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Best Practices in Investment for Development: How to Attract and Benefit from FDI in Mining: Lessons from Canada and Chile

Report by UNCTAD, 2011

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The purpose of this report is to identify best practice policies that successfully attract foreign direct investment (FDI) in mining, while optimizing its economic, environmental and social impacts. The report focuses on two cases, Canada and Chile, relying on primary and secondary research, including interviews with some 20 stakeholders in both countries.1 The first chapter provides an overview of mining as an economic activity and the challenges facing host governments in balancing the interests of foreign investors and those of the host country. The following two chapters look at how Canada and Chile, respectively, have addressed these challenges. The final chapter compares the two cases, and draws out lessons for policymakers in mineral-rich developing countries.

United Nations

For more information please visit
http://www.unctad.org, e-mail iif@unctad.org

or contact James Zhan, Director,
Division on Investment and Enterprise

at +41 (22) 917 57 97

United Nations

For more information please visit
http://www.unctad.org, e-mail iif@unctad.org

or contact James Zhan, Director,
Division on Investment and Enterprise

at +41 (22) 917 57 97

Investment Advisory Series
Series B, number 7

United Nations Conference on Trade and Development

Best Practices in Investment
for Development

How to Attract and Benefit from FDI in Mining:
Lessons from Canada and Chile





How to Attract and Benefit from FDI
in Mining:

Lessons from Canada and Chile


New York and Geneva, 2011

ii How to Attract and Benefit from FDI in Mining

UNCTAD Investment Advisory Series B


As the focal point in the United Nations system for

investment within its mandate on trade and development, and
building on three and a half decades of experience in this area,
UNCTAD, through the Division on Investment and Enterprise
(DIAE), promotes understanding of key issues related to foreign
direct investment (FDI) and enterprise development. DIAE also
assists developing countries in enhancing their productive capacities
and international competitiveness through the integrated treatment
of investment and enterprise development.

The term “country” as used in this publication also refers, as
appropriate, to territories or areas. The designations employed and
the presentation of the material do not imply the expression of any
opinion whatsoever on the part of the Secretariat of the United
Nations concerning the legal status of any country, territory, city or
area, or of its authorities, or concerning the delimitation of its
frontiers or boundaries. In addition, the designations of country
groups are intended solely for statistical or analytical convenience
and do not necessarily express a judgment about the stage of
development reached by a particular country or area in the
development process.

The following symbols have been used in the tables:

Two dots (..) indicate that data are not available or not
separately reported. Rows in tables have been omitted in those
cases where no data are available for any of the elements in the

A dash (-) indicates that the item is equal to zero or its value is

A blank in a table indicates that the item is not applicable.


UNCTAD Investment Advisory Series B

A slash (/) between dates representing years – for example,
2004/05, indicates a financial year.

Use of a dash (–) between dates representing years – for
example 2004–2005 signifies the full period involved,
including the beginning and end years.

Reference to the “dollars” ($) means United States dollars,
unless otherwise indicated.

Annual rates of growth or change, unless otherwise stated, refer
to annual compound rates.

Details and percentages in tables do not necessarily add to
totals because of rounding.

The material contained in this publication may be freely

quoted or reprinted with appropriate acknowledgement. A copy of
the publication containing the quotation or reprint should be sent by
post to the Chief, Investment Promotion Section, DIAE, UNCTAD,
Palais des Nations, Room E-10086, CH-1211 Geneva, Switzerland;
by fax to 41 22 917 0197; or by e-mail to ips@unctad.org.
Publications are available on the UNCTAD website at

iv How to Attract and Benefit from FDI in Mining

UNCTAD Investment Advisory Series B


The Investment Advisory Series provides practical advice

and case studies of best policy practice for attracting and benefiting
from foreign direct investment (FDI), in line with national
development strategies. The series draws on the experiences gained
in, and lessons learned through, UNCTAD’s capacity-building and
institution-building work in developing countries and countries with
economies in transition.

Series A deals with issues related to investment promotion
and facilitation and to the work of investment promotion agencies
(IPAs) and other institutions that promote FDI and provide
information and services to investors. The publications are intended
to be pragmatic, with a how-to focus, and they include toolkits and
handbooks. The prime target audience for series A is practitioners in
the field of investment promotion and facilitation, mainly in IPAs.

Series B focuses on case studies of best practices in policy
and strategic matters related to FDI and development arising from
existing and emerging challenges. The primary target audience for
series B is policymakers in the field of investment. Other target
audiences include civil society, the private sector and international
organizations. Series B was launched in response to a call at the
2007 Heiligendamm G-8 Summit for UNCTAD and other
international organizations to undertake case studies in making FDI
work for development. It analyses practices adopted in selected
countries in which investment has contributed to development, with
the aim of disseminating best practice experiences to developing
countries and countries with economies in transition. The analysis
forms the basis of a new technical assistance work programme
aimed at helping countries to adopt and adapt best practices in the
area of investment policies.


UNCTAD Investment Advisory Series B

For Series B, UNCTAD’s approach is to undertake case
studies of a pair of developed and developing or transitional
economies that exhibit elements of best practices in a selected issue.
Country selection follows a standard methodology, based primarily
on the significant presence of FDI and resulting positive outcomes.

The Investment Advisory Series is prepared by a team of
UNCTAD staff and consultants in the Investment Policies Branch,
under the guidance of James Zhan. Fact-finding missions were
undertaken in Canada and Chile in the summer of 2009. Draft
chapters for this study were prepared by Keith Brewer, Juan Carlos
Guajardo, and Philip Maxwell. The report was finalized by Cam
Vidler. Contributions and comments were received from Richard
Bolwijn, Chantal Dupasquier, Ioanna Liouka, John Tilton, Joerg
Weber and Desiree Van Welsum. The report has also benefited from
interviews with current and former government officials, the
domestic and foreign private sector, and local stakeholders.
Financial support was received from the Government of Germany.

Geneva, November 2010

vi How to Attract and Benefit from FDI in Mining

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NOTE........................................................................................... ii
PREFACE .................................................................................. iv
KEY FACTS TABLE ................................................................ ix

A. The global mining industry: market and industry players.......... 1
B. Attracting FDI in mining............................................................ 4
C. Managing the development impact ............................................ 7
D. Canada and Chile as successful cases ...................................... 13

II. FDI in mining – the Canadian experience..........................17
A. Industry background and FDI Trends ...................................... 17
B. Attracting FDI in mining.......................................................... 20
C. Contributions and impacts of FDI ............................................ 33

III. FDI in mining – the Chilean experience............................55
A. Industry background and FDI trends........................................ 55
B. Attracting FDI in mining.......................................................... 58
C. Contributions and impact of mining FDI ................................. 69

IV. Best practice lessons from Canada and Chile...................83
1. How to improve supply factors affecting mining investment ... 85
2. How to ensure policy stability................................................... 89
3. How to tax the mining industry................................................. 93
4. How to encourage industry efficiency and local enterprise

development............................................................................. 96
5. How to improve the environmental and social impact of

mining .................................................................................... 100
REFERENCES ........................................................................107
INVESTMENT ............................................................................115
QUESTIONAIRRE .....................................................................125


UNCTAD Investment Advisory Series B


Box I.1: Mineral-based economic development and the "resource
curse" ...............................................................................7

Box I.2: Policy considerations for level and structure of mineral
taxes and royalties .........................................................10

Box II.1: Multi-stakeholder policy formulation: the case of the
WMI ..............................................................................24

Box II.2: Federal and provincial overlap in EIAs .........................31
Box II.3: FDI and diamond mining in Canada's North .................35
Box II.4: Federal-provincial revenue sharing ...............................40
Box II.5: The use of IBAs to manage the impact of mining on

indigenous communities ................................................50
Box II.6: Modernizing Ontario's Mining Act to incorporate

community issues ..........................................................52
Box III.1: Tax stability agreements under Decree-Law 600 ..........65
Box III.2: Regional contributions of mining activities...................71
Box III.3: The challenge for state-owned companies - the case of

CODELCO ....................................................................72
Box III.4: Pascua-Lama gold mine and community consultation ..81


Figure I.1: A taxonomy of minerals................................................2
Figure II.1: Canada: Inflows and stock of FDI (million US$) .......19
Figure II.2: Foreign ownership in mining and quarrying

(per cent of industry total)..........................................37
Figure II.3: Tax revenues from mining industry - 2002-2008

(C$ millions) ...............................................................39
Figure III.1: Inflows and stock of FDI in mining in Chile - 1974 to

2008 ($US million) .....................................................57
Figure III.2: Income tax paid by top ten private copper producers

(thousands of US$)......................................................74

viii How to Attract and Benefit from FDI in Mining

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Table I.1 A ranking of mining investment decision criteria
factors ranked by importance ........................................ 6

Table I.2 of mineral mining industry and FDI in Canada and
Chile ............................................................................ 13

Table II.1 Mining investment climate in key Canadian
jurisdictions ................................................................ 21

Table II.2 Summary of contributions and impact of FDI in
Canadian mining industry ........................................... 33

Table III.1 Inflows and stock of FDI in mining in Chile – 1974 to
2008 ($US million) ..................................................... 58

Table III.2 Summary of contributions and impacts of FDI in
Chilean mining industry.............................................. 70

Table IV.1 Lessons for mineral-rich developing countries and
policymakers ............................................................... 84


UNCTAD Investment Advisory Series B

Canada Chile

Canada Chile

1981-1990 1991-2000 2001-2010 1981-1990 1991-2000 2001-2010

Population (million)* 27.7 30.68 33.7 13.2 15.4 16.8
Annual GDP growth 2.8 2.9 3.1 3.9 6.5 5.3
GDP per capita ($)* 21037 23623 48192 2540 4877 15400
GDP by sector (%)

Services 59 62 78 49.8 55.5 53.9
Industry 31 28 20 41.5 38.4 40.5

Agriculture 3 3 2 8.7 6.1 5.6
FDI inflows (annual
average) ($ million) 3960 16530 35948 526 3667 8103

FDI outflows (annual
average) ($ million) 4548 16832 42059 9 1324 3113

FDI inflows ( % of GDP) 1.0 2.7 3.1 1.9 5.2 6.5

FDI inflows (% gross
fixed capital formation) 4.5 14.2 14.5 9.6 22 30.2

Exports of goods and
services (% GDP) 26.7 36.6 35 27.5 28.8 40.2

Imports of goods and
services (% GDP) 25.2 34.4 33.3 26.2 28.3 32.8

Source: UNCTAD, FDI/TNC database and GlobStat database.
Note: Simple annual average.
* Data are for 1990, 2000 and 2010 only

x How to Attract and Benefit from FDI in Mining

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BIT bi-lateral investment treaty
CANMET Canada Centre for Mineral and Energy

CIC China Investment Corporation
CIMM Centro de Investigación en Minería y

CODELCO National Copper Corporation of Chile
COCHILCO Chilean Copper Commission
CONAMA National Commission of the Environment
COREMA Regional Commission of the Environment
CSR corporate social responsibility
FDI foreign direct investment
FIRA Foreign Investment Review Act
GDP gross domestic product
EDC Export Development Canada
EIA environmental impact assessment
IBA impact-benefit agreement
ICA Investment Canada Act
ICMM International Council on Mining and

IFC International Financial Corporation
ILO International Labour Organization
MAC Mining Association of Canada
M&A merger and acquisition
NAFTA North American Free Trade Agreement
NEP national energy programme
NGO non-governmental organization
NORCAT Northern Centre for Advanced Technologz
NPV net present value
NRCan Natural Resources Canada
OECD Organization for Economic Cooperation

and Development


UNCTAD Investment Advisory Series B

PDAC Prospectors and Developers Association of

R&D research and development
SOE State-owned enterprise
TNC transnational corporation
TSM Towards Sustainable Mining
TSX Toronto Stock Exchange
UNCTAD United Nations Conference on Trade and

WMI Whitehorse Mining Initiative


The purpose of this report is to identify best practice
policies that successfully attract foreign direct investment (FDI) in
mining, while optimizing its economic, environmental and social
impacts. The report focuses on two cases, Canada and Chile, relying
on primary and secondary research, including interviews with some
20 stakeholders in both countries.1 The first chapter provides an
overview of mining as an economic activity and the challenges
facing host governments in balancing the interests of foreign
investors and those of the host country. The following two chapters
look at how Canada and Chile, respectively, have addressed these
challenges. The final chapter compares the two cases, and draws out
lessons for policymakers in mineral-rich developing countries.

A. The global mining industry: market and industry players

Minerals vary widely in their physical and chemical
characteristics. Some are rare, while others are relatively abundant.
A typical taxonomy such as that used by UNCTAD divides minerals
into metallic, non-metallic and fuel minerals (UNCTAD, 2007: 84).
Metals can be further divided into ferrous metals, base metals and
precious metals, and non-metallic minerals into construction
minerals, industrial minerals and precious stones (figure I.1). While
oil and gas are of particular economic importance, the focus of this
study is on the other minerals, including the energy minerals of coal
and uranium, more than fifty metals, and also a large number of
non-metals. All play a role in the production of the world’s
economic goods and services and are, therefore, crucial to every day
economic activity and social and economic development.

The use of minerals and energy has increased dramatically
since the industrial revolution, with consumption during the 20th
century exceeding the cumulative total of such consumption in all
earlier periods. In 2002, the minerals sector accounted for some $1.2
trillion (about 4 per cent of estimated world GDP).2 Following
dramatic increases in mineral prices starting after 2003, world

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minerals and energy value added increased to more than US$3
trillion in 2007 (around 6 per cent of world GDP). Oil and gas
accounted for about 75 per cent of total mineral production by value,
while other minerals (of which coal, iron ore, gold, bauxite, nickel,
zinc, copper and the platinum group metals are most prominent)
accounted for the remaining share.

Figure I.1: A taxonomy of minerals

Source: UNCTAD (2007).

Mineral resources must be discovered before extracting
them, which is a costly process. They are fixed in quantity, variable
in quality, and often in remote locations. Once extracted, they must
be processed, refined and sold to intermediate and end-use markets.
The distinction between the exploration and extraction phases of
mineral investment, both of which are the focus of this study,
corresponds to a division of labour between two different types of
mining companies. A large population of "juniors" is involved


UNCTAD Investment Advisory Series B

primarily in exploration activities (UNCTAD, 2007: 109). These
firms are similar to small high-technology firms in other industries,
in that they engage in risky investments with potentially high
returns. If a significant deposit is discovered, it is then typically sold
to a large producer firm (i.e., a "senior" firm) with superior
extraction and processing capabilities. Senior firms have significant
economies of scale, technical expertise and access to finance, all of
which provide them with a comparative advantage in mine
construction and mineral production, processing and refining.

Junior and senior companies are often transnational, and
engage in significant FDI. This internationalization of the industry
can be understood from a host-country or home-country perspective.
Financial and technical constraints have led many mineral-rich
developing countries to rely on FDI to translate their mineral wealth
into broader economic development (UNCTAD, 2007: 92).
Domestic financial markets are often insufficient for large, capital-
intensive projects, and domestic firms may have problems securing
foreign lending at low rates. Even state-owned enterprises (SOE)
with financial backing from the government often lack the
experience to extract mineral deposits at a competitive cost. As a
result, throughout the 1980s and 1990s, many mineral-rich
developing countries reformed their mining codes and investment
legislation to permit the entry of foreign companies (UNCTAD,
2007: 161).

Aside from capturing returns by exploiting mineral deposits
in well-endowed countries, FDI has been motivated by the desire of
home countries and their investors to secure access to raw mineral
inputs for their economic activities. Countries with limited domestic
mineral resources must import them to support their economies and
supply their factories. These countries include Britain, France,
Germany and Japan, but also, more recently, China, India, and the
Republic of Korea. Their firms have been encouraged to invest in
mines and mineral processing facilities abroad to ensure a steady
and reliable supply of minerals at a reasonable price. Global FDI

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flows have also reflected major merger and acquisition (M&A)
activity by transnational corporations (TNCs) in the industry since
the mid-1990s.

B. Attracting FDI in mining

Profitability is a key goal of FDI in mining projects. The
level of profits that TNCs expect to derive from any new extractive
project is determined by a range of economic and policy factors.
These factors will influence the decision to invest, whether it is for a
new or an existing project. Moreover, investments in mining are
typically capital-intensive, have long gestation periods and involve
high levels of uncertainty (UNCTAD, 2007: 91-92). The exploration
phase of a mining investment can be very lengthy, and there is no
guarantee of a discovery. Mine construction and development can
involve massive investments in machinery and equipment. Even if a
mine goes into operation, it can take decades for the company to
recover the original investment, and its profitability is highly
sensitive to risks related to technical issues, market conditions (e.g.
commodity prices), and changes in the mineral regime. Countries
seeking FDI in mining need to consider these profitability and risk
factors when designing their regime for the industry.

This report builds on the work of authors such as Otto
(1992a, 1992b, 2006 and 2009) and Johnson (1990) who
interviewed mining executives to assess the importance of key
factors in influencing their investment decisions. Indicators that
encompass these factors are used by Behre Dolbear Group Inc.
(2010) and the Fraser Institute (McMahon and Cervantes, 2010) in
their annual assessments of the attractiveness of mining
jurisdictions. Their reports are a valuable resource with which to
compare mineral investment climates across countries.

