roads and bike lanes Proponent: Public Project coordinator(s): Ministry of Public Works (MOP) Location: Colchagua Province, O’Higgins Region Area/capacity: Approximately 36 km Estimated investment: US$145 million Starting date: 2013 Duration: To be defined Type of concession: To be defined Source and contact: Same as project above

REGION

186 INTERNATIONAL INVESTOR

transport & logistics projects

9,900 m2 EXISTING AREA

US$14m

ESTIMATED INVESTMENT

Los Lagos REGION

85,500 m2 AREA / CAPACITY

US$716m

ESTIMATED INVESTMENT

Santiago REGION

RE-TENDER OF EL TEPUAL AIRPORT (PMC) Description: Second re-tender of the concession for the El Tepual Airport (PMC) in Puerto Montt. The current contract is estimated to expire in the second half of 2014. At present, the concession is held by Sociedad Concesionaria Aeropuerto Puerto Montt S.A. which invested US$15 million in 2009. Annual traffic through the airport currently reaches 820,000 passengers. The installations are expected to include an expansion of the passenger terminal, the car parking facilities and the aircraft parking apron. Proponent: Public Location: Puerto Montt municipal district, Los Lagos Region Area/capacity: The existing passenger terminal has an area of 9,900 m2 Estimated investment: US$14 million Starting date: 2013 Duration: To be defined Type of concession: To be defined Source and contact: Rodolfo Guerrero, Chief of Staff, Concessions Department, rodolfo.guerrero@mop.gov.cl, tel: +56 2 2449 7009; Rigoberto García, Coordinator of International Relations, rigoberto.garcia@mop.gov.cl, tel: +56 2 2449 3205

RE-TENDER OF AMB INTERNATIONAL AIRPORT IN SANTIAGO Description: Concession contract to expand and improve the existing passenger terminal of the Arturo Merino Benítez (AMB) International Airport in the Santiago Region. AMB Airport is among the most modern and efficient in Latin America and, by 2024, is expected to handle over 23 million passengers a year. The goal is to triple passenger capacity to over 29 million people. The project envisages the construction of a new international passenger terminal and new freight facilities as well as road infrastructure, aprons, taxiways, support infrastructure and landscaping. Proponent: Public Project coordinator(s): Ministry of Public Works (MOP) Location: Pudahuel municipal district, Santiago Region Area/capacity: 85,500 m2 (passenger terminal, aprons, asphalt runways, freight terminal and car parking) Estimated investment: US$716 million Duration: To be defined Type of concession: BOT (Build, Operate, Transfer) Source and contact: Same as project above

CHILE 187

projects transport & logistics

129 million JOURNEYS PER YEAR

Line 3: 22 km LENGTH

Line 6: 15.3 km LENGTH

METRO PROJECT 63 Description: Two new lines for Santiago’s subway (Metro de Santiago). Line 3 will connect the Huechuraba municipal district (Américo Vespucio station) with the city center and on to the Ñuñoa municipal district to terminate in the La Reina municipal district (intersection of Avenues Tobalaba and Larraín). Line 6 will connect the Pedro Aguirre Cerda and Cerrillos municipal districts with the city center, passing through Ñuñoa and along Avenue Pedro de Valdivia to terminate in the Providencia municipal district (Los Leones station on the existing Line 1). The two lines will account for 129 million journeys per year, with a maximum of 120 million passengers. Proponent: Public Project coordinator(s): Metro S.A. Location: City of Santiago, Santiago Region Area/capacity: Line 3 will have a length of 22 km (22 stations) while Line 6 will have a length of 15.3 km (10 stations) Estimated investment: Line 3 has an estimated cost of US$1,722 million and Line 6 of US$1,036 million Starting date: The project is already at a preliminary stage. Activities have begun for both lines and Line 3 must be completed by April 2018 and Line 6 by November 2016. Duration: Construction of both lines between 2016 and 2018 Type of concession: Both lines will be operated by Metro S.A. Source and contact: Metro S.A.: Roland Zamora, Planning Manager, rzamora@metro.cl, tel: +56 2 2937 3531

Line 3: US$1,722m ESTIMATED INVESTMENT

Line 6: US$1,036m ESTIMATED INVESTMENT

Santiago REGION

Tobalaba Metro Station, Santiago

188 INTERNATIONAL INVESTOR

telecommunications overview

TELECOMMUNICATIONS As new laws and regulations aimed at fostering a more level playing field and encouraging competition begin to take effect, and the much anticipated 700MHz spectrum auctions allow for improved 4G connection and coverage, the door is wide open for new operators and content providers

GROWTH AND COMPETITION

Strong growth in mobile telephony and internet services

INTRODUCTION The telecommunications sector in Chile is developed and mature, operating with stateof-the-art infrastructure; the accompanying regulatory environment is also well developed. However, market actors are facing many challenges, such as increased competition, a need for increased investment, and a price structure that stipulates tariffs must ensure universal access to services. Additionally, the predominant focus within the industry is to be at the forefront of the digital market, which is a huge challenge in itself. Telecommunications companies must ensure that they manage the complex situations that arise from new developments, regulations and the scenarios of their competitors. This involves managing the latest technology to create and offer new services and improve their current offering; creating a positive customer experience, ensuring current clients are fully satisfied and

attracting new entrants and their competitor’s customers; whilst, simultaneously, reducing costs and increasing revenue. Furthermore, after five years of debate, the Senate has approved a new digital television law that will come into effect in 2014. The new law stipulates that all current FreeTo-Air television channels will have to turn off analogue signals and cover the 15 regions of the country for free within five years. It also regulates coverage, stating that a single channel or economic group, national or foreign, will not be able to own more than one concession per region, with the exception of the state broadcaster, TVN. The Chilean government is a very important actor in Chile in the information and communications technology (ICT) field. The Department of Telecommunications (Subtel), which is an agency under the Department of Transport and Telecommunications, has the function of proposing national policies, ac-

cording to government guidelines, exercising direction and control of their implementation, monitoring public and private companies in the sector and controlling compliance laws, regulations and standards. Following a 2013 study carried out by the Universidad Adolfo Ibáñez, Subtel highlighted certain objectives regarding the telecommunications infrastructure operators, specifically relating to broadband, these being: Banda Ancha para todos, which aims at moving from 40 per cent broadband penetration to over 70 per cent; Internet en las Aulas, which aims to have 100 per cent of schools connected at high speed; and a final objective that aims to ensure 100 per cent of SME businesses have high-speed connections. In addition to these objectives, there are a number of other intermediate objectives the department has identified that, given the dynamism of the sector, are required in the medium term, these being: to define a policies for setting tariffs, efficient subsidies and a single concession system. Importantly, both the concession regime and tariff setting require legislative changes in order to move forward. GENERAL CONTEXT Although Chile has the highest GDP per capita in Latin America and its economy is expected to continue growing by at least 4 per cent per annum in the coming years, the country is currently experiencing a period of uncertainty tied to a decline in the price of copper, its main export, and an economic slowdown in China. This is particularly important for telecommunications operators as economic figures for the 1st quarter of 2013 suggest the telecommunications market may begin to slow down. However, according to a report from the OECD, Chile’s mobile internet market grew four times faster than its OECD peers in 2012, supporting Chile’s impressive performance

CHILE 189

overview telecommunications

in the telecoms market overall and the positive view of the country’s developments, particularly its leadership among Latin American telecommunications markets. As of December 31st, 2012, the GDP generated by the telecommunications sector had reached 5.66 per cent, which, although slightly down from previous years, still shows a healthy expansion in the sector, which is characterised by strong growth in mobile telephony and mobile internet. Generally, the market is following a similar growth pattern to other countries with developing telecommunications markets. Telefónica Chile, trading as Movistar, is the incumbent local telephone operator and the largest telecommunications company in Chile. It is the market leader in local and long-distance telephony, broadband and satellite TV. In terms of the mobile market, Movistar also leads the way, closely followed by Entel. Movistar’s main fixed-line competitors are pay TV and triple play operator VTR Globalcom, Entel Chile, the GDT group (including GTD Manquehue, GTD Telesat, Telsur, and Telcoy), and América Móvil’s Claro Chile. In a bid to unify services under a single brand, the fixedline business previously operated by Telmex Chile was taken over by mobile operator Claro Chile, both of which companies are controlled by the Mexican businessman Carlos Slim. Chile’s mobile penetration is one of the highest in Latin America, but lags behind Panama, Uruguay and Argentina. The number of mobile subscribers reached 24,130,754 in December 2012, achieving a growth of 7.7 per cent compared to December 2011 (see fig. 1). Three major mobile companies serve the Chilean market: Telefónica’s Movistar, Entel and América Móvil’s Claro. Two new market entrants, Nextel Chile and VTR, have won licenses for 3G services, with both companies launching UMTS networks. Mobile phone tariffs in Chile are among the cheapest in Latin America, with a basic plan costing about 1.3 per cent of the average wage. Chile is also the Latin American country with the cheapest smart phones, when compared with per capita income. Mobile broadband has increased rapidly and it is expected that, by 2015, two out of every ten Chileans will own either a 3G USB modem or portable computer with a built-in 3G of 4G receiver. Chile’s fixed broadband market is one of the most developed in Latin America. In terms of internet speed, although Chile is the regional leader, with a mean download speed of 19.3 megabytes per second (as of Q2, 2013), this figure is still rather low compared with the rest of the world. The concept of portability has been central to the Chilean governments telecommunications policy, which promotes competition

190 INTERNATIONAL INVESTOR

STRENGTHS MOBILE ■■ Fully liberalised telecoms market ■■ Sophisticated mobile sector with penetration of more than 150 per cent ■■ 3G services for all and 4G LTE launched in 2013 ■■ Mobile broadband favoured by Entel and Claro as a means of encouraging 3G use ■■ Already a foreign direct investment destination in Latin America for the ICT sector ■■ Strong foreign investors in Movistar and Claro (América Móvil) ■■ Market accommodates both local and foreign companies

OPPORTUNITIES MOBILE ■■ Focus on post-paid subscriptions should increase average revenue per user (ARPU) for operators ■■ Mobile operators are investing heavily in their networks, providing good opportunities for equipment vendors and integrators ■■ Subtel looking to reduce unnecessary regulation by forming a second body to stimulate competition and encourage new entrants ■■ Nextel’s expanding network and the licensing of VTR create opportunities for infrastructure build-outs ■■ 2013 launch of 4G services should boost subscriber numbers and increase revenues ■■ Looking to auction 700MHz spectrum in 2014 and considering a secondary spectrum market

and transparency. Fixed and mobile number portability was approved in August 2010, with mobile number portability implemented in January 2012. Since its launch, with the release of enhanced terminal equipment for use on any network, mobile phone plans are being offered with discounts of up to 50 per cent on the price plans available prior to the enforcement of the portability policy. According to Subtel, by the end of July 2012, a total of 391,882 mobile phone users had switched operators, while keeping their numbers. At the end of July 2013, more than 1.3 million customers had changed their provider, of which 1.2 million were mobile phone users. In July 2010, Chile became the first country in the world to pass a Network Neutrality Law aimed at ensuring free and equal access to the internet. The law stipulated that ISPs must offer Internet access in which content is not arbitrarily treated differently based on its source or ownership Furthermore, according to external sources, the Department of Telecommunications is working on a proposal to create a secondary

WEAKNESSES MOBILE ■■ Mobile growth has slowed with operators looking to move subscribers to post-paid tariffs ■■ Regulator looking to restrict operators’ spectrum to 60MHz, which could lead to network congestion ■■ Trend towards post-paid subscriptions has reversed since mid-2011 as operators focus more on market share

