business chile · fernando concha, citigroup andean – caribbean and central america region chair...

The voice of The chilean-american chamber of commerce n°276, november 2011

business chile

Special RepoRtadding value to copper

Mining RegulationTunnelling to safety

tRade teStiMonialcolumbia calling

2012 Budget: Financing Social Demands

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November 2011 3business chile

Eneldocracia

Stay in 3 star hotels

Regiona

Assam

Decentralize Central

Government

Eight sub-regions for Greater Santiago

Regional

Ambassadors

must live in

Valparaiso

Regional Assemblies must adviseand

supervise Contents

Columbia Callingcolumbia university, one of the most prestigious universities in the us, is opening an office in chile to promote research and attract chilean students.

TRADE TESTIMONIAL

122012 Budget: Financing Social Demands The 2012 budget will increase public spending with a focus on education and healthcare, but making social programs sustainable will require higher taxes.

COvER STORy

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8 MININg REguLATIONS

Tunneling to Safetya year after the dramatic rescue of the 33 miners in the atacama Desert, safety standards at chile’s mines appear to have improved, but they could be better.

20Adding Value to Coppercodelco is taking advantage of copper’s health properties to develop new applications that are creating opportunities for chilean companies.

SpECIAL REpORT

EDITORIAL BOARD 2011CHAIR, Kathleen Barclay, Asesorías KCB; VICE CHAIR, Karen Poniachik, British American Tobacco Chile; VICE CHAIR, Manuel José Vial, Grupo Vial Abogados; PAST CHAIR, Michael Combes, Marco Chilena; GENERAL EDITOR, Julian Dowling, AmCham Chile; ASSISTANT EDITOR, Daniela Valda, AmCham Chile.

MEMBERSJaime Bazán, AmCham Chile; Ruth Bradley, The Economist; John Byrne, Boyden Consultores Chile; Richard Diego, Royal Bank of Canada; John P. Dill, Project Management; Francisco Garcés, Banco de Chile; Claudio Hohmann, D&S; Javier irarrázaval, The Walt Disney Company Chile; Charles Kimber, Celulosa Arauco y Constitución; Olga Kliwadenko, K&D Comunicaciones; Gideon Long, BBC; Vincent McCord, Asesorías e Inversiones CarCon; James Newbold, Tanager Enterprises; Patricia O'Shea, AmCham Chile; Roberto Ossandón, Ossandón Abogados; Rodrigo Silva, Silva & Asociados; Mitch Larsen, U.S. Embassy; Paulina Dellafiori, AmCham Chile.

PRODucTIOnK & D Comunicaciones Ltda. Olga Kliwadenko, General Manager, 11 de Septiembre 1945 - Of. 213, Providencia. Phone: 481-6940 / 481-6941, Cell: (09) 874-0619; e-mail: [email protected]; [email protected];www.kyd.cl

Special RepoRt

adding Value to copperonly a fraction of the copper chile produces each year is turned into finished products, but chilean companies are developing innovative applications that take advantage of the metal’s antimicrobial properties.

What comes after Democracy?Mr. eneldo’s doctrine of eneldocracy would decentralize chile by giving power to the Regions, but is anyone paying attention?

© 2011 AMchAM chILEReproduction in whole or in part is strictly forbidden without permission from the publisher. Opinions expressed in bUSiness CHILE are those of the authors and do not necessarily reflect those of AmCham or bUSiness CHILE. We accept no responsibility for the accuracy of the articles and any unforeseen errors. bUSiness CHILE is published monthly, 10 months a year and mailed free of charge to AmCham members. Letters are welcome. They should be accompanied by the author's name and daytime telephone and sent to [email protected] For reasons of space limitation, AmCham reserves the right to edit letters published.Advertising inquiries should be addressed to AmCham's Sales Department: Paulina Dellafiori: E-mail: [email protected]; Phone:2909741. Fax 2120515 Av. Presidente Kennedy 5735, Torre Poniente, Of.201, Las Condes, Santiago de Chile; E-mail: [email protected]; www.amchamchile.cl; www.businesschile.cl

life in the SloW lane

12

20

THE VOICE OF THE CHILEAN-AMERICAN CHAMBER OF COMMERCE N°276, NOVEMBER 2011

bUSiness CHILE

SPECIAL REPORTAdding Value to Copper

MINING REGULATIONTunnelling to Safety

TRADE TESTIMONIALColumbia Calling


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While the government’s 2012 budget is expansive, it will not instantly solve social demands that have been brewing for years.

BREAkfAST38Driving with Cautionchile’s central bank president, José de Gregorio, compares the eu financial crisis to driving into a tunnel with no lights and no end in sight.

36It’s All Greek to MeThe drama of european politics continues to confuse investors, but the change in leadership in Greece and italy has contained the crisis, at least for now.

26Piracy Doesn’t Paychilean exporters using unlicensed software risk being sued under the state of Washington’s new law to protect us companies from unfair competition.

SpOTLIghT

ECONOMIC SNApShOT

42

INTERvIEw40Soup to Nutsmitch larsen, commercial counselor at the us embassy, talks to business chile about the us-chile trade relationship and upcoming trade missions.

November 20114 business chile

AmChAm GlobAl SponSorS 2011


Rarely has a commercial disagreement involving an asset in chile captured such global interest as the dispute that has arisen between codelco and anglo american in connection with the former’s option to acquire a stake in the latter’s anglo Sur property (formerly disputada de las condes).

the option, for up to 49% of anglo Sur, was granted to codelco when the property was sold to exxon in 1978 and anglo american assumed the obligations when it purchased the property in 2002. under the agreement, codelco can exercise its option, which expires in 2028, every three years. However, its terms would yield a price that is, today, significantly below market value, making it attractive for codelco but unattractive from anglo american’s viewpoint.

in mid-october, codelco publicly announced its intention to exercise its option in January 2012 with financing from the Japanese firm Mitsui, which could, in turn, subsequently acquire part of codelco’s stake in anglo Sur as part of the transaction.

in response, anglo american preemptively sold a 24.5% stake in anglo Sur to Mitsubishi corporation at current market pricing to minimize the potential negative impact of codelco’s action on its shareholder value. codelco strongly believes that this response does not comply with the terms of the option agreement.

Both companies and their management are working to legitimately protect the value for the owners of their respective companies – an objective that is the legal responsibility of their management and boards. clear rules of the game, as applied through appropriate legal institutions, provide a mechanism to settle the difference of opinion. this mechanism should be allowed to run its course.

chile has developed a thriving mining industry based on the rule of law and non-discriminatory treatment for

foreign investors. this case is an opportunity to reinforce chile’s leadership in this area, thereby encouraging further investment in mining and other areas.

But there are potential clouds on the horizon.the Republic of chile owns codelco. Because of its

history and importance to the economy, the company, quite naturally, inspires strong feelings of national pride. there is a risk that this pride could be stirred by the outcome of the dispute with anglo american. this lends itself to potential use by politicians who value short-term political dividends over the long-term benefit to chile and its people of stability and respect for clear rules – rules which chile developed and which foreign investors have accepted.

on the other hand, anglo american is a respected global investor which has contributed much to the development of chile and its mining industry – a company that has been a good corporate citizen with a long and prestigious history in the country. But the temptation is for corporate ego, as defined by a short-term victory in this case, to take priority over the long-term perspective, which has always been a signature of the company’s presence worldwide.

Both these risky scenarios should be avoided in the interest of the two companies involved and, more importantly, the long-term wellbeing of chile, its people and its globally respected mining industry. We encourage observers, including the governments of the countries where the key players engaged in this dispute are located, to support its resolution through established institutional mechanisms.

amcham chile has confidence in the good judgment of the two corporate players and their management. We have faith in chile’s regulations and institutions. We believe that, ultimately, the dispute will be settled between the two companies through appropriate institutional mechanisms. and, if the rule of law is allowed to triumph, everyone wins.

The Power of the Rule of Law

Editorial

boArD oF DIrECTorS eXecUtiVe coMMitteePRESIDENTJavier Irarrázaval, The Walt Disney Company Chile

VICEPRESINDENT; CHAIR CORPORATE AFFAIRS AND SUSTAINABILITY COMMITEECharles Kimber, Celulosa Arauco y Constitución S. A.

TREASURER; Felipe Cerón, AES Gener

SECRETARY; CHAIR LEGAL COMMITEEMichael Grasty, Grasty Quintana Majlis & Cía.

