Ecuador: Legislative Reforms Favor Mining Companies

By Luis Ángel Saavedra

The Ecuadoran government is committed to promoting large-scale mining, and to do so it must implement national legislation that, although contrary to constitutional principles, satisfies the economic interests of multinational mining companies that have been reluctant to invest in the country until they are guaranteed total control over the royalties the industry will produce.

Ecuador’s most recent Constitutional Assembly (2007-2008) not only incorporated environmental rights into the Constitution, guaranteeing the preservation and reproduction of nature’s lifecycle, but was also very careful to give the State control of the benefits produced by the exploitation of natural resources, even if this activity should be delegated to private or joint ventures through concessions.

In this regard, Article 408 of the Constitution states that “the State will participate in the benefits of exploiting these resources, in an amount not less than those of the company that exploits them.”

Based on the Constitution, the National Assembly drafted the Mining Law, enacted in January 2009, which ensures that the economic benefits for the State shall be subject to Article 408. Thus, Article 93 of this act states that the mining concessionaire shall pay a royalty “not less than 5 percent of sales, in addition to payment of 25 percent for income tax, 12 percent of net income determined in this act, 70 percent tax on extraordinary income, and 12 percent of value added tax (VAT).” Consequently, the State ensures that more than 50 percent of the mining profit will go to its coffers as taxes and royalties.

Under that law, in March the first large-scale mining contract was signed with Chinese firm EcuaCorriente, which will invest US$1.4 billion in the Cóndor Mirador project, located in Zamora Chinchipe province in the Amazon in the south of the country, and from which the State will receive 52 percent of revenues.

EcuaCorriente did not hesitate to sign a mining contract favorable to the State, since its interest is more geopolitical than economic.

“EcuaCorriente is a [Chinese] state-owned firm that is thinking about a profitable business, but is more interested in securing China’s access to the natural resources to sustain its economic expansion,” said Amazonian assembly member Kléver Jiménez, of the Pachacutik Pluricultural Movement.

Kinross changes the mining scene

The contract signed with EcuaCorriente was presented as an example of strength and sovereignty that marked the path for future contracts, not only in Ecuador.

“This contract is being followed by throughout America because it is unprecedented, where the State receives the largest amount of the resource,” said President Rafael Correa while signing the agreement through which EcuaCorriente will extract some 180,000 tons of copper a year.

But despite the government’s commitment, starting in February negotiations stalled with Canadian mining firm Kinross Gold Corporation, which is looking to extract gold in the so-called Fruta del Norte project, located in the mountain range of El Cóndor along the border with Peru, in which there is a projected investment of $1.3 billion. The multinational company declined to accept the same terms as EcuaCorriente.

“I want to make it clear to everyone that we will not move forward unless we have a better agreement in economic terms,” Kinross Executive Director Tye Burt said while explaining the end of negotiations with Ecuador.

The company’s demands were labeled as exaggerated and in February, Minister of Non-renewable Resources Wilson Pastor warned that Ecuador would not sign any agreement with Kinross.

“There are things we can’t accept because we can’t ignore a law or change a law,” Pastor said.

Despite that statement, Pastor announced on July 20 that the Mining Law would be reformed to correct errors such as the fact that the legislation establishes a 5 percent minimum on royalties for the government in addition to taxes for mining, but does not set a maximum. Also, Pastor stated that the tax on extraordinary profits due to the increase in metal prices won’t be charged until the company has made back enough to cover its initial investment.

To that end, the reform plan the Administration will send to the National Assembly will include two proposals: first, to postpone levying taxes until the concessionaire has recuperated its initial investment, and second to establish a maximum on royalties. In doing so, Pastor yielded to pressure from Kinross and aligned himself with the president’s position, as Correa had already anticipated: “What Kinross has asked for is reasonable, and we are preparing a legal reform so that any extraordinary gains will go towards recuperating the investment.”

Presidential pressures

In the National Assembly, the approval of these reforms will not be easy. Even if the ruling party, Alianza País, maintains a slight majority, the mining issue is a very sensitive and some government supporters could abstain from voting when the time comes. However, in the current political scene, Correa may push for the assembly members to back the official position if they wish to be considered for a possible re-election.

There is time until October to present the list of candidates to the National Assembly for the February 2013 elections, and several current assembly members don’t see much of a chance in making the list and getting reelected. The vote on Mining Law reforms is a chance to make their vote count and negotiate their inclusion on the ballot.

“We’ll be witnessing a fair of candidacies in exchange for the vote to reform the law and to continue with the neoliberal model that we’ve never emerged from. The reform of the Mining Law is an example of how we keep subjecting ourselves to the interests of multinationals and how the government’s discourse about sovereignty is empty,” said Jiménez, who has lodged a complaint with Ecuador’s Constitutional Court about the unconstitutionality of the contract signed with EcuaCorriente and said he is ready to do the same regarding the reforms announced by the administration if they are approved.

Jiménez added that the agreement doesn’t guarantee that the State will receive 52% of revenues since the VAT, which accounts for 12% of that figure, is only paid on finished products, while the minerals mined will be exported as ore, without added value. He argued also that no prior consultation was carried out in the communities affected by the mining activity, primarily in the Shuar nation.