Drawing from these studies on the determinants of mining
investments, two sets of factors are identified for the purposes of
evaluating the cases of Canada and Chile. Clearly, geological
potential is a pre-requisite to the investment decision of a mining
company and the perception of this potential is also affected by the


UNCTAD Investment Advisory Series B

level of publicly available geological data. Yet, other important
supply-side factors that determine whether a given deposit can be
profitably exploited include:

 Infrastructure, such as transportation, water and
electricity, all of which are important to the mineral
production process;

 Availability of skilled labour, such as mining
technicians, engineers and managers.

The second set of determinants of profitability relate to

policy and institutional factors, including:

 Political stability and quality of governance, including
the likelihood of unexpected policy and regulatory
changes, and the clarity and enforcement of regulations;

 FDI legislation and policy, including protection and
treatment of foreign investors, as well as the ability to
repatriate profits;

 The nature and security of mining concessions or titles;
 The level of taxation, but also its structure;
 The level and clarity of environmental and social

regulatory obligations.

While each of these determinants is important, it should be
noted that the weight assigned to each is not equal. The relative
importance of various factors will depend on the context, but a
general sense of investor priorities is presented in table 1, which
ranks 23 criteria for mining investment decisions for both the
exploration and operations phases. It is notable that many of the
policy factors relate not so much to the substance of government
regulations, but to the level of uncertainty associated with them.

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Table I.1: A ranking of mining investment decision criteria
factors ranked by importance

Ranking at Stage
Mining Exploration

Decision Criteria Based on:

1 2 Security of tenure
2 3 Ability to repatriate profits
3 na Measure of profitability
4 8 Stability of exploration/mining terms
5 9 Ability to predetermine tax liability
6 7 Realistic foreign exchange regulations
7 5 Company has management control
8 10 Ability to predetermine environmental

9 4 Consistency and constancy of mineral

10 11 Stability of fiscal regime
11 6 Mineral ownership
12 12 Ability to raise external financing
13 16 Method and level of tax levies
14 21 Permitted external accounts
15 17 Import-export policies
16 13 Long-term national stability
17 14 Established mineral titles system
18 18 Majority equity ownership held by

19 22 Modern mineral legislation
20 20 Internal (armed) conflicts
21 19 Right to transfer ownership
na 1 Geological potential for target demand
na 15 Ability to apply geological assessment

na: not applicable
Source: Otto (1992b).
Note: Survey results based on 39 companies, mainly from Heads of
exploration departments. Based on 60 possible factors.


UNCTAD Investment Advisory Series B

C. Managing the development impact

Among the more than 200 economies in the world today,
some 50 depend on minerals as a major source of their exports and
as a significant contributor to their GDP. While less dependent,
several other countries are also well endowed with minerals. Yet,
despite their mineral wealth, a significant number of them have not
managed to achieve positive development outcomes. To explain this
paradox, some have suggested the existence of a "resource curse"
(box 1.1). Given a combination of broader economic and political
challenges associated with mineral exploitation, the growth of the
mining industry is not a sufficient condition for economic growth
and societal welfare. While not ignoring these issues, this study has
a narrower scope, limiting itself to how governments can attract
mining FDI and optimize the more direct benefits and costs that
arise from these activities. Broader issues of natural resource-based
development, such as economic diversification, macroeconomic
stability, and the political effects of resource revenues, are therefore
not explicitly addressed.

Box I.1: Mineral-based economic development and the

"resource curse"

The idea of the “resource curse” is sometimes brought up in the context of
poor economic performance by mineral rich countries. It may arise when a
combination of external market forces, internal economic stresses and
distorted processes of policy making generate slower economic growth and
development in resource-rich countries. In a strictly economic sense, this
occurs through, for example, falling real mineral prices and mineral price
volatility, and losses of competitiveness in other economic sectors due to
an overvalued real exchange rate (often referred to as "Dutch Disease").
Policy-making processes can be distorted, for example, by corruption and
excessive rent seeking stemming from the availability of resource revenues.


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Box I.1 (concluded)

Any convincing rationale for FDI-supported mineral development must
demonstrate that these challenges have been addressed. Research has found
that high-quality governance institutions, characterized by bureaucratic
autonomy, transparency, low corruption, the rule of law, and strong
property rights, can prevent mineral-rich countries from falling victim to
the resource curse. These institutions foster effective macroeconomic
management and limit political rent-seeking, allowing mineral wealth to
complement or provide a strong foundation for broader socio-economic

Source: Sachs and Warner (1995); Davis and Tilton (2005); Mehlum et al.

Governments should seek to set tax and regulatory
requirements at an optimal level that balances the need to attract
foreign capital and expertise, with the need to maximize net benefits
to the host country. These requirements can take the form of fiscal
contributions, or regulations related to economic, environmental and
social impacts. If requirements are set too high, profitable mining
projects may end prematurely, and future investment may be
deterred. This undermines the long-term development of a country's
mineral deposits. If set too low, companies will have a strong
incentive to invest, but mineral deposits may be exhausted while the
host country appropriates only a small portion of the benefits, with
potentially significant environmental risks and social problems.
More specifically, the optimal point can be defined as the point
where the net present value (NPV) of future benefits is maximized
(Otto et al., 2006: 7-10).

Key economic objectives of government include increased
investment, production, exports and job creation, the latter of which,
however, is often limited due to the capital intensity of mining
activities. Given the relatively limited direct economic contributions
of mining investment, governments primarily focus on the use of
taxes and royalties to translate mineral assets into public revenue
streams. This task, however, is not straightforward. A number of


UNCTAD Investment Advisory Series B

factors need to be taken into consideration when it comes to setting
the level and structure of taxation (box I.2).

To broaden the impact of mining activities on the domestic
economy, governments may encourage TNCs to locate their
processing or refining activities in the host country. However, these
efforts have had very limited success (UNCTAD, 2007: 140, 169).
Refining and processing assets are heavily dependent on economies
of scale, and the scope for promoting these activities is limited,
particularly in small developing countries. In fact, investments in
mineral extraction by major TNCs are often motivated in part by the
need to supply their own refineries abroad.

Another approach to increasing the economic contribution
of mining is to focus on upstream activities. Government can
promote the use of domestic suppliers of goods and services to the
mining sector, with the objective that this will increase demand for
local products and result in spillovers of knowledge, skills and
technology from foreign affiliates. Under certain conditions this can
help develop related industries and even result in the creation of a
mining industry cluster.3 Having benefited from inward FDI,
domestic firms may, in turn, invest abroad, generate profits and
repatriate their dividends. Policies to encourage linkages with the
domestic economy should focus on building capacity among local
firms and workers (e.g. technological capabilities, access to finance,
skills, etc.), so that they can adequately cooperate with foreign
affiliates (UNCTAD, 2007: 141, 168-69).

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Box I.2: Policy considerations for level and structure of mineral
taxes and royalties

Highly profitable mining opportunities may justify higher rates of taxation.
Mineral deposits can range from low to high grade, based on the
concentration of the target mineral. Accordingly, the profitability of mines
exploiting these deposits can vary considerably, from marginal mines to
mines with significant rents beyond the level necessary to justify the
investment. In the latter case, these rents could theoretically be taxed away
without affecting the decision of a company to invest. Thus, many
governments apply different tax rates to different minerals, or to different
mines. Yet governments should remain cautious when taxing mineral rents
for two reasons. First, high short-term rents may be justified to compensate
for low profits or outright losses in other periods due to factors such as low
commodity prices. Second, the taxing of mineral rents also lowers the
incentive for private exploration, since these costly activities are motivated
by the search for high-rent mineral deposits.

While the tax rate is a key determinant of the division of revenues between
the government and company, the structure of the tax is another important
consideration. Taxes can take two general forms: 1) production-based taxes
which determine liabilities according to the volume or value of minerals
exploited, and 2) profit-based taxes which apply the tax rate to a measure
of company income or profits (i.e. revenues minus qualified costs).

From an investor's perspective, profit or income-based taxes are preferable,
since they are based on a company's ability to pay, ensuring that tax
liabilities are reduced when company profits are low. They may also allow
the company to limit tax payments until it has recovered part or all of its
up-front costs. In contrast, production-based taxes can require payments to
the government even if a project is making losses, potentially resulting in
scaled back production or even premature mine closure. Over the past
decades, many countries have shifted away from production-based taxes
and royalties towards taxation based on the level of company income or

Yet, production-based taxation has some advantages over profit-based
taxation from a government's perspective. First, taxes on mineral output



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Box I.2 (concluded)

ensure a more reliable and steadier stream of revenue to the government.

Under profit-based taxation, the government shares part of the financial
risk with the company. Second, it is easier to calculate the tax obligations
of companies under production-based taxes, since it requires only that
company output be tracked. Profit-based taxation is more complex,
involving calculations of deductible costs, depreciation and other
allowances. Governments that do consider profit-based taxation must
ensure that they have the necessary bureaucratic capacity and expertise in
tax administration, in addition to mechanisms to deal with more volatile
revenue streams.

Source: Otto et al. (2006: 23-27, 62-68); ICMM (2009: 36-37).

Aside from maximizing economic benefits from FDI in

mining, governments seek to minimize negative aspects, including
adverse environmental impacts. These include the dumping and
accumulation of waste, water and air pollution, deforestation, and
acid mine drainage. Mine closure and restoration of the land is
another important environmental issue. Though mining activities
have traditionally taken place underground, open-cut operations,
which often have a larger environmental footprint, have become
more prevalent. Governments seek to minimize these environmental
costs through increased monitoring and regulation, including the use
of environmental impact assessments (EIAs). Over the past thirty
years, greater environmental protection requirements have
significantly changed the industry.

The large footprint of mining projects may also result in
adverse social impacts, which governments seek to mitigate. These
issues most often concern land use conflicts with local and
indigenous communities, including the effects of mining activities
on economic livelihoods and traditional lifestyles. Several aspects of
government policy are relevant in this area. At the basic level, it is
important to have a legal framework outlining the rights of local

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communities and indigenous peoples with respect to mineral
exploration and exploitation on their lands.4 In any case,
governments should consider community input prior to project
development, as is done in many countries through the EIA process
and other mechanisms. Legal requirements may also exist for
companies to consult affected communities and seek their agreement
on project development. Community input can result in the adoption
of specific commitments, covering a range of economic, social,
cultural and environmental costs and benefits. Yet, it is important
for governments to oversee company-community consultation
processes to ensure due process, and to follow-up on the
implementation of commitments by companies. To guide the
relationship between indigenous peoples and natural resource
development, some countries have signed and ratified the
International Labour Organization's (ILO) Convention 169, which
outlines indigenous land and resource rights, as well as a set of
consultation procedures.

Even if government policy does not directly address or
enforce requirements limiting these negative environmental and
social externalities, companies may nonetheless voluntarily incur
costs to limit them. With the rise of civil society and activist
networks, it is becoming increasingly important for companies to
secure a "licence to operate" from key stakeholders. When the
interests of stakeholders are not taken into account, these groups
may seek to apply some form of veto power to a project to prevent,
alter or delay the project. This kind of behaviour can involve a
variety of actions, such as general bureaucratic delay in approval by
different levels of government, worker strikes, court challenges on
environmental grounds or by indigenous groups, and unexpected
rises in mining taxation.5 In each of these situations, profitability
will be undermined.

This report examines key channels through which mining
FDI impacts local development. These include:


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 The level of investment, production and employment at
the national and regional level;

 The level and distribution of tax revenues received by
different levels of government;

 Contributions to the development of competitive local
enterprises; and

 Environmental and social impact.

Throughout the report, the role of government policies in
shaping these impacts is also discussed.

D. Canada and Chile as successful cases

The implicit tenet of this study is that minerals offer
countries economic opportunities if their exploitation is effectively
managed. The case studies in this report, Canada and Chile, have
attracted significant FDI, particularly in recent years, and are seen as
highly attractive destinations by investors in terms of both mineral
potential and policy factors.6 At the same time, governments in each
country have successfully employed policies to manage the direct
benefits and costs arising from these mineral investments. Table I.2
gives a snapshot of their respective mining industries and the role of
FDI within them.

Table I.2: Snapshot of mineral mining industry and FDI in
Canada and Chile

Canada Chile
Mineral production
relative to GDP

$38 billion (2.6 per
cent of GDP)

$29.8 billion (17.6 per
cent of GDP)

Major minerals
currently produced

Potash, nickel, copper,
gold, iron ore,
diamonds, sulphur,

Copper, molybdenum,
gold, lithium, iron ore,

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Mining FDI (stock,

$20.3 billion $23.5 billion

Major TNC

Anglo American, BHP
Billiton, DeBeers,
RioTinto, Vale, Xstrata

Anglo American, Barrick
Gold, BHP Billiton,
Goldcorp, Teck Cominco,
Rio Tinto, Xstrata

Foreign ownership
as share of total

30 per cent of
production (2006)*

48 per cent of industry
assets (2006)

60 per cent of production

Specific targeting
of foreign

No; entry through
general foreign
investment regime

Yes; special incentives for
mining projects in foreign
investment legislation;
government targeting of
mining TNCs

Link between FDI
and historical
development of
mining industry

Limited; majority of
current FDI stock
linked to acquisition of
domestic mining
companies over past

Significant; greenfield
FDI responsible for
majority of increased
output since late 1980s

Sources: DIPRES; MAC (2009); Natural Resources Canada; Statistics
Canada (2010); UNCTAD (2007); US Geological Survey; Author's
Note: All figures excludes oil and gas extraction
*Based on value of output; excludes non-metal mining.

Although the importance of inward FDI to the development
of Canada's mining industry has been relatively limited when
compared with countries such as Chile, the Canadian policy
experience still has many relevant dimensions for policymakers in
mineral-rich developing countries. These include the use of
consultative processes to create policy consensus, taxation policy
and revenue sharing between different levels of government, the
evolution of environmental regulations, and the integration of


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indigenous peoples in mining decisions. The recent acquisitions of
Alcan, Noranda/Falconbridge and Inco by foreign mining TNCs
also provide an opportunity to examine the impact of M&As on
local mining and related activities. Finally, the significant
population of outward-oriented mining firms and mining suppliers
provides clues regarding the potential future of maturing mining

The case of Chile is particularly relevant for mineral-rich
developing countries, since it relied heavily on foreign investors to
develop its mining industry. It has gone through many challenges
along the way, including the need to provide an attractive policy
climate after the nationalizations, and more recently, the need to
ensure that the country receives a fair share of mineral rents from
foreign investors. Chile's use of foreign companies to enhance
environmental and social practices in the mining industry also holds
lessons for developing countries.

The following two chapters review the two cases in depth
along the dimensions identified early in this section. The final
chapter brings the two cases together and identifies key lessons for
other policymakers seeking to use FDI to develop their mining
industry in a way that contributes to national development

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1 These interviews were conducted with representatives from three broad
stakeholder groups: (i) mining company executives (as representatives of
companies, their shareholders and workforces); (ii) public servants, current
and former ministers (as representatives of government); and (iii) other
stakeholder groups (including academics, NGOs with a mineral sector
focus, local community representatives and indigenous population
2 These estimates have been derived from public domain UN data readily
available on the Internet. They do not include the processing of
concentrates to metals or related downstream compounds, which are
typically included in manufacturing.
3 According to the World Bank (2009), a cluster can be defined as an
"agglomeration of companies, suppliers, service providers, and associated
institutions in a particular field. Often included are financial providers,
educational institutions, and various levels of government. These entities
are linked by externalities and complementarities of different types and are
usually located near each other."
4 In many cases, surface (i.e. land) rights are held privately, while sub-
surface (i.e. mineral) rights are held by the State, which can provide
concessions without the explicit consent of the landowner.
5 In some extreme cases, not dealing with unsatisfied stakeholders has
resulted in the kidnapping of project staff, civil war in the area of the mine,
and partial or full nationalization.
6 McMahon and Cervantes (2010) and Behre Dolbear Group Inc (2010)
rank Canada and Chile at or close to the top of the list of most attractive
jurisdictions for mining investment.

II. FDI in mining – the Canadian experience
A. Industry background and FDI Trends

Canada has a long-standing mining history, which started
before European settlement and has developed extensively since
then.1 According to Udd (2000), archaeologists have identified
evidence of mining in Canada by indigenous groups dating some
9000 years. With the arrival of European explorers in the 1500s and
of French settlers from the early 1600s there are several reports of
small-scale iron, copper, lead-zinc and silver prospecting and
mining activities. During the latter century, more significant coal
mining began in New Brunswick and on Cape Breton Island in
Nova Scotia and this continued through the 1700s. Udd’s
chronology details many significant discoveries of base metals
(copper, lead, zinc and nickel), precious metals (gold and silver),
iron ore, oil and gas, coal, uranium, potash and several other
minerals. Many of these deposits have been exploited and, as a
result, Canada emerged by the latter half of the 19th century as a
major mineral producer and exporter. Many regional towns and
districts throughout Canada can trace their origins to mineral
exploitation and continue to depend on mining activities. Key
examples include Sudbury, Val d’Or, and Timmins. Major cities
such as Toronto, Vancouver and Montreal also developed strong
links to mining, particularly in mining services. Calgary and
Edmonton enjoy a strong association with the oil and gas industries.