PAST PRESIDENTRicardo García, Compañía Pesquera Camanchaca

GENERAL MANAGERJaime Bazán, AmCham Chile

DIRECTORSFernando Concha, Citigroup Andean – Caribbean and Central America Region CHAIR FINANCE AND ADR COMMITTEE

Gonzalo Iglesias, Coca-Cola de Chile S.A.VICE CHAIR LABOR AND HUMAN CAPITAL COMMITTEE

Mitch Larsen, Embajada de los E.E.U.U. EX OFFICIO

Luis Marcelo Moncau, Microsoft Chile

Enrique Ostalé, D&S

Karen Poniachik, Enterprises directorVICE CHAIR EDITORIAL COMMITEE

Luis H. Siles, IBM de Chile

Carolina Valdivieso, Kimberly Clark CHAIR LABOR AND HUMAN CAPITAL COMMITTEE

ADVISORY COUNCILRubén Covarrubias, Rector, Universidad MayorCHAIR TRADE & INTERNATIONAL BUSINESS COMMITTEE

Alfredo Ergas, EnersisVICE CHAIR FINANCE AND ADR COMMITTEE

Mauricio Ramos, VTR Global ComVICE CHAIR CORPORATE AFFAIRS AND SUSTAINABILITY COMMITEE

Ramon Vergara, SCIP Group

Kathleen Barclay, Asesorías KCBCHAIR EDITORIAL COMMITEE

AmCham Mision Statement“Promote free trade and business between Chile and the United States"


Columbia Calling

hile thousands of chileans aspire to study in the united States, only a handful actually gets the chance to do so. But things will become a

little easier for those would-be students from March next year when new York’s columbia university opens its doors in Santiago. columbia has chosen the chilean capital as the site for it latest

“global center”. it already has similar centers in amman, Beijing, Mumbai and paris and is in the process of opening in nairobi and istanbul. Santiago will serve as columbia’s hub for Spanish-speaking latin america. the university plans to open another office in Rio de Janeiro next year to serve Brazil.

the director of the Santiago office is Karen poniachik, a former minister in the previous government of Michelle Bachelet and a columbia alumnus with a Master's degree in international affairs. “columbia is a global university these days, not just a new York institution,” she told buSiness chile. “its students come from all over the world, it has alumni all over the world, and it conducts research all over the world, so it has to have a global presence.”

She says the center will have three aims. Firstly, it will promote recruitment by columbia’s dozens of undergraduate, graduate and professional schools. chileans who want to study in new York will be able to find out more about what is on offer. Secondly, the Santiago office

one of the most prestigious universities in the

united states is about to set up shop in santiago

in a bid to foment research and debate, and give

chilean students a better chance of getting a top-

class us education.

WBy Gideon long

TrADE TESTImonIAl


will promote faculty exchanges and put researchers in new York in touch with their peers in latin america. and thirdly, it will facilitate student exchanges, allowing columbia students to live, work and study in chile. By setting up in Santiago, columbia hopes to ensure its academics play a greater role in public policy debate, not only in chile but throughout the region.

the impetus for this project came in part from chilean business magnate andrónico luksic, who has a long-standing friendship with John coatsworth, the dean of columbia’s School of international and public affairs (Sipa). it was luksic’s influence that helped ensure that Santiago was chosen over other latin american cities. luksic is providing some of the money for the new office but poniachik says she is looking for additional funding from both the public and private sectors. “Financing is a big issue,” she acknowledges. “one of my challenges is to finance not only the programs but also research activities and exchanges.”

at the moment, a small number of students go to columbia from chile each year thanks to grants provided by luksic. But these grants are only open to government officials from the energy and environment ministries. other chileans finance their studies at columbia with grants from the state program Becas chile. poniachik is in talks with the directors of Becas chile and another state program, the national commission

for Scientific and technological Research (conicyt), to try to secure more grants for a greater number of students.

She also wants to tap into columbia’s alumni network to get the project off the ground. in chile, those alumni include former finance ministers andrés Velasco and Hernán Büchi, economists Joseph Ramos and Manuel agosín, educationalist gregory elacqua and writer arturo Fontaine, director of the center for public Studies.

“there are more than 200 former columbia students living in chile,” poniachik says. the challenge is to find them all. We currently have around 150 on our mailing list, ranging from people who studied there in the 1960s right through to people who were there recently.”

poniachik stresses the Santiago office will not be a campus. Students will not be able to study there. the idea, rather, is to use it as a springboard for columbia’s latin american operations.

even though the office is not due to open formally until March, columbia has already organized activities in chile. in early november, the historian and Barnard professor nara Milanic came to Santiago to present her book on the origins of inequality in chile.

and, in January, columbia will run week-long executive courses on international finance in collaboration with the university of chile. “professors from columbia will come down from the united States to teach chilean students,” poniachik says.

chilebUSiness

Gideon long is a freelance journalist based in Santiago

Columbia Calling

Karen Poniachikcolumbia university

the range of opportunities offered to students will be broad.

“columbia is one of the most multidisciplinary academic institutes in the united States,” poniachik said. “they teach everything from religious studies to finance, human rights, entrepreneurship, physics, earth studies and gender issues.”

once the Santiago office is up and running, poniachik says she will turn her attention to other countries in the region by reaching out to columbia alumni in peru, argentina and uruguay.

“But that’s the second stage,” she says. “For now, we’re concerned with finding an office here. We’ll start small and grow over time.”


The government says it is taking measures to defend consumer rights after a series of scandals involving alleged abusive practices by chilean firms, but do they go far enough?

Tunneling to Safety

year after the dramatic rescue of the 33 miners in the atacama desert, safety standards at chile’s mines appear to have improved, but the state still

needs to push through key legislation to make things better still.

on october 18, 2010, just four days after chile’s 33 miners had been hauled to safety amid astonishing scenes at the San José mine, president Sebastián piñera made the following pledge during a visit to london: “We cannot guarantee that we will not have accidents in the future but we can guarantee one thing -- that we will do whatever is necessary to have a more secure mining industry in our country.”

a year on, and the president’s pledge appears to be bearing fruit. the number of deaths from mining accidents in chile has nearly halved – to 17 in the first nine

months of this year from 32 in the same period in 2010. the government says it has kept its promise to more than double the number of mine inspectors employed by the national geology and Mining Service (Sernageomin), the state body tasked with regulating the country’s mining industry. there were just 18 at the time of last year’s accident and there are now 45.

in July, the government sent a draft bill to congress to overhaul mine safety regulation, describing it as the most important legislation in the area in 30 years. it will lead to the creation of a new Mining Superintendence dedicated exclusively to mine safety.

"after what happened at the San José mine, mine safety became a key objective for the government,” says chile’s Mining Minister, Hernán de Solminihac.

new legislation

under the terms of the bill, chilean mines will in future be categorized on the basis of their safety standards and color-coded as either “excellent” (blue), “good” (green), “sufficient” (yellow) or “conditional” (red). Mine owners will be obliged to display a plaque at the entrance to their mine indicating which color they have been graded.

Fines for breaches of safety regulations will be increased. Mine owners found guilty of “very serious” breaches will be fined up to 10,000 utM (uS$775,000). “Serious” breaches will carry a fine of up to 5,000 utM and “less serious” breaches, up to 1,000 utM.

anyone found guilty of reopening a mine that has been closed due to its poor safety standards faces a fine of up to 6,000 utM.

any mine that employs more than 100 workers will be obliged to have a full time risk prevention expert on site. Mines of that size must also produce a full safety audit every three years.

the draft bill also addresses complaints procedures, one of the key demands of mine workers. Some of the 33 miners rescued last year said they never dared complain about safety due to fear of losing their jobs. they described a “culture of silence” at the San José mine.

under the new legislation, all workers at chile’s mines will be entitled to make “blind complaints” about their working conditions without fear of being

aBy Gideon long

mining regulations


identified or of recrimination. these complaints will be investigated by the new Superintendence.

the legislation also stresses the need for prevention as well as punishment. Mine owners will be encouraged to attend training courses on safety procedures. there will be more training for miners themselves — on risk prevention, on how to handle explosives and on the dangers of electrocution.

“it’s a complete change in the institutions of the sector,” says de Solminihac.

But despite this progress, there is still work to be done.

international standards

on the same day that president piñera vowed to do everything possible to improve working conditions at chile’s mines, he also said chile would ratify international labor organization (ilo) convention 176 on mining safety. one year on, it has yet to do so. the government says it is still studying the convention.

“the government has a duty and a responsibility to analyze every detail to see if [the convention] fits with our own legislation and if it makes sense, given what we’re trying to achieve,” says de Solminihac.

But it is difficult to escape the feeling that the government is back-tracking on its promise to ratify.

ilo 176 has been in existence for over a decade and has been adopted by 25 countries. it upholds the rights of workers to refuse work they consider unsafe, to leave a mine they consider dangerous and to elect their own health and safety representatives. it seeks to protect the rights of workers if they complain about their working conditions.

the united States ratified the convention in 2001 but many major mining nations have not – notably canada and australia. the argument against ratification is that it gives workers too much leverage and leads to an escalation in strikes related to safety conditions.

“chile has made some progress in revamping its antiquated mine safety

laws and regulations,” says tom grinter, spokesman for the international Federation of chemical, energy, Mine and general Workers' unions (iceM), a geneva-based organization with over 20 million members. “But it cannot claim to be a world class mining nation until it adopts the standards contained in ilo 176.”

grinter says he is still hopeful that president piñera will keep his promise.

“We had a recent tripartite meeting in peru on convention 176 and an official from the chilean government made clear that the convention was still on the table,” he says. “they’re showing a willingness for dialogue with a possible move to ratify.”

more inspections

in the wake of last year’s accident, the state cracked down on mines with sub-standard safety records.

according to the mining ministry, Sernageomin officials have carried out more than 3,800 inspections so far this year, compared to less than 2,600 in the


whole of 2010. By the end of 2011 they expect to have carried out 4,500, rising to 6,600 in 2012.

“in the months immediately afterwards there was a lot of concern among small producers because it’s certainly true that Sernageomin increased the number of inspections, and that led to some mines closing down,” recalls alberto Salas, president of chile’s national Mining Society (SonaMi).

“However, the closures only affected a few mines, and they reopened once they had met the standards required of them.”

SonaMi, which represents over 3,000 small mining operations, acknowledges that many of its producers were guilty of “administrative problems” but says it has worked alongside Sernageomin to sort them out. around 800 of its producers signed up to a program to improve their administrative procedures.