THREATS MOBILE ■■ Antenna Law may affect revenue, due to the need to move or change or implant new antennas to avoid health and physical threats by radiation, as the law is retroactive ■■ Chilean mobile market unless it targets a niche market segment

spectrum market. This will allow operators to sell, lease, transfer, partition and disaggregate radio frequencies between them, based on their demand needs. While the other actors in Chile’s economy try to maintain or grow net revenues, the telecommunications companies are consistently pushed to innovate and invest in the new digital frameworks that are introduced. INDUSTRY FORECAST MOBILE Chile’s mobile market continues to expand, recording year-on-year subscriber growth of 6.5 per cent; however, overall growth has slowed. Moreover, as market penetration has reached over 143 per cent, this could be an indication the market is close to saturation. As in other Latin American countries, mobile broadband will become the predominant technology and has already taken off in Chile. Between 2009 and 2012, 3G connections rose from 638,000 to 4.9 million and, over the same period, 3G internet penetration increased from 3.76 to 28.16 people out

telecommunications overview

1. MOBILE PHONE SUBSCRIBERS

2. TELEPHONE LINES SUBSCRIBERS

3.5

3.0

15 10

2.0

million

2.5

1.5 1.0

5 0

3. INTERNET MOBILE LINES

* estimate

2010 2011 2012 2013* 2014* 2015* 2016*

* estimate Source: Subtel and PwC

of every 100 inhabitants. The introduction of the new 4G spectrum in 2013 and 2014 will boost the demand for mobile broadband and operators are likely to focus on this area as a growth driver. This strategy is already evident from Claro’s launch of a 4G LTE in Santiago in June 2013 and Movistar’s launch of their 4G LTE service nationwide in November 2013. The regulator Subtel has launched a 700 megahertz spectrum tender for the provision of LTE services; Chile will adopt the Asia Pacific Telecommunity (APT) band plan for the spectrum for mobile services. Following the 2.6 gigahertz spectrum auction held in 2012, which allowed operators to start the deployment of 4G LTE networks, the 700 megahertz spectrum will enable improved 4G connection and greater coverage. The bidding process is scheduled to open in January 2014. There is a possibility that Claro, Entel and Movistar might consider working together regarding this technology; tower sharing is also becoming a feature of the Chilean market and, as margins become tighter due to market saturation, it is expected that the trend towards pooling resources will grow. Future subscriber growth in the mobile market is likely to be boosted by the following factors: the presence of new players, such as VTR, and Falabella and Virgin in the Mobile Virtual Network Operator (MVNO) market; new technologies and products, such as 4G-capable handsets and Apple’s iPhone 5S; and mobile number portability, which is positively affecting market dynamics with more than 1,175,000 recorded requests by July 2013. In April 2012, Virgin Mobile became the second operator to launch a MVNO service in April 2012, behind GTD Móvil who makes use of Movistar’s network. A third MVNO, Móvil Falabella, launched its operations in September 2013. As an established Chilean retailer, it will target existing portfolio of customers. Prepaid services continue to dominate the Chilean mobile market, although operators have made several moves to reduce this de-

4 2

0.5 2010 2011 2012 2013* 2014* 2015* 2016*

2010 2011 2012 2013* 2014* 2015* 2016*

* estimate Source: Subtel and PwC

pendence. Movistar, in particular, has struggled to improve its subscriber mix and has seen it fluctuate in recent quarters. Despite this, in comparison to much of Latin America, Chile has a lower dependence on prepaid services, with 71.9 per cent of subscribers in 2012 using the prepaid platform. Claro still has the largest proportion of prepaid subscribers in the market by far, which consisted of 80.3 per cent of its total mix in the first quarter of 2013. This reflects its strategy of aggressively lowering prices when it enters new markets to build up its subscriber base. Ostensibly, the strategy has affected the entire mobile market, as the trend towards more post-paid subscribers in 2011 has been reversed. FIXED LINES The Chilean fixed line market continues to decline (see fig. 2). The tendency is that the number of fixed lines will continue to decrease slowly in the future as the mobile market becomes even stronger with 4G / LTE and demand decreases. The introduction of fixed-line number portability, which started in late 2011, has had limited impact on the total number of fixedline telephony subscribers in Chile. Only operators offering bundled packages will be able to slow the decline, with pay-tv packages as a particularly strong growth area. Market developments will now be seen in terms of triple and quadruple-play packages and with a few, smaller operators gaining market share at the expense of larger players. Telefónica remains the largest player in the market with 52.4 per cent of lines in service at the end of June 2013. Business fixed lines are declining at a slower rate than consumer landline usage and this should offset the likelihood of sharp drops in the total number of subscribers. However, the popularity of Voice Over Internet Protocol (VoIP) services is also contributing to the decline in the number of fixed line subscribers. This the lack of demand for fixed-line connections due to the strength of the mobile

Source: Subtel and PwC

market is a trend that is observable throughout Latin America. Chileans are no different in finding mobile services more convenient and accessible than fixed lines with the market not seeing any growth since 2009. INTERNET BROADBAND As previously stated, there has been rapid growth in the 3G and 4G LTE markets. From 2010 to 2012, the government invested US$75 million in digital development projects and the total amount invested in 2013 and 2014 could reach as much as US$80 million, some of this amount represents a development strategy to extend connectivity to remote areas of the country. The rapid growth rate of mobile broadband is helping to drive growth in fixed broadband too, so the expectation is that both for a steady increase in the number of subscribers up to 2017 for mobile and fixed lines. As a result of the 700 megahertz spectrum bidding process for LTE scheduled for January 2014, Chile is likely to become the most advanced market in the region. ADSL still leads the broadband connection options with approximately one million connections. There are an increasing number of subscribers using other technologies, such as cable, fibre optics and WiMAX, although only cable is seeing significant growth. DATA NETWORK The latest data from Subtel showed that mobile data connections reached 9.5 million in June 2013. Operators have not heavily marketed services such as GPRS or EDGE; yet, they are likely to remain popular among light mobile data users as a more cost-effective alternative to mobile internet. While post-paid subscribers are the most likely to sign up to mobile broadband and other 3G or 4G applications, Chilean mobile operators are looking to encourage mobile broadband use among their prepaid customers. This strategy will allow all operators to take a better position in the prepaid customer subscriber bases.

CHILE 191

sector data telecommunications

TELECOMS IN NUMBERS International Investor’s summary of key data and quantitative dynamics of the sector. For more detailed information, please contact International Investor directly.

GENERAL TELECOMMUNICATIONS STATISTICS Market size 2012 (US$ in billions)

9.2

Market growth (2012 vs. 2011) sector

Sector share of GDP December 2012

6.7%

Expected data growth multiple 2013-2019

Number of employees in the sector 2012

20,579

Mobile phone penetration 2012

138%

3G mobile internet peneration 2012

22.8%

Total 3G connections

4,921,587

Mobile internet penetration*

17%

Residential local telephony penetration**

39%

Fixed broadband penetration**

41%

Pay TV penetration**

40%

IM:Internet over smartphones - MBB: Mobile Broadband * MBB+IM Penetration as of December 2011 ** Penetration over homes as of December 2012 Source: Subtel, information provided by operators and Tekedia: efforecast

FIXED TELEPHONY MARKET SHARES (JUNE 2013)

MOBILE MARKET SHARES (JUNE 2013)

52.4%

37.3%

21.6%

24.1%

20 10.2%

7.5%

6.3% 2.1%

37.3%

Movistar VTR

Grupo GTD

Claro

Entel

Others

10 0

Movistar Entel

Claro

0.5%

0.4%

0.3%

Nextel

Virgin

VTR

Source: Subtel

FIXED INTERNET MARKET SHARES (JUNE 2013)

PAID TV MARKET SHARES (JUNE 2013)

60 50

50 40

39.3%

41.2%

38.2%

40 30

11.3%

10 0

Movistar

VTR

Claro

7.8%

Grupo GTD

1.3%

2.0%

Entel

Others

Source: Subtel

192 INTERNATIONAL INVESTOR

19.5%

18.1%

14.4% 6.8%

10 0

VTR

Movistar

Claro

DIRECTV

Others

Source: Subtel

telecommunicationsâ&#x20AC;&#x192; sector data

3G SUBSCRIBER EVOLUTION AND PENETRATION 8,000

40 31.6

7,000

thousands

6,000

29.0

28.2

24.9

5,000

20.6

22.2

3,000 2,000

3.8 134

1,000

505

8.4 413

6.9

236

258 927

1,032

1,337

818

1,239

666 I

III

2009

921

782

2,223

1,901

1,631

3,173

2,843

2,714

2,609

2,451

2011

III

2012

5 0

II 2013

Penetration (%)

Prepaid Subscribers

Contract + Postpay Subscribers

1,409

7,025

III

2010

1,362

1,203

523

6.2

5.0 194

1,734

14.8

12.3

10.2

2,231

2,207

17.9

4,000

2,384

Source: Subtel

MOBILE TELEPHONY SUBSCRIBER EVOLUTION AND PENETRATION 40,000 35,000

thousands

30,000

100.2

96.7

25,000

115.6

106.9

102.7

20,000 15,000

14,066

118.0

138.0

133.0

129.0

139.5

137.6

140

14,617

14,333

12,455

12,930

4,517

4,820

5,106

5,380

5,786

5,975

6,220

IV 2009

III

15,886

15,114

16,122

17,283

16,390

15,704

17,463

17,181

2010

6,370

6,516

6,581

6,752

III

2011

6,847

6,925

III

7,025

57.2

57.6

Source: Subtel

INVESTMENT ACCORDING TO TYPE OF SERVICE IN TELEMMUNICATIONS SECTOR 3,000

41.8 35.3

40.7

39.3

36.6 29.6

2,500

41.0

37.5 28.2

19.0

17.9

13.7

14.9

8.4

4.4

3.8 2009

2010

Internet penetration (fixed and mobile 3G) (%) Internet penetration per household (fixed and mobile 3G) (%)

millions of US$

37.0

2011

2012

Variation 2011-2012

2,000 1,500

1,920

1,756

907

2,445

1,343

1,390

724

500

849

667

839

1,009

1,102

0 2009

Fixed and others Source: Subtel

2,416

1,407

1,081

1,000

2008

Fixed broadband penetration per household (%) Broadband penetration and mobile 3G (%)

50.2

2013

Penetration (%)

INTERNET PENETRATION

6,798

2012

Prepaid Subscribers

Contract Subscribers

100

10,000 5,000

160

120

12,259

11,933

130.7

129.3

124.3

120.8

2010

2011

2012

Mobile Source: Subtel

CHILE 193

interview telecommunications

the right incentives and conditions to make investing in the industry profitable and allow for the consolidation of investment policy of the market participants. These conditions should include clear and stable rules to those who make investments, efficient management of the radio spectrum and quality consumer service control.

ROBERTO MUÑOZ LAPORTE TELEFÓNICA CHILE

Chief Executive Officer

INTERNATIONAL INVESTOR: How has Telefónica in Chile evolved? What is the global strategy? ROBERTO MUÑOZ LAPORTE: In 1990, Telefónica S.A. acquired 50 per cent of the shares of Compañía de Teléfonos de Chile S.A. and initiated an important development plan that included the complete digitalisation of the fixed network and the introduction of the mobile business; thus, in 1996, the mobile subsidiary Telefónica Móviles Chile S.A. was created. Mobile market penetration since then has increased from 2.2 per cent to 140 per cent in 2013. Currently, Telefónica in Chile is controlled by Telefónica S.A. (Spain) and has integrated operations in fixed and mobile businesses, through two different subsidiaries. Telefónica in Chile is the largest telecommunications company in the country, with more than 13 million accesses, including voice (fixed and mobile), broadband through ADSL, VDSL, optical fibre, USB modem and mobile internet, and pay TV. Additionally, the Company offers data solutions and private communications to corporate clients and SMEs throughout Chile. As part of the Telefónica Group, we are driving the global strategic plan ‘Be More’. This means promoting innovation as a new source of growth and the development of digital services in different areas, such as e-heath, cloud computing, security, financial services and marketing, among others. This strategic plan has moved the company towards Ultra Broadband technologies for both the mobile and fixed line business and also involves an internal transformation of culture based on three key concepts: discover, disrupt and deliver, which guides the attitude of our employees. What do you believe the main challenges are for Telefónica going forward? For the next decade, the industry in Chile will have to maintain its investment in networks to

194 INTERNATIONAL INVESTOR

CAREER DEFINING MOMENT

When I was appointed as CEO of Telefónica in Chile in 2012, after I had returned from Madrid where I had been director of innovation and business development for Latin America since 2008. LESSON IN BUSINESS

There are three key elements necessary to ensure a particular project is successful, you must have: a clear vision of where you want to take your company; a strategy focused on your objectives, that will allow you to align people and financial resources; and an understanding that people make the difference. increase the capacity and coverage of optical fibre, IPTV, and 4G and 3G mobile technologies in order to cover 80 per cent of households and people and, therefore, ensure the digital gap is reduced. Currently, fixed broadband penetration has reached 46 per cent of households and only 38 per cent of mobile accesses have an Internet access. Currently, one of the main challenges for Telefónica in Chile is to have the ‘best network’ for mobile and fixed business in terms of quality, coverage and capacity and to provide high-speed data services in order to strengthen our competitive advantages. In line with this challenge, in the fixed business, we have been developing an optical fibre network and VDSL to offer Ultra Broadband to our clients with a speed of up to 150 megabytes and additional services such as IPTV and a wide range of digital services for corporate clients. In the mobile business, we have been improving the coverage and capacity of our 3G network resulting in data capacity doubling for the whole customer base. Moreover, our 4G service will be nationwide. The development model that the authorities choose should ensure that the required investments are made in telecommunications infrastructure, as these are the real engines of growth. The regulators need to introduce