Today, the volume of non-fuel mineral production in
Canada is equivalent to around 2.5 per cent of GDP (table I.1).
While this is low in comparison with countries such as Chile, it
should be kept in mind that Canada remains the world’s leading
producer of uranium and potash, and is among the top five
producers of gem-quality diamonds and nickel. It is also a
significant producer of raw copper, gold and iron ore (Mobbs,
2010). Significant metal refining also takes place in Canada,
resulting in the production of aluminium, zinc and refined copper
and nickel.

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Foreign capital has always been present in the Canadian
mining industry, typically through portfolio investment. FDI played
a role, but until recently, the bulk of mining industry development
took place through activities of domestically controlled companies.
A brief wave of economic and resource nationalism in the 1970s
resulted in restrictive foreign investment policies, although a
relatively liberal regime has been in place since. Though the
government has not specifically targeted foreign investors to
develop the domestic mining industry, the stock of FDI has
increased rapidly in recent years. From 2003 to 2008, it grew four-
fold, from under $5 billion to over $20 billion (see figure II.1). This
sharp increase is due primarily to the acquisition of senior Canadian
mining firms, including Inco, Noranda/Falconbridge and Alcan by
foreign mining TNCs (Vale, Xstrata, and Rio Tinto, respectively).
There have also been several major Chinese investments in
Canadian metals firms. Due to these transactions, as well as several
significant greenfield investments, most of the major international
mining companies now have a presence in Canada (such as Anglo
American, BHP Billiton, DeBeers, RioTinto, Vale, and Xstrata).
There are now around 200 foreign mining companies operating in
Canada (Mobbs, 2009), and around half of the industry’s assets are
foreign-owned (see table II.1).


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Figure II.1: Canada: Inflows and stock of FDI (million US$)

Source: UNCTAD FDI Database

In parallel with rising FDI inflows, Canadian mining
companies have also been making substantial investments abroad.
These took off in the 1980s, when developing countries began to
rewrite mining laws and opened up to foreign investment. Canada
retains a strong international mining presence, with senior firms
such as Barrick Gold, Goldcorp, Teck Resources, and Kinross Gold.
In addition, the country has a large and growing population of small
and medium-sized firms with exploration and mine assets overseas.
In 2008, the stock of FDI held by Canadian mining companies
abroad reached $21.6 billion.2 The level of in- and outward
investment gives Canada status as a mining hub, which has helped
develop a professional services industry focused on the global
mining industry.

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B. Attracting FDI in mining

A number of combined factors have made Canada an
attractive location for mining FDI. As outlined in Chapter I,
important determinants of FDI include a combination of economic
and policy factors: geological potential and the level of publicly
available geological information; availability of infrastructure,
including water, energy and transportation; availability of labour
and skills; political stability and quality of governance; FDI policy;
and the mining regime, including the system of land concessions or
titles, taxation, and social and environmental regulations.

Most policies towards the mining industry in Canada are
formulated and implemented at the provincial level, although the
federal government also plays a role through foreign investment and
tax laws, as well as some policies related to environmental and
indigenous issues. The federal government also has jurisdiction over
mining policy above the 60-degree latitude. Table II.1 outlines how
Ontario, Quebec, British Columbia, and Saskatchewan compare to
other jurisdictions worldwide in terms of investment attractiveness.
Together, these provinces made up 69 per cent of the value of
Canadian production of mineral production in 2008 (NRCan, 2008).
The ranking is based on a survey of internationally active mining
companies. The factors included in the table roughly correspond to
those outlined above, and are ordered accordingly.


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In general, all four provinces are relatively attractive
locations for mining investment, with geological features and the
supply of labour and skills being notable strong points. Yet there is
significant variance between these provinces when it comes to their
policies and institutional frameworks. Whereas Quebec and
Saskatchewan rank among the top jurisdictions in the world across
many of these indicators, Ontario and British Columbia are
perceived less favourably by investors, particularly in the area of
environmental regulations and indigenous land claims. Details of the
mining investment climate in Canada and its major provinces are
discussed in more depth below.

Supply factors

Canada has significant mineral endowments, though
reported levels of reserves of selected major metals (copper, nickel,
silver, gold, lead, zinc and molybdenum) have fallen over the past
30 years, in some cases quite drastically (MAC, 2009). While falling
reserves may be indicative of mature or even declining actual
minerals reserves, the level of known reserves is also affected by
exploration efforts.

Federal and provincial governments in Canada fund detailed
programmes where geological survey results are provided as a
‘public good’ to stimulate further exploration. In the public sector,
staffs of geologists provide information on likely drill targets.
Moreover, provincial governments act as custodians of privately
collected mineral assessment data. Typically, when an exploration
licence is issued to a company for a certain territory, they are not
charged a fee for the right to explore. Rather, they are required to
spend a minimum amount of money each year to hold the right to
explore over a certain territory. This results in a large database of
information about exploration activities and results that reside with
the provincial government. Data provided to each province remain
confidential for a period of time, after which free access allows
other companies to build on the knowledge accumulated. Therefore,
the potential benefits from previous exploration are not lost. As a


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result of these efforts, Canadian mining jurisdictions have some of
the most extensive geological databases in the world (see table II.1).

Since 1954, the federal government has offered a unique tax
vehicle to encourage exploration investments. "Flow-through
shares" allow exploration companies with no revenues to transfer
their expenditures to offset the tax obligations of their parent
company. This has encouraged producing firms to engage in
exploration activities. Since 1983, the exploration deductions could
be transferred to taxpaying individuals to offset their personal
income tax obligations. Flow-through shares have resulted in
significant financing opportunities for private exploration activities
and the government has continued to renew the legislation.

Although Canada has world-class infrastructure, it is
primarily concentrated in populated areas. In more remote regions,
connecting mine sites to electricity and transportation networks can
be challenging, especially given the size of the country. As a result,
international mining companies find the availability of infrastructure
in Canada to be a mild deterrent to investment (see table II.1). Given
its long mining history, the country has developed strong education
and training institutions to support the development of skill sets
specific to the mining industry, a point which investors recognize.

Political stability and quality of governance

The importance of natural resources such as minerals to the
Canadian economy was recognized in 1867 by the authors of the
Canadian Constitution. Under the division of powers in the
Constitution, the federal government has responsibility for peace,
order and good government (including the development and growth
of the Canadian economy), and the provincial governments were
given ownership of natural resources within their boundaries, and
thus the right to levy taxes or royalties on mineral extraction. This
clear division of powers minimizes the potential for
intergovernmental conflict in the defined areas, resulting in more
stable mining policies.

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The historical role of mining in the Canadian economy has
usually resulted in support for the industry from across the political
spectrum. In cases where conflicts do emerge over the direction of
mining policy, multi-stakeholder consultations have been used to
build consensus and to ensure that policies are politically
sustainable. The example from the mid-1990s presented in box II.1
illustrates the role of these processes in limiting policy uncertainty.

Box II.1: Multi-stakeholder policy formulation: the case of the

By the early 1990s, the policy climate surrounding the mining industry had
become highly contentious. The Club of Rome worries of the early 1970s,
commodity price volatility over the next decade, and rising environmental
concerns, combined to raise the level of policy uncertainty in the mining
industry. There was much discussion among groups who considered
themselves as stakeholders in mining in Canada. Consequently, the
Intergovernmental Working Group on the Mineral Industry (including the
federal Department of Natural Resources and provincial and territorial
Mining Departments), formed in the early 1980s, researched and authored
several studies from 1992 to 1993 on issues deemed important by various

These studies provided the basis for an on-going policy discussion
involving the federal, provincial, and territorial mining ministers, industry,
environmental groups, and representatives from labour and indigenous
groups. This process became known as the Whitehorse Mining Initiative
(WMI). Initiated by the Mining Association of Canada (MAC), with some
financing from Natural Resources Canada, the WMI culminated in an
Accord in 1994. While the Accord did not impose requirements on the
different jurisdictions, the discussions resulted in compromises between the
positions of stakeholders on desirable mining policies in various issues
areas. Issues discussed included finance and taxation; environment;
workplace/workforce/community; and land access. Interpersonal
relationships across stakeholder groups were also created during the year
long discussions. The outcomes were used to guide future policies and
negotiations at the provincial and federal level, and also played a role in



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Box II.1 (concluded)

shaping the environmental and social activities of the private sector mining
associations and their members.

Many federal and provincial policies concerning the mining industry since
then have been arrived at through these types of multi-party discussions
and negotiations. They are a mechanism and means of encouraging net
benefits from mining activities, and ensuring that these benefits are
appropriately shared and distributed among stakeholders.

Although public attitudes have typically been friendly to
mining, skepticism of foreign involvement in the industry grew in
the 1960s and early 1970s. Responding to concerns of resource
scarcity and American corporate influence in the domestic economy,
the Canadian government introduced more restrictive legislation. In
the petroleum industry, the government created the National Energy
Program (NEP) to promote Canadian ownership and to secure a
steady stream of oil supplies for domestic use. The government also
passed restrictive foreign investment legislation (see below).
However, by the early 1980s, poor performance of the Canadian
economy and the election of a new federal government brought a
reversal of Canadian economic policy in the direction of deeper
integration with the global economy. As a sign of this policy shift,
negotiations began with the United States to create a free trade area
(which would ultimately result in signing of NAFTA along with
Mexico in 1992). Over the past few decades, public attitudes
towards foreign investment in the mining industry have been
generally positive, although the recent takeovers of senior Canadian
mining firms by foreign TNCs has raised some political opposition.

In terms of governance, the Canadian bureaucracy is largely
competent and effective, and corruption is minimal. Canada has a
legal system based on the rule of law, with an independent judiciary.
Investors can rely on the security of tenure that they acquire and on
systems of remediation that are open and transparent in case of

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dispute. The country ranks highly in a range of international surveys
that are published annually. These include the Legatum Prosperity
Index, Transparency International’s Corruption Perception Index
and the World Bank’s Worldwide Governance Indicators, all of
which measure political stability and the absence of violence,
government effectiveness, regulatory quality, the rule of law and
control of corruption.

While Canada in general can be considered as politically
stable and as possessing high quality governance and legal
institutions, investors find significant variance between provinces
(see table II.1). Relatively low rankings for British Columbia and
Ontario in terms of perceived political stability, regulatory
duplication, and uncertainty about the administration of regulations,
can be partly attributed to historic and on-going challenges in the
provinces’ management of environmental issues and indigenous
land rights. These issues are further discussed below.

FDI policy

Canada has generally been open to foreign investment in the
mining industry, although this was not always the case. In 1973, the
Canadian government passed the Foreign Investment Review Act
(FIRA), which was aimed at foreigners acquiring control of a
Canadian business or establishing a new business. All acquisitions
were subject to automatic review, as were new establishments above
a certain threshold value. The standard for approval of an
investment was that it would result in "significant benefits" to the
Canadian economy. However, the principles by which to judge
potential benefits were never made clear, and approval decisions
tended to be secretive and without provisions for an appeal process.
Often, the government would negotiate with foreign investors to
extract a written commitment to undertake certain activities related
to local content, employment, etc. There were no pre-set formats for
the undertakings and these were legally binding for the investor.
Furthermore, the government monitored approved investments
(subject to the Act). If the investment involved specific


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undertakings, the investor was asked for regular progress reports on
their implementation. Some foreign investors heavily criticized the
Act as being burdensome and too restrictive.

By the early 1980s, Canada began removing some of these
legal and regulatory barriers to FDI. In 1982, the threshold for the
review of new investments or direct acquisitions under the small
business procedures was raised. In 1985, FIRA was replaced by the
Investment Canada Act (ICA). The central objective of the ICA was
to rely on private markets to allocate capital according to global
efficiency. It was underpinned by the belief that Canada could
benefit from increased foreign investment and incoming new
technology. To accompany the new regime, the Investment Canada
Agency was created to promote both domestic and foreign

Under the ICA, a foreigner investing in Canada is required
to notify the government, but formal review is required only in cases
of acquisition of Canadian companies above a certain value.3
Greenfield FDI projects are not subject to review, unless they are
involved in cultural industries. In cases of review, the provincial and
federal governments are consulted to identify any concerns
regarding the impact of the investment. If concerns are raised,
negotiations occur and the investor may be required to commit to
certain legally binding undertakings (typically valid for three to five
years), as under FIRA. However, the new standard for approval of a
foreign investment has been lowered from "significant benefits" to
"net benefits".4 Moreover, Canadian governments have been
reluctant to enforce negotiated commitments in court. For example,
commitments on staffing levels by Vale, Rio Tinto and Xstrata after
their recent takeovers have not been maintained, yet no formal
action has been taken against them.5

The ICA still gives the Canadian government significant
scope to block certain acquisitions by foreign companies. This has
been seen most recently in the case of BHP Billiton's $40 billion
takeover bid for PotashCorp, which at the time of writing had been

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rejected by the Industry Minister for not providing "net benefits" to
Canada.6 Yet, to put this into perspective, it is only the second
rejection since 1985, despite the number of notifications by foreign
investors recently increasing to between 600 and 700 per year.

Mineral titles/concessions

Public ownership of natural resources, including land and
minerals,7 is divided between the federal and provincial
governments according to their jurisdiction. A succession of judicial
decisions has confirmed that the provinces have authority to enact
laws related to mineral titles, exploration and mine. While the
specific details of mineral titling vary by province, e.g. the filing or
transfer of titles, there are some general principles embedded in
Canada's common law legal system. These principles are similar to
those in other common law jurisdictions that have also been
successful in mining development such as Australia, Ghana,
Botswana, the United Kingdom, and the United States.

The common law legal model enables individuals or
companies to take ownership of a mining title, claim or lease as a
property right (although the mineral deposits themselves typically
remain property of the government). The ability to put multiple
names on the title facilitates the use of a variety of investment
vehicles, such as joint-ventures or trusts. The property rights aspect
allows mineral titles to be easily transferred and facilitates financing
for mining projects by allowing loans to be secured by the title.
Financing of a mine is hampered if the mineral title belongs to the
government as in countries with civil codes. Russia, for example,
has had to use production-sharing agreements to get around the
constraints posed by its civil code legal system. Although Quebec
typically relies on the civil code model, its mineral titling regime is
based on the principles found in common law.

In most jurisdictions, including British Columbia, Ontario
and Quebec, individuals and companies must acquire a prospector's
license before engaging in exploration activities. In other provinces,
such as Saskatchewan, exploration activities do not initially need a


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license, but one is required in order to stake a claim (i.e. acquire
mineral rights). These licenses are typically subject to fees and
disclosure of geological information. Holders of claims or mineral
rights are required to do a certain amount of geological assessment
to maintain their standing. To move to the mine development stage,
the holder of a claim must seek a mineral lease from the relevant
government agency.

Mineral taxation

Provincial governments typically levy a specific tax or
royalty on mineral production, although the rates and structure of
these taxes vary by province and by mineral type. In the 1970s,
these royalties were raised significantly, and were often applied to
measures of gross production. As a result, in British Columbia, for
example, taxation of copper production reached effective rates of
over 100 per cent of profits. Since then, however, mineral tax and
royalty rates have been capped in most provinces between 10 and 20
per cent, depending on the mineral, and this rate is typically applied
to measures of company income or profits, not mineral production.
In other words, authorities calculated the value subject to taxes or
royalties by taking total revenues and subtracting costs, including
operating costs, depreciation allowances and other deductions.
Profit-based taxation helps reduce the financial risks facing mining

Both federal and provincial governments levy corporate
income taxes. In 2009, the federal corporate income tax rate was
19 per cent. It will be gradually reduced to 15 per cent by 2012.
Provincial income taxes add an additional 10 to 16 per cent. A range
of tax deductions are available at the federal and provincial levels
that take into account the special needs of the mining industry,
particularly related to exploration activities. For example, the federal
Canadian Exploration Expense allows exploration costs to be
accumulated and carried forward to offset tax obligations when the
mine goes into production. In some cases, foreign investors have

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established exploration subsidiaries in order to make use of flow-
through shares, provided they have taxable Canadian income against
which to write off the exploration tax deduction.

International tax comparison studies carried out on mining
tax regimes in the mid-1990s and mid-2000s (Brewer, 2005a,
2005b) showed that Canada was in the average range of global tax
burdens. The studies found that some 25 to 35 per cent of profits
were taken by corporate taxes, mining taxes and royalties together.
Yet, generous tax incentives are often available. This is particularly
the case in Quebec and Saskatchewan, which international mining
investors ranked second and seventh respectively out of 72
jurisdictions (see table II.1).

Environmental and social regulations

Canada’s mining policy adheres to the principle of
sustainable development, as laid out in the Mineral and Metal
Policy of the Government of Canada (NRCan, 1996). Key
objectives of this policy include encouraging environmental best
practices, respecting the needs and values of all resource users,
maintaining the quality of life and environment for future
generations, and securing the involvements and participation of
stakeholders and communities in decision-making.

The federal and provincial governments have a range of
general laws and regulations covering the release of toxins and
contaminants into the air and water, endangered species, natural
parks and wildlife protection. The key piece of legislation at the
federal level is the Canadian Environmental Protection Act (CEPA),
which was introduced in the late 1980s to comprehensively deal
with environmental issues. It is informed by the Toxic Substance
Management Policy, which provides a mechanism to assess the level
of toxicity of a given substance under the CEPA.