“We’ve resolved about 300 cases out of a total of 800, and we hope to complete the process by the end of the year,” says Salas.

SonaMi says it is also following closely the passage through congress of the draft legislation on mining safety, and has already made some suggestions for how it can be improved.

Yet, despite the government’s good intentions and SonaMi’s laudable actions, some union leaders in chile complain they have seen no notable improvement in safety since last year’s accident.

néstor Jorquera, president of the chilean Mining confederation, which groups more than 60 mining unions, questions the fatality figures compiled by Sernageomin. He claims more than 50 mine workers have died in accidents in the past year, although he acknowledges that some of them been killed outside the mines themselves – while handling explosives or in road accidents on their way to work.

and while the price of copper remains high, so will the likelihood of accidents.

last year was the deadliest in chile’s mines for a decade – 45 miners were killed at work. it is no coincidence that it was also the year in which the copper price averaged a record high of over uS$3.40 per pound.

Higher copper prices have always led miners to take greater risks. When the price rises, an army of part-time, unsupervised miners seeks to benefit from the boom by heading out into the atacama desert in search of the mineral. they are the ones who are most at risk

from accidents.this year promises to be another

record year for copper. it has averaged over uS$4.00/lb during 2011 and hit an all-time high of uS$4.60/lb in February.

“it shouldn’t be the case that when the price of copper is high, the number of accidents rises,” says Jorquera. “it should be the other way round. When the price is high, that’s precisely when companies have the extra money to spend on safety.”

the rescue of “los 33” at the San José mine a year ago could so easily have ended in disaster, and serves as a reminder to chileans of the danger inherent in their country’s leading industry.

the government has taken concrete steps to improve safety since then, but there is still clearly a lot more that can be done.

“our aim is to ensure that even if our miners earn a few pesos less, they get home with both hands, both eyes and walking on their two legs,” says Jorquera. “We won’t sacrifice security for money.”

Gideon long is a freelance journalist based in Santiago

chilebUSiness

mining regulations

hernán de solminihacchile’s Mining Minister

"mine safety has become a key objective for this government.”

alberto salas, national Society of Mining (SonaMi)

Tom Grinter, international Federation of chemical, energy, Mine and general Workers' unions (iceM)

“sernageomin increased inspections after the accident at the san José mine.”

“chile has made some progress in revamping its antiquated mine safety laws.”

Note: Some material used in this report was published in the article “Chilean mines: Safety still an issue, a year on from 'Los 33'” by Gideon Long, which appeared on the BBC website on October 13, 2011


By ruth bradley

2012 Budget: Financing Social Demandssocial demands

tend to imply

permanent spending

commitments and

the dilemma for

chile is how to

satisfy them without

endangering the solid

fiscal finances that,

for the past decade,

have been the

hallmark of its sound

macroeconomic

policies.

COVER STorY

perfect storm - that is what Sebastián piñera, chile’s president since March 2010, faced in october and november as congress

debated his government’s proposed budget for 2012.

By november, student protests, and public support for them, appeared to be waning. But, over the previous six months, their demands for changes in the structure and financing of state education had left no doubt that strong economic growth - and, crucially, the sense of wealth induced by high prices for copper, the country’s main export - were fuelling, rather than placating, chileans’ impatience to see tangible benefits.

But, at the same time, international organizations like the international Monetary Fund ( iMF) and

the organisation for economic co-operation and development (oecd) had been urging the government to restrain spending. While recognizing the solidity of chile’s fiscal position, they had both suggested a need to move faster in rebalancing the budget after the inroads made by the 2009 recession and the 2010 earthquake.

and then, further increasing the tension, there was the increasingly certain prospect of a downturn in the external conditions that are so important to the small, open chilean economy. that not only threw into doubt the assumptions on which the government had based its proposed budget - 5.0% gdp growth next year and an average annual copper price of uS$3.70/lb - but also suggested a possible need for emergency

stimulus measures not envisaged in the budget.

Finance Minister Felipe larraín recognizes that 5% growth is now “a little over average forecasts”. However, he argues that, given chile’s strong fiscal position, lower than budgeted growth wouldn’t be a problem.

its fiscal situation is “unique”, he points out. chile is, after all, a net international creditor and, if the world were to slip back into recession, it would, as in 2009, be able to draw on the economic and Social Stabilization Fund (FeeS), an offshore sovereign wealth fund worth some uS$13 billion.

under the draft budget - which, by law, congress must approve or reject by the end of november and, despite all the noise, actually has little power to modify - government spending would rise by 5.0% next year, up from

a


COVER STorY

andrés velascoFormer finance minister

“There really is no excuse for not going back to a 0% structural deficit.”

leonardo suárezlarraín Vial

“next year’s budget will be expansive but that’s not necessarily a bad thing.”

felipe larraínFinance Minister

“if chile grows below 5% next year, the budget will be moderately expansive.”

an estimated 4.6% increase this year, reaching just over uS$60 billion (22.7% of estimated annual gdp).

it is an expansive budget although that’s not necessarily bad, says leonardo Suárez, chief economist at the local larraín Vial investment bank. gdp growth will be significantly less than 5%, he forecasts, with tax revenues almost certainly below their budgeted level. However, this latter effect would, he notes, be partly offset if - as widely

expected - a temporary increase in corporate tax from 17% to 20%, introduced last year to help finance post-earthquake reconstruction and due to start to come down in 2012, were made permanent.

the largest increase under the budget in dollar - although not percentage - terms would be for the education Ministry which would see its allocation rise by uS$781 million to uS$11.7 billion. But its 7.2% increase

is mostly inertial growth, says Suárez, who, contrary to the government’s claims, maintains that there is “zero emphasis on education in this budget”.

other important increases include the Health Ministry, with its budget rising by uS$568 million (6.7%) to uS$9.1 billion and the new Social development (formerly planning) Ministry whose budget would rise by 8.5% to uS$930 million. But, rather than the details of these allocations, attention has tended to focus on the broader and longer-term issue of whether chile can finance ever more vociferous social demands while remaining within the bounds of the fiscal policy it has adhered to for the past decade.

The rule

the concept behind this policy is extremely simple. essentially, it states that the government’s spending in a given year should be determined not by the revenues it happens to receive in that particular year but by its structural or cyclically-adjusted income or, in other words, the average level of revenues it can expect to receive over a much longer period.

during a boom year, the government doesn’t, therefore, go on a spending spree but, instead, sets aside some of

its higher revenues for leaner times. that was what happened between 2004 and 2008 when a series of fiscal surpluses went largely into the FeeS and the pension Reserve Fund (FRp), the country’s other sovereign wealth fund.

But, although the concept is simple, calculating structural fiscal revenues is far from straightforward. Some of the problems were addressed when the policy was introduced and, for example, the two key determinants - the long-term copper price and the economy’s capacity for non-inflationary growth - are estimated each year by committees of independent experts summoned by the Finance Ministry.

But that still leaves a lot of room for argument. What, for example, about the price of molybdenum? and how should interest earnings on the government’s sovereign wealth funds be treated? Should they be included in structural income?

these were among the issues debated by a special committee set up last year to advise the government. But its findings triggered another argument that is at the root of much of the current debate about chile’s fiscal sustainability.

in 2009, its last year in office, president Michelle Bachelet’s government aimed to run a structurally balanced budget or, in other words, to spend exactly its structural revenues. But the international recession had a greater impact than it had anticipated and the end result, according to its figures, was a structural deficit of 1.2% of gdp.

But the Fiscal Rule committee questioned that figure and argued that the structural deficit in 2009 was, in fact, 3% of gdp. the discrepancy is almost entirely explained by some tax reductions introduced in 2009 as part of measures to stimulate the economy.

COVER STorY

Boyden 18.5x12amchamN.indd 1 07-11-11 21:17

Klaus schmidt-hebbelcatholic university

“chile passes the test of fiscal sustainability with flying colors.”

Because they were temporary - and were, in fact, reversed as planned - the Bachelet government did not subtract them from structural income as, according to the committee, it should have done. the committee’s argument is that temporary tax changes have a habit of becoming permanent so, as a prudential measure, should be considered when calculating structural fiscal income.

long-term sustainability

the problem, according to Bachelet’s finance minister andrés Velasco, is that the present government, which had initially promised to put the budget back into structural balance, took political advantage of this point and has used it as grounds for continuing to run a structural deficit. “We ran three years of structural surpluses with just a small deficit in the last year; with this government, we’re looking at

four years of deficits,” he points out. disputing Minister larraín’s claim

that the government has to tighten its belt each year in order to close the deficit to its target of 1% by 2014, Velasco maintains that, because the

tax cuts were reversed, the piñera administration started out with an inherited structural deficit of only 1.2% of gdp. “So moving to 1% over four years implies no fiscal effort; there really is no excuse for not going back

increase in fiscal spending, Draft budget 2012

Source: Budget Office

Total increase = US$3.0 billionEducation MinistryUS$781 million

Health MinistryUS$568 million

Interior & Public Safety MinistryUS$248 million

OthersUS$1.4 billion


COVER STorY

to a 0% structural deficit,” he argues. the risk is not this year or next, he says, but further in

the future. “the problem with fiscal sustainability is that if you persevere on even a slightly wrong track for, say, ten years, then you end up getting it really wrong,” he warns.