What is Telefónica doing in terms of developing content for 4G technology? For several years, we have been developing new digital services promoting innovation and the evolution of 4G mobile and optical fibre networks. Currently, over 10 per cent of the company’s revenues belong to new digital products and services. We will continue with this trend, discovering the new needs of our customers and surprising them with more digital solutions. Since 2012, we have been deploying a nationwide 4G network and we launched our service nationwide in November 2013. So far, the content applications for 4G technology are mainly in the fields of financial services and e-health, among others, and we are about to launch new services such as video streaming for mobile called Movistar Play. What can you tell us about the development of telecoms infrastructure and how you raise the capital to invest in this area? Our optical fibre network currently has around 18,000 kilometres nationwide allowing us to offer high quality data services and broadband to our corporate and residential customers, respectively. The optical fibre networks are key in supporting the wireless transmission network. The annual EBITDA of the company self-finances investments of over US$600 million per year. The company maintains a debt of about US$1.7 billion. This debt is diversified due to our good access to both International and local financial markets and, during the last two years, we have refinanced US$760 million. In 2012, Telefónica Chile issued an international bond for US$500 million, which was more than 10 times over subscribed and in October 2013, Telefónica Móviles Chile issued a local bond for US$137 million, both with very good conditions for the company. Telefónica has one of the largest network infrastructures in the country and has been very proactive towards the shared infrastructure business. Since mobile virtual network operators (MVNOs) were authorised to operate in 2012, we have entered into agreements with three of the four MVNOs currently operating in Chile, that reflects our commitment to the development of the Chilean telecommunications industry.

telecommunications interview

Claro Chile, it is our first big step into data services of this kind. The response has been incredible. Mining companies and banking institutions are looking at this new infrastructure, as they want to ensure continuity of services and security. Our data centre is the perfect solution for them. I think Chile is two or three steps ahead of other Latin American markets and, in the case of data centres, Claro Chile is taking a very clear lead.

GERARDO MUÑOZ LOZANO CLARO CHILE S.A.

Chief Executive Officer

INTERNATIONAL INVESTOR: Please provide us with a brief overview Claro Chile? GERARDO MUÑOZ LOZANO: Claro Chile is a wholly owned subsidiary of the most important regional telecommunications group, América Móvil, operating in 18 countries across Latin America with close to 330 million subscribers in the mobile industry, fixed telephony, television services, and internet. Claro Chile became an operator in Chile in 2006 as a result of the acquisition of a local company called Smartco. Over the last seven years, Claro Chile has evolved to now hold an important position in the market with close to 6.2 million mobile customers and 1.2 million subscribers for residential and corporate services. We have invested close to US$500 million per year, strengthening infrastructure, increasing capacity and bettering coverage of all our technologies. Claro is a pioneer in this market and has been leading with new infrastructure investments, better prices and better service quality. We are involved in all the segments of the Chilean telecommunications market, in line with our overall Latin American strategy. What are the main challenges for telecoms providers in Chile? As providers, we need to keep improving all our processes; quality is the most important part of this right now. In Chile, we have very sophisticated customers who are very demanding; they want the best services and they want it at all times. Another important challenge is the regulatory environment, which has recently gone through some changes, with the introduction of antenna law, for instance. The changing regulatory environment has obligated us to better our service, to make important efforts to ensure we are complying with the law and to adjust some of our long-term models to accommodate these regulations. I think the government wants to introduce these regulations to give the market the best

CAREER DEFINING MOMENT

Leaving Mexico 13 years ago and becoming an international manager. This period has been a great time for me, and since leaving Mexico I have been based in Ecuador, then Colombia and now Chile. LESSON IN BUSINESS

For me, it is humility and hard work. possible services at the best possible prices; however, the risk is that sometimes these changes can impact the industry, the potential investment or the development of technology. There is a very fine line between regulation and development of the industry for the sake of the customers. The government needs to continue looking at this balance, but, in my opinion, they have been doing important and good work. What can you tell us about your provisions content development and the announced investment in data centres? Content has become a very important part of our business. In the past, we just looked at our network, now we need to develop and introduce content for our customers. We are very aware of this and we are making important efforts to have our own content. For example, we are launching an Over The Top (OTT) service, named Claro Video in Chile, which will bring our customers more than 3,000 titles, movies, concerts, television shows and more. This service is already running well in Mexico, Colombia and Brazil. Regarding data centres, we are making a very important investment. We are finishing the first phase of a world-class data centre, which will have 1,000 square metres of the best technology in the best location. We plan to develop additional capabilities, including services, such as cloud management. América Móvil is deploying different data centres, which will be interconnected as part of a regional deployment of data centres, but for

What can you tell us about the adoption of 4G in Chile? We are very proud to be the first company in Chile that launched 4G LTE technology. In 2012, when we participated in the bid, we made the assumption for planning purposes that we would win the frequency, so we worked hard in the time before the bid and established our alliances with the technology providers. This meant that when we did receive the frequency, we were very advanced in our 4G LTE project. We began with a cluster in downtown Santiago and intend to keep rolling out the infrastructure and coverage. The main objective is to assure a quality customer experience in the cluster and, every time we launch a new cluster, we will communicate this information to our customers, so they understand how our 4G coverage is developing. What’s your view on infrastructure investment and shared infrastructure? As operators, we need to look at new ideas to reduce capital investments. Thus, by this rationale, shared infrastructure makes sense and the opportunities for shared infrastructure will increase as the market matures. In fact, we have had discussions with some of our competitors about shared infrastructure in some areas. Operators are beginning to come around to this idea, still, in the case of Claro Chile, our infrastructure is currently one of our competitive advantages. Shared and non-shared models provide you with a layer of flexibility that you can apply in your business depending on the situation. Nevertheless, I would like to emphasise that Claro Chile is committed to the country in terms of investment and telecommunication development. Our entry into the market changed Chilean telecommunications from a landscape of two main competitors to one with three major players and this has been important. Competition has been positive for Chile’s telecoms sector. There will be a revolution in the telecommunications sector worldwide and Chile will be part of this revolution. We have seen that our customers will adopt application services and new technologies very, very rapidly, and we are committed to meeting their demands and ready to take on the challenges that go along with that commitment.

CHILE 195

interview telecommunications

This is supported by a commercial model that prioritises the relationship we have with our customers. With an account manager who knows the customer’s needs and organises presale models adapted to these needs. We also have a follow-up team that personally and directly responds to further requirements of the network. Due to the fact that Internexa concentrates on one part of the telecommunication services value chain, our transport services meet very high performance, carrier-class indicators. Finally, our open-network business model provides the necessary infrastructure for all operators, large or small, without restriction.

RODRIGO PIZARRO ELISSEGARAY INTERNEXA CHILE S.A. Chief Executive Officer

INTERNATIONAL INVESTOR: Please expand on the operations of Internexa? RODRIGO PIZARRO ELISSEGARAY: Internexa is a telecommunications company specialising in connectivity infrastructure and ICT solutions. It operates with an open network philosophy, promoting competition in order to strengthen the telecommunications ecosystems that impact development. With the recent acquisition of the state network in Rio de Janeiro, Internexa has around 28,000 kilometres of continuous fibre optic cable that covers seven countries throughout Central and South America. The network is supported by technologies that provide high reliability and high availability (such as OPGW cables and humidity regulation), the linkage of complex topographical regions and a team of 254 talented professionals. We focus on providing infrastructure for commutated clear-channel Carrier Ethernet, general MPLS and IP transport. Additionally, CDN operators are housed with this infrastructure to make local and regional traffic more dynamic, improving the experience of our clients’ customers. Internexa is part of the ISA group, one of the largest electric transmission conglomerates in Latin America, which has diversified to telecommunications transport, highway concessions, management of intelligent systems, and construction of infrastructure projects. Working in nine countries, it is the twelfth largest company in terms of market capitalisation on the Colombian Stock Market and has signed the United Nations Global Compact for Corporate Social Responsibility and also the UN’s Millennium Development Goals. In Chile, it controls ISA Intervial, operating concessions along Route 5 South (the Chilean portion of the Pan-American Highway) and it is implementing ISA Interchile, which will operate a 750 kilometre interconnection line between Santiago and Vallenar in northern Chile.

196 INTERNATIONAL INVESTOR

CAREER DEFINING MOMENT

23 years of experience in the market of telecommunications in Chile and other countries. Although not a single moment, it has been pretty career defining and has given me the pleasant opportunity to lead in various areas of the telecommunications value chain at a number of well known international companies. LESSON IN BUSINESS

The main lesson learned in my professional life has to do with honesty, applied to a broad spectrum of professional activities. Honesty is good for business. When you are honest with a client and explain the genuine reasons for a price, or because a service runs one way and not another for example, then they will rely on you and rewards you: depositing trust to grow their business with you. Could you tell us in more detail about Internexa’s network infrastructure in Chile and how you differentiate yourself? Internexa bases its business model on being a wholesale supplier for telecom operators and consumers of large volumes of bandwidth and internet connectivity at a regional and global level. It arrived in Chile in 2011 with an initial 1,118 kilometre network extending from the Metropolitan Region of Santiago to Region VIII (Bío Bío). Given the topographical complexity of the Chilean territory and operators’ need for a maximum redundancy solution, we embarked on the process of linking the network. Today, Internexa Chile and Internexa Colombia, are fully linked operations. Their network amounts to more than 2,700 kilometres, including the links that have provided more capillarity and presence in high demand areas. What makes Internexa stand out in the telecommunications market? First, the full linkage we have for transmission throughout an expanding network sets us apart from domestic network providers.

How does your business model allow you to respond to the changing telecommunications regulations in Chile? Internexa’s business model responds to the meets the needs of regulators and governments in the sense that promotes competition through the provision of a scarce resource: infrastructure. Infrastructure that is based on optical fibre with high levels of quality and availability, providing a modern, superior network without any barriers of entry for any actor interested in the telecommunications sector and who wants to develop end user services. This model is very appropriate at times like the present in which new broadband access technologies, both mobile and landlines, create pressure for further investment in infrastructure for traditional landline and mobile service operators. Our business allows these operators to focus resources on their core business, while purchasing the connectivity they need as a service. What is your view on the development of regional telecommunications integration? Internexa’s initiative to integrate a regional network, that allows the aforementioned services to be delivered at local, regional and international levels, has been a determining factor for the integration of communications for the countries in South America. It has created an ecosystem of interconnectedness that has facilitated optimal use of capacity provided by submarine transport infrastructure, previously regional traffic needed to be commuted outside of the continent. It has also substantially improved customers’ experiences with accessing internet content that is already localised in the regional ecosystem. This integration is undoubtedly generating a platform that will incentivise the development of local content in Spanish and Portuguese, like the repatriation of applications and content that have historically resided at data centres off the continent because of limited infrastructure on the continent.

telecommunications interview

ANDREW ZHENG HUAWEI CHILE S.A.

Chief Executive Officer

INTERNATIONAL INVESTOR: Can you provide some background on Huawei’s operations? ANDREW ZHENG: Huawei has over 150,000 employees, of which 45 per cent, or about 70,000 employees, are specialised in research and development. Outside of China, 73 per cent of our employees are recruited from the local markets in which we operate. Looking at our presence globally, we have 14 regional headquarters, 16 research and development centres, 28 joint innovation centres and 45 training centres; our products and solutions are applied in over 140 countries worldwide. In 2012, global device sales revenue reached US$7.5 billion and units shipped totalled around 127 million. These sales were composed of 32 million units of smartphones and 20 million feature phones, with mobile broadband devices reaching 50 million units and home device shipments totalling 25 million. In the first half of 2013, smartphone shipments reached 21.14 million units, with an OEM ratio of 95 per cent. This is an increase of over 80 per cent from the same period in 2012. With regard to patents and standards, Huawei has joined around 150 standards organisations, holding more than 180 positions. Just during the first half of 2013, over 2,300 standards proposals were filed, and as of June 30, 2013, Huawei has filed a total of 33,055 patent applications that were subsequently granted. What is Huawei’s role in the adoption of 4G Long Term Evolution (LTE)? Huawei is a global leader in terms of LTE commercialisation, and we have deployed 100 of the 213 commercial LTE networks currently available in the world. We have also deployed 80 commercial Evolved Packer Core (EPC) networks, which provide a framework for providing converged voice and data on a 4G LTE network. We currently rank number one in the industry, with this level of LTE contracts.