More specific to mining, the federal government's 2002
Metal Mining Effluent Regulations limit the emission of deleterious
substances above certain threshold concentrations, and create


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requirements for environmental effects monitoring. It also addresses
mine closure and emergency crisis management, such as the failing
of a tailings dam. In 2009, Environment Canada went further and
published an Environmental Code of Practice for Metal Mines. In
addition, most provinces have legislation mandating companies to
make preparations for mine closure and reclamation. These include
requirements for detailed plans and assurances to the relevant
government agency that financial resources will be available. Some
mechanisms to ensure the latter include a requirement that
companies maintain an investment-grade credit rating, or agreeing
to post a security or deposit funds with a third party trustee.

EIAs are mandatory for most large-scale projects in Canada,
although early exploration activities typically do not require them.
EIAs for large projects that require comprehensive studies involve
public consultations, which allow the voicing of community
concerns. The process consists of a study identifying environmental
risks and mitigation strategies, followed by an assessment by the
review panel, and finally, a design and implementation programme
that the project is to be bound by. Formerly, both levels of
government carried out their own environmental assessments, a
duplication and time-delay situation that was eventually addressed
by intergovernmental harmonization agreements being signed to
limit companies to a single review (box II.2).

Box II.2: Federal and provincial overlap in EIAs

Duplication of EIAs at the federal and provincial level has been a problem
in the past, often leading to delays. The power to regulate the environment
was not mentioned in the Canadian Constitution. As a consequence, both
the federal and provincial governments have dedicated ministries, and both
may call for an EIA, which must be approved prior to issuing the necessary
permits for a mining project. This may help account for some of the
negative perceptions of investors concerning regulatory duplication and
uncertain environmental regulations in British Columbia and Ontario (see
table II.1). To address these issues, seven provinces have entered into
agreements with the federal government to cooperate in conducting EIAs.

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While environmental regulations and EIAs are necessary to
address the impact of mining projects, particularly during the
construction and production phases, investors require them to be
clear and relatively stable to allow for long-term planning. This has
been a problem in some jurisdictions, such as Ontario and British
Columbia, where uncertainty concerning environmental obligations
is seen as a major deterrent to investment (see table II.1).

Competition with indigenous communities over land use
constitutes one area that poses significant problems for mining
companies operating in Canada. In situations where an indigenous
community owns mineral rights, companies must negotiate to secure
the title or lease, often resulting in the payment of royalties to the
community, or the creation of an impact-benefit agreement (IBA)
between the company and community. IBAs can include a variety of
social, cultural, environmental and economic requirements for the
project to meet, some of which may be quite costly to the mining
company involved.

Problems for investors are more acute when a mining
project is set to take place on an area with unsettled land claims.
These typically stem from land treaties signed between indigenous
communities and the British and colonial governments that were not
incorporated into the national system of titles for land ownership. In
these cases, a series of judicial decisions has clarified a legal
obligation for companies to consult the community. However,
companies often find the specifics of the obligation to be unclear. In
addition, the capacity to consult and engage with indigenous
communities varies significantly across firms. For example, a cash-
poor junior mining company is unable to devote the same resources
to community engagement as a large mining company. The lack of
formal consultation mechanisms early on often result in the voicing
of social grievances through EIAs, which increases the uncertainty
faced by mining companies seeking approval for a project.
Uncertainty surrounding indigenous land claims is a major problem
in some Canadian jurisdictions, particularly in British Columbia and
Northern Ontario (see table II.1).


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C. Contributions and impacts of FDI

Foreign involvement in Canada's mining industry has taken
the shape of both greenfield and M&As, with the latter being
dominant over the past decade. This section examines the
contributions and effects of these types of FDI along several
dimensions. Although direct data for foreign and domestic firms are
limited, evidence suggests that FDI has had a net positive impact
(table II.2).

Table II.2: Summary of contributions and impact of FDI in

Canadian mining industry
production and

- Translation of domestic exploration efforts into
mine project development
- Provision of finance to large Canadian firms
through minority equity positions
- Foreign mining companies have higher
operating profits than domestic firms on average
- Some restructuring resulting in reduced
employment in refining and processing
- Significant contributions to local employment
through greenfield projects in Northern regions

Government revenues - Higher royalty and income tax contributions
from foreign companies due to higher operating

Local enterprise

- Some access to new markets through global
TNC networks
- A shift of resources from former senior
Canadian firms into start-up juniors
- Reinforcement of Canada's role as hub for
international mining finance

Environment and
social impact

- Comply with advanced Canadian legislation
- Foreign investors are active members of
national private sector associations with
mandatory and voluntary corporate social
responsibility (CSR) frameworks

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In addition to focusing on FDI, this section also looks at the
economic, environmental and social effects of mining activities in
general, and particularly how the different levels of government in
Canada have addressed them. Policies in Canada have generally
optimized the impact of FDI on production, employment, tax
revenues, local business development, and the environment. Foreign
mining projects have also made notable contributions to indigenous
communities in Canada, yet some challenges remain in this area.

Investment, production and employment

The mining industry and its downstream activities,
including refining, smelting and other primary mineral
manufacturing, make a strong contribution to the Canadian
economy. Between 2000 and 2008, the value of non-fuel mineral
production more than doubled to $38 billion. In 2008, the
contribution of direct mining activities to real GDP (including coal,
but excluding oil and gas) was C$9.4 billion, or 0.8 per cent (MAC,
2009: 7-10). The contribution of downstream mineral manufacturing
and processing was larger, at C$30.9 billion (2.5 per cent of GDP).

As a capital-intensive industry, employment in mining is
less than proportional to the industry’s output, although it remains
important in mining regions. In 2008, employment in mineral
exploration and extraction reached 58,500, or 0.4 per cent of total
employment. This is up from 45,800 in 2004. However, when
downstream processing and manufacturing is included, the figure
grows to 351,000 in 2008 (or 2.4 per cent of total employment),
although this is down from a high of 401,000 in 2000. Most of the
losses in recent years have been in primary metal manufacturing,
such as smelting and refining, where employment dropped from
104,000 in 2000, to 69,000 in 2008. The MAC (2009) attributes this
primarily to restructuring resulting from technological
advancements and foreign competition.

The contribution of FDI to overall mining investment,
production and employment has come in several forms. Greenfield
investments tend to have the most visible economic benefits,


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particularly in remote regions where mining activities are major
sources of local economic activity and employment. FDI inflows
through M&As can play a similar role when they involve the
purchase and expansion of junior firms. By identifying potential
deposits “in the ground”, Canadian prospectors and exploration
companies create opportunities for large-scale investment. They
then sell all or part of a claim to larger companies that provide
financing for further exploration or mine development. Although
domestic companies may be able to fulfill this function, by
expanding the market of potential buyers to include foreign
investors, Canadian junior firms can secure higher prices for their
assets. The expansion of the diamond industry in the Northwest
Territories has relied to a large extent on foreign investors
purchasing and capitalizing junior exploration companies with
promising discoveries (box II.3).

Box II.3: FDI and diamond mining in Canada's North

Since the early 1990s, FDI has been driving the development of a lucrative
diamond industry in Canada’s North. In 1991, two Canadian geologists
from Diamet Minerals Ltd. discovered a significant diamond deposit at
Ekati in the Northwest Territories. After claiming the ground, an 80 per
cent stake in the project was sold to BHP (now BHP Billiton). The Ekati
mine began production in 1998. Soon after the Ekati discovery, another
Canadian junior company, Aber Resources, founded the Diavik mine
nearby. To develop it, it partnered with RioTinto (which took a 60 per cent
stake) – leading to Aber’s downstream purchase of Harry Winston
Diamonds in New York as an outlet for Canadian diamonds. Diavik and
Ekati are widely regarded as two of the richest diamond mines in the world.
De Beers is another foreign investor who has been active in the Canadian
diamond sector. Present in Canada since the 1960s, the company
iscurrently working on some 30 exploration projects ranging from
grassroots exploration to feasibility studies. The Snap Lake Project in the
Northwest Territories and Victor Project in Northern Ontario are De Beers'
first diamond mines outside of Africa.


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Box II.3 (concluded)

Mining activities in these remote regions have helped boost economic
activity and employment. Some 50 per cent of totalcapital and operating
expenditures of these mines have been sourced in the surrounding region,
half of which were sourced through business partnerships with indigenous
communities. The costs to build the mines were high: Ekati cost
C$900 million, Diavik C$1.3 billion, while Snap Lake and Victor were also
around C$1 billion each. Since 1991, the Northwest Territories’ GDP rose
from C$1.6 billion to C$4.5 billion in 2007, while unemployment dropped
from 13 to 5.4 per cent.

Aside from junior exploration firms, some larger Canadian

mining companies have benefited from foreign investors purchasing
a minority stake in their operations. This has represented an
important source of finance since the global financial crisis in 2008.
For example, in July 2009, Teck Resources Ltd sold a stake in the
company to China Investment Corporation (CIC) in a C$1.7 billion
all-cash deal. Teck Resources said CIC had agreed to take a roughly
17.2 per cent equity stake and 6.7 per cent voting interest in Teck.
CIC agreed to hold the shares for at least one year. The Chinese
fund said this lock-up period was consistent with its strategy as a
long-term investor. From Teck’s point of view, the Chinese
investment was critical to put the company back on a sound
financial footing after the crisis.

Although most M&As clearly help finance industry
investment, transactions involving the purchase of senior Canadian
mining companies have had less obvious benefits. Most notable are
the acquisitions of Inco, Noranda/Falconbridge and Alcan in 2006.
In these cases, the purchasing companies have made cutbacks to
both investment and employment.8 Since 2007, Rio Tinto has
postponed investments to build and upgrade smelters, closed
smelters in Quebec, cut 300 jobs, and reduced its head office
employment by 18 per cent. In 2009, Xstrata cut 700 jobs from its
Sudbury operations and closed some nickel mines. That same year,
Vale cut 463 jobs.


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Although these cutbacks have become controversial, their
significance can be questioned. Considering the companies’ large
share of industry employment, the job cuts have been relatively
mild.9 Moreover, reductions in investment and employment were
likely to occur even if the companies' operations had remained
domestically owned. Most of the cuts were motivated by falling
mineral prices following the financial crisis in 2008. A study by the
Mining Industry Human Resources Council found that more than
6,400 mining jobs in both domestic and foreign owned companies
were eliminated across the country between November 2008 and
January 2009.

There is also evidence to suggest that foreign-controlled
mining companies have better financial performance than their
domestic counterparts. As shown in figure II.2, the share of industry
operating profits generated by foreign affiliates has consistently
exceeded their share of total assets and revenues. The acquisition of
domestic mining companies by more efficient foreign firms
improves industry productivity, freeing up resources for additional
investments in explorations and mine development.

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1999 2000 2001 2002 2003 2004 2005 2006

Assets Operating revenues Operating profits

Figure II.2: Foreign ownership in mining and quarrying
(per cent of industry total)

Source: Statistics Canada (2010).

Government revenues

With rising commodity prices until 2008, the federal and
provincial governments have seen the total of royalty and tax
revenues from mining companies increase significantly, up to nearly
C$5 billion in 2008 (figure II.3). The structure of Canada's mineral
taxation is also apparent. Since mining taxes and royalties are
primarily based on profits, including income taxes and royalties, tax
revenues have risen in line with company profits. The contribution
of FDI to government tax revenues has been strong. Since foreign
companies have higher rates of pre-tax profits than their domestic
counterparts, they have presumably contributed a larger share of
their sales to government tax revenues.


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Figure II.3: Tax revenues from mining industry - 2002-2008
(C$ millions)









2002 2003 2004 2005 2006 2007 2008

Mineral sector royalties Income taxes (provincial and federal)

Source: ENTRANS (2009).

As noted, an attraction of the Canadian system of mining
taxation to potential investors is that provincial mineral royalties
have been converted largely to profit-based taxes, especially when it
comes to base metals and gold. These minerals make up the bulk of
Canadian mining activities. Historically, they were not extremely
profitable and excessive rent was not present. When rent is present
during times of high prices, the profit-based tax system is adequate
to ensure that the State captures a fair share. Thus, these specific tax
and royalty rates have not required significant adjustments.

In contrast to gold and base metals, potash, uranium, and
diamond production in Canada are typically based on high-grade
deposits. Governments have judged that these are sufficiently
profitable to justify higher effective tax rates for companies mining
these minerals. For example, to address the growing diamond
industry in Ontario, in 2007 the government created a separate

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royalty regime. Whereas the province's Mining Tax Act sets a
general mineral tax at 10 per cent of profits (in addition to corporate
income taxes), the specific diamond royalty would be up to 13 per
cent.10 Other instruments used by governments in Canada to address
high-grade deposits include basic gross royalties on sales revenue,
tiered royalties which increase with product price, and graduated tax
rates. By attempting to capture a share of so-called excessive
mineral rents, the government seeks to balance between making the
host jurisdiction attractive to mining investment and obtaining a fair
share of rent for the state. However, using such complicated
measures increases the complexity of the rules and regulations, the
intricacy of the formulae, and the required administrative

Parallel taxation by the provincial and federal governments
in the Canadian context has occasionally raised distributional issues.
Since provincial tax measures can affect federal tax revenues,
mechanisms have been developed to coordinate policies in this area
(box II.4).

Box II.4: Federal-provincial revenue sharing
In terms of revenue distribution, Canada is in the fortunate situation of
having the basic rules of intergovernmental revenue-sharing incorporated
in the Constitution. Provinces own the minerals inside their borders, and
they have power to levy direct taxation on them. Each province can decide
how intensely to tax minerals in its jurisdiction and how to fund minerals
and mining expenditure programmes - as well as fund other programmes
for which provinces were given responsibility in the Constitution, such as
health, education and welfare. The federal government acts as a “province”
government acts as a “province” in taxing minerals in offshore and Canada
Lands north of 60 degrees latitude.

Despite these clear delineations, some tensions between the two levels of
government remain on this issue. In the 1970s, provinces often had much
higher royalty rates than today. Since, at the time, provincial royalties were
deductible expenditures when calculating mining companies’ federal



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Box II.4 (concluded)

income taxes, the federal government saw its corporate income tax
revenues from mining companies decline. To address this problem, the
federal government abandoned the deductibility provision and introduced a
"Resource Allowance", which would guarantee that a portion of "resource
profits" were taxed by the federal government. Provincial governments
would then decide how much to tax the remaining share. Some provinces
taxed more than the resource allowance and some less, depending on the
provincial assessment of the economic situation facing them and their
mining industries.

In place for some 30 years, the Resource Allowance was eliminated in
2006. The federal government has now returned to treating provincial
royalties as deductions in the calculation of federal income taxes. The
reasons for this include disagreements between companies and taxing
authorities on how to define "resource profits", as well as lower provincial
royalty rates and higher mineral prices, which have largely eliminated the
problem of excessive provincial taxation.

A budding trend in Canada is the creation of mechanisms to

share mineral revenues with indigenous communities, even in cases
where minerals deposits are nominally owned by the state. For
example, in early 2010, the provincial government of British
Colombia announced an agreement with two indigenous
communities to share its revenues from a new gold and copper mine
in the province. Similar agreements by British Columbia and other
provincial governments are expected in the future. The initiative is
strongly supported by the mining industry, which sees it as an
effective measure to improve perceptions of mineral development
among indigenous peoples. The direct allocation of government
revenues complements the current use of private IBAs by companies
and communities to ensure an adequate distribution of the costs and
benefits associated with mining activities (see below).

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Domestic enterprise development

With the presence of well-established mining activities,
geographically focused clusters of associated industries have tended
to develop naturally in Canada. Companies have an incentive to
work with educational and research institutions to increase
innovation and develop a strong local skills base, and they also
benefit from establishing relationships with reliable local suppliers.
For example, the historically important nickel mining centre of
Sudbury in Ontario is home to Laurentian University, a technical
college, and the Northern Centre for Advanced Technology
(NORCAT), which is involved in occupational health and safety
training, mine training, technology innovation and
commercialization, contractor training, and eLearning. Large mining
companies and local suppliers carry out research there, and it has
received donations from major foreign investors, including Vale and
Xstrata. A 2010 study commissioned by the Ontario North
Economic Development Corporation estimated that Sudbury-based
suppliers of goods and services to the mining industry have an
annual output of C$3.94 billion and employ 13,800 workers.
Outside mining regions, cities such as Toronto, Vancouver and
Montreal have clusters of firms involved in providing professional
services to the industry, such as investment houses, mining analysts,
and specialized accounting, legal, and taxation advisory services.
Overall, the Mining Association of Canada (MAC) (2009) estimates
that there are around 3,100 firms that supply the mining industry

The federal and provincial governments have helped
facilitate these types of clusters, primarily through the provision of
resources or encouragement of activities that take the form of public
goods, such as information, infrastructure, skills development, and
other industrial services.11 In the early 1980s, Energy, Mines and
Resources (1982) commissioned a report outlining potential
measures to link major mining projects with local equipment
manufacturers, and ways to use public research and development
(R&D) or incentives to stimulate innovation among the latter.


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Although many of the suggestions were not implemented, the
federal government has maintained several agencies related to R&D
in the mining industry, including the Canada Centre for Mineral and
Energy Technology (CANMET), Geomatics Canada, and the
Geological Survey of Canada. At the provincial and territorial level,
nearly every jurisdiction in Canada has a strategy to encourage the
development of mining and supporting industries. Of the major
mining regions, Ontario, British Columbia, and Quebec currently
have "stand-alone" strategies, in that they are not merely part of the
provinces' broader innovation strategies (CMIC, 2008: 1-3). For
example, the Ontario government has created the Ontario Mineral
Industry Cluster Council, consisting of representatives from the
mining industry, academia and government. This group meets
regularly to collaborate, exchange ideas, and promote competition
and economic development.