However, Klaus Schmidt-Hebbel, an economics professor at the catholic university and president of the committee that advises the government on management of its sovereign wealth funds, maintains that the speed at which the structural deficit is closed is not a key issue. “Whether it takes two, three or four years is marginal,” he says.

indeed, he argues that chile, which passes the test of fiscal sustainability with “flying colors”, could afford to run a permanent structural deficit, even if it used up its sovereign funds and became a net international borrower. debtor countries are still fiscally sustainable, he says, as long as their growth exceeds the interest rate on their borrowing.

But, in chile’s case, it’s unlikely to come to that. in 2011, thanks mainly to strong growth and high copper prices, government spending will fall short of actual - although not structural - fiscal revenues and the Finance Ministry has recently confirmed that the difference - some 1.2% of annual gdp or around uS$2.6 billion - will be deposited in its sovereign wealth funds.

even while maintaining a structural fiscal deficit, the government would, in other words, leave chile in a stronger position than when it took office in 2010, argues Schmidt-Hebbel. that would, however, change if the world were to go into recession next year since not only would tax and copper revenues drop accordingly but the chances are that the government would dip into the FeeS to finance contingency measures.

how much tax is enough?

But that still leaves the problem of responding to the social demands that have surfaced with such vigor this year. the government cannot, as Minister larraín insists, be expected instantly to solve demands that have been brewing for years.

and so far, the amounts of money it has committed are, in fact, relatively small but the issues being debated - principally education but also, for example, healthcare - could potentially require massive amounts. and new programs, even if small, all add to inertial expenditure and, without new sources of permanent fiscal revenues, shrink the space for future governments to implement new initiatives of their own.

there’s broad agreement that new programs which imply a permanent spending commitment should be matched by a new source of permanent revenues and that’s positive, says larraín Vial’s leonardo Suárez. But, he adds, what the structural deficit tells us is that medium-term sustainability will require higher taxes.

as countries get richer, they also tend to increase their tax burden or, in other words, the ratio of tax revenues to gdp and the question now being asked is whether chile isn’t at the point where it should consider this option. there will have to be an increase at some time in the future but it’s not an issue the government is prepared to discuss in the heat of the budget debate, says Minister larraín.

comparing tax burdens across countries is notoriously complex and, in chile’s case, more than usually so. in chile, unlike many other countries, most social security payments are, for example, paid into private pension funds, rather than as taxes. and how do you key in the tolls paid for the use of roads built as private concessions or the usually high percentage of spending on education that is borne by households?

there is, however, a fair degree of consensus that chile’s tax burden is not far out of line with its current level of per capita income. But where it does have a lot of room for improvement, says Schmidt-Hebbel, is in the efficiency of its tax system.

it is neither efficient nor fair, he says, that a high-earning individual on a company payroll pays a marginal income tax rate of 40% and an average of perhaps 30% - higher than in many other oecd countries, he points out - while a self-employed person earning a similar amount pays much less tax.

chile’s tax system has also been criticized as being regressive and, therefore, helping to lock in income inequality. But knowing whether a tax is regressive or progressive is not easy, points out Velasco.

take, for example, fuel tax. levied at a fixed rate per liter,

chilebUSiness

ruth bradley is a freelance journalist based in Santiago and a former editor of bUSiness CHILE.

it is apparently regressive, hitting the poor harder than the rich, but, in practice, is paid mostly by better-off households because they have more cars.

in any case, the tax system is not an efficient way to transfer resources to those who need them, points out Schmidt-Hebbel. What matters far more is how the money is spent and, in particular, how well spending is targeted.

in other words, the current debate about tax reform is back-to-front. Before deciding whether higher taxes would be in order, chile first needs to agree on the initiatives it would like to implement - and, on education at least, that may not be easy.

chile produces more than a third of the world’s copper but only

a fraction of the 5.4 million tons it mines each year is turned

into finished products. now chilean companies are hoping new

applications for the metal could bring new opportunities to the

country’s manufacturing base.

Adding Value to Copper

By Tom azzopardi

SpECial rEporT

he importance of copper in the Chilean economy is hard to overemphasize. Last year, the country exported US$39 billion worth of the red metal, the equivalent to

56% of its exports. The mining industry, for which copper is by far the most important product, generated almost 20% of gross domestic product. The

industry also accounts for about a quarter of public revenues through taxes, royalties and profits earned by state mining company Codelco.

Despite this, since the beginning of the last century Chileans have wondered whether they could extract more value from their country’s huge reserves of the metal, equivalent to around a third of the global total.

After all, copper, which Chile sends across the Pacific Ocean as ore, comes back in the shape of sophisticated goods such as cars, computers and smartphones. No wonder many have the feeling that while Chile does the hard work of getting copper out of the ground, others are exploiting the properties which make it a vital resource for so many high-tech products.

Yet most of the copper the country exports is already refined into high purity metal ready to be manufactured into tubes, wires and other components required by a range industries, says Vicente Pérez, head of research at the Chilean Copper Commission (Cochilco).

Out of 5.4 million tons of copper produced by Chilean mines last year,

2.1 million tons was turned into copper cathodes through a process called solvent extraction and electrowinning, a technology pioneered in Chile during the 1990s mining boom.

Of the remaining 3.3 million tons, just under half is smelted in Chile. Of this, 1.2 million tons is refined into cathodes while the remaining 300,000 tons is exported in intermediate forms like blister and anode. But that still leaves 1.8 million tons exported in the form of concentrates. So why doesn’t Chile build smelters to process the metal domestically, thus creating additional investment, jobs and business opportunities?

To smelt or not to smelt

There are historic and economic reasons why Chile continues to export a third of its copper as ore. Many of the large copper mines built in Chile in the 1990s, such as Candelaria, Collahuasi, Escondida and Los Pelambres, were financed by Japanese companies looking for a guaranteed supply of concentrates for their smelters on the other side of

t

the Pacific and thus had no interest in building new capacity in Chile.

Meanwhile, huge investment in new smelters in rapidly developing Asian nations, particularly China, has created an excess of smelting capacity globally and a relative dearth of concentrate. The tariffs charged by smelting companies have collapsed, making smelting a marginal business while mining copper, thanks to years of high prices, can be extremely lucrative. During the first six months of 2011, Codelco’s Ventanas smelting and refining complex in central Chile barely broke even while the company’s mines earned it more than US$3.9 billion.

Moreover, smelting is an environmentally tricky affair, creating c

ourt

esy

of e

cose

a

SpECial rEporT

huge emissions of pollutants like sulfur dioxide and arsenic while consuming large amounts of energy. Last March, Codelco was forced to halt operations at its Ventanas site after a cloud of emissions left teachers and pupils from a nearby school in hospital. The company is already considering refits worth US$1 billion to bring its four smelters into line with tighter regulations on emissions from metallurgical plants, which the government plans to publish later this year.

Given the meager margins and environmental hazards, some mining companies are looking to exit smelting: Xstrata has announced plans to close or sell smelters in Australia and Canada, although it has yet to make a decision on its Altonorte smelter near Antofagasta.

In these circumstances, few companies outside Asia, in Chile or

anywhere else, are planning significant investments in copper smelting. Chile’s mining industry is expected to invest US$70 billion over the next decade, largely in copper projects that will lift production to over seven million tons by the end of the decade. But there are no plans to expand smelting capacity even though much of the additional output will be in the form of concentrates.

Still, market conditions could change, warns Cochilco’s Pérez. A large increase in Chilean production of concentrates could make the country beholden to terms dictated by smelters in China, which already accounts for 40% of global copper demand. To avoid that happening, Codelco may invest in a major expansion of Ventanas to handle additional output from its Andina division which is expected to triple production over the next decade. But so far no decision has been taken.

manufacturing challenges

Smelting and refining are just two stages in the copper production chain. Before refined copper can be turned into consumer products, it must be molded, cut and bent into fabricated and semi-fabricated shapes, like the rods, tubes and bars used by many industries.

Chile’s manufacturing industry handles around 100,000 tons of copper each year, which is just a sliver of the 3.3 million tons of refined metal produced by the mining industry but significantly more than one would expect for a country of Chile’s size, says Pérez.

Reflecting Chile’s small domestic market, the industry is largely focused on overseas markets. Madeco, Chile’s largest copper manufacturer, exports up to 70% of the 2,000 tons of copper it processes

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each month, not just to neighboring Peru and Argentina but as far afield as North America and Europe, says commercial manager Juan Enrique Aguirre.

It helps that the Madeco brand is well-known in these markets. In 2008, it sold its wires and cables division to cables giant Nexans in exchange for shares and is today the French company’s largest shareholder.

But Chile’s copper manufacturers face the same difficulties as the rest of the country’s manufacturing base: a strong peso, relatively high wages and soaring energy prices. Madeco would like to produce around the clock but peak energy prices make this prohibitively expensive while Chile’s metalworkers are amongst the best paid on the continent.

Nor does the industry derive any benefit from being on the doorstep of some of the world’s largest copper

mines, says Aguirre. Madeco is controlled by the Luksic family, which also owns Antofagasta Minerals, but the company is treated as any other manufacturer, he says.

In fact, rather than benefitting from high copper prices, Madeco is seeing demand undermined as consumers switch to cheaper alternatives such as plastic and aluminum. The International Copper Association, the marketing arm of the global copper industry, estimates that high prices have reduced demand for the metal by as much as 8% in recent years.

Meanwhile, the appreciation of the peso has made Madeco’s output less competitive abroad. Last December, the company announced the closure of its copper sheet line to concentrate on larger volume markets like tubes and bars.