CAREER DEFINING MOMENT

One the most important moments in my career was when I was appointed to work in Iraq. After the war in 2003, there were no mobile telephony services and no ICT provider wanted to do business in a war-torn country due to security reasons. We decided to help and started building a small mobile network with 200 sites, and despite the lack of local resources, we developed a successful mobile network. It made a huge contribution to the country in terms of communication, and it was life changing for many. Currently, Iraq has 2G/3G networks with thousands sites. LESSON IN BUSINESS

I feel very proud working in ICT industry. My main lesson from this business is the fact that through our work we can improve people´s quality of life, sometimes by just doing small things. We are one of the few companies that provide end-to-end LTE Time Division Duplexing (TDD) and LTE Frequency Division Duplexing (FDD) solutions. According to data from the 3rd Generation Partnership Project (3GPP), Huawei has received the most LTE/LTE-Advanced standard patents since 2010 (again ranking first in the industry) and further demonstrates Huawei’s leadership in industry standardisation. The company has partnered up with early adopters of LTE devices and mobile broadband networks including Deutsche Telekom, Telefónica, Vodafone, Emobile and NTT, and Huawei’s LTE networks have been deployed in over 90 cities worldwide, including Hong Kong, Singapore, Zurich, Seoul and Tokyo. What can you tell us about the market’s reception of the new ‘Huawei Ascend P6’ smartphone and the MediaPad? The Huawei Ascend P6 received the prestigious ‘European Consumer Smartphone 2013−2014’ award from the European Imaging and Sound Association (EISA), and, as of the end of Sep-

tember 2013, global shipments of the Ascend P6 have surpassed two million units. We have secured sales contracts with carriers and channel vendors in more than 90 countries for the Huawei Ascend P6, including Europe’s mainstream carriers such as Vodafone, Telefónica, Orange, H3G, as well as the largest mobile phone retailer in the UK, the Carphone Warehouse. The Ascend P6 has proven to be one of the most popular our products among mainstream global carriers. It is also the first smartphone to be made available simultaneously across China’s three main carriers, China Mobile, China Telecom, and China Unicom as their key promotional product. With regard to the Huawei MediaPad, we have secured contract sales with carriers and channel vendors in more than 100 countries, including Vodafone, Telefónica, Softbank and Svyaznoy (a leading digital product retailer in Russia). In Russia and Saudi Arabia, the MediaPad obtained over 10 per cent of tablet market share. Vodafone, one of Australia’s top three carriers, launched its first Cat 4 product, the MediaPad 10 Link LTE tablet, which not only meets Vodafone’s high standards but also leverages Vodafone’s entire broadband network. Cat 4 is able to reach a peak speed of 150Mbps, which is 50 per cent higher than traditional LTE devices. The shipment figure for the Ascend P6 is still far from the target of ten million units. How does Huawei plan to achieve the sales target? Ten million units is a target shipment figure for the Huawei Ascend P6’s life cycle, which was estimated at approximately one year. Sales contracts for the Huawei Ascend P6 are secured with carriers in over 90 countries and our performance to-date shows we are on target to achieve our goal. Global carriers are currently very active in promoting the Ascend P6 with various campaigns and activities to win more consumers. Also, Belarus’ biggest carrier Mobile Tele Systems (MTS) launched its first zero down payment promotion with the phone. As I have mentioned, it also the key promotional product with China’s three major operators. With additional Huawei Ascend P6 ATL and BTL sales activities planned for Q4 and Christmas and New Year, and promotions taking place in more than 60 countries around the world, we feel confident of hitting our 10 million units target. We are excited to bring such a high-quality device to the global market at a very competitive price, and are certain more and more consumers around the world will choose the Huawei Ascend P6.

CHILE 197

interview telecommunications

These discussions can take a long time, but data protection regulation and technology is time sensitive, so the speed of these steps forward is key. There is always the danger that once a final agreement is reached, technology and the market might already have moved on.

NICOLÁS CHIAPPARA CISCO SYSTEMS INC. Country Manager

INTERNATIONAL INVESTOR: Please tell us with a brief overview of Cisco’s operations in Chile? NICOLÁS CHIAPPARA: We have been operating in Chile for almost 15 years now with a local office of around 110 employees and a business that has been growing rapidly in recent years. Chile is one of the most important countries for Cisco in Latin America. We work with telecommunications companies as well as corporations in other industries such as mining, finance, healthcare, as well as the public sector. In terms of social responsibility, we invest a lot in what we call networking academies. Currently, we have more than 100 from Arica to Punta Arenas, the whole length of the country. In the last ten years we have assisted more than 80,000 students through these academies. This has been very important in terms of developing local skills.

80 per cent of the content accessed by Chilean users is located and developed outside of the country What has been Cisco’s role in the development of the Chilean telecommunications industry? Firstly, we have been working with government on the development of the industry. We believe that the development of countries has a direct relationship with the evolution of the telecommunications sector. There are studies that show that with broadband development countries offer a better quality of life for their citizens, and over the last ten years, we have been collaborating with Subtel and other governmental institutions on studies of broadband penetration. Every six months we present our results regarding broadband penetration in the country, both fixed and mobile.

198 INTERNATIONAL INVESTOR

CAREER DEFINING MOMENT

I think the most important is yet to come. In my career, I always challenged myself to go beyond what I have already achieved in terms of business results and in terms of the position of my company and in the market. LESSON IN BUSINESS

Always keep your eyes open and listen actively and consciously to what is going on in the market with customers, the government, your organisation and your employees. It is all about making good decisions, and to make good decisions you need to have the right information. In this regard, velocity is important. Chile has the highest broadband penetration rate in the region, reaching more than 40 per cent of households with an average speed of 7.6 megabytes per second. That is the highest in Latin America, and almost three or four times the average speed in other Latin American countries. We also have been working with the main service providers and telecommunication companies in the country, providing them with architecture, expertise and knowledge. Delivering fixed and mobile broadband, as well as architectural solutions for cloud services. How do you see the issue of data protection evolving? Data protection is important for companies and consumers. Companies are offering solutions that pay special attention to the security standards and the government is also taking action. Dealing with the issue of data protection is going be key when competing and providing safer, quality services for domestic users, and also for Chilean companies offering IT services beyond its borders. The government is moving in the right direction, understands this, and is looking to replicate the best aspects of different regulatory environments from other countries like the US, for example.

How are the proposed second spectrum auctions going to impact the Chilean telecommunications sector? Spectrum is a key component of development and like any country it is limited. The new spectrum that will be released next year will hopefully help the development of higher velocity services and broader coverage, which I think is necessary. On the other hand, I believe that the total spectrum that will be released may not be sufficient for the consumption demand that we are seeing. Users are demanding more bandwidth especially for multimedia and video applications. The majority of the traffic on the network is already video and that trend in growing video demand will continue. Bandwidth is growing faster than penetration. That means growth is not driven by numbers of customers using the Internet, rather, growth is driven by quality and velocity, which is directly related to the content being accessed. There are two main aspects to this; first, more than 50 per cent is video, in three to five years more, 80 to 90 per cent of network traffic will be video. The second is that more than 80 per cent of the content accessed by Chilean users is located and developed outside of the country. That’s another important issue, as this will require more international bandwidth. As of today, the vision of the government is that the market has to evolve and compete by itself. There is no direct investment from the government in terms of developing national bandwidth or fibre development. So there is an on-going debate in terms of who should be investing: the government, the private sector, or a mix of the two. The economy here is changing and if we want to be a developed country, and not only count in terms of copper production, we need to develop a knowledge economy. We are moving in that direction and telecommunications infrastructure is a key element in that sense. How is Chile going to attract more content providers to this market? Actually, I think that there is a lot of movement in this area. Not only are local providers developing big data centres to host content, but also international companies are looking to develop content infrastructure too. CORFO, through the year of innovation, is incentivising companies to focus on the area of content development. There is an opportunity here and with the further government incentives it will develop.

human capital & educationâ&#x20AC;&#x192; overview

HUMAN CAPITAL & EDUCATION Chilean higher education has accomplished a lot in the last decades, changing from being a small-scale, homogeneous and highly selective system into a larger, more diverse system. However, this has produced new challenges for the higher education sector that now need addressing.

CHALLENGES AND ACCOMPLISHMENTS

Chile had nearly 1,200,000 students in higher education as of 2013

GROWTH AND COMPLEXITY OF HIGHER EDUCATION IN CHILE In recent decades, Chileâ&#x20AC;&#x2122;s higher education system has not only been defined by high growth, but also by increasing complexity. The expansion and diversification undertaken in the sector has enabled a sea change in terms of access, but it is also a source of new challenges. These changes in the higher education system have impacted the way tertiary-level education is approached and has influenced the views of academics and policymakers regarding how to address the new challenges in an ever-changing and highly globalised environment. Several factors demonstrate the increasing complexity that is affecting the sector. While some of these factors have been developing for the past 10 or 20 years, others are more recent developments and some are incipient. There are more students participating in higher education and these students are sig-

nificantly different in terms of mindset and demographic. Moreover, Chile has a much larger and diversified landscape of higher education institutions, with different scopes, purposes and goals. Both national and international organisations are providing deeper analyses related to the sector, pushing the Chilean higher education system to perform at a higher level through multiple quality and equity indicators. Higher education institutions must also comply with information requests and be publicly accountable. There is a growing demand for advanced human capital in several economic sectors, as a result of Chileâ&#x20AC;&#x2122;s dynamic market. Furthermore, new social actors, including the student movement, are questioning the institutional structure of higher education, as well as its financial and regulatory schemes. Notwithstanding these developments, much has been achieved in the sector. In terms of access, in 1990 the number of students in

higher education was approximately 250,000; Chile had nearly 1,200,000 as of 2013, the largest number of students in higher education in its history. Moreover, half of this number is receiving financial aid in the form of loans and scholarships. Interestingly, there has been an increasing emphasis put on the importance of vocational education at the tertiary level, which accounts for more than 50 per cent of undergraduate enrolment. More than 60,000 students are currently enrolled in national graduate programs, including master and doctorate degrees, while nearly 5,000 students have been funded to pursue their studies aboard, at prestigious universities. This expansion, significantly boosted by government financial aid schemes, has raised the gross coverage to 57 per cent, fairly close to the OECD average. Important segments of Chilean society have been incorporated into the higher education system, particularly students from lower socioeconomic backgrounds. The new student profile also includes older students, with family and work responsibilities, who are returning to higher education in search of lifelong learning. However, with increased access comes the necessity to construct and implement effective and efficient responses that can tackle high dropout rates and facilitate timely graduation throughout the sector. In contrast to the eight universities available pre-1981, Chilean students can now choose from 160 higher education institutions, including vocational colleges, professional institutes and universities. The number of higher education institutions has now stabilised and the current offering includes a variety of types of institutions including: stateowned, state-supported and private; ones focused on teaching or research; vocational and professional institutes; and science and technology colleges. These institutions offer more than 17,000 undergraduate programs and nearly 3,500 graduate programs. Thus,

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overview human capital & education

students have many more choices within a much more complex higher education system and, consequently, information about choices has become crucial for decision-making. Market dynamics are driving higher education institutions to design, propose and develop programs, which are aligned to the requirements of the productive sectors. This has led to an increasing prevalence of professionally-oriented programs as opposed to more general, formative educational programs in the liberal arts, science and humanities, which are essential for the formation of ethical citizens. However, achieving balance in the higher education system while ensuring diversity is crucial. Thus, the provision of adequate information is vitally important. This is currently being addressed through the strengthening of information systems, not only for prospective students, but also for employers and other actors interested in the outcomes of higher education. Beyond market forces, new social actors are ensuring a number of demands regarding funding, access and quality are issues that stay on the national agenda. The student movement questioned excessive debt and high interest rates of student loans, as well as quality and transparency in higher education, pushing for large scale institutional reforms and transforming the role of the state in tertiary-level education. In response to these demands, the government significantly increased state resources to student aid, defined a 2 per cent subsidised student loan interest rate, set a 10 per cent maximum income-contingent repayment and limited the payment period to 15 years. The student movement and several higher education institutions are also pushing for access equality. One particularly relevant measure in this regard is the use of high school grade rankings as a criterion for college entry, as it is already use to assign merit-based scholarships. Other quality-related demands led to the creation of the Higher Education Superintendency to carry out regulation and supervision, and the New Accreditation Agency to administer quality assurance. To strengthen the institutional structure of higher education, a new law is currently progressing through the Chilean congress that will create an undersecretary of higher education. In summary, Chilean higher education has accomplished a lot in the last decades, changing from being a small-scale, homogeneous and highly selective system into a larger, more diverse system and this has produced new challenges for the higher education sector. In order to ensure Chile develops as a nation and can address global trends in this area, the higher education system must to respond to a number of emerging topics,