The existence of well functioning stock exchanges has been
critical to the success of Canada's mineral and supporting industries.
The exchange of secondary stock on stock exchanges needs a
constant supply of new issuances, and this has been facilitated in
Canada through taxation measures. The 1983 amendment to the
flow-through shares legislation (see section II.B) made exploration
expenses deductible against any income (including personal), rather
than only against resource income. This provided for the rapid
growth of financing for exploration in Canada. The subsequent
strong growth in the junior exploration sector represented the
development of a group of domestic investors acclimatised to
investing in mineral development across the country, and provided a
burst of exploration funding that continued into subsequent years.

Toronto, Vancouver and Montreal became centres of deal-
making and financing for the exploration and mining industry, and
flow-through tax vehicles were a major driver. It was common after
the mid-1980s to see limited partnerships assemble up to C$100
million to finance mineral exploration, where the sponsors were
funding around 40 promising junior exploration companies as a way

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to spread the risk for the many ordinary Canadians who were new
investors in mineral resources. Today, Canada remains a centre for
equity finance in the global mining industry. In 2008, 55 per cent of
the world's public mining companies were listed on the Toronto
Stock Exchange (TSX). From 2004 to 2008, it was the scene of $45
billion worth of mining financings, or 31 per cent of the world total
(MAC, 2009: 24).

The strong development of Canada's domestic mining
industry, and associated financial and other professional services,
have made it an ideal location from which to invest in the mining
industries of other countries. Canadian mining companies operate in
more than one hundred countries, and in 2008 held an FDI stock of
around $21 billion.12 Of the 9,300 or so mineral projects owned by
companies listed on the TSX, 49 per cent are located outside of
Canada (MAC, 2009: 24, 26). Canadian firms are responsible for the
largest share of exploration expenditures in Canada, the United
States, Latin America, Europe and Africa. Outward mining
investment also presents significant opportunities for upstream
activities. Although their mining operations may be located abroad,
Canadian-based head office activities and financings continue to
provide fees for professional and financial services firms in
Canada's major cities. Many suppliers of goods in Canada's mining
clusters have actually never supplied mining companies operating
domestically, focusing instead on supplying operations abroad.
Their efforts are facilitated by the work of Canadian embassies,
which provide specialized advisory services to Canadian mining
firms in key jurisdictions, such as Mexico and Chile.

Despite the successful development and internationalization
of Canada's mining and supporting industries, popular commentators
have argued that the recent takeovers of senior Canadian firms will
undermine this position.13 One major concern is that a
rationalization of the acquiring firm's global operations will result in
a broad reduction of economic activities associated with the
Canadian mining industry. These include the loss of corporate
headquarters and a shift towards the use of foreign refineries instead


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of those located in Canada, both of which may be expected to
reduce the demand for goods and services from Canadian supplier
firms. As noted above, there is some evidence of that Vale, Xstrata
and Rio Tinto have reduced employment at the head offices of the
formerly Canadian firms or put on hold plans to invest and upgrade
refineries and smelters, particularly since the financial crisis.

Yet there are three reasons to believe that the transfer of
ownership of these companies to foreign TNCs will not significantly
undermine Canada's mining clusters. First, Vale, Xstrata and Rio
Tinto hold significantly more global assets than their formerly
Canadian-owned subsidiaries, meaning that established Canadian
mining suppliers may be exposed to new marketing opportunities.
The Canadian government, through Export Development Canada
(EDC), has sought to encourage these activities, recently approving
financing of up to $1 billion for Vale's operations in Canada and
abroad with the understanding that they will encourage the use of
Canadian suppliers in their global operations. Canada already has
some positive experience with this approach. For example, EDC has
provided finance to the National Copper Corporation of Chile
(CODELCO), which helped increase the company's use of Canadian
suppliers from five to 80 firms.

Second, Canada's significant remaining mining firms
continue to grow in numbers and size. As noted, Canadian
companies remain world leaders in exploration, with thousands of
flexible junior firms holding exploration assets around the world.
These firms continue to rely on Canadian suppliers of specialized
exploration equipment, as well as Canadian equity markets and
professional service firms. This suggests that Canada's domestic
mining industry may be experiencing a shift in specialization
towards exploration and supporting activities, and away from large-
scale mineral production, where a few long-established global
mining TNCs enjoy significant economies of scale. On the other
hand, however, many senior Canadian firms have been on the
buying end of global consolidation trends. Companies such as

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Barrick Gold, Teck Resources, Kinross Gold and Yamana Gold
have expanded significantly, having made a number of important
acquisitions along the way, both of Canadian and foreign firms.
These trends challenge the view that the Canadian mining industry
is being "hollowed out" by foreign acquisitions.

Third, these growing junior and senior Canadian-owned
firms have the potential to absorb some of the resources that may
have been displaced due to the acquisitions of Inco,
Noranda/Falconbridge and Alcan. These companies were sold at the
top of a commodity price cycle, ensuring that shareholders received
significant capital gains which could then be reinvested in other
parts of the Canadian mining industry. The case of Royal Nickel,
which was founded by former Inco management, is an example of
how some of the management expertise associated with the
company was redirected towards the growth of a competitive junior

Environmental impact

Since the 1980s, the environmental performance of the
Canadian mining industry has been consistently improving.14 Most
notable has been a major decline in the release of toxic substances
into the air and water. By 2007, the annual release of arsenic,
cadmium, copper, hydrogen sulphide, lead, mercury, nickel and zinc
had declined by between 60 to 93 per cent, when compared to base
years in the late 1980s and early 1990s (MAC 2009: 43). Progress
has also been made in the area of mine closure. In the past, mines
often shut down with little effort to clean-up waste or reclaim the
land. Recently, however, mining companies, including foreign
investors, have been proactively addressing these issues. For
example, DeBeers worked with Sudbury's Laurentian University
prior to opening its Snap Lake and Victor mines, in order to
construct closure plans that would re-establish local vegetation and

Government policies at the federal and provincial levels
have underpinned theses improvements. The use of EIAs has


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prevented certain mining projects deemed to be too harmful, and has
tried to minimize the negative effects of approved projects. As
mentioned in Section II.B, environmental legislation and regulations
at both levels of government have progressively set more stringent
limits on the release of substances, and specifically in the mining
industry. These regulations have also increased the legal obligations
of companies regarding mine closure.

The regulatory process in Canada has involved significant
input from the industry, which possesses specialized knowledge of
its activities. This process also allows companies, stakeholders and
the government to identify areas of potential improvement that do
not require hard legal measures. For example, the industry has
cooperated with government ministries (e.g. Natural Resources
Canada and Environment Canada) and other stakeholders in a series
of initiatives to limit pollution from mining activities, including the
Mine Environment Neutral Drainage programme and the
Accelerated Reduction/Elimination of Toxins programme. Another
multi-stakeholder initiative involving the mining industry, known as
the National Orphaned and Abandoned Mine Initiative, created a
fund to cleanup abandoned mine sites, which plague certain regions
and have been estimated to require up to $C4 billion in cleanup

Over the past two decades, Canada's national mining
associations have been developing frameworks for their members
that include principles and guidelines on environmental and social
practices. Much of the substance of these guidelines goes beyond
the legal requirements of Canadian mining jurisdictions. Self-
regulation is driven by a desire to improve the image of the mining
industry in Canada, and by extension, to create a mining-friendly
policy consensus. In the late 1980s, the MAC was one of the first
national mining associations in the world to adopt an explicit
environmental policy, containing a set of suggested environmental
reporting standards for their members. In the 1990s, the MAC used
stakeholder consultations, including the WMI, to help develop a

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comprehensive sustainability program that included various
performance indicators. The programme, entitled Towards
Sustainable Mining (TSM), was released in 2004, and includes
indicators related to tailing management, greenhouse gas emissions,
community outreach, and crisis management planning. The
reporting requirements are mandatory and verified for all members
of the association, which includes the vast majority of senior mining
companies operating in Canada. Canada's other major industry
association, the Prospectors and Developers Association of Canada
(PDAC), whose membership is made up primarily of junior
exploration firms, also maintains a framework for its members
called e3 Plus. This framework does not contain obligations for
members, and instead focuses on building the capacity of smaller
firms to deal with environmental problems and community relations.

The entry of foreign mining TNCs has the potential to affect
environmental outcomes in Canada, due to the importance of
internal company policies. Foreign companies with superior
practices would improve industry performance, while those with
inferior practices could undermine some of the progress achieved so
far. While all foreign companies must comply with Canadian
legislation and regulations, some may opt to ignore the voluntary
initiatives taking place throughout the industry. One way that this
challenge has been addressed is by involving the foreign affiliates in
the national mining associations. For example, the Canadian
subsidiaries of Vale, Xstrata and Rio Tinto are all part of the MAC,
and thus subject to its mandatory TSM framework. Moreover, as
some of the largest mining TNCs in the world, they are members of
the International Council on Mining and Minerals (ICMM), an
organization with its own set of international best practices for
members companies.

Social impact
Canada's mineral policy stance seeks to protect local

communities from detrimental aspects of mining. One of the most
significant issues in this area relates to the impact of mining


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activities on indigenous peoples. Opinions among indigenous
communities in Canada vary on whether to allow mining activity on
their lands. At one extreme is a view that mining could destroy the
environment, social fabric, and indigenous culture. At the other end
is the view that poverty issues are paramount and that socially
sustainable development offered by mining should be seized if it is
available. Rather than choosing one view or the other, the objective
should be to create mechanisms that protect indigenous rights and
allow them to have a voice in mining projects that affect their

As noted, in cases where an indigenous community has
clear ownership over a mineral deposit, or has a potential land claim
over the surface area, companies often negotiate a private, legally
enforceable IBA with the community, stipulating general and
specific terms for the mining project. By 2009 there were some 170
IBAs across Canada, ranging from a Memorandum of
Understanding to formalize the working relationship to
comprehensive IBAs, where mining activities provide the
opportunity and funding for training of individuals and support of
indigenous businesses (see box II.5). In addition to legal
requirements stipulating consultation with indigenous communities
in certain cases, the impetus for these agreements also comes from
the national private mining associations, which have strongly
endorsed the use of IBAs. PDAC and the MAC have each signed
agreements with the indigenous Assembly of First Nations,
challenging companies to create jobs and alleviate poverty.
Moreover, their self-regulatory frameworks provide guidelines for
their members on how to effectively incorporate local and
indigenous communities into the decision-making process.

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Box II.5: The use of IBAs to manage the impact of mining on

indigenous communities

A positive example of the use of IBAs comes from the case of Diavik
Diamond Mines, which is owned by Rio Tinto. Located in a part of the
Northwest Territories where 40 per cent of the population is of indigenous
decent, the company has signed a variety of agreements with local
communities, driven by both its internal CSR policy, and by regulatory
developments aimed at increasing the involvement of indigenous peoples
in resource governance. These agreements cover training, employment and
business opportunities, and ongoing monitoring of positive and negative

By 2006, six years after the commencement of the project, Diavik has
made over C$1 billion in purchases from indigenous businesses.
Indigenous employees made up 33 per cent of the company's workforce,
although this was still below the target rate of 40 per cent. Many of the
workers entered the company with entry-level or semi-skilled positions, but
apprenticeships and professional development programs have focused on
upgrading their skills. Success of the initiative is partly attributed to early
community consultations, which began at a very early stage during the
exploration phase in the mid-1990s, and has involved over 300 meetings.

Source: Wise and Shtylla (2007: 39-40).

To assist indigenous communities in negotiating IBAs with

mining companies, which often possess more information,
experience and general bargaining power, the government has
created a mining information kit. It raises awareness of legal
specificities and provides a checklist of issues for consideration
during consultation and negotiations. The website of Natural
Resources Canada describes the kit as being designed to "help
Aboriginal [indigenous] communities better understand the mining
cycle and to identify the many opportunities that mining can bring to


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Aside from IBAs, indigenous communities can also
influence the terms of major mining projects through their
participation in special environmental agreements with the
government and project developers (O'Faircheallaigh, 2007). These
agreements are often recommended by EIAs to ensure the
involvement of indigenous communities in EIA follow-up. The
agreements give legal standing to communities to voice complaints
about the implementation of environmental commitments over the
lifetime of the project. They may also play a role in monitoring
compliance, for example, by having representatives on a monitoring

Despite progress made since the mid-1990s, there remain
many critics of Canada's policies towards the relationship between
mining and indigenous communities (e.g. Hipwell et al. 2002; Sosa
and Keenan, 2001). One of the most significant problems is that
indigenous involvement in mineral development continues to
predominantly rely on private agreements between companies and
communities. While these contracts are legally enforceable, the
consultations and negotiations have limited government supervision
to ensure protection of indigenous communities. Canada has not
signed the ILO Agreement 169 on Indigenous Peoples, which would
give it stronger obligations in this realm.

To address some of these criticisms, the Canadian
government has started to focus on its own duties towards
indigenous communities when a project is seeking federal approval.
According to the 2007 Action Plan to Consult First Nation, Métis
and Inuit Groups, no single department or agency has been
responsible for coordinating a federal approach. Consequently, the
Plan includes: discussions with indigenous groups, provinces and
territories, and industry to develop consensus; the development of a
federal policy on consultation; better interdepartmental
coordination; and the creation of an inventory on the location and
nature of established and potential indigenous land rights. At the
provincial level, some jurisdictions, including Ontario, have been

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developing comprehensive frameworks of their own (box II.6).
Although they may impose additional regulatory requirements for
mineral development, clear and stable frameworks formalizing
consultation procedures and indigenous land rights can also benefit
investors, who continue to face significant uncertainty in this realm.

Box II.6: Modernizing Ontario's Mining Act to incorporate
community issues

In late 2009, the provincial government amended the Ontario Mining Act
in an effort to "modernize" their mineral legislation. One of the main
objectives of the legislation is to reduce conflicts and disputes between the
industry and private and indigenous landowners that do not own the sub-
surface (i.e., mineral) rights on their properties. The prevailing model in
Ontario allowed any individual with a prospector's license to stake a claim
and acquire exploration rights from the government over a certain territory,
even if the surface rights are held privately. The amendments and following
regulations include:

- Inserting a statement in the Act's purpose that recognizes and affirms
indigenous and treaty rights.

- Withdrawing government mineral rights from various tracts of private and
indigenous land and cultural sites, and allowing landowners in other areas
to apply to have them withdrawn.

- In cases where a mineral claim has been staked on an area with private or
indigenous surface rights, landowners will be notified of the claim.

- Requiring prospectors to submit detailed exploration plans and, in some
cases, acquire permits from the Ministry of Northern Development and
Mines prior to the commencement of exploration activities on private

- Prohibiting new mine openings in the province's northern regions without
prior approval of a community land use plan.

- Introducing dispute-resolution process for indigenous-related mining
issues, particularly related to community consultation, exploration permits,
and the filing of closure plans.



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Box II.6 (concluded)

- Developing a mandatory "prospectors awareness program" for holders of
prospectors licences. This will address issues related to indigenous
engagement and consultation, reclamation of exploration sites, and the
rules for staking claims on private lands.

- Creating a map-based staking system, precluding the need to make
physical stakes on private or indigenous land

The new amendments resulted from consultations involving over 1,000
diverse stakeholders and over 200 written submissions. They are supported
by a number of indigenous groups, as well as the provincial mining
industry associations, which see them as a way of clarifying the regime for

Sourc: An Act to amend the Ontario Mining Act; Ministry of Northern
Development and Mines.


1 See, for example, Udd (2000) and Cranstone (2002) for a history of
mining in Canada.
2 UNCTAD TNC/FDI Database.
3 This was initially set generally at C$50 million. The threshold for review
varies according to whether the home country is a member of the World
Trade Organization (WTO), and also differs for American investors due to
the country's membership in the North American Free Trade Agreement
(NAFTA). In the 2009 Budget, the Canadian government outlined
amendments to the ICA that would see the capital value threshold for
review raised to C$1 billion over the subsequent five years.
4 The factors used to assess net benefits are outlined in Section 20 of the
ICA and include: effects on the level and nature of economic activity in
Canada; degree and significance of participation by Canadians in the
business; effect of investment on productivity, industrial efficiency,
technological development, product innovation and product variety in

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Canada; effects on competition within the relevant industry; the
compatibility with national industrial, economic and cultural policies; and
the contribution to Canada's competitiveness in international markets.
5 Hoffman, Andy. "Broken promises mark foreign mining deals." The
Globe and Mail. 4 October 2010.
6 A couple of reasons have been cited in the media for blocking the
takeover. These include the company's strategic control over 25 per cent of
global potash supply and the important role the company plays in
government revenues (up to 15 per cent of Saskatchewan's public budget).
7 Although mineral ownership could in principle be granted to private
persons, the provincial and federal governments have been careful to
ensure that the sale of Crown land has excluded any rights to mineral
deposits in the ground. The majority of existing mining titles have been
purchased or leased from the Crown.
8 Hoffman, Andy. October 5, 2010.
9 In 2008, Rio Tinto employed 64,700 workers, while Xstrata and Vale
Inco employed 14,500 and 11,700, respectively (MAC, 2009: 35)
10 Initially, the main target of this tax, DeBeers, was not consulted on this
change, prompting it to express concerns about tax stability. However, the
Ontario Government has since entered into discussions with the company
and has agreed to a slightly lower top marginal rate.
11 For example, firms may be reluctant to train local workers if they believe
these workers may then work for another company, despite this being
beneficial to the industry as a whole. Thus, there is a strong argument for
government subsidization or provision of specialized training services.
12 UNCTAD TNC/FDI database
13 Simpson, Jeffrey. "We've sold off assets so often, branch plants 'R' us."
The Globe and Mail. March 8, 2010.
14 The environmental performance of non-fuel companies, including tar
sands operations, is not considered here.