“The rise in the copper price has harmed our business,” admits Aguirre.

antimicrobial properties

Despite the limitations facing downstream copper-based businesses, several companies in Chile are pursuing opportunities related to new applications using some of the metal’s lesser known properties.

A main player is Codelco, the world’s largest copper producer, through its subsidiary INCuBA. The aim, according to Víctor Pérez, Codelco’s vice-president for market development and the general manager of INCuBA, is not only to increase demand for copper but to produce value-added products and improve the industry’s image through association with sectors like agriculture and health.

“We want to identify and consolidate business models in Chile and then export them to the world,” explains the executive.

One of the most exciting areas of

development is in healthcare. Although copper’s health properties have been known for millennia - the Ancient Egyptians used the metal to purify water – this property has been mostly forgotten. New scientific research has highlighted just how effective the metal is in eliminating harmful bacteria.

While bacteria can survive on stainless steel or plastic for hours, placed on a copper surface they die off within minutes. Tests show 99.9% of bacteria die within two hours of coming into contact with the metal, even if it is tarnished. Scientists believe that copper’s high conductivity short-circuits the thin-skinned microbes’ outer membrane.

A major breakthrough came in 2008 when, after months of intensive testing, the US Environmental Protection Agency registered 275 copper alloys as antimicrobial products.

The possibilities and benefits are enormous, says Dr. Michael Schmidt, a professor of microbiology at the Medical University of South Carolina who has conducted trials funded by the US Department of Defense.

Infections acquired by hospitalized patients are an increasing burden on healthcare systems around the world. In the United States alone, more people die from hospital-acquired infections each year than from AIDS and breast cancer. Even if the infection is not fatal, it could mean months longer spent in hospital with huge costs for the system.

But the trials have shown that replacing frequently-touched surfaces in intensive care units such as bedrails, intravenous drip poles and overbed tables with copper alloys can cut the rate of infection

by almost 50%. The challenge now is to convince the healthcare industry and copper manufacturers: most items used in the trials had to be handmade by craftsmen.

“We’ve got the data and are begging vendors to start thinking about how to do this,” says Schmidt who has spoken at numerous industry conferences about his findings. “Whoever gets to market first will be very well-positioned,” he adds.

President Barack Obama’s recent healthcare reform bill should help get the ball rolling: it includes a clause providing incentives for US hospitals which reduce rates of intra-hospital infection.

And once copper becomes associated with clinical cleanliness, it could soon be seen in a wide variety of locations where contagions can spread, including schools, gyms, public

transport systems and workplaces. The International Copper Association has even created a trademark for antimicrobial copper, Cu+, which it hopes will soon be seen on a huge number of products.

Gleaming copper surfaces are found all over Codelco’s head offices in downtown Santiago, on door handles, the reception desk and elevator panels. The company has also worked with Santiago’s Metro underground rail to install 350 meters of copper handrails throughout its new Santiago Bueras station. The Metro has committed to using copper throughout stations on its two new lines.

Put it in a sock

Copper’s rediscovered properties are also creating applications for the clothing industry. Earlier this year,

sales of refined copper to the chilean manufacturing industry (thousands of tons)

Source: Chilean Copper Commission

Cathodes

Fire Refined

TOTAL

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

78,1

11,9

90,0

66,5

15,0

81,5

76,4

18,3

94,7

82,1

18,3

100,4

85,7

17,0

102,7

94,0

16,7

110,7

95,1

10,2

105,3

94,8

8,4

103,2

86,3

5,0

91,3

96,0

4,2

100,2

Juan enrique aguirre Madeco

“The rise in the copper price has harmed our business.”

aldo magnascoMonarch

”Demand for our socks has exceeded expecta-tions.”

SpECial rEporT

Chile’s largest sock manufacturer, Monarch, launched its own SaniCopper brand of socks which has copper woven into its fibres.

After finding a way to weave copper- bearing thread into the hard-wearing textile needed for footwear, the socks underwent gruelling testing when the company provided pairs to the miners trapped underground during last year’s San José mine rescue. Several of the men were suffering from skin infections as a result of the hot, damp and dirty conditions which the socks’ antimicrobial properties helped to clear up.

“The miners were able to test that the socks really worked,” says Monarch’s products manager, Paz Macera.

That kind of global publicity helped to raise awareness about the new product, which Monarch sells through its own outlets and department stores up and down in Chile.

“Demand has exceeded expectations, it’s done very well,” says Monarch’s president, Aldo Magnasco. The company recently launched women’s and children’s socks containing copper.

Monarch has also looked at exports but difficulties in obtaining certification and licenses in other countries have kept

this project on hold for now. “We have received countless calls from abroad but it’s not easy,” admits Magnasco.

animal health

Copper’s health benefits are not limited to humans. For example, a range of horseshoes made from a copper alloy not only helps to keep the animals hooves free of fungi and other infections but they are also able to better absorb the impact of galloping than traditional iron horseshoes.

Marketed under the Kawell brand (from the indigenous Mapuche word for horse), the horseshoes have been used by racehorses, polo ponies and Chile’s show-jumping team at the recent Pan-American Games in Guadalajara, Mexico.

An even more promising application is in fish-farming. Cages made from copper, rather than traditional nylon, are more durable and fully recyclable while copper’s antimicrobial properties prevents the build-up of fowling on the mesh. The fish enjoy cleaner, better oxygenated water and suffer less from parasites and other diseases.

A copper cage costs considerably more than its nylon equivalent, but the fish grow faster and larger, which

increases the harvest, explains Codelco’s Víctor Pérez.

EcoSea, a firm set up with Codelco’s support and based in Puerto Montt city, the heart of Chile’s salmon-farming industry, has already installed 68 of its cage systems in Chile and hopes to reach 400 within four years. The company has also begun exporting to China, Turkey, Scotland and Hawaii.

According to EcoSea’s projections, the opportunities are considerable: China alone has more than one million cages. As well as improving the efficiency of existing farms, copper cages could also open up new opportunities for the industry.

Strong enough to resist attacks from marine predators and requiring only periodic maintenance, EcoSea’s systems could be installed offshore and controlled remotely, reducing the industry’s environmental impact and allowing it to experiment with new species.

Such applications may never match the scale of Chile’s gigantic mining industry, but new uses for copper should help Chileans and the world have a greater appreciation for the properties of the red metal.

vicente Pérez cochilco

“a large increase in chilean production could make the country dependent on chinese smelters.”

Dr. michael schmidt Medical university of South carolina

“Whoever gets to market first will be very well-positioned.”

víctor Pérez codelco

“We want to consolidate new business models in chile and export them to the world.”

Tom azzopardi is a freelance journalist based in Santiago

chilebUSiness


SpoTlIGhT

n June 22, 2011, the Stolen or Misappropriated information technology law took effect in the state of Washington. the law protects uS companies

from unfair competition by making it illegal for manufacturers to use pirated hardware or software in the production and commercialization of products sold in the state. the law is designed to specifically target foreign manufacturers that export and sell their products in the united States. therefore, the law could have an important effect on chilean exporters.

it is important to note that the "stolen or misappropriated it" need not actually be incorporated into a product sold in Washington State; a manufacturer is liable under the law if it uses pirated software in any part of its business operations, including in its inventory, logistics, or accounting systems.

Washington is not the only state fighting unfair competition resulting from piracy. louisiana has already passed a very similar law and other states are in the process of implementing regulations including arizona, california, connecticut, indiana, Kentucky, Massachusetts, Missouri, north carolina, and oregon.

of course, many manufacturers are

outside the jurisdiction of Washington State, but the law also provides plaintiffs with a cause of action for damages against third parties (distributors and retailers) who generate more than uS$50 million in annual revenues, have a contractual relationship with the offending manufacturer, and sell the offending products in Washington.

these third parties can avoid being subject to damages by obtaining a written letter from the manufacturer stating that it has not used pirated it in its production processes. therefore, chilean companies need to be prepared for uS buyers that require strict compliance with local ip laws as a condition to sell their products in the united States.

as a condition in order to file a lawsuit against a manufacturer, the law requires that the it owner give written notice. Failure by the manufacturer to either disprove the allegations or stop using the offending software within 90 days could make them liable under the law.

a lawsuit can be brought either by the Washington attorney general or a private entity that sells directly competing products. to prove it has been damaged by the sale of the offending products, a company must show it does not use stolen it in its own operations and that the

Piracy Doesn’t

Payby esteban elias

The state of Washington has passed a law

that makes it possible for us companies

to sue competitors that sell products

manufactured by suppliers using pirated

software in any part of their business

operations. for chilean exporters the law is a

wake-up call to improve their iT practices.

o

retail price of the software or hardware in question is uS$20,000 or more.

Some products and services are excluded from the law including products used for medical or medicinal purposes, food and beverage products, restaurant services, products copyrighted under uS law and certain components of products for which there are no comparable substitutes.

to understand how the law could potentially affect a chilean company, let’s assume that a chilean manufacturer of a popular and unique item of furniture uses a pirated copy of excel to track orders, shipments, or payments regarding its products and those products are supplied to a retailer, such as Home depot, in Washington State.

© 2011, PricewaterhouseCoopers Consultores, Auditores y Compañía Limitada. Todos los derechos reservados. Prohibida su reproducción total o parcial. “PwC” se refiere a la red de firmas miembros de PricewaterhouseCoopers International Limited, cada una de las cuales es una entidad legal separada e independiente.

La creciente demanda, impulsada por los mercados emergentes, transforma a la oferta en el reto más importante que deberá afrontar la industria minera.