200 INTERNATIONAL INVESTOR

such as the structure of the formation cycles; science, technology and innovation; internationalisation; the development of students; the development of higher education institutions; and the formation human capital for economic, social and cultural development. CURRENT AND FUTURE CHALLENGES FOR HIGHER EDUCATION IN CHILE ON FORMATION CYCLES In order to ensure the consistency, quality, length and pertinence of undergraduate formation is continuously improving, it is important to clearly identify the concept of tertiary level education and, therefore, generate an adequate structure for the cycles of formation. In many countries with advanced tertiary education systems, an initial cycle of formation is understood as the development of general knowledge, competences and skills in a certain discipline leading to an academic degree to enable the student to perform professionally in the job market. Deepening and specialising this knowledge and skill set is part of a second cycle of formation, which may lead to a third cycle of advanced training focused in research. Chile needs to reassess the chain of formation, its definition and its mechanisms of articulation. In this regard, vertical articulation issues arise. It is important to clarify the conditions required to go from one level to the next and to clearly distinguish the content and skills taught at each level. Moreover, the different paths for research-oriented academic formation and those particularly oriented to professional work must also be defined. Ensuring vertical integration is also important in specific areas of knowledge; for instance, a vocational or technical formation in health or technology should allow for the continuity from bachelor to master’s degree and avoid disruption between levels, especially within the same areas. A second level of articulation concerns the link between academic formation and work environments. Thus, Chile’s higher education system must provide better modalities of teaching, which highlight links between theory and practice, and integrate professional experiences, state-of-the-art equipment and technology, as well as other mechanisms to articulate how theoretical knowledge can be applied in a professional capacity. ON SCIENCE, TECHNOLOGY AND INNOVATION For Chile, the link between higher education and scientific and technological development is becoming increasingly important. Universities worldwide are now required not only to produce basic knowledge, but also to push forward technological development and transfer processes into productive innova-

tion. Therefore, a broader concept of higher education must explicitly include science, technology and innovation as a core aspect for its development. In this regard, the quality of scientific production should not be assessed solely by the number of papers published a year. Indeed, quality, indexation and impact at a global and local level are all factors that are becoming essential for modern institutions. New indicators and measures of scientific production must be used to provide incentives for high-quality and relevant research, from which the whole of society can benefit. Chile has made great progress in advanced human capital formation, both in national and international programs. More than 4,500 students are pursuing their PhD in Chilean institutions and, in 2013, nearly 2,000 students attended top ranked international universities on government scholarships. These unprecedented efforts to build research capacity entails that the country must also generate high-level institutional platforms in the next years to absorb the new contingent of doctorates in the market. Thus, additional efforts in institutional funding for universities will be required to set up research programs in universities, both in terms of human resources, as well as fully equipped labs and research facilities. In this sense, the diversification of destination for this advanced human capital is also a major challenge, as more than 85 per cent of PhD candidates are currently working in universities, while a minor proportion are developing new technology in companies or innovating within the public sector. Providing a consistent, integrated and stronger institutional structure for research and development is a task that is still pending. In order to expedite this task, a new ministerial level institution should be established to link higher education with science and technology within clear, coherent, effective and efficient funding schemes, in order to boost the country´s research and development (R&D) capabilities. ON INTERNATIONALISATION The internationalisation of higher education in Chile is great and important challenge. In the recent past, the process of internationalisation has been mostly approached through mobility programs, which allow teachers, researchers and students to enter academic settings in foreign countries. Although academic mobility is still very important, a new wave of internationalisation initiatives will look to promote the international reputation of Chilean university degrees and ensure that an academic degree from a Chilean institution will be as good as in anywhere in the world. In order to achieve this, the higher education system will require

human capital & education overview

curricular structures that are comparable and compatible with those in countries with leading tertiary education systems. Quality assurance systems play a major role in generating trust and comparability in this respect. However, significant developments are needed in this area to make these objectives a reality, including bilateral agreements between countries, regional higher education areas and worldwide academic circulation schemes. In this regard, promoting the knowledge of the English language becomes decisive, as it is the universal language of science, technology, business and international issues. Only a small fraction of the adult population in Chile can hold a conversation in English, and this fraction is smaller if we consider the level required to perform in academic or professional settings. The urgency of expanding English language proficiency requires the country to focus not only on English learning at a school level, but also provide alternatives that enable citizens to learn English at all stages of their lives. ON STUDENT’S DEVELOPMENT The transformation of Chilean higher education necessitates a new way of understanding student development, which goes beyond access. In order to prevent dropouts and increase graduation rates, this understanding must ensure student’s needs are met at every stage of their schooling. The average profile of a student in Chile is no longer the full-time student dedicated exclusively to their studies, many also work part-time, have families of their own and must arrange their time and resources to reconcile multiple responsibilities. The Ministry of Education is steadily improving access to higher education, and currently a reasonable proportion of students come from low-income sectors. Many of these students are the first of their families to study at the tertiary level. Thus, they possess less social and cultural resources compared to the typical college student in recent decades. These new types of students require government student aid programs to provide adequate and pertinent assistance alternatives, including levelling entry skills to prevent dropout for academic reasons. For institutions, more comprehensive psychosocial assistance units will be increasingly important to address the different needs and to allow vulnerable students to catch up with tertiary level academic requirements. ON THE DEVELOPMENT OF HIGHER EDUCATION INSTITUTIONS In terms of institutional development, ensuring continuous quality improvement and guaranteeing transparency, while respecting autonomy and promoting the diversity of higher education institutions is a major chal-

lenge for the Chilean system. An institutional arrangement for regulation and quality assurance, implemented through an improved accreditation system and Higher Education Superintendency is required. If this is combined with efficient results-based funding mechanisms for higher education institutions it will allow the country to establish the necessary steering capabilities to position national universities and other educational institutions as world-class organisations, both in teaching and research. Quality assessment, regulation and funding mechanisms should promote the institutional development. These mechanisms must be flexible enough to address the specific needs of different kinds of higher education institution, while demanding adequate outcomes in return. The same is valid for accreditation, in which quality criteria and standards should be relevant for the specific mission and purposes defined by each particular institution. Coordination among institutions is another challenge. The system requires increased flexibility, allowing the students to transit fluidly between the labour market and higher education, from one institution to another, from the vocational level to a university degree, and from undergraduate to graduate studies. With a credit system allowing circulation within these ambits and levels, the whole system will receive the benefits of increased coordination. ON HUMAN CAPITAL FOR ECONOMIC, SOCIAL AND CULTURAL DEVELOPMENT There is global consensus about the importance of the production and use of knowledge to contribute to the economic, social and cultural development of a nation. The higher education system of a country must serve society as a whole, generating the skills and competences required both in a global knowledge society and for local development needs. Consequently, in terms of producing advanced human capital for development, higher education has a double role in that it must produce high-level research leading to technological progress and it must be committed to regional and local development, improving productive processes, quality of life and the environmental balance. Thus, higher education, in Chile, as it is in the rest of the world, is inextricably linked to the rest of society, to which it has a major responsibility to train the population to not only be the new technicians, professionals and academics, but also the citizens that will lead development in to the future decades.

➥

This feature was produced in conjunction with Alberto

Vásquez, head of the higher education division, Ministry of Education

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not just focused on one area. We have built a multi-disciplinary institution with departments in arts, science, humanities, biomedicine and engineering. Furthermore, we are a more comprehensive university in the sense that we are interested in all areas of human development. Of course, we are part of the Catholic Church, but we are an open university. We do not ask students whether they are catholic or not, but we have an identity and mission, which is to show a catholic proposal in higher education. Quality is at the basis, but it is also important for us to show that we believe in some ideas, principles and values.

IGNACIO SÁNCHEZ PONTIFICIA UNIVERSIDAD CATÓLICA DE CHILE Rector

INTERNATIONAL INVESTOR: Could you outline the role that Chilean universities are performing in relation to the overall economy? IGNACIO SÁNCHEZ: We have about 60 universities in Chile; they are divided between staterun universities, traditional universities and new, private universities. The term university, in our country, is very broad, very open and, thus, allows for different proposals and projects to be implemented. Our university is 126 years old and is a research-oriented university. We focus on the disciplines, but also the training and formation of our students in terms of life skills. The Pontificia Universidad Católica de Chile (PUC) has about 120,000 alumni and they have an important impact on our society in the fields of economy, finance, cultural issues, health, engineering, arts and science. We have 72 professors that have won national prizes in arts, science, humanities and education, which reflects the importance and influence of this university. Both the Universidad de Chile and PUC have built the whole higher education system in the country, because the majority of professors, directors and deans, received their education at one institution or the other. Importantly, PUC’s professors and alumni transformed this country. The economic theory that has structured the Chilean economy and informed its economic policy comes from the Chicago School of Economics at the University of Chicago. This theory was introduced through PUC: for example, the pension plans, health structure and the constitution. I know there is opposition and there are different thoughts about this approach, but we have been growing as a country and several important issues or reforms were initiated by this university. So, when you see the status of this country in 1970 and what has happened in forty years, the transformation of the country has been in-

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CAREER DEFINING MOMENT

After four years in Canada and eight years in Chile doing research in my chosen field, I realised that academic duties were important to me. At the medical school, they asked me to direct the school and focus part of my time as academic director. I have continued on this path, but I have moved from the medical school to the university. LESSON IN BUSINESS

As rector I have an open agenda and if a student, professor or administrator asks for my time I do my best to give it to them. As a result of this approach, people feel that in me they have a potential listener and a potential resolution to their problem. This gives me a great deal of satisfaction as it brings our community together and, I think, shows good leadership. credible in regards to growth, decrease in poverty and increase in opportunities. Forty years ago about 8 per cent of people were going into higher education; today it’s more than 50 per cent. A large portion of this transformation is due to PUC, through its professors and alumni. What about the importance of PUC with regard to the region?   First of all, approximately 22 per cent of our postgraduate education students and about 14 per cent of our professors are foreigners. Most of the students are here for a Master or PhD. When they go back to their respective countries, they will keep in touch with us and this will reinforce the strong academic networks that PUC has with universities like Sao Paolo, UNAM, and Buenos Aires. Three or four key universities are in our network of research universities; we have strong links, work together on research projects and share resources. The PUC has been important in building a research-oriented university in many different areas of study. One of our main advantages is that we are

What should be happening in order that higher education can continue to evolve in the correct way for Chile?   For the past 50 years, Chile has been significantly increasing access to education and the number of Chileans that are entering higher education, as well as increasing the number of careers and areas of development. Even though the access to finance for higher education has been increasing, today the main thing focus should be on quality because we know that universities and higher education institutions have a big responsibility and should be trusted by families and students. Students come to university at 18 years old with different talents, efforts, backgrounds and high school educations; they trust that the university they choose will ensure a proper transformation process and an environment in which they can develop their skills in an important way. Most undergraduate students will be exposed to a similar experience, but they develop in different ways because of the interaction between their needs, hopes and willingness to grow; we believe this development has to take place within a rich atmosphere and this is what the country should work towards. In that sense, we have to really put a lot of effort in quality. The institutions, families, government have to make sure that each and every institution in Chile provides a certain standard. Today, one of the main problems we are facing is that there are a lot of institutions that, unfortunately, do not attain that standard. How do you think this standardisation can be achieved within the higher education system?   There were a few decisions made that were moving towards that goal ten or fifteen years ago, which aimed towards creating a standard in accreditation. I feel that, as a country, we did our best to accomplish these requirements, but the main issue was the enormous growth of the sector. The vast increase in the number of institutions did not allow the country to maintain those minimums. When a system like

human capital & education interview

this grows ten fold in a few years and you do not have the quality of the professors to keep up with the growth, the system does not have the capacity to respond and the quality of the institutions suffers. To train a PhD student and transform that person into an independent researcher takes four to seven years, some institutions tried to fit this process into two or three years and it is not possible. That is why we are trying to modify the accreditation law and trying to make sure that the regulations are stronger. Where do you see higher education moving in the medium term?   On a technical level, higher education has to be better aligned with the needs of the country. For example, with regard to the mining industry, we need to train technical people. Today, we have to employ technical people from different South American countries, so we must to establish exactly what we require in terms of human capital and how we will meet these needs.