III. FDI in mining – the Chilean experience

A. Industry background and FDI trends

By the end of the 19th century, mining had claimed a leading
role in Chile's economy, mainly with the production of silver, gold,
and particularly copper. By the mid-twentieth century, Chile secured
its position as a leading copper producer in world markets. Between
1900 and 1973, copper production increased on average by 70 per
cent per decade. Production slowed between 1973 and 1982, but
more than tripled from 1982 to 2007 (Wagner and Diaz, 2008;
COCHILCO, 2009). Other minerals have been important in the
Chilean context, although not to the same extent as copper. These
include molybdenum, gold, lithium, iron ore, and several non-
metallic minerals, such as iodine and nitrates. In some cases, these
minerals are extracted as a by-product of copper mining. In 2008,
total mine production was $29.8 billion, equivalent to 17.6 per cent
of GDP (see table I.1).

Foreign capital has played a major role in the development
of the Chilean mining industry, both historically and today. In the
19th century, British entrepreneurs were among the first to invest in
the country’s nitrate deposits. American investment, through TNCs
such as Anaconda and the Guggenheim Group, were the primary
driver of copper production in the early and mid-twentieth century.
Yet, by the 1970s, dissatisfaction with the economic contributions of
the foreign copper companies resulted in a constitutional
amendment authorizing the nationalization of major copper TNCs
operating in Chile. This situation virtually froze the entry of new
foreign capital and technology. In 1976, the assets of the
nationalized firms were transferred to state-owned CODELCO.
CODELCO became the largest copper producer in the world; a
position it continues to occupy today. Nationalist forces within the
military government (1973-1990) had supported this initiative, yet
influential liberals were calling for a rival development model, one
based on market forces and foreign investment. Although

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CODELCO would remain under state control,1 the military
government introduced legislation to allow parallel foreign
investment in the mining industry.

Inward FDI trends in the Chile mining industry show
limited flows beginning in the late 1970s, after the passage of new
foreign investment legislation (Figure III.1). Inflows increased by
the late 1980s, but FDI grew most quickly during the mid-1990s,
reaching a 1998 peak of $2.5 billion. Since then, flows have become
more volatile. Although the rapid accumulation of FDI experienced
during the 1990s has slowed somewhat, Chile's stock of FDI in
mining ($23.5 billion) remains one of the highest in the world. A
number of the world's largest mining TNCs have become prominent
players in Chile, along with many smaller foreign-owned firms.
Together, foreign affiliates account for a majority of mineral
production in Chile (see table I.1). Aside from CODELCO,
important local firms include public companies such as Antofagasta,
Molymet and SQM. There are also many smaller, locally owned
mining companies currently operating in Chile.


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B. Attracting FDI in mining

Table III.1 shows how Chile compares with other major
mining jurisdictions in terms of investment attractiveness. Overall,
Chile is among the most attractive locations for mining investment
in the world, with strong performance across most indicators. A
more detailed analysis is provided below.

Table III.1: Key factors in Chile's mining investment climate,

Mineral potential assuming no regulation
and land restrictions


Geological database 29
Infrastructure 31

Supply factors

Availability of labour/skills 21
Political stability 25
Uncertainty concerning the administration,
interpretation, and enforcement of existing


Regulatory duplication and inconsistencies 5
Taxation regime 5
Uncertainty concerning environmental


Policy and

Uncertainty concerning native land claims 9
Source: McMahon and Cervantes (2010)
Note: Based on survey of 672 representatives of mining companies around
the world, ranking 72 jurisdictions worldwide.

Supply factors

Chile has around a third of the world's copper reserves and
significant reserves of other minerals such as molybdenum, lithium,
nitrates and iodine. Exploration has been extensive in the past three
decades (registering the highest level of exploration investment in
the world in 1997). Major reasons for this trend were the quality of
pre-existing copper reserves, and the limited taxation of mineral
revenues which ensured that companies would capture a very large


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share of mineral rents if a deposit was discovered. Recent
discoveries, especially in the vicinity of large deposits as Escondida,
Collahuasi, Sierra Gorda and in the district of Andina - Los Bronces,
show that the geological potential of the country remains strong.
This is confirmed by international mining investors, which ranked
Chile fifth out of 72 jurisdictions in terms of pure mineral potential
(see table III.1).

However, the quality of and access to Chile's geological
information needs to be improved, notably through the activities of
the Public Geological Service (Sernageomin). This is particularly
important in light of recent trends for the government to secure a
higher share of mineral rents, which could limit the incentive for
private exploration.2 Sernageomin's budget is currently low relative
to that of equivalent services in other mining countries. Moreover,
although Sernageomin is entitled under Article 21 of the Mining
Code to collect geological information generated by enterprises, this
regulation is typically not enforced due to the lack of clear
regulation and procedures. These limitations result in the waste of
valuable data that could be used by potential investors.

The state of physical infrastructure in Chile is mixed. On the
one hand, many stakeholders recognize Chile's transportation
infrastructure as a positive factor contributing to the attractiveness
of the country as a destination for foreign investment. Roads, ports
and airports have improved their standards in recent decades as a
result of strong public and private investment, resulting in the
expansion of many transport services relevant for mining activities.
On the other hand, access to water is becoming problematic, as
mining tends to take place in the dry climate of Northern Chile. This
has prompted the government to look for other water sources, as
well as ways to generate the electricity necessary to develop and
operate them. As a result of these challenges, overall infrastructure
provision can be seen as a relative weak point in Chile's mining
investment climate (see table III.1).

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Water scarcity has become a problem for the mining
industry in Chile for two main reasons. First, the number of mining
projects has increased, and although the efficiency of water use has
improved in recent years, the absolute needs of the industry have
increased. Second, the national regulatory authorities on
environmental matters and water have begun to restrict the use of
groundwater, a major source of water for mining projects, arguing
that the replacement rate of this source has not been kept up. This
restriction has been applied even in cases where usage rights had
already been granted. Although the mining industry uses less water
than other consumers, such as agriculture, strong political pressure
remains for mining projects to operate without using underground
water sources, or competing with agriculture or other industries.

One long-term option is to rely on desalination plants or use
seawater directly. However, these options require significant
electricity supplies, both to power the plants and to pump water to
mine sites, which are usually located at considerable altitude.
Currently there is an adequate supply capacity, yet it is increasingly
concentrated in coal, which puts severe pressure on carbon
emissions. International policy trends intending to limit water usage
and carbon footprints are additional challenges that will need to be
accommodated in the future development of the industry. These
factors have not been detrimental to foreign investment in mining
until now, but they will be important elements in the future as they
will increase the operating and construction costs of both current
and new projects.

Aware of the importance of water, the Chilean Ministry of
Mines established a working public-private team to deal with this
issue. Under instructions from the President, the government created
an inter-ministerial committee of Water Policy in June 2009 to be
chaired by the Minister of Public Works. This committee aims to
develop a proposal containing guidelines for long-term national
water policy to promote efficient and sustainable use and
preservation of these environmental assets.


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An element frequently mentioned as positive for investment
in mining in Chile is the availability of skilled workers,
professionals and services (see Table III.1). The long history of
mining in Chile, including experience with a large state-owned
mining company, has contributed to the existence of a strong mining
culture, with a willingness of workers and professionals to work in
the industry. A network of 11 universities offering programmes
focused on mining, geology and metallurgy has also contributed to
the build up of relevant skills in the Chilean population. Since 2000,
Chile has graduated more mining engineers than any other country,
with the exception of the United States, Australia and Europe as a
whole (Hebblewhite and Knights, 2009).

Some limitations exist to the extent that mine sites are
located in remote regions, and require staff to travel from other parts
of the country. For example, around 15,000 skilled workers transit
in and out of Antofagasta, Chile's largest mining region, every
month. These transportation requirements add to the cost of hiring

Political stability and quality of governance

The return of democracy in the early 1990s led to political
stability without undermining the market-oriented institutions
created in the previous decades. Aside from some changes in social
and labour policy, the newly elected Coalition of Parties for
Democracy, which governed the country until 2010, largely
maintained the reforms of the military government, particularly in
the mining industry. The country has defined its approach as a
"social market economy" open to the world, with a major focus on
free trade. Within this vision, Chile has opted for foreign investment
as a fundamental element to the development of certain key
activities (mining being one of them), creating specific institutions
and instruments to attract and promote it. Record-high commodity
prices and company profits in recent years have brought about some
opposition to foreign mining enterprises, prompting some, on the

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political left, to call for another round of nationalizations. However,
with the exception of the introduction of a new specific tax on
mining in 2005, the political climate for the mining industry has
remained relatively stable.

Along with political stability, Chile possesses high quality
governance, and corruption levels are minimal. It scores above the
Latin American average in all the World Bank’s governance
indicators, ranking in the top quartile for indicators covering voice
and accountability, government effectiveness, regulatory quality,
rule of law and control of corruption. According to the 2008
Corruption Perceptions Index, published by Transparency
International, Chile ranks 25th out of 180 countries. In May 2010
Chile became a member of the Organization for Economic
Cooperation and Development (OECD), the first South American
country to join.

FDI policy

The Foreign Investment Statute or Decree-Law 600 was a
legal statute passed in 1974 under the military government, but
amended again in 1993 and 2006. Several aspects of the law are
attractive from a foreign investor perspective. First, it allows the
entry of foreign capital and the creation of a contract with the
Chilean government (Articles 2 and 3). Second, it guarantees non-
discriminatory treatment for foreign investors with respect to legal
or regulatory provisions (Articles 1 and 9). Third, foreign investors
are given the right to transfer capital and net profits to other
countries (Article 4). Fourth, foreign investors are entitled to include
clauses in their agreements with the Chilean government, whereby
certain tax rates and regulations can be fixed for a period of 10 or 20
years, depending on the size of the investment (Article 7, 8, 11 bis,
and 11 ter). Details on the options available to investors are
provided below in the discussion on taxation.

Property rights are also strongly protected by the 1980
Constitution - reformed in 1989 and afterwards - including for
foreign citizens, entities or legal persons who are, either


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permanently or temporarily, located in Chile. Article 19 outlines the
"freedom to acquire ownership over all types of property."
Expropriations may still be carried out, but they must be justified by
national interest and can only occur through legislative action. Even
then, investors targeted for expropriation can challenge the order in
court and are entitled to compensation (in the mining industry, this
compensation should equal the net present value of the given mine).
Although mineral deposits remain under exclusive ownership of the
government, mining concessions granted by the government to
explore or exploit these deposits are protected as private property
(see below).

Internationally, Chile has protected the rights of investors
through a number of bilateral treaties (BITs). As of 2010,
information available to UNCTAD shows that Chile has signed 51
BITs. Canada and the United States, which are major sources of
mining investment, do not have dedicated BITs with Chile, but their
free trade agreements (FTAs) have included chapters that address
investment protection.

Mineral titles/concessions

Mining laws in Chile have to be compatible with the 1980
Constitution, which specified State ownership of mineral deposits,
but at the same time granted a form of private property rights over
mineral concessions. The tension between these two objectives was
resolved through the enactment of Law No. 18,097, the
Constitutional Organic Law on Mining Concessions in 1981. The
Law confirms state ownership of all mineral deposits, yet also
determines which ones are subject to exploration and exploitation
concessions. Article 2 states that "mining concessions represent real
and immovable rights; different and independent from the surface
land ownership, in spite of belonging to the same owner; opposable
to the Government and to any person; transferable and
transmissible; susceptible to mortgage and other immovable rights
and, in general, to any act or contract; and are ruled by the same

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civil laws applicable to other immovable rights." In other words,
mining concessions are treated as other forms of private property,
which are entrenched in the Chilean Constitution. All aspects of
concessions, including their granting, duration and expiry, are dealt
with exclusively by ordinary courts of justice, which limits the room
for administrative discretion. This law was strengthened by its
constitutional nature, making it difficult to amend at a later date by a
simple majority in Congress.

The Organic Law on Mining Concessions was followed in
1983 by a new Mining Code, which replaced the former Code of
1932. The new Code improved the organization of mining properties
by providing new rules to accurately define the boundaries between
concessionaires and avoid overlapping properties. This eliminated a
problem that had become quite frequent.

As noted, to acquire a concession, investors apply through a
non-discretionary judicial procedure on a first-come first-serve
basis. Exploration concessions are valid for a period of two year,
although they can be extended for another two years if half of the
land area allocated is foregone. The holder of the exploration
concession has priority when it comes to acquiring an exploitation
concession. The process of transforming the exploration concession
to allow for mine development includes a required interim period,
including a review by Sernageomin. Investors must pay a monthly
license fee to the local government based on the size of the land
plot. Failure to do so can result in the loss or public auction of the

Mineral taxation
Chile has traditionally been one of the lowest taxed mining

jurisdictions, although the government has made efforts recently to
increase the share of mineral revenues going to the State. Until
2006, mining companies operating in Chile were not subject to a
special mineral tax or royalty. The general income tax regime is the
lowest in Latin America, with a corporate tax rate of only 17 per
cent - although there is as 35 per cent withholding tax on remitted


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profits.3 Tax incentives to accommodate the specific needs of the
mining industry were introduced, including accelerated depreciation
and deferred payment of customs duties on imported capital goods.
Moreover, as noted, qualified investors can enter a stability
agreement with the Chilean government to fix the tax regime (box
III.1). The above factors combined to establish Chile as one of the
jurisdictions with the lowest tax burdens for mining activities
(Colorado School of Mines, 1997; Otto, 1997).

Box III.1: Tax stability agreements under Decree-Law 600
Income taxes: Article 7 of Decree-Law 600, which had been included in
the original 1974 legislation, allows foreign investors to put a clause in
their contract with the State ensuring a fixed corporate income tax rate for
10 years. The fixed rate is 42 per cent, which is higher than the standard tax
rate for remitted profits (35 per cent). The investor may opt out of the
stability clause at any time, and enter the general tax regime, but they are
not allowed to re-instate the agreement at that point. Many foreign
investors opted for this regime, paying a slight premium in corporate tax
rates to protect themselves against future taxes or royalties and to secure
the use of accelerated depreciation and other tax incentives.

Indirect taxes: Article 8 allows a clause to be inserted in the agreement,
which fixes the VAT and charges for imported machinery and equipment.
This clause remains in place for the period that it takes to implement the
investment agreed upon. This allows mining companies to assess with
certainty the costs associated with importing inputs for the exploration and
mine construction phases. In the case of certain physical capital and
technology imports, the VAT is waived entirely.

Special regime for large projects: An amendment to Decree-Law 600 in
1993 (Articles 11 bis) offers additional benefits to investments over $50
million, and specifically those in the mining industry. These benefits
include: extension of the 42 per cent fixed income tax under Article 7 for a
period of up to 20 years; permission to hold accounts in foreign currency;
and fixed tax incentives for up to 20 years, such as those related to
accelerated depreciation, carry forward of losses, or start-up and


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Box III.1 (concluded)

organizational expenses to the government. As of 2008, the policy under
Article 11 bis was under review, and no new agreements were being

Special mining tax amendment: Decree-Law 600 was amended again in
2006 to adjust for the introduction of a new specific mining tax (see
below). The amendment (Article 11 ter) allows investments equal or higher
than $50 million to fix this new tax rate for 15 years, and to avoid being
subject to any increase in start-up or organizational licensing expenses.
However, to be eligible, the investor must opt out of any other stability
agreements they are party to under Articles 7 and 11 bis. Some firms have
decided to stay under those previous regimes, since companies that signed
agreements prior to 2005 are not required to pay the specific mining tax.
Some companies will not be required to start paying the royalty until 2024.

However, this low level of required contributions, combined

with rising world prices for copper, stimulated political demands to
increase taxation of the industry. The government has addressed
these concerns through several channels, including changes to the
accelerated depreciation regime and measures to avoid tax evasion.
Most notably, however, it passed Law 20.026, establishing a new
specific mining tax, which came into force in 2006. Mining
companies selling the equivalent of less than 12,000 tons of fine
copper do not pay the tax. For sales above this level, the tax rate
ranges from 0.5 to 5 per cent, depending on output.

Although it raised the required level of fiscal contributions
for companies, the implementation was done in such a way as to
minimize the effects on investment attractiveness. First, the tax was
established in consultation with the foreign mining industry,
resulting in several modifications to the original proposal. Instead of
applying the tax rate to measures of sales revenues, it would apply
to taxable operating income, which allows a wider range of eligible
tax deductions. This makes the tax similar in some aspects to an
additional income or profits tax, which ensures that the state shares
some of the financial risk.4 Second, companies that had signed up to
tax stability agreements under Decree-Law 600 before the passage


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of the royalty were exempt for the remainder of their contracts.
However, incentives were offered for companies to opt into the new
taxation regime. Most of the large copper mines operated by TNCs
would face the 5 per cent rate, but those opting out of their tax
stability agreements are guaranteed a rate of 4 per cent until 2013.
The tax's careful design and implementation has maintained Chile's
competitiveness in this area (see table III.1).