El cambio en el balance es positivo para el sector, pero no será fácil y requerirá una gestión cuidadosa.

PwC es líder mundial en asesoría a compañías mineras, colaboramos con empresas de exploración, producción y servicio, ayudando a nuestros clientes a identificar y desarrollar sinergias a través de las distintas áreas de sus negocios, proporcionando soluciones empresariales a medida.

Extrayendo valor en conjunto

Servicios PwC Chile

Consultoría y Asesoría EmpresarialAsesoría Legal y TributariaAuditoría

www.pwc.cl

in this situation, the chilean company is in violation of the law and can be sued. if it does not appear before the court in Washington State, which is the more likely scenario, then the distributors or retailers that contracted with this company to acquire the furniture can also be sued

for up to uS$250,000 and the products themselves could be seized.

although distributors and retailers in the united States can defend themselves, as explained above, the seizure of products or a potential injunction could dramatically affect the whole operation and create a

major delay in the sale of the furniture. While the chilean company cannot be brought before a court in Washington, or eventually another state, the case described above shows the impact that such a case could have on its commercial operations.

as a result of this law, chilean companies that manufacture and export products to the uS market should now more than ever pay close attention to their it practices. Some common guidelines should include: creating a code of conduct regarding it practices and carrying out periodic audits to make sure that software and hardware comply with ip laws and regulations. companies should also train key employees and executives regarding good it practices.

esteban elias is legal counsel for Microsoft Chile and a law professor at the Central University in Santiago.

chilebUSiness

Sophisticated packaging makes it difficult to distinguish the genuine product (right) from the counterfeit (left).

SpoTlIGhT


Javier Irarrázaval Elected Vice-President of AACCLA

amcham chile’s president, Javier irarrázaval, was elected as a vice-president of the american association of chambers of commerce in latin america (aaccla) for a two-year term during the association’s annual meeting in Washington dc in october.

aaccla groups the region’s 23 amchams, which together represent 20,000 companies and over 80% of uS investment in latin america. in partnership with the uS chamber of commerce, aaccla promotes business between countries of the continent as part of its mission to promote free trade with the united States.

AmChAmCOMMITTEES

on october 14, amcham’s Finance and capital Markets committee held a meeting with Standard & poor’s analyst Sebastián Brioso. Brioso analyzed the current situation in global markets and how latin america is positioned. Brioso said the region is well prepared in the event of a recession in the united States and europe, but noted there are still risks for chile’s economy.

on october 25, amcham’s trade & international Business committee met to discuss the Stolen or Misappropriated information technology law recently approved in the state of Washington. the guest speakers where three lawyers with experience in intellectual property issues: esteban elías, Microsoft; Rodrigo Rojas, chilean association of it companies (acti) and Sebastián Rodríguez of the association of Software distributors (adS)

AmChAm nEwS

Javier Irarrázaval, AmCham Chile

on october 19, Roberto peralta, a lawyer at the firm peralta, gutiérrez & asociados, and María angélica Zegers of the planning Ministry (Mideplan) addressed amcham’s corporate communications & Sustainability committee about the new donations law. the speakers discussed the importance of creating a regulatory framework in this area as well as other government measures.

Fernando Concha, Citigroup country officer and president of the Finance and Capital markets Committee, and Sebastián Brioso, Standard & Poor’s

Rodrigo Rojas, ACTI; Esteban Elías, microsoft; Jaime Bazán, AmCham, and Sebastián Rodríguez, ADS

us-chile Partnership Presentation Kit

amcham has produced a powerpoint presentation about the key issues facing the chilean economy, including rankings of chile compared to other latin american countries and an overview of its trade relationship with the united States. the presentation is available free to members on the amcham website: www.amchamchile.cl. For more information contact Sam andrus in the department of Research and Special projects, tel.290-9733.


nEw mEmbErSalto impacto consultantsRodrigo del campo / general Manager

Dale carnegie chileeducation & traininglaurent devlieger / general Manager

asia marketing ltda.Business Related Servicesguillermo echeñique / partner afeX agencia de valoresFinancial & investment Servicestomás Morandé / commercial Manager

maersk chile Shipping agenciestodd pigeon / general Manager

mazars auditores consultores ltda.auditorsgermán Sanhueza /partner

Puente sur outsourcing Business Related ServicesSteve Ruddell / Relationship Manager

marksmen Partners consultoresconsultantsgiorgio olivari / partner

legoocom ltda.telecommunicationscristián omeñaca / general Manager

Tetra Tech chileconsultantsShandor Franulic / general Manager

haworth / aimsBusiness Related ServicesMaría acuña / aims Manager

Herb Weiner, Mayor of Sausalito city in california, met with amcham’s president, Javier irarrázaval, on november 4 during a trip to chile to meet with authorities in Sausalito’s sister city, Viña del Mar. like Viña, Sausalito is a coastal city with 7,000 inhabitants and panoramic views of San Francisco Bay.

Weiner and his team also met with representatives of the uS embassy and the Foreign affairs Ministry in Santiago to discuss the sister-city initiative, and attended a ceremony in Viña del Mar’s Sausalito park, where a plaque was unveiled in honor of the sister-city relationship.

Sausalito mayor Visits AmCham

amcham congratulates Kimberly clark, transbank and coca cola on placing in the top three of chile’s great place to Work 2011 ranking announced in november. carolina Valdivieso, ceo of Kimberly clark chile, and gonzalo iglesias, ceo of coca cola chile, are both members of amcham’s board. amcham also congratulates its many other members among the 35 companies in the 2011 ranking. For the full list see: www.amchamchile.cl

Great Place to Work 2011

Jaime Bazán, AmCham; michael moyle, Sister Cities Working Group; herb Weiner, mayor of Sausalito, and Javier Irarrázaval, AmCham

Carolina Valdivieso (2nd row, 3rd from left) celebrates with colleagues from Kimberly Clark


Anglo American has kicked off a training program to teach women how to operate heavy machinery at its mantoverde Division. During the first stage of the program, 20 women from the communities of El Salado, Diego de Almagro and Chañaral will receive training for six months at the Atacama University. After this period they will be certified to work in the company’s mines.

“Our operation has a

responsibility with neighboring communities where there are a high number of women with skills and the desire to improve the quality of their work and family life,” said mantoverde’s CEO, Edgardo Riffo.

maría Victoria Fonseca, one of the participants in the program, sees the program as a chance to improve her income and her family’s future: “In life you only get a few chances and you have to take them,” she said.

Anglo American Trains Women to Operate heavy machinery

maría Victoria Fonseca, Anglo American's training program for women

In November, Teradata and SAS formed a strategic partnership to provide customers with a unique value proposition that exploits the best of both companies’ core strengths, namely data warehousing and business intelligence solutions. The partnership will allow SAS to run its

analytic processes using the Teradata database engine.

“It is a very beneficial partnership,” said matías Gil, Teradata’s country manager for Chile and Peru. “Teradata is the number one company in data warehouse solutions and SAS will use their business intelligence on our large volumes of data.”

Teradata Partners with SAS Institute

In October, Nextel Chile began offering its mobile broadband service to its existing clients. The high-speed service is offered in the cities where Nextel currently offers its digital Push-to-Talk service: Antofagasta, Calama, Valparaíso, Viña del mar, San Antonio, Rancagua, Santiago and Concepción.

“We want our clients to be the first to receive the new service,” said Claudio hidalgo, president of Nextel Chile. The company has provided platforms for its clients to give feedback on the service in terms of quality and coverage.

AmChAm mEmbErS nEwS

marcelo Sukni, country manager of SAS Institute Chile, and matías Gil, Teradata’s country manager for Chile and Peru

Claudio hidalgo, president of Nextel Chile

Nextel Launches mobile Broadband Service


ExECUTIVE aPPoinTmenTs

On November 2, Viña Concha y Toro was once again recognized as Chilean Company of the Year during the annual industry dinner organized by Chile’s manufacturers’ association, Sofofa. With 1,300 business people in attendance, President Sebastián Piñera presented the prize to Concha y Toro’s management team.

“Our origins as a company are in Chile and, from here, we have

taken important steps that have allowed us to become the first global Chilean brand,” said the company’s president, Alfonso Larraín.

The judges highlighted the company’s globalization, its business model which is an example for the national viticulture industry, and its contribution to the economy by creating new jobs throughout Chile.

American Airlines is working with Chile’s national tourism service, Sernatur, and the private sector association, Turismo Chile, on a new campaign to promote the country as a tourist destination in the US market.

The campaign includes advertising in subway cars, buses, bus stops, billboards and taxis in New York and miami. The campaign

highlights Chile’s natural wonders such as Torres del Paine and Easter Island, as well as new attractions such as wine routes and ski resorts.

“For American Airlines, it is an honor to collaborate in this initiative with the Chilean government to promote the country’s image around the world,” said Pamela Camus, Chile director for American Airlines.

American Airlines Gives Wings to US Campaign

Concha y Toro is Chilean Company of the Year 2011

Andrés Concha, Sofofa; Eduardo Guilisasti, CEO, Alfonso Larraín, president, and Rafael Guilisasti, vice-president of Concha y Toro with President Sebastián Piñera

UPS has announced the appointment of Francisco Ricaurte, an executive with 15 years’ experience in the company, as the new CEO for Chile, Argentina, Paraguay and Uruguay. he will assume responsibility for the business areas of packaging, air cargo and UPS Supply Chain Solutions in these countries.

