Argentina has moved to harmonise its provincial mining laws, but risks remain.
Despite being rich in deposits of metals, particularly aluminium, copper, gold, lead, molybdenum, silver, and zinc, as well as having the second-largest economy in South America, Argentina’s mining sector has long been chronically under-developed, and is far smaller than that of its neighbour, Chile. This is largely due to the federalist system of government in Argentina that gives each of the country’s 23 provinces a great degree of sovereignty over policies concerning the extractive industry, creating a patchwork of regulations that ranges from relatively restrained to outright bans on open-pit mining. As a result of the system, even provinces with more business-friendly regulations have had underperforming mining sectors, as the risk of provinces changing their regulations once capital has been sunk into them, as well as the requirement of firms to attain legal expertise and ensure compliance in both federal and provincial law, have served as disincentives to operating in the country at all.
Furthermore, from 2001 to 2015, the country was under the leadership of leftist governments that discouraged foreign direct investment, including in mining, by enacting capital controls and otherwise intervening heavily in markets to protect Argentine firms from foreign competition. It is of little surprise, then, that under these governments, the federal government did not discourage provinces from enacting onerous regulations on mining, and instead seemed content with the patchwork of regulations that stymied foreign investment.
That, however, dramatically changed with the surprise 2015 election to the presidency of Mauricio Macri, a business-friendly conservative who vowed to dismantle the capital control regime, right-size a stagnant economy by encouraging greater investment, and adopt friendlier relations with Canada, the United Kingdom, and the United States, countries in which many of the world’s largest mining firms are headquartered.
Almost since being sworn into office, President Macri tasked his government with encouraging the provinces to reach an agreement whereby they would simultaneously modify their own provincial laws by adopting a unified set of regulations on the mining industry, thereby neutralising the concerns of foreign companies about the patchwork system.
Earlier this month, a major milestone was met when 20 of the 23 provinces jointly signed the Acuerdo Federal Minero (‘Federal Mining Accord’, AFM), an agreement to harmonise regulations and tax rates on mining companies. While the AFM still needs congressional approval to take effect, under it, the provinces agreed to grant mining concessions that last until the mines are depleted and to tax mining production at no more than 3 per cent in royalties on production, with an additional 1.5 per cent tax that must be paid into a provincial infrastructure fund that pays for projects to control ecological damage caused by mining and to improve water quality in the relevant province. They also agreed to abolish a current 1 per cent tax designed to fund provincial development accounts.
Thus, under the new system, mining companies will be allowed into 20 provinces and pay no more than a total of 4.5 per cent of their production’s value in taxes. The provincial infrastructure fund is touted by the government as being easily worth the 1.5 per cent tax on companies used to fund it, as it is designed to address and mitigate local concerns about the environmental and health impacts of mining, thereby decreasing political risk.
Macri is marketing the law to his domestic constituency as a means to bring what he says will be 125,000 mining jobs and USD25 billion to the country, and he is marketing it to international mining firms as the abolition of the last major impediment to mining in the country.
However, risks to doing business in the country remain. Most prominently, the Macri government was unable to get all of the provinces to agree to the AFM; the provinces of Chubut and La Pampa, where mining is effectively banned via harsh regulations, refused to even participate in negotiations, and the province of La Rioja refused to sign the agreement. The failure to bring these three provinces into the AFM is indicative of the unpopularity of mining among their people: local politicians in the provinces knew that signing the accord would put their jobs in serious jeopardy.
More serious a threat, however, is the political system in Argentina, where power has historically vacillated between pro-business conservatives and leftists. In past transfers of power, a dynamic has repeated itself: left-wing governments have ignored macroprudential fiscal policy and instead attempted to intervene in the market to deliver jobs and benefits to their core supporters, and when right-wing governments then take power and attempt to impose painful market discipline on the country, they are promptly voted out of office.