Forty years ago about 8 per cent of people were going into higher education; today it’s more than 50 per cent. A large portion of this transformation is due to PUC The capacity of the higher education system to be able to provide the solution to this problem is crucial. For example, we have one technical institute that is training people to work the fisheries industry and, when they finish, these students will find employment in that industry. We require a lot of expertise in the energy and mining industries and the connection with technical institutions in this area is lacking. There is a need for closer affiliation and closer communication with industry in many sectors. However, every time that you put together researchers or university professors with people from industry, there is some degree of prejudice: industry thinks that academics are analysing things that are not important and academics think that commercial companies just think about profit; neither of these two perspectives is the reality. There are a lot of areas where we can work together and we can be creative and innovative; the first step is to know each other. Why hasn’t the relationship between universities and industry been consolidated? I think that is a very important question, especially in terms of the situation in Chile. If you think about the normal trajectory with

regard to training and education of a Chilean person. You go to school, then to university, then you do postgraduate training in Chile or abroad, you come back and you work until you retire, you never go back to university. Some exceptions are medicine and some scientific careers, but the professional director or executive in a mining company or bank for example, does not return to education. I believe that it is different in the U.S. or Europe, where you go back and forth, you get your first degree, work for two or three years, and then go back to university and get a master’s degree or PhD. Continuous education is very important for professionals, universities and also for industry because you get feedback and you learn much more about both spheres. I believe that is one of the main reasons the relationship has not been consolidated. What boundaries and challenges do  you have to address to keep this sector moving forward?   One of the main challenges is to understand that a group of international level universities have to advance and improve their research abilities and their capacity to really add to certain new values that are developing in this country. Chile is rich in natural resources, but we need to work as a country in training and improving human capital to add more value to those natural resources. Moreover, in Chile, 95 to 97 per cent of the research is done in the universities, in contrast to Europe or the U.S. where industry invests a significant amount in research. Given this reality, we need to convince the authorities, industry and the private and public sector to trust the universities to facilitate advances in the country through research. When you look at the quality of Chilean scientists and the productivity of this university, as well as others, it is very encouraging. Considering the total research budget for the whole country is about US$650 million, which is less than the total budget of a medium-level university in the U.S., we are extremely efficient in this area. We are doing an excellent job with a restricted budget. If we want to increase our activity to the next level, we need much more conviction and more help and trust from the government. If we take the U.S. rankings, for example, three years ago this university was ranked 301, today we are ranked 166, which is exceptional. I am convinced that, with more trust from the public and private sectors, we can grow efficiently and successfully for the benefit of both our students and the country. Ultimately, the better the alumni we give to society, the better it will be for the development of Chile.

Chile is rich in natural resources, but we need to work as a country in training and improving human capital to add more value to those natural resources How can university help to advance the research and development sector in industry? I think this is a very important area. We need to have a two-way dialogue between university-based research groups and industry. It will have to be a free and open dialogue in which professors can give their own ideas about different topics and industry can explain their needs. From those dialogues we can build new research. If industry can take universities as partners, in the sense that there would be a dialogue and an exchange of interests and ideas, then we can move forward. We are not going to be hired by industry to do research on request. Moreover, we won’t carry out research and then just hand it over to industry. I think we have to find a common pathway where both parties are satisfied with the amount of input and the return on that input. Is there a development path in which universities could perform some for-profit functions in line with their particular research interests that would be available for industry and also help fund access to education? If certain new research creates value for the company and the university, the rules and the regulations or a contract would have to be very clear about what the benefits were for the company and for the university. This university is a non-profit institution and, as such, we will reinvest any resulting income in to scholarships for students, new infrastructure or new research groups. The key issue is to pass appropriate and adequate laws that regulate the system because some private universities may take advantage of soft regulation and we could have situations where companies make a profit from a university and, in this country, universities are not for profit. The role of Superintendencia de Educación is crucial here and regulation is currently in parliament that should be approved to make sure that this process is governed correctly and where the regulation enacted ensures that the potential for extraction of resources from an institution is completely negated.

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BERNARDO DOMÍNGUEZ COVARRUBIAS DUOC UC Rector

INTERNATIONAL INVESTOR: Please provide us with a profile of Duoc UC and its position in the Chilean education system? BERNARDO DOMÍNGUEZ COVARRUBIAS: The founding of Duoc UC, in 1968 by the Pontificia Universidad Católica de Chile, was motivated by the university’s desire to accommodate not only the study of science, humanities and professional subjects, but also technical education and training, an area that was considered essential to the development and growth of the country. In 1981, the institution adopted its current structure forming the Instituto Profesional Duoc and the Technical Training Centre. Our mission is to be an inclusive, academic, higher education project that addresses the proliferation of education in the citizenry with a strong commitment to quality. This is evidenced by the fact that Duoc UC has obtained the maximum institutional accreditation from the National Commission of Accreditation (CNA), seven accreditations out of seven years. This achievement confirms the soundness of our project and its relevance among higher professional and technical education institutions in Chile. Over a period of nearly half a century, we have become an innovative, open institution with strong market connections, characterised by our ability to recognise and adapt to market needs. Working with Pontificia Universidad Católica de Chile, we are consistent in our pursuit of academic excellence and we are at the forefront of teaching-learning processes. The institute is an active player in the field of job training and promoting an integrated, fully developed national community. Duoc UC is one of the leading higher professional and technical education institutions in Chile with 80,000 students, offering 84 technical and professional degree programs through nine schools deployed over 15 campuses in three economically important regions of Chile: Santiago, Valparaíso/Viña del Mar and Concepción.

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CAREER DEFINING MOMENT

I have had a rich academic and professional development path in life and academia. I am a vastly experienced senior lecturer and professor emeritus at Pontificia Universidad Católica de Chile, where I was director of the School of Engineering, dean of the Faculty of Engineering from 1982 to 1988 and vice-rector of academic affairs from 1990, before becoming rector of Duoc UC in 2012. LESSON IN BUSINESS

That it is possible to combine academic life and high-level professional activities. In contrast to the extended university programs offered by some other institutions, Duoc UC offers two-year technical degrees and four-year professional degrees. Students are admitted on a first come, first served basis. Approximately 73 per cent of Duoc UC students are from the lowest three income quintiles, compared to 50 per cent for the Chilean tertiary education sector as a whole. Around 74 per cent of the students who attended the institution are the first in their families to receive higher education, representing a significant opportunity for a new generation of Chileans whose families historically have lacked access to higher education. Can you describe in more detail Duoc’s curriculum focus and how it manages its relationships with industry and employers? Duoc UC focuses on employability with 84 study programs relevant to the labour market, offered through nine schools: engineering, informatics and telecommunications (ICT), communication, design, health, business administration, natural resources, construction, and tourism. Duoc UC also offers mixed-discipline subjects like English and ethics, as well as entrepreneurship programs that are unique in the region. Duoc UC also focuses on ‘learning by

doing’, using state-of-the-art infrastructure and equipment to simulate conditions students will find on the job. Faculty bodies also have work experience in their fields of specialisation. Furthermore, to ensure that our curriculum stays up-to-date with labour market needs, Duoc UC schools have business councils comprised of industry representatives. The study programs are created through a procedure that actively involves these industry representatives and we have in place an ongoing industry feedback system establishing concrete partnerships between education and different economic sectors. For us, a leading technical-professional education institution should ensure the pertinence of its course content vis-à-vis the requirements of the labour world, market or industry. Moreover, the ability to respond in a timely manner to new trends and to changes is crucial. Our model allows us to maintain a continuous process through which we can review, update and improve our curricula. Thanks to the information we receive through the business councils in each school, ongoing feedback from stakeholders, faculty input and the surveys we conduct among employers, alumni and graduates, we can take timely action and modify specific courses, update whole curricula and detect new opportunities for the creation of academic offerings. Can you elaborate on your network and connections with the global business community and the internationalisation of Duoc? In 1993, our dream was to generate a gradual, systematic process of institutional globalisation and internationalisation of Duoc UC’s classrooms, schools and campuses. We understand that globalisation involves broadening perspectives towards other horizons. Accordingly, our international connections strategy has facilitated access to other cultures and realities for our students, graduates and faculties. The possibility of students complementing their academic studies in other countries is certainly a great contribution to the formation of better professionals and, above all, well-rounded individuals. This process, which we started 20 years ago, has allowed us to plan for the future and anticipate change in the fields we teach. Thus, we are able to prepare our students to perform in a highly competitive environment where they will be interacting with specialists trained in different countries, from different cultures and under different education paradigms, characterised by globalisation, interdependence, competitiveness and multiculturalism. While much has been done to fulfil our goals already, so much more remains to be achieved.

health overview

HEALTH Chile represents a growing healthcare market with rising income per capita, a demand for higher coverage, more sophisticated treatments and an increased life expectancy

THE GROWING DEMAND FOR HEALTHCARE viduals working in a given company or sector of the economy, such as large public copper mining companies. Open institutions allow anyone to become affiliated. Of the 15 ISAPREs nationwide, most work through private providers, but may also sign contracts with public health institutions for specific services, e.g. hospitalisation in private wings of public hospitals, emergency care, and care in intensive care units.

There are approximately 392 hospitals in the country of which 59.4 per cent are public institutions

INTRODUCTION Chile’s estimated average health spend in 2012 was US$1,217 per year (PPP), almost double the average in 2000, which was US$691, with just under half of this spend coming from the private sector. Chile has maintained a dual healthcare system under which its residents can voluntarily opt for coverage by either the public National Health Insurance Fund (FONASA, its Spanish Acronym) or any of the country’s private health insurance companies, Instituciones de Salud Previsional (ISAPRE). FONASA is also responsible for supervision and control of public health sector financing and currently provides cover to 68.3 per cent of the population. ISAPREs provide cover to 17.6 per cent of the population. Of the remaining 14.1 per cent, 11.6 per cent is covered by other private plans, such as the armed forces plan, and 3.5 per cent of Chilean residents are not affiliated to one of the public or pri-

vate healthcare sector options. Historically, FONASA beneficiaries have suffered from a lack of adequate infrastructure and an absence of up-to-date technology in the public sector healthcare system, but recent governments have focused on and invested large amounts in addressing this gap with the private sector. In terms of healthcare financing in 2012: public sector spending on healthcare represents approximately 4.4 per cent of GDP, which is 57 per cent of total healthcare spending and amounts to US$9.5 billion. Of this total, 58 per cent comes from direct fiscal contribution and 42 per cent comes from individual contributions into FONASA and others. Private sector healthcare expense represented 43 per cent of total healthcare expenditures in 2012, equivalent to approximately 3.4 per cent of GDP and amounted to US$7.8 billion. ISAPREs can be ‘closed’ or ‘open’. In closed institutions, membership is limited to indi-

REGULATORY FRAMEWORK In 2005, the Chilean government passed a healthcare reform, known as the AUGE plan, which establishes the minimum standards of service to be provided to all FONASA and ISAPRE members. The AUGE plan guarantees all Chilean residents access to medical services, with certain minimum standards for defined core medical conditions. These standards include maximum waiting times for treatment after diagnosis and limits on outof-pocket healthcare spending related to the defined benefit plan. All providers must be registered and accredited by the Ministry of Health. Public sector hospitals often cannot attend to patients within the specified timeframes and therefore refer these patients to private clinics. Originally embracing 25 conditions, the scope of AUGE has subsequently been expanded and amended on a number of occasions since its introduction to include additional conditions. The plan has been well received by the public and is seen as very successful. Most of the ISAPREs are vertically integrated to include a network of hospital and ambulatory facilities to provide care for their subscribers and/or the general public, a trend that has been consolidated as the AUGE Plan has been progressively implemented and expanded in scope. The insurance contract is negotiated individually between the ISAPRE and the client, who is required to make a co-payment on