Francisco Ricaurte, UPS CEO for Chile, Argentina, Paraguay and Uruguay

Chile campaign billboard in miami

Felipe Gavilán Núñez, a lawyer from the Universidad de Chile with over nine years of experience in the national tax service (SII), has joined the tax area of KPmG Chile as manager of Department of Litigation and Administrative Proceedings. Since 2002, Gavilán has worked in the Justice Department of the Santiago South Region and, later, in the Justice Department of SII.

Felipe Gavilán, Manager of the Department of Litigation and Administrative Proceedings at KPMG Chile

Relsa Chile Gets EthicalIn September, Empresas Relsa published a new version

of its Business Ethics and Conduct Code to improve its business practices throughout Latin America.

“The challenge that moves us as a company is to become better people and do better work. This is why we want this code to become a reference for healthy business practices,” said Relsa Chile CEO, Patricio Brinck.

During the launch, the company held an activity called Ethical Dilemmas, which tested workers’ reactions in ethically complex situations. Each worker received a copy of the code and agreed to abide by it. The same code will also be used by the company’s offices in Peru and Brazil.

maria Teresa Díaz, social responsibility and communications manager; Pablo Cruz, corporate manager and Patricio Brinck, CEO of Relsa Chile


AmChAm pEoplE

on September 29, amcham hosted a breakfast at the Hotel Radisson with José de gregorio, president of chile’s central Bank, who discussed the international economic situation and the outlook for 2012.

Breakfast with José de Gregorio

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Gonzalo Díaz and christian Kelly, Terramar chile alfredo schmutzer, hoteles club Presidente, and sergio carrera, Kimberly clark James Williams, us embassy; mauricio baeza, banco de chile, and luis martínez, Jeria, martínez & asociados matías Domeyko and charles Kimber, arauco adolf Kortge, arauco, and Patrick esnouf, chilean-british chamber of commerce fernando concha, citigroup; isauro Torres, foreign ministry; José de Gregorio, central bank, and Javier irarrázaval, amcham rodrigo lópez, infoPrint solutions company llc, and John rojas, Dole chile

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“Trabajamos para ser un referente mundial en el desarrollo sostenible de productos forestales”

WWW.ARAUCO.CL

October 201136 business Chile www.businesschile.cl

It’s All Greek to MeBy axel christensen

Economic Snapshot

chilebUSiness

For the last few weeks, the world’s financial markets have been witness to a true greek drama. like the plays written by Sophocles and euripides, we have seen how the “hero”, former prime Minister papandreou, seeks to overcome his destiny and that of his country. However, he finally succumbs to his fate, brought upon him by the gods that dwell on Mount olympus, or in this case in Frankfurt at the headquarters of the european central Bank. the drama seems to end (or is it just the beginning?) with a new leadership, chosen for its ability to contain, at least momentarily, the wrath of the gods.

Markets have learned to deal with volatility since their inception as long as the uncertainty stemmed from known sources: economic growth disappointments or companies not meeting their earnings expectations. But this time it seems different as the most important cause of unpredictability comes from political leaders and their inability to make decisions.

in the case of greece, which has endured hundreds of years of Byzantine politics, the markets have been driven crazy waiting for the decisions needed to avoid, or at least postpone, financial armageddon. at one point european authorities seemed to sigh in relief after appearing to have settled on a massive bailout program for greece that would reduce the imminent risk of europe’s banking system collapsing. the arrangement called for writing off 50% of greece’s debt. However, all this was upset unexpectedly when the government called for a public referendum on the plan, which would extend the period of uncertainty for months. Markets reacted immediately with investors taking every step to find the safest asset available. after all, it is very difficult for investors to manage this type of risk. it’s all greek to them.

Fast forward a couple of weeks: our heroic prime Minister is out of a job and the referendum is called off. everything seems to be back to normal. However, in a dramatic change in events, it is now italy that takes the center stage. and again, political events are at the source of market anxiety. Former prime Minister Berlusconi was

axel christensen

managing Director for South America ex Brazil, Blackrock

more a part of the problem than the solution and a change in leadership was necessary to refocus the debate on the economy. the new prime Minister, Mario Monti, is well respected by multilateral agencies and banks although he does not seem to be welcomed by italian politicians, which may not be a bad thing. But investors are again victims of the panic that originates from politics. this time, it’s all italian (or latin perhaps) to them.

if anything, however, the recent changes in leadership have struck a positive note. to the extent that investors are able to calm down as some political uncertainties disappear, they can now focus on economic forecasts. unfortunately, there is not much good news to be found. Some analysts calculate that a far larger bailout is needed for the greek economy to recover and start growing again. italy, for its part, still faces sovereign debt that exceeds 120% of its gdp and rising as it has to finance itself with euro denominated 10-year bonds issued at more than 7%. By comparison, issuing debt is much cheaper for chile which issued dollar denominated government debt at 3.3% for the same term last September.

despite this gloomy economic scenario, there is too much at stake for european leaders to let Rome fall. they will do anything possible to keep europe united and to keep the euro alive. it will not be an easy road, but at least it is a familiar one for investors. notwithstanding its difficulties, it will surely be easier than learning greek or latin.

axel christensen is managing Director for south america ex brazil at blackrock


s 2011 draws to a close there are substantial risks in the global economy that Chile cannot afford to ignore. These are focused

in Europe, but the fallout from the debt crisis in that continent could have important repercussions for emerging economies next year and beyond.

“The world has changed significantly during 2011,” said José de Gregorio, president of Chile’s Central Bank, at an AmCham breakfast on September 29.

The current global economic situation was virtually unthinkable six months ago. At that time the major risks facing Chile’s economy were overheating and higher inflation due to soaring commodities prices. Developed economies were recovering more slowly, but emerging economies including Chile were surging.

“The right thing to do in that situation in terms of monetary policy is raise rates in line with inflation,” said de Gregorio.

But by the end of August, that scenario had changed dramatically. Standard & Poor’s downgraded the US debt and at the same time the EU debt crisis, which until then had been contained in Portugal, Greece and Ireland, began to spread to Italy, Spain and other countries.

The result in Chile and the world has been slower economic growth, lower commodities prices and lower inflation. Nevertheless, the Central Bank has maintained the benchmark rate steady at 5.25% since June. And, according to the bank’s latest monetary policy report (IPOM), it

plans to leave the rate unchanged until at least the end of this year.

“One thing is monetary policy and another thing is what actually happens in the real economy,” said de Gregorio, adding that Chile’s economy is expected to grow around 6% in 2011. However, the Central Bank has downgraded its economic growth forecast for 2012 to between 4.5% and 5%.

This reflects the risk of contagion of the Euro crisis. With Greece and Italy facing risk premiums up to ten times higher than Germany, it is becoming increasingly expensive for these countries to finance their debt. “There is a tremendous crisis of confidence in Europe which is contaminating the banking system,” said de Gregorio.

But unlike the dramatic collapse

of Lehman Brothers in 2008, the European crisis has evolved “in slow motion” with days of optimism and others of pessimism, said de Gregorio, who has governed the Central Bank since 2007.

“Lehman was like a car going at 100 kilometers in the rain when it suddenly jumps the barrier and crashes,” he said. “Today, it’s like the same car going into a tunnel without its lights on where none of the other cars have their lights on either and you can’t see the end.”

Of course, in this situation drivers are going slowly and some European economies have stalled. “We can’t rule out that the situation will get even worse next year,” said de Gregorio.

The EU has approved a significant

brEAKFAST

José de Gregorio, central bank

Driving with CautionBy Julian Dowling

a

bailout package for Greece, but now Italy looks like it may also need a hand. “European leaders can’t find a way out of this crisis,” admitted de Gregorio.

Part of the problem is that the institutions don’t exist that could solve the crisis. But the world is better prepared today than it was in 2008. This time governments and central banks have had plenty of time to prepare and implement necessary safeguards.

“There are many more mechanisms to mitigate a potential recession or prolonged slowdown,” said the Central Bank president.

But further weakening of the US economy is likely. Business confidence in the United States, which has rocked by the Japanese earthquake in March, continues to slide. Unemployment is rising

and household debt has reached exorbitant levels. Meanwhile, the Federal Reserve benchmark interest rate remains near 0%, leaving little room for expansive monetary policy.

Even so, US stock markets have not fallen as much as Latin American markets, noted de Gregorio. The reason is that in times of uncertainty investors take refuge in US treasury bills and the dollar. This has had an important impact on the exchange rate, with the dollar rising from 460 pesos at the beginning of August to over 500 pesos in November.

Even more worrying for Chile than the peso’s depreciation, has been the sudden drop in prices for commodities including copper, which has fallen from a record high of US$4.60 per pound in February to

less than US$3.50/lb.The world economic outlook for

2012 is uncertain with recession a strong possibility, said de Gregorio. In this scenario, Chile must drive with caution but as long as it keeps its eye on other drivers and brakes when necessary, it should make it out the other side of the tunnel.

“We have shown our ability to adjust monetary policy when necessary,” said de Gregorio, adding that, thanks to its low risk premium – lower than two thirds of European countries – Chile has all financing options open.

“We will keep monitoring the external situation but Chile remains in a very strong economic position,” he concluded.