In October 2010, Chilean lawmakers passed a bill increasing
the maximum mining tax to 9 per cent in order to raise funds for
reconstruction after the earthquake that took place earlier that year.
As with the 2006 tax changes, companies with pre-existing stability
agreements will not be required to pay it, although they will be
offered incentives to opt into the regime. Chile's private sector
Mining Council has expressed concerns that this may result in a
much higher tax burden.

Environmental and social requirements

Until the late 1980s, despite the existence of a number of
different laws and regulations, Chile's overall environmental regime
lacked coherence and was not consistently enforced (Lagos and
Velasco, 1999). While this reduced the regulatory obligations for
foreign investors, it also created uncertainty and did not prevent
environmental regulations from being applied in a discriminatory
fashion. For example, in 1985, a special decree was issued to a
investor, Disputada, to improve air quality at one of its smelters,
while state-owned CODELCO and ENAMI's five smelters were

As Chile's mining industry developed, its environmental
impact moved to the forefront. In the early 1990s, the newly-elected
democratic government created the National Commission of the
Environment (CONAMA) and passed the Environmental
Framework Law. In 2001, the legal framework was complemented
by substantive regulations aimed at particular environmental issues.

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A key outcome of these reforms was the introduction of compulsory
EIAs in 1997, particularly for large mining projects.

The EIA process begins with CONAMA, through its
regional commissions (COREMA), proposing the terms of
reference. The company is then to submit a study by an accredited
consultant or university. COREMA then analyzes the results to
come to a decision. The company's initial EIA study is publicly
available for comment by affected stakeholders, who may submit
specific concerns to be taken into consideration by the review board.
If the EIA is approved, a declaration is made determining the
specific conditions to be met by the project. These include
conditions related to the environment, population health and local
communities. Tools used to manage the project may include plans to
mitigate environmental risks, to repair or restore the site, to
compensate for any damage that may occur, and to monitor key
aspects of the project. The results of an approved EIA are enforced
by CONAMA and COREMA, which may issue warnings or level
financial penalties in cases of non-compliance. Currently, the EIA
process focuses primarily on the exploitation phase of mining
projects; exploration activities and mine closure are not usually

Although Chile has been enhancing its environmental
policies and regulations since the mid-1990s, foreign mining
investors do not find them particularly burdensome. Many senior
mining TNCs already have their own environmental standards and
procedures, making it feasible for them to meet the requirements
under Chilean legislation. In fact, Lagos and Velasco (1999) found
that "the [environmental] policies and practices of mining
companies in Chile seem to be way ahead of the legislation and the
institutional system." If anything, the creation of CONAMA and the
introduction of compulsory EIAs have reduced the uncertainty
facing mining companies regarding their environmental obligations,
allowing them to plan their projects with these in mind. Mining
investors have ranked Chile tenth out of 72 jurisdictions in this area
(see table III.1).


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Relations with indigenous communities have not posed a
major challenge to foreign mining investors in Chile. This can be
estimated from the fact that international mining companies rank the
jurisdiction ninth most attractive worldwide when it comes to levels
of uncertainty concerning indigenous land claims (see table III.1).
One of the main reasons for this is that mining activities typically
take place in the North of the country, where the indigenous
population is less present. Mining activities in the central and
southern parts of Chile face stronger competition for land use with
indigenous communities. Another reason, however, is that
regulations concerning indigenous land claims and resource rights
have been limited in Chile until recently. Mineral deposits belong to
the state, and mineral concessions on indigenous land have been
traditionally granted without consent from local communities. The
1993 Indigenous People's Law gave indigenous groups some status
and recognition, but did not address the issue of natural resource
rights. In 2008, however, Chile ratified ILO Convention 169, which
gives the State substantive obligations in the area of indigenous
rights and community consultations. Yet, a hard legal framework in
this area has yet to be implemented.

C. Contributions and impact of mining FDI

Greenfield FDI has been responsible for the majority of the
growth in Chile's mining industry since the early 1990s, and the
positive impact goes beyond increased production and employment
(see table III.2). Foreign mining TNCs have also played a role in
training local workers, developing local supplier firms, and bringing
in international environmental and social best practices. On the other
hand, their contribution to government revenues has been limited
until recently. This section examines these contributions, and
particularly the role of government policy in shaping them.

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Table III.2: Summary of contributions and impacts of FDI in
Chilean mining industry

production and

- FDI has been responsible for the vast majority
of increased investment and mineral output since
the mid-1990s

Government revenues - Until the mid-2000s, foreign TNCs contributed
significantly less to government revenues than
- Recently, however, taxes paid by mining TNCs
have risen to a level more in line with their share
of production

Local enterprise

- Early foreign investors employed Chilean
workers in mines, helping to develop a local base
of skills and expertise
- In the 1990s, foreign mining TNCs had a high
propensity to contract out to local suppliers

Environment and
social impact

- Environmental and social practices of foreign
TNCs have traditionally been higher than local
- Foreign TNCs have worked with government to
clarify and enhance environmental regulations

Investment, production and employment

Over the past 20 years, mining has accounted on average for
around 8 per cent of GDP measured at constant prices. Furthermore,
the growth rate of mining (over 6 per cent per year) exceeds the
average real GDP growth for Chile (around 5.5 per cent). At
nominal prices, mining’s share of national production soared to over
23 per cent in recent years, as a consequence of the increase in
international commodity prices. The significant expansion of copper
production also shows up in the country's export statistics. While in
1997 the value of copper exports where $6.9 billion, in 2008, the
value had increased to $36.6 billion. Part of this is due to price
effects, but physical production has still increased substantially.


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The contribution of mining to national employment is more
limited than its contribution to economic growth because mining is
highly capital intensive. Direct mining employment in 2009
amounted to 50,000 jobs, or under one per cent of total employment.
Yet, mining's contribution to employment on a local level can be
quite significant (box III.2). The amount of indirect employment
created by mining activities is more substantial. Contractor workers
in mining amount to about 40,000, while an additional 400,000 jobs
in other sectors of the economy can directly be linked to the demand
from the mining industry (around 6 per cent of total employment)
(Consejo Minero, 2008).

Box III.2: Regional contributions of mining activities

In the northern regions of Chile, mining is by far the most important
economic activity, not only because of its direct operations but also for its
contribution in generating other economic activities. Employment
generated by mining in the northern regions as a percentage of total
employment exceeds the national average of mining, with 2.3 per cent in
the region of Tarapacá, 13 per cent in Antofagasta and 10.1 per cent in
Atacama. According to the socioeconomic survey of Chile (CASEN),
poverty in the region of Antofagasta declined from 34 per cent in 1990 to
7.3 per cent in 2006, one of the lowest levels in the country. In the
metropolitan area of Santiago, it declined from 33 per cent to 10 per cent.

A study carried out by COCHILCO, which analyzed the relationship
between mining and quality of life for people in Chile, contrasted the
quality of life in mining and non-mining areas between 1994 and 2003.

The study found that regions and communities with high dependence on
mining systemically performed better according to a range of indicators,
including lifespan, literacy, education, household income, poverty rates,
inequality, and the regional Human Development Index.

Sources: Mideplan (2008); COCHILCO (2008).

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Although state-owned CODELCO remains the largest
mining company in Chile, private mining companies, and foreign
investors in particular, have played a more important role in the
recent expansion of the industry. Whereas Chilean copper
production grew only 20 per cent between 1974 and 1981, it rose by
332 per cent between 1982 and 2007, after the introduction of liberal
foreign investment legislation and mining regulations (Wagner and
Diaz, 2008; COCHILCO, 2009). From 1990 to 2008, the private
mining sector in Chile increased at an average annual rate of 16 per
cent, nearly three times higher than the industry as a whole.5 Foreign
affiliates now make up more than 70 per cent of copper mining.
CODELCO's investment and production levels have not been able to
keep up with those of foreign companies (box III.3). On the other
hand, foreign affiliates have been less likely than CODELCO to
refine copper locally, preferring instead to supply their refinery
assets abroad (Sáinz, 2007). Since the 1980s, the share of refined
copper in total copper exports has dropped from 70 to just over 50
per cent in 2005.

Box III.3: The challenge for state-owned companies - the case of


In the 1970s and 1980s, CODELCO dominated the copper industry in
Chile (Lagos 1997: 54-57). However, beginning in the 1990s, private
(mostly foreign affiliates) production levels rose quickly, while
CODELCO's output remained relatively constant. As a result, by 1995,
copper production among private mining companies surpassed that of
CODELCO. This can be explained to a large extent by lower levels of
investment. Copper investments by CODELCO dwarfed those by foreign
investors until the late 1980s. In 1988, however, annual FDI inflows to the
mining sector began to exceed the level of investment by the SOEs.

Today, CODELCO faces great challenges given its activities in
exploitation of aging mines with declining head grades, and the consequent
need of large new investment to maintain or improve its competitiveness.



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Box III.3 (concluded)

CODELCO executives recently estimated that within the next ten years, the
company would need to invest $12 billion in structural projects (equivalent
to 5.7 per cent of GDP in Chile in 2008) to offset the deterioration of
mining variables such as low grades, and higher costs due to greater
transportation distances.

To address some of these concerns, a new corporate governance policy was
recently enacted, introducing professionalized senior management. The
new governance model excludes representation at the ministerial level and
seeks to remove political influence from the appointment of other directors.
Yet one of the continuing problems affecting the competitiveness of
CODELCO is its high level of mandatory contributions to the government
that prevent it from accumulating profits to reinvest and grow.

Government revenues

The distribution of mineral rents between the government
and foreign companies has been a major issue in Chile, with
concerns that the government was not receiving its fair share. Chile
lacked a specific mining tax or royalty until 2006, relying instead on
the general income tax system to secure a share of mineral revenues.
While this regime improved the attractiveness of investing in Chile,
by not having a specific royalty, the government was essentially
forgoing payment for its mineral endowment. Moreover, tax
incentives available under Article 11 of Decree-Law 600, such as
accelerated depreciation, reduced income tax liabilities, particularly
in the early years of a project. This investor-friendly tax regime may
have been necessary to compensate for the history of political
instability in the 1970s and 1980s. However, debates over taxation
intensified in the late 1990s and early 2000s, when despite
consistent inflows of FDI and rising copper production, income tax
revenues from mining remained very low (figure III.2).

From 1991 to 2003, income taxes paid by the private
(mostly foreign) copper sector came primarily from only two firms,

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Escondida and Pelambres, with the rest largely exempted due to tax
incentives (Ruiz-Dana, 2007: 25). Over this period, the 10 largest
private mining companies paid a total of just under $2 billion in
taxes to the government. This figure contrasts with the contributions
of CODELCO over the same period, which paid a total of around
$6.5 billion in taxes, with an additional $2.5 billion in profit
dividends (UNCTAD, 2007: 138). This discrepancy becomes even
more significant when one considers that private sector copper
production had surpassed that of CODELCO by 1995.

Figure III.2: Income tax paid by top ten private copper

producers (thousands of US$)









1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Ministry of Finance and Tax, COCHILCO.
Note: Includes income tax and the specific mineral tax, which was
implemented in 2006.

Aside from policy decisions, tax evasion and avoidance
were other factors limiting government revenues from the mining
activities of TNCs (Ruiz-Dana, 2007: 25-26). For example, foreign
affiliates could manipulate transfer prices and sell unrefined copper
to a related company abroad at an artificially low price, reducing
both the value of their sales and resulting tax obligations. Another
approach was to borrow heavily from parent companies through
loans. The tax on remitted interest payments to the parent company
was only four per cent, compared to 35 per cent for remitted profits.
This loophole was closed in 2001 by raising the tax on foreign


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interest payments to 35 per cent, and limiting the use of accelerated
depreciation deductions for remitted profits. However, most
companies were initially exempted from these changes under
Article 11, Decree-Law 600 contracts.

Tax revenues from the major private copper producers rose
significantly in 2004-2007 to a peak of $6 billion. There are three
reasons to account for this. First, world copper prices nearly
quadrupled over the period 2004-2008, before the financial crisis
caused them to drop again. High prices increased the profits of
mining companies, resulting in higher income tax receipts. Second,
some tax stability agreements and incentives (e.g. accelerated
depreciation) began to expire in 2004, bringing more companies into
the general taxation regime and increasing tax revenues (del Pino et
al., 2004: 228). Third, the implementation of the specific mining tax
in 2006 has increased the government's take of mineral rents.
Revenues collected from the royalty have been $603 million in
2006, $566 million in 2007 and $675 million in 2008. The specific
mining tax is expected to yield more revenues in the future, as some
companies continue to have agreements under Decree-Law 600 that
shielded them from this recent change. Moreover, recent 2010
legislation increasing the specific mining tax to 9 per cent is
expected to bring in an additional $1 billion over a three-year

The fluctuations of copper prices, when combined with
Chile's reliance on profit-based taxation of mineral production,
make government revenues highly volatile. In 1985, Chile created a
fund to manage this volatility. The role of the Copper Stabilization
Fund was to absorb excess revenues in boom times, which could be
drawn on in times of low prices. This fund was replaced in 2007 by
two new funds: the Economic and Social Stabilization Fund, and the
Pension Reserve Fund. The former receives all fiscal surpluses over
1 per cent of GDP, while the latter receives between 0.2 and 0.5 per
cent of GDP annually.

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Domestic enterprise development

Some have argued that the Chilean development model,
which succeeded in increasing growth based on mineral extraction,
must evolve into a second phase of more complex production
(Meller, 2000). In the long run, it is desirable to develop an
internationalized cluster of mining and related supplier firms (Lagos
and Blanco, 2010: 274). This would ensure a sustainable mining
industry that does not rely on the level of domestic mineral deposits
and investment levels. Evidence suggests that FDI has already made
contributions towards this goal.

Over the past few decades, domestic and foreign mining
companies have increasingly embedded themselves in the local
economy, having outsourced activities to focus on their core
business. In the early days after nationalization, the mining industry
had a limited impact on the broader economy. CODELCO and the
foreign companies before it followed an “enclave” operating model,
where mining activities were vertically integrated, with minimal
linkages with local firms (Lagos and Blanco, 2010: 9). Yet,
according to a study by the Mining Council, the vast majority of
mine workers were Chilean, including some senior managers and
engineers. This promoted the development of a local knowledge and
skills base that would become important to the broader industry.
From the early 1980s to the early 2000s, the ratio of regular workers
to those employed by contractor firms dropped from five to one
(Lagos and Blanco, 2010: 9). The ratio dropped at an even faster
rate among private (mostly foreign) mining companies. While this
was often due to the fact that contracted workers required lower
wages than regular employees, it nonetheless helped create a
network of local supplier firms. The northern region of Antafagasta
is often cited as an example of a developing regional mining cluster
(Buitelaar, 2001: 11-13; Lagos and Blanco, 2010: 9-10).

A number of government policies have helped facilitate
these developments, with the most relevant focused on providing
services related to skills development, innovation and R&D. These
policies have contributed to the capacity of local firms to supply


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foreign affiliates and have encouraged inter-firm collaboration. An
early example is the Centro de Investigación en Minería y
Metalurgia (CIMM) which, since its founding in 1970 to assist with
the nationalization process, has focused on building domestic
capabilities in the mining industry. It now encourages collaborative
research among public and private mining firms and offers them
commercial services through a subsidiary organization. The 1993
“Chile exports mining” programme established as an explicit
objective the development of competitive mining-related industries.
Most recently, Chile established the National Cluster Council in
2009, a comprehensive initiative involving the federal government,
academia, industry and regional governments. Mining is one of the
industries to be addressed under this framework. Chile’s network of
universities specializing in mining-related education and research
has provided important services to companies, and will play an
important role in future cluster initiatives. Innovation and R&D
activities should also receive a boost from the revenues of the 2006
mining tax, which are earmarked for these purposes. So far,
however, the government has been slow to translate these funds into
concrete programmes. Up to 2008, $30 million had been spent.

Despite the growth of outsourcing and specialization, and
government efforts to improve firm capacities and capabilities, some
studies find that cluster developments remain limited (Aroca, 2001;
Arroyo and Rivera, 2004). Small and medium-sized enterprises
(SMEs) are found to lack the capacity to innovate and link up with
large mining companies. Supplier relationships are akin to “hubs
and spokes”, where TNCs at the centre have significant bargaining
power over suppliers, resulting in short-term contracts and
competition based on low costs (Romani and Atienza, 2005).
Nonetheless, there is some evidence to suggest that Chile is at least
moving towards a model with “virtuous interactions among agents
and a significant learning process at the national level” (Buitelaar,
2001: 11).