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overview health

health services provided. The guaranteed financial protection specified under the AUGE Plan sets the maximum co-payment amounts for FONASA and ISAPRE beneficiaries (guaranteed financial protection) for health conditions covered by the plan. Public health services must meet all demands for emergency services. Moreover, the public health programs cover the entire population, without discrimination. Peak coverage under the ISAPREs was reached in 1995 reaching 26.3 per cent of the population. Since 1997, there has been a migration of clients from ISAPREs to FONASA, which is due to improved public health services and to the recent implementation of the AUGE Plan. The healthcare system is part financed through health insurance and part via the service delivery. By law, all workers are required to pay 7 per cent of their monthly wages into FONASA or private ISAPREs. In addition to contributions from its members, FONASA receives transfers from the Ministry of Finance to cover indigents and to carry out public health programs. The private insurance sector is represented by the ISAPREs, private health insurers that administer the obligatory contributions from wage earners. Their members can voluntarily elect to pay additional premiums to improve their insurance plan coverage. Because of this arrangement, up to now, the public and private health sub-systems in Chile have existed almost completely separately rather than in a coordinated manner to achieve common health objectives. HEALTH INSURANCE MARKET Insurance companies are the third important actor in the healthcare coverage market in Chile. The insurance market does not act as a primary or first line of protection intermediary, but rather offers a complementary health insurance, which is an extension of the ISAPRE plan, and catastrophic coverage, aimed at covering very expensive treatments. The former is increasingly popular as an employee benefit and over 80 per cent of group life policies are estimated to include the cover. The individual and employee benefits life insurance markets (the insurance sector where the healthcare policies are underwritten) are dominated by a small number of companies. The top three insurers for individual policies hold close to 55 per cent of premium income and for group or employee benefits, the top three hold over 42 per cent and the top four over 50 per cent. Metlife is the largest player in the healthcare sector with a 10.6 per cent market share, followed by Consorcio and Cruz del Sur with a 8.6 per cent and 5.8 per cent market share, respectively. Healthcare is an important issue for Chilean consumers and there is an increasing

206 INTERNATIONAL INVESTOR

STRENGTHS ■■ Regulatory framework ■■ Projected growth rate due to ageing population, higher per capita income; 9.1% CAGR 2008−2012 period ■■ Policy continuity from government to government, allowing for long term strategy ■■ A robust fiscal balance of payments that can respond to the additional spend required to upgrade the system

OPPORTUNITIES Incorporating emerging technology aimed at providing basic treatment at a lower cost to a broader base of the population ■■ Either directly or through partnerships with large international players, exporting capital and industry expertise to the region ■■

interest in obtaining appropriate insurance cover. More competition has recently entered the employee benefits market, all coming from established healthcare players, primarily integrated healthcare providers, like Cruz Blanca and ILC, which took advantage of a segment not covered previously in their business model, but with potential for growth. This has been more profitable than the ISAPRE segment and is complementary to their current product offering. PUBLIC VS. PRIVATE In the public sector, primary care services are relatively well organised currently delivering free medical, dental, and nursing and midwifery services at local health centers, administered and owned by local municipalities. Secondary and tertiary care is provided by a network of public outpatient and hospital facilities with different levels of complexity. By contrast, the private sector has not focused its efforts on the development of primary care networks, focusing mainly on the delivery of secondary and tertiary care. Therefore, in Chile, the public sector plays a duel role, acting not only as the main insurer but also as the largest healthcare provider in the country. Despite the strong growth in healthcare spending over the last 20 years, Chile remains below the OECD average of health spend to GDP percentage (see fig.1) and the number of physicians and hospital beds per 1,000 inhabitants. In order to meet the OECD average, current health spend would have to increase by US$4.7 billion. The number of hospital beds in the healthcare sector reached 39,508 in 2012. Of that total, 69 per cent are public sector facilities. The number of beds in private clinics grew significantly between 2005 and 2012, whereas

WEAKNESSES Reduce and eliminate existing disparity between coverage and quality of healthcare service and infrastructure between public and private healthcare ■■ Contain perceived escalating costs ■■

THREATS Social pressure for accelerated improvement to existing public infrastructure ■■ Limited interaction between public and private sector, focused more on competing and less of collaborating ■■

the public sector capacity did not grow at all. Nevertheless, in 2010—2011, the public sector entered into a process of expansion of existing facilities and development of new facilities throughout Chile. The number and quality of public sector hospitals is expected to increase significantly by 2014—2015. The private sector continues its expansion in number of beds, both through the expansion of existing facilities and to a lesser extent, through the development of new hospitals. The Office of the Health Superintendent, an arm of the Health Ministry, oversees both the ISAPREs and FONASA. Implementation of the AUGE Plan has consolidated the role of his authority. There are also employers’ mutual insurance plans that specifically administer insurance for on-the-job accidents and occupational diseases financed by the employers. Although FONASA and the Office of the Health Superintendent are autonomous, they are subject to oversight by the Ministry of Health, which bears responsibility for sector policy. The Public Health Institute control drugs and medical inputs and acts as the national reference laboratory. CENABAST procures products for the public sector. The delivery of services is also mixed. The municipalities carry out the administration for a vast majority of primary care facilities, whereas hospitals fall under the responsibility of the Health Services area of the Health Ministry. The system includes a network of autonomous hospitals, which should provide greater flexibility in the management of the country’s 56 highly complex hospitals. In 2005, autonomy authorisation was granted to five hospitals; by 2012, all 56 of the country’s highly complex hospitals had been granted this authorisation. In addition, there are numerous clinics, medical centers,

health overview

1. HEALTH EXPENDITURE AS A PERCENTAGE OF GDP 20% 18% 16% 14% 12% 10%

9.3% OECD country average

7.6%

8% 6% 4% 2%

Ne ra ce th e Un rla n ite ds d St at es

Es to ni a M ex ic o Tu rk ey Cz Ko ec r h ea Re pu bl ic Ch ile Hu ng a Sl ry ov en ia Fi nl an d Un ite It a d l y Ki ng do m Ne Jap w a Ze n al an Be d l Sw giu i tz m er la nd

Source: OECD Health Data 2013

laboratories, and pharmacies managed by private individuals or companies. There are only a few not-for-profit non-governmental organisations, and their work is limited to some rural health centers and hospitals operated by religious organisations. The number of physicians in Chile is approximately 28,200, of which an estimated 18,600 have a specialisation area certified by the Superintendency of Healthcare. An estimated 52 per cent of the total physician population works exclusively in the private sector, and the percentage increases to over 60 per cent when the total medical hours worked are considered. Attracting physicians to the public sector is seen as one of the challenges of the Health Ministry. There has been a spike in medical career students over the last 10 years, as private universities have generated or expanded enrollment opportunities and university facilities dedicated to the medical field. 2. YEARLY GROWTH OF HEALTHCARE PROVIDERS 400,000 350,000

pesos in millions

300,000 250,000 200,000 150,000 100,000 50,000 2008

2009

Cruz Blanca Banmedica

2010

Colmena Consalud

2011

2012

Mas Vida Vida Tres Source: PwC

HEALTHCARE PROVIDER SEGMENTS Chilean healthcare providers are also a mixture of public and private. There are approximately 392 hospitals in the country of which 59.4 per cent are public institutions. The larger ISAPREs also provide healthcare services through their own clinics. Healthcare infrastructure was significantly impacted during the 2010 earthquake, which damaged or destroyed an estimated 79 hospitals in the most populous regions of the country, some of which still remain closed as of today. As of 2012, there are 2.2 hospital beds per 1,000 habitants, which is one of the highest in the region, but far below the OECD average of 4.9. Chile also has a significant physician shortage with only 1.0 physician per 1,000 inhabitants, significantly below the OECD average of 3.0. The key players in the private health care sector in Chile are: Banmédica with 26 per cent market share; Cruz Blanca with 21 per cent market share; ILC Inversiones, through Consalud, with 22 per cent market share; Colmena Golden Cross with 16 per cent market share; and Masvida with a 14 per cent market share. These groups provide integrated services of health insurance (ISAPREs) and the provision of healthcare (hospitals/clinics, ambulances and home treatment providers). Banmédica Group is the largest healthcare group in Chile in terms of policyholders and beneficiaries in its ISAPREs (Banmédica and Vida Tres) and has the highest number of hospital beds in mid and high complexity hospitals. Banmédica also operates similar business models in Colombia and Peru. There are some successful providers in Chile that have not opted for the integrated business model strategy, such as Clínica Las Condes, Indisa and Clínica Alemana. KEY REGULATORY FRAMEWORK The Health Ministry sets rules and regulations

as well as enforcing them, in all matters that impact the development and access to healthcare. The Health Superintendency oversees and regulates insurance companies that issue health related policies, ISAPREs and healthcare providers. The Public Health Institute establishes and oversees the compliance of technical and scientific standards to be followed by healthcare providers and pharmaceutical companies. Life insurers must be authorised by the supervisory authority, the Insurance Superintendency (SVS, its Spanish acronym) in order to carry out business in Chile, including Group Medical Insurance. The SVS sets capital and solvency requirements for insurers and has rights to review and issue sanctions. KEY TRENDS AND DEVELOPMENTS Chilean demand for healthcare has been growing strongly over the past few years, driven mainly by the increase in purchasing power of its population and a growing elderly population. Like other developed nations, aging of the population is driving an increase in prevalence of chronic diseases. According to the National Statistics Institute (INE), the top three causes of death in 2010 were due to cerebrovascular diseases, ischaemic heart disease, and cirrhosis and other liver diseases. Chile has a track record of public-private partnerships in the healthcare sector. To date the government has tendered three PPP hospitals and has announced plans to tender an additional 11 hospitals in 2013 and 2014, including Hospital Sótero del Río (US$386 million), Hospital Salvador Geriátrico (US$313 million), Hospital de Santiago Occidente – formerly Félix Bulnes (US$240 million), Hospitales Red Sur (US$ 530 million) and Hospitales Red Quinta (US$277 million). INVESTMENT CLIMATE AND KEY CONSIDERATIONS Some modifications have been observed in the private system as providers now compete to offer the cheapest alternatives using a scheme similar to preferred provider organizations in the United States. The supervision of quality standards and financial oversight is performed by an independent government agency called the Superintendency of Health. Similar agencies exist in Colombia and other Latin American countries. OUTLOOK 2013 is an election year and the issue of Health is one of the areas being discussed by candidates. There is therefore some degree of uncertainty related to the priorities that will eventually be set as public policy in 2014 and beyond.

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projects health

INVESTMENT OPPORTUNITIES: HEALTH International Investor’s snapshot of public and private projects available for investment in the sector. For more information on investment opportunities, please contact International Investor directly.

500

BED CAPACITY

US$265m

ESTIMATED INVESTMENT

Valparaíso

V REGION HOSPITAL NETWORK Description: Construction, maintenance and operation of non-medical support services for the existing Quillota-Petorca and Marga Marga Hospitals. The concession envisages the provision, replacement and maintenance of medical equipment. Proponent: Public Project coordinator(s): Ministry of Public Works (MOP) Location: Petorca, Quillota and Marga Marga Provinces, Valparaíso Region Area/capacity: 500 beds Estimated investment: US$265 million Starting date: 2013 Duration: To be defined Type of concession: BOT (Build, Operate, Transfer) Contact: Rodolfo Guerrero, Chief of Staff, Concessions Department, rodolfo.guerrero@ mop.gov.cl, tel: +56 2 2449 7009; Rigoberto García, Coordinator of International Relations, rigoberto.garcia@mop.gov.cl, tel: +56 2 2449 3205

REGION

Source: MOP

1,300

BED CAPACITY

US$508m

ESTIMATED INVESTMENT

Bío-Bío REGION

SOUTHERN NETWORK HOSPITALS Description: Construction, maintenance and operation of non-medical support services for the Curicó, Linares and Chillán Hospitals. The concession envisages the provision, replacement and maintenance of medical equipment. Financing for this public infrastructure will take the form of state subsidies for both the construction and operation of the facilities. Proponent: Public Project coordinator(s): Ministry of Public Works (MOP) Location: Linares and Curicó municipal districts, Maule Region, and Ñuble municipal district, Bío-Bío Region Area/capacity: 1,300 beds Estimated investment: US$508 million Starting date: 2013 Duration: To be defined Type of concession: BOT (Build, Operate, Transfer) Contact: Same as project above Source: MOP

208 INTERNATIONAL INVESTOR

tourism projects

INVESTMENT OPPORTUNITIES: TOURISM International Investor’s snapshot of public and private projects available for investment in the sector. For more information on investment opportunities, please contact International Investor directly.