Julian Dowling is Editor of bUSiness CHILE

chilebUSiness


InTErvIEw

his year bilateral trade between chile and the united States is set to meet or surpass the record of uS$20 billion set in 2008. the Free trade agreement, signed in 2003, is the main reason for the growth

in trade, but behind the numbers are strong relationships between uS and chilean firms.

it helps that when uS companies come to chile looking for local partners they are not alone. the uS commercial Service, which is part of the department of commerce’s international trade administration, is the uS counterpart of prochile, the chilean government’s export promotion bureau. it organizes trade missions, arranges meetings and provides logistical support for uS companies in chile.

Mitch larsen, who began his tour as the uS commercial counselor to chile in 2007, sat down with business chile to discuss next year’s busy trade agenda and why uS companies are more interested than ever in coming to chile.

What is the outlook for bilateral trade this year?the good news is that in 2010 trade rebounded in both

directions and in 2011 we are on track to meet or exceed the numbers from 2008. For the first three quarters of this year the numbers are looking good. the current global situation has made things difficult, but we expect trade will continue to grow.

at the micro level, we’ve seen a number of trade missions in the last six months including from the states of Florida, texas and louisiana and a visit by the governor of delaware. We just had a mission of eight companies from Maine in november and in early december we have the governor of Massachusetts coming to talk about bilateral cooperation in energy, education and science.

chile’s exports have risen but it exported fewer products to the united states in the first nine months of 2011 than in 2008, why is this?

demand has not been as strong due to the slow growth of the uS economy. chile has also been adept at opening new markets around the world including in north america, europe and asia. But on the bright side there are more chilean companies exporting to the uS than any other market, which is a sign the Fta is working.

the other positive thing is that a lot of small and medium size chilean companies have found a market in the united States. We need chile and chile needs us, and that’s a big part of the health of our relationship.

in the other direction, chile’s imports from the united states have surged nearly 20% since 2008. What explains this growth?

part of it is the demand equation and then you have to look at the exchange rate. a rate around 500 pesos is positive for uS exporters. We’ve also found a lot of small and medium sized companies are interested in chile because it’s a transparent market and an easy place to do business.

also, because chile’s economy is growing strongly you see more demand for automobiles, petroleum products and other manufactured goods. chile is an exporter of agricultural products but there is not a large manufacturing industry here so they need to import food processing machinery, tractors and things like that. in order to be a great exporter, chile fortunately needs a lot of things that we have to offer in the united States.

speaking of imports, how is the implementation of the fTa progressing?

the uS-chile Fta commission meets regularly and both sides talk about how to move quicker than anticipated in terms of bringing in new products or decreasing tariffs. For instance, we have been successful in chile with uS beef, which has opened the market not only for the united States but other countries like australia and Brazil.

What are the advantages and challenges for us companies looking to set up shop here?

chile is a great market for uS companies, there are very few obstacles. i always tell trade missions that the customs regime in chile is excellent. You can get products in and out quickly and easily. i don’t get many calls from uS companies saying “i can’t get my products out of customs,” which is a daily occurrence in other markets.

another advantage is that the red tape required to set up a new business has been reduced. our gold Key program, which offers individualized trade missions, is very popular in chile. companies that come here have been refreshed by the welcome they have received, the people they have met and the opportunity to quickly get down to business.

But chile has become a much more competitive market in the last five years. Because chile has been growing so strongly, a lot of companies around the world want to do business here. chile has really come on the radar screen for a lot of countries and, since chile is a small country, finding partners here is more challenging.

Soup to NutsBy Julian Dowling

t

mitch larsen, us embassy


how important is it for us companies to have a local partner?

it’s very important to have someone with local expertise and knowledge and, if there are products stuck in customs, that one in a million, then they’re there to help. they are their eyes and ears in chile and other markets as well.

chile is also a great platform for the region because of its security, level of education and ease of doing business. large companies like caterpillar and even small and medium size companies are using chile as their regional base.

What are the main areas of interest for us companies?We’ve seen a lot of interest from energy efficiency

companies. energy prices are high in the united States and a lot of uS companies have expertise they can share with chile. Solar energy is another big area since chile’s has some of the best solar conditions in the world. We’re working with amcham to promote clean energy investment through the Business council on energy.

another area is education. Boarding schools on the uS east coast see a growing interest in international students coming to study from countries like chile. Higher education is also a key element of the chile-california partnership and it will be a focus of the visit by the governor of Massachusetts.

What trade events are planned for next year?there is an energy trade mission coming from the state of

illinois in March. We are also working with amcham on the iFt energy show in May. the other growing area is venture capital and private equity investment. With amcham, we hosted a successful venture capital mission in January this year and we will be doing another one in March 2012.

We get a huge number of uS companies at the Fidae airshow every March and at the mining show expomin. then there is a medical show, expo Hospital, in June. So our 2012 calendar is very full. it’s a good sign for our bilateral relationship that it’s not just mining companies, but also companies in energy, defense, education, construction and finance. it’s a broad relationship which translates into more trade.

how does the us embassy support these trade missions?

the key is arranging the right meetings because the worst thing you can have is a company coming all the way to chile and finding out their schedule is off. We do conference calls and get feedback before they hit the ground. We also arrange networking events with amcham and in many cases our ambassador will host a reception. We even arrange hotels so it’s really soup to nuts as far as the support we provide.

What role does amcham play?amcham has a large membership of uS and chilean

companies and is respected as one of the best chambers in the hemisphere. our ability to interact with amcham members, as well as the board of directors and staff, is critical to the success of these missions. chilebUSiness


By santiago eneldo

emocracy is the worst form of government, except for all those other forms that have been tried from time to time," Sir Winston churchill (July 1945, after he had just won WWii but lost power in a general election).

Mr. churchill may have exaggerated slightly, but he had a point. democracy, defined by Wikipedia as a form of government in which all adult citizens have an equal say in the decisions that affect their lives, seems to be on the ropes. But, what comes next?

John F. Kennedy famously said: "ask not what your country can do for you; ask what you can do for your country.” So, as we appear to be headed toward the brink of Recession, depression, collapse, Melt down, apocalypse, i decided that something should be done and, after studying some very complex issues for all of ten minutes, here is what should happen, at least in chile.

it is called the Eneldo Doctrine for Progressive Governance with the people, by the people and for the people. it is also called eneldocracy – look it up on google.

there are two major problems with democracy in chile as we currently understand it: first, no one listens to me or cares what i think; second, the three people i voted for in the last election (president, Senator and congressperson) have no idea i even exist and so how can they possibly represent me in a democracy? they cannot!

in the great uS of a politicians of all shapes and sizes, colors and political creed would come crawling to my front door if they knew we had nine voters willing to swing one way or the other. Here in chile, the president recently appointed my Senator to a cabinet position and “others” have appointed his replacement to represent us; someone for whom absolutely nobody voted for - ever!

chile is a “new democracy” having recovered the free vote only 22 years ago and there is still much to improve on. What to do?

eneldocracy would require the following to happen:• Only foreign policy, justice, armed forces and police, taxation,

public health, pensions, highways, minority rights and public education would be the domain of the central government. all other issues of governance would be handled regionally – and chile has 15 Regions.

• Central Government would be required to “decentralize” the following ministries: Fisheries, Mining, energy, public Works, agriculture, and any others i simply cannot recall due to their total lack of significance and impact.

• Regions would have elected Governors and would receive tax revenues from central government based on the inverse

of per capita income i.e. less per capita income, more funding. Spread the wealth.

• Senators and Representatives could only be elected if they come from, and maintain their major residence in, the Region they are elected to represent.

• There would be a Regional Assembly and Assemblypersons, elected annually by proportional representation, could be re-elected ad infinitum. this means the bad ones get the boot quickly and the good ones keep going...

• Regional Assemblies would have the obligation to “advise and supervise” Senators and Representatives concerning local issues and projects. they would also be required to promote local business opportunities as well as monitoring the actions of central government.

• Regional Ambassadors would be sent to live in Valparaiso and talk regularly to congress. no other lobbying would be allowed; certainly not commercial.

• Every Region would have its own University, much along the lines of a State university in the uS, where solid research would be rewarded with grant money.

• The Minister of Tourism would have a staff of just THREE and would spend 95% of his or her time travelling the globe (staying in 3 star hotels only) and promoting chile as a holiday destination. the remaining 5% would be spent visiting the Regions.

• Greater Santiago would be split into eight sub-regions each with its own assembly and ambassador.

that’s it! Simple but highly effective. take the power away from the highly centralized bureaucracy and spread it around the regions. Will this increase the cost of government? absolutely not. Will this increase efficiency and accountability? absolutely YeS!

eneldocracy is nothing new; in fact it’s as old as feudalism. let the King reign in Santiago but let the power lie where the goods are produced.

in March a full presentation on eneldocracy will be given in casa piedra.

i remain surprised by my brilliance but also humbled by it,

santiago eneldo

(Membership to eneldocracy.com is free but an annual subscription for the Quarterly Magazine is uS$5,000; for transfer details write to [email protected])

life in the Slow lane

"d

So What Comes After Democracy?

Eneldocracia

Stay in 3 star hotels

Regional

Assamblies

Decentralize Central

Government

Eight sub-regions for Greater Santiago

Regional

Ambassadors

must live in

Valparaiso

Regional Assemblies must adviseand

supervise

invest banking remolino 28x215 Rev amcham B.pdf 2 14-11-11 18:22

Plan Libre

$15.990*Push to Talk (PTT) ilimitado Nacional e Internacional.

1000 minutos en llamadas entre celulares Nextel.

100 minutos en llamadas a red móvil y fija.*IVA incluido.

business chile · fernando concha, citigroup andean – caribbean and central america region chair...

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