30%

RISE IN VISITORS A YEAR

US$1.25m

ESTIMATED INVESTMENT

Antofagasta

ATACAMA ADVENTURE WELLNESS & ECOLODGE Description: Boutique hotel for sale in San Pedro de Atacama, a high-level tourist destination in the world’s driest desert. Tourism demand in San Pedro is growing constantly, with the number of visitors rising by 30 per cent a year. There is also the possibility of acquiring a property of approximately 5.2 kilometres neighbouring the lodge. Proponent: Private Project coordinator(s): Fitzroy Tourism and Real Estate Location: San Pedro de Atacama municipal district, Antofagasta Region Area/capacity: Total of 765 m2 (current area of 365 m2 and a further 400 m2 to be built) Estimated investment: US$1,250,000 Starting date: To be defined Source and contact: Fitzroy: Francisco Bañados, Coordinator, franciscob@fitzroy.cl, tel: +56 2 2232 0668

REGION

Organic Certification FOR ANIMAL AND CROP FARMING

US$150k − 600k ESTIMATED INVESTMENT

Valparaíso REGION

EDELWEISS-COSTAVOLCANO ECOLOGICAL CENTER Description: As well as providing tourism services, the Edelweiss-Costavolcano Ecological Center produces and sells organic foods and other products. Located in the Aconcagua Valley, it combines tourism with research into environmentally friendly processes and technologies and organic farming, with three irrigation canals and organic certification for both its animal and crop farming from Chile’s Agricultural Inspection Service (SAG). The centre is seeking to sell a 10 to 40 per cent stake of its business to finance investment in the construction and improvement of infrastructure, installations and basic services in order to make it more attractive and safe. Proponent: Private Project coordinator(s): Costavolcano Group Location: Catemu municipal district, Valparaíso Region Area/capacity: 2.9 hectares Estimated investment: US$150,000—600,000 Starting date: To be defined Source and contact: Costavolcano Group: Francisco Jara, Coordinator, francisco@costavolcano.com, tel: +56 9 7538 1860

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projects tourism

7 Km

OF COASTLINE

166,356 m2 SITE

Antofagasta REGION

Long-term concession FOR USE

High summer demand AREA

Coquimbo REGION

HORNITOS Description: Hornitos is one of the Antofagasta Region’s main beach towns and is a territorial platform with great potential for tourist-residential development. Its attributes are related to its seven kilometres of coastline and a coastal desert climate suitable for beach tourism. The sector has the potential to attract demand for second homes, principally from families in the region’s mining centers and inland parts of northern Argentina, as well as international visitors to the Atacama Desert tourist circuits. Access to Hornitos is along a paved road of great scenic beauty that follows the coast from Antofagasta. Proponent: Public Location: Mejillones municipal district, Antofagasta Region Area/capacity: 166,356 m2 Estimated investment: Depending on bid Starting date: To be defined Duration: Not applicable Type of concession: Direct sale Source and contact: Ministry for Fiscal Properties: Jacqueline Alluanlli, Coordinator, jalluanlli@mbienes.cl, tel: +56 2 2937 5314

TONGOY WETLANDS PROTECTED FISCAL PROPERTY Description: The area of the Tongoy Wetlands offers the possibility of developing ecotourism projects related to birdwatching and contact with nature in general. The area’s connection to the Tongoy beach town, through a heritage route, means that there is also the option of exploiting beach tourism. Tongoy has a consolidated position as a pole for tourism in the Coquimbo Region, with very high summer demand that can be expanded to other seasons and types of tourism through the development of alternative projects that harness the area’s natural prestige. Proponent: Public Project coordinator(s): Ministry for Fiscal Properties Location: Coquimbo municipal district, Coquimbo Region Area/capacity: Not available Estimated investment: To be defined Starting date: To be defined Duration: To be defined Type of concession: Long-term concession for use Source and contact: Same as project above

210 INTERNATIONAL INVESTOR

tourism projects

Taltal

MUNICIPAL DISTRICT

7,000 − 11,000 m2 SITE

Antofagasta REGION

CALETA CIFUNCHO Description: The Taltal municipal district has beautiful beaches with clear water and white sand. In recent years, it has emerged as a popular summer holiday destination. The district’s Cifuncho sector is likely to become an important tourist beach. The area on offer is located on a small plateau with a privileged view over the bay, but also close to the beach and other attractions, such as the Llullaillaco National Park, the Pan de Azúcar, the Paranal Astronomical Observatory, the Quebrada El Médano and the Paposo Reserve. Proponent: Public Project coordinator(s): Ministry for Fiscal Properties Location: Taltal municipal district, Antofagasta Region Area/capacity: Sites of between 7,000 m2 and 11,000 m2 Estimated investment: Depending on site and bid Starting date: To be defined Duration: Not applicable Type of concession: Direct sale Source and contact: Ministry for Fiscal Properties: Jacqueline Alluanlli, Coordinator, jalluanlli@mbienes.cl, tel: +56 2 2937 5314

A pedestrian street located on Bellavista hill in Valparaiso, one of Chile’s top tourist destinations with 80,000 visitors per year

CHILE 211

hot spots chile 2014

HOT SPOTS International Investor’s pick of the ten places to visit while in Chile

➥ Source: www.whynot.chile.travel

212 INTERNATIONAL INVESTOR

1. EASTER ISLAND

2. LAUCA NATURAL PARK

Tepito Ote Henua (The Centre of the World), as the people who lived there called it, is the most remote inhabited island on the planet. Easter Island is a National Park and UNESCO World Heritage Site, and it has a lot to offer: pink sand beaches, volcanoes and grasslands, marine life, silent caverns and the Moai statues that bore witness to the rise and fall of a complex and stratified society.

The park enjoys the status of being a World Biosphere Reserve where 60 different bird species thrive. The birds and mammals are numerous and easy to observe, especially around the lake area. Among the most noteworthy are the Giant Coots and the Puna Teals. The only path accessible by vehicle is the 13 kilometres Cotacotani trail, with eight lookout points along the trail.

3.PUCÓN & VILLARICA

4. TORRES DEL PAINE

Whether you are a pleasure-seeker or an outdoor enthusiast, you will find plenty to do in Pucón and Villarrica, which are home to casinos, restaurants and markets as well as hot springs like Coñaripe and San Luis and national parks. These cities combine the cosmopolitan legacy of the German colonists who settled here in the 19th century with the traditions of the Mapuche people.

The main attraction of this National Park and Biosphere Reserve is its mountains. You will be surprised by its hiking trails, which will take you through forests and by waterfalls and lakes with fantastic views of the snow capped Campo de Hielo Sur (Southern Ice Field). Take a boat trip on Lake Grey to the glacier of the same name or paddle a kayak among enormous blue and white icebergs.

chile 2014 hot spots

5. VALLE DE LA LUNA & DE LA MUERTE

6. SAN RAFAEL GLACIER

7. VALPARAÍSO

The strange rock formations and dunes of Valle de la Luna, the changing colours of Valle de la Muerte and the Cordillera de la Sal offer wonderful photo opportunities. These desert destinations are also perfect for star gazing. Several agencies offer a five-hour tour of this valley, Valle de la Muerte and the Cordillera de la Sal. Some even include trekking and sandboarding on the dunes.

Before you arrive, you’ll cross Témpanos River, which ships must navigate carefully in order to avoid the ice floating. You will undoubtedly take many photographs of the glacier’s huge wall. Wait for the magic and thunderous moment when ice detaches from it; this is the perfect time to give in to the Patagonian tradition of drinking a toast with a glass of whiskey cooled by a piece of prehistoric ice.

Valparaíso is Chile’s largest port and one of its oldest, dating back to 1536. The hills circle the bay of Valparaíso and each is filled with multicolored houses perched at crazy angles connected by a labyrinth of streets, staircases and lookout points. Between these hills and the sea lies a downtown area filled with beautiful architecture and narrow streets. It was declared a UNESCO World Heritage Site in 2002.

8. CHILOÉ ISLAND

9. LOS PINGÜINOS NATURAL MONUMENT

10. CERRO SAN CRISTÓBAL

Isla Grande de Chiloé, is the first island to come into view as you cross the Chacao Channel. The archipelago is composed of 30 islands, each of which offers views of rolling hills and villages filled with coloured wooden houses. The colourful houses on stilts, have become one of the classic images of Chiloé, as have its 18th century wooden churches, 16 of which are UNESCO World Heritage Sites.

The largest penguin colonies in southern Chile, is home to more than 120,000 Magellanic penguins. Located on the small Magdalena Island, just one square kilometre and topped by a red lighthouse, it lies 35 kilometres (22 miles) northeast of Punta Arenas. In September or October each year, the birds migrate back here and find their mate. By the end of March the penguins have returned to sea again.

This is Santiago’s “green lung” and the best place to appreciate the true dimensions of the capital. On weekends, thousands of Santiaguinos take to its trails for jogging, biking or just a stroll with the family. Cerro San Cristóbal is part of the Santiago Metropolitan Park, the largest urban park in the world and has all the ingredients that a traveler can appreciate.

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Torres del Paine

chile 2014â&#x20AC;&#x192; hotel listing

HOTEL LISTING International Investorâ&#x20AC;&#x2122;s pick of top places to stay on business in Chile

1. SANTIAGO MARRIOTT HOTEL Av. Presidente Kennedy 5741, Las Condes, Santiago T: +56 2 2426 2000 W: www.marriott.com/SCLDT 280 modern guest rooms and suites

The Santiago Marriott Hotel is situated in Las Condes business district making it an ideal destination for both business and leisure travelers. 280 modern guest rooms and suites combined with dynamic technology allow guests to experience all the excitement Santiago has to offer, while enjoying the benefits of a fullservice luxury hotel.

CHILE 215

hotel listing chile 2014

2. THE RITZ-CARLTON, SANTIAGO

3. RADISSON PLAZA SANTIAGO

4. GRAND HYATT SANTIAGO

5. W SANTIAGO

Calle El Alcalde Nº5, Las Condes, Santiago T: +56 2 2470 8500 E: sclrz.leads@ritzcarlton.com

Av. Vitacura 2610, Las Condes, Santiago T: +56 2 2433 9000 E: centralreservas@radisson.cl

Av. Kennedy Nº4601, Las Condes, Santiago, T: +56 2 2950 1234 E: santiago.grand@hyatt.com

Av. Isidora Goyernechea 3000, Las Condes,Santiago T: +56 2 2770 0000 E: reservas.santiago@whotels.com

205 guest rooms and suites

65 guest rooms and suites

310 guest rooms

196 guest rooms and suites

Slip effortlessly from the sand to the ski slopes with the splendid Andean Mountain Range in your sights. The Ritz-Carlton, Santiago 5-star hotel is the perfect venue to take in the history and admire the natural beauty of this geographically gifted place.

Radisson Plaza Santiago Hotel, an upscale property located in the prestigious Las Condes commune in the heart of the city’s thriving business district. During your stay, you will enjoy outstanding amenities and services, including complimentary high-speed Internet access and exquisite on-site dining.

Grand Hyatt Santiago hotel is a luxury hotel in the exclusive business district of Las Condes in Santiago, Chile. Our hotel in Santiago is one of the best luxury hotels in the city. We offer easy access to Santiago city centre and its international and domestic airports.

Against a panoramic backdrop of the snow-capped Andes, W Santiago reinvents style and sophistication in the city’s most fashionable and trendsetting enclave, a fascinating universe of urban innovation amid cobblestone streets and glitzy skyscrapers.

Business Centre, Santiago

Old street in Santiago

6. INTERCONTINENTAL SANTIAGO Av. Vitacura 2885, Las Condes, Santiago T: +56 2 2394 2000 E: santiago@interconti.cl 377 guest rooms and a convention centre with 20 functional meeting rooms Located in the heart of the financial, commercial and gastronomic district of Vitacura, the hotel offers a wide variety of services including 377 first class rooms and a convention centre with 20 functional meeting rooms equipped with state of the art technology specially designed for congresses, seminars and social events with a capacity of more than one thousand people.

7.PLAZA EL BOSQUE NUEVA LAS CONDES Av. Manquehue 656, Las Condes, Santiago T: +56 2 2498 1800 E: reservas@plazaelbosque.cl 276 guest rooms Plaza El Bosque Nueva Las Condes is located within the business and commercial district of Nuevas Las Condes, just a few steps away from the Manquehue subway station and Parque Araucano, a well-known green spot of Las Condes. Keeping the style and tradition of Plaza el Bosque hotels, at Nueva Las Condes our guests will also find a modern convention and events centre. Financial District, Santiago

216 INTERNATIONAL INVESTOR