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There are also signs that Chilean mining companies are
growing and becoming more internationally oriented. For example,
outflows of mining FDI have been increasing since 2000.6 Chilean
FDI mining outflows even exceeded inflows in 2000, 2002 and
2004. The government has used legislation to encourage the use of
Chile as a base for foreign TNCs to engage in outward FDI. The
Investment Platform regime allows foreign investors to set up an
affiliate in Chile that can invest in third countries. The affiliate is not
required to pay Chilean taxes on income earned abroad. The idea is
that these companies can set up regional headquarters in Chile. The
trend of outward mining FDI in Chile represents a potential engine
to drive the development of internationally competitive mining

Environmental impact

There is evidence that FDI has made strong contributions to
improved environmental practices in the Chilean mining industry. A
study comparing CODELCO and ENAMI with two early foreign
investors (Disputada and El Indio) found that, during the 1980s, the
foreign companies undertook stricter environmental measures and
had more advanced environmental management practices, going
beyond the requirements of Chilean law (Lagos and Velasco, 1999).
For example, major mining projects by foreign TNCs in the early
1990s often employed EIAs, even before there were official
regulations requiring these. The gap between foreign TNCs and the
SOEs narrowed by the late 1990s, but there were still signs of
lagging. Prior to 2003, foreign companies were the only ones
certified under ISO 14001, an internationally recognized
environmental reporting standard, while the majority had
environmental risk prevention plans and mine closure plans
(Borregaard and Duffey, 2002: 15). In 2003-2004, for example, the
Barrick Gold Corporation used a mine closure plan for the El Indio
mine, even though the law governing this procedure was not yet
enacted by the Chilean parliament. The environmental practices of
foreign mining companies are likely motivated by shareholder
pressure to follow the same practices as in jurisdictions with more


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advanced regulations, and the desire to anticipate future regulations,
which may be expensive to comply with (Lagos and Velasco, 1999).

Foreign mining TNCs have not only employed more
advanced environmental practices, they have also been a force
driving Chilean environmental legislation (Borregaard and Duffey
2002: 16). They have been motivated by a desire to reduce
regulatory uncertainty, and to create a level playing field with
Chilean firms.7 For example, a major motivation for the government
to create CONAMA in 1990 was to clarify environmental
regulations facing foreign investors. The standards and procedures
of the current EIA system were also strongly drawn from the
experience of voluntary EIAs submitted by foreign companies
throughout the 1980s and early 1990s. In another example, the
Mining Council, whose membership is largely made up of foreign
companies, created the Framework Accord for Cleaner Production
with the Chilean government in the early 2000s. The Accord
outlined commitments on mining-specific environmental issues that
would guide future performance improvements and public
regulatory efforts (Newbold, 2006: 259).

Despite notable progress in environmental performance over
the past two decades, there continue to be gaps that the government
has sought to address. In particular, the OECD (2005), for example,
has expressed concerns about the follow-up on commitments made
by companies during the EIA process, due to inadequate
enforcement resources. To strengthen the institutions associated
with environmental assessment and enforcement, in 2009, the
Chilean Parliament enacted a law establishing a Ministry of
Environment, an Environmental Assessment Service and a
Superintendent of Environmental Control. This new law gives the
Ministry the power to set policies and environmental regulations on
a broad range of issues such as the conservation of biodiversity and
renewable natural resources. The new Environmental Assessment
Service will streamline the EIA process, while the Superintendent
would be responsible for environmental monitoring.

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To ensure that environmental issues are given adequate
political importance and integrated into broader policy frameworks,
this recent legislative initiative also includes the creation of a
Council of Ministers for Sustainability. This formal forum will
discuss environmental policies and coordinate the content of
environmental regulation with the Ministry of Environment. The
Council is to be chaired by the Minister of Environment, and will be
composed of the Ministers of Finance, Health, Economy,
Development and Reconstruction, Energy, Public Works,
Agriculture, Housing and Urban Development, Transport and
Telecommunications, Mining and Planning.

Another notable limitation in Chile's environmental
framework is the absence of a comprehensive framework for mine
closure. While legislation was introduced in developed countries in
the 1980s, the formulation of such a law in Chile began only in
1999, and it has yet to be enacted. The Mining Safety Regulations
established in 2004 make closure plans mandatory. However, there
is not yet any systematic legislation governing all aspects of closure
plans, including regulatory, environmental, technical and financial

Social impact
The impact of mining activities on local communities in

Chile has been mixed. On the one hand, there is strong evidence of
improved socio-economic outcomes in the northern regions, which
depend on mining activities (see box III.2). Even in these regions,
mining often takes place in remote and unpopulated areas, which
works to limit land use conflicts. Yet, there are cases of mining
projects competing for land and water resources with local
communities and agricultural activities. The Pascua-Lama gold mine
being developed by Barrick Gold illustrates these challenges, and
how they are often addressed through the EIA process. (box III.4).
The case also demonstrates the advanced consultative techniques
used by major TNCs to integrate local concerns into their


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Box III.4: Pascua-Lama gold mine and community consultation

Currently under development in the mountains on the Chilean-Argentinian
border, Pascua-Lama will be the second largest gold mine in South
America. During the exploration and planning phases in the early 2000s,
local activists began to protest potential environmental and social costs
associated with the project, particularly related to alleged glacier damage
that would affect the local water supply and traditional indigenous ways of

The smooth development of the Pascua Lama project has since been
primarily a function of the company’s careful management of community
relations through CSR initiatives. In 2004, Barrick Gold launched a series
of door-to-door consultations and agreements with community
organizations. Based on their input, the company initiated development
projects related to health, infrastructure, and social work. Two publicly
available EIAs have been completed by Barrick Gold. During the second
assessment, Barrick Gold struck a deal with the private management board
of the basin’s water supply (made up primarily by large-scale farmers),
providing $60 million in compensation for potential damages, and $5
million to construct a new reservoir. This agreement secured the support of
the water board. An opposition movement to the mine remains, particularly
among the Diaguita indigenous community, which is made up of families
committed to ancestral farming practices.

Source: Urkidi (2010).

Despite the willingness of companies to consult
stakeholders, the government still has a role to play, particularly
when it comes to protecting the land and resource rights of
indigenous peoples. As noted, Chile has been slow to implement
legislation in this area. Traditionally, there was no inherent
recognition of indigenous rights over natural resources, such as
water or mineral deposits. As a result, mining concessions could be
granted by the government to mining companies without consent of
the community. Of the 1,357 concessions granted by 1996, 104 were

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on indigenous lands (Aylwin, 1998). Chile's recent ratification of
ILO Convention 169 resulted in a draft Code of Responsible
Conduct (CCR), establishing principles for consultations with
indigenous communities. Yet, dissatisfaction with the Code from
both the industry and indigenous groups led to its withdrawal, and
the government is in the process of formulating a new approach.


1 CODELCO’s was politically important to the military government, most
notably through a 10 per cent tax on export revenues earmarked for
military spending. Moreover, privatization would likely have triggered
labour action by powerful CODELCO workers, causing major damage to
the Chilean economy.
2 The Chilean government has recently imposed a new specific tax on
mining companies, seeking to secure a larger share of profits deemed above
the level necessary to justify private investment.
3 In practice, foreign affiliates are subject to the 17 per cent "First Category
Tax" on operating income. The 35 per cent withholding tax applies to the
same base as the First Category Tax, but the payment of the latter is
credited towards the amount. The 42 per cent tax rate, if applicable,
replaces these two taxes (see box III.1).
4 However, certain deductions under the general income tax regime are not
applicable - namely, accelerated depreciation, carry-forward of losses and
interest payments.
5 Calculated based on figures from Central Bank of Chile
6 UNCTAD TNC/FDI database.
7 As noted, there have been cases of uneven application of environmental
regulations to the disadvantage of foreign affiliates.

IV. Best practice lessons from Canada and Chile

Canada and Chile have attracted high levels of FDI to their
respective mining industries. With some exceptions, they have
secured significant economic benefits from these investments while
limiting their environmental and social costs. Doing so has meant
finding the appropriate balance between, on one hand, an attractive
policy environment for mining TNCs and, on the other, tax and
regulatory requirements that hold these companies accountable to
the country's development goals. Drawing on their experiences, this
section presents a set of lessons for mineral-rich developing
countries and their policymakers (table IV.1). Given their basis in
the Canadian and Chilean cases, these lessons cannot be generalized
to all situations. There is no "one-size-fits-all" model of mining
industry development. The following lessons should be taken as
guidelines or policy options that require adjustment according to
specific contexts and constraints.

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Table IV.1: Lessons for mineral-rich developing countries and

Policy Areas Lessons
Supply factors  Enhance public and private efforts in exploration

and the accumulation of geological data
 Proactively address the water, energy and

transportation needs of major projects
 Encourage the training of specialized engineers

and mine technicians
Policy stability 1. Use policy instruments that assure foreign

investors of regime stability (e.g. constitutional
guarantees of property rights, tax and regulatory
stability contracts, etc.)

2. Use multi-stakeholder consultations to create
social and political consensus and sustainable
mining policies

3. Adjust tax and regulatory policy when necessary,
but do so gradually and transparently, taking into
account investments under previous regimes

Taxation  Consider geological endowment when setting tax

 Prioritize profit-based taxation, yet combine with
proactive tax enforcement and management of
financial risks

 Grant tax incentives that allow capital costs to be
recuperated more quickly and that recognize the
cyclical nature of mining

Industry and
local enterprise

 Rely on capabilities of senior mining TNCs for
efficient mineral production

 Ensure that the mineral title and concession laws
facilitate competitive mine development

 Assist the efforts of TNCs to develop local
workforce and supplier capabilities, and facilitate
the development of mining clusters


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As noted in Section I.C, this study does not directly address

broader challenges of resource-based development, as identified by
literature on the "resource curse" (see box I.1). It is worth restating
here that countries seeking to develop their mining industries must
have the capacity to confront macroeconomic challenges associated
with dependence on volatile commodity prices. These include
highly cyclical tax revenues and the danger of an overvalued real
exchange rate limiting the competitiveness of exports in other
industries (i.e. Dutch Disease). High quality governance institutions
are also essential to limit rent-seeking or corruption that may occur
due to the availability of resource revenues.

1. How to improve supply factors affecting mining investment

Support the public availability of geological data and enhance these
databases through public investment and the encouragement of
private exploration

Having and maintaining a significant mineral endowment is
a necessary condition for a successful and competitive mining
industry. An important source of a mineral industry's continuing
competitiveness comes from mineral exploration activities, which
can expand the level of known and probable mineral reserves.
Policy tools used towards these ends by Canada and Chile have
relied on both the public and private sector.

and social

 Require comprehensive EIAs for project approval
and ensure government follow-up on commitments
by project developers

 Implement a legal framework that protects the
rights of local communities and ensures their
participation in mineral development

 Incorporate TNCs with leading environmental and
social practices into domestic private sector
associations and government policy

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Direct government efforts to enhance geological potential
should include public funding for geological studies and mapping,
as well as the storage and dissemination of geological data to mining
investors. In Canada and Chile, these tasks have been assigned to
specialized government agencies. Private sector exploration has also
been used in both countries to maintain the overall competitiveness
of the mining industry. Effective policies to facilitate private
exploration and ensure its contribution to overall mining industry
competitiveness include:

 Requiring the deposit of geological information as a

condition for securing an exploration license. This
information must be kept confidential for a period of
time so as not to undermine the incentive for investors
to explore.

 Facilitating access to finance for junior exploration
firms. In Canada, the TSX Venture helps facilitate the
funding of high-risk exploration firms that find it
difficult to secure project finance. Special tax vehicles
allow exploration expenses to be "flowed-through" to
corporate and individual shareholders as a tax deduction
on other sources of income.

 Limiting the taxation of mineral rents, even in cases
where they are above the level necessary to justify
investment in the production stages. Exploration efforts
rely on highly profitable mineral deposits to compensate
for the risk of not making a discovery. Taxing away
these "excess" returns limits the incentive to explore.
Chile's low rate of mineral taxation in the 1990s and
early 2000s helped spur extensive private exploration
efforts. This, of course, must be weighed against
foregone government tax revenues.


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Proactively address the water, energy and transportation needs of
major mines through high-level interaction between the government
and the industry. Private investment can be sought to carry out
necessary projects.

While mineral deposits are necessary to develop a mining
industry, so are supplies of cheap water and competitively priced
energy to extract these minerals in a cost-effective way.
Transportation infrastructure is also needed to bring in physical
capital for mine construction and to transport the extracted minerals
for exportation or further processing. Thus, these factors are key
elements used by investors to assess the profitability of exploiting
mineral deposits. The location of mineral deposits in remote regions
with limited pre-existing infrastructure compounds the problem
facing policymakers.

One approach to dealing with the general challenge is to
involve mining investors in the formulation of infrastructure policy.
For example, a significant share of mining in Chile takes place in
the arid desert region in the north of the country, putting significant
pressure on water resources. To address these issues, the Chilean
government has created a dialogue between private mining
companies and the public sector, and has established a high-level
committee involving key ministries, including those involved in
infrastructure development. By taking the needs of the mining
industry into consideration, opportunities can be identified to
maintain its competitiveness in this realm.

In some cases, mining TNCs may construct their own
electricity, water or transportation infrastructure, although this raises
their initial capital needs and operating costs. This was particularly
the case for copper TNCs in Chile prior to the nationalizations, and
has been seen more recently with the need to construct desalination
facilities to supply water to large-scale projects. Governments can
ease the burden by sharing the costs and, by doing so, can also
leverage projects to provide infrastructure to remote communities in
the vicinity. However, it is not realistic for mining companies to

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operate as surrogate government agencies in remote regions. Where
companies invest in local infrastructure such as roads, railways,
airports, electricity provision and other key infrastructure, host
governments should be willing to recognize this contribution

Another option for governments is to use the demand from
major mining projects to "anchor" other private investments in
infrastructure. This, however, requires a pre-existing legal and
regulatory framework to outline the terms of private infrastructure
investments, and to ensure reasonable prices for mining companies
and other users.

Encourage and facilitate the training of specialized engineers and
mine technicians. This can be done through the creation of domestic
training institutions, facilitating TNC training programmes, and/or
training local workers abroad.

Mining has become more technologically sophisticated over
the past century. Modern mines are large and capital intensive and
require a highly trained and professional workforce for their
operations to be profitable. Local presence of these workers reduces
costs for mining TNCs, which otherwise would need to train them
independently, or import foreign workers at higher wages and/or
living expenses. Building and maintaining a strong professional and
technical training system is a necessary part of any long-term
competitive national mining strategy.

Canada's pool of skilled mining engineers and technicians
grew along with the domestic development of the mining industry.
A strong network of training programmes and educational
institutions, such as those that emerged in Ontario's Sudbury region,
developed in response to industry needs. In Chile, local workers
were initially trained by foreign TNCs, which found this approach
cheaper than importing foreign workers. Over the years, a strong
network of educational institutions has emerged, training more
mining engineers on an annual basis than any other country, with the
exception of the United States, Australia and Europe as a whole.


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Some mineral-rich developing countries may lack the
capacity to develop specialized training institutions locally.
Moreover, reductions in transportation costs have led to increased
use of "fly in-fly out" practices that rely on foreign workers, often
precluding the need for TNCs to train locals. In these cases, initial
accumulation of specialized mining skills may require programmes
that send local mining professionals abroad for training. In
Botswana, for example, co-operative programmes between the
government and mining TNCs have trained local professionals in
places such as the United Kingdom, Australia and South Africa.

2. How to ensure policy stability

Use policy instruments that assure foreign investors of regime
stability, including constitutional guarantees of property rights and
security of tenure, tax and regulatory stability contracts with the
state, and international investment agreements.

With long investment timelines, large up-front capital
requirements, and exposure to volatile mineral prices, mining
projects require a high degree of policy stability to allow for long-
term planning. They require protection from expropriation, secure
rights over mineral concessions or titles, and assurances against
arbitrary or unforeseen changes in regulations and taxation.

Chile's experience is highly relevant for mining-rich
countries seeking to convince foreign investors that these factors are
in place. After American copper TNCs were expropriated in 1971
with little or no compensation, FDI came to a halt. Chile faced a
seemingly insurmountable challenge when it sought to reintroduce
FDI in the industry several years later. Yet as early as the late 1970s
and early 1980s, FDI inflows began to trickle into mining projects
again, and by the mid-1990s, FDI had once again become the
dominant driver of the industry's development.

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Important policy tools used by Chile to achieve this goal

 Foreign investment legislation guaranteeing national
treatment and profit repatriation;

 Option for mining investors to enter into special
agreements with the government to ensure the stability
of the tax and regulatory regime for a period of up to 20

 Guarantee of property rights of foreign investors in the
Constitution, with the right to compensation in cases of

 Mining laws treating concessions as property rights
protected under the Constitution.

 International agreements guaranteeing the rights of
investors from major sources of mining investment,
including the United States, the United Kingdom,
Canada and Australia

These laws outline strong protection for foreign mining
investors, enforceable in the country's courts. Yet, it is important to
carefully craft these provisions so that an appropriate balance is
struck between the interests of investors and those of the host
country. In Chile, for example, in exchange for entering a stability
agreement with the government, investors pay a higher corporate tax
rate (42 per cent compared with the standards 35 per cent on
remitted profits). In addition, the government retains the right to
make changes to the VAT and to apply new regulations to the
industry, as long as they do not discriminate between domestic and
foreign investors.

Adjust tax and regulatory policies to conditions over time,
but do so gradually and transparently, with respect for investments
made under previous regime.


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Although policy stability is a key determinant of investment
attractiveness for mining TNCs, it is not an end in itself. Changes in
fundamental circumstances justify adjustments to aspects of the
regulatory or fiscal regime. Mineral deposits are property of the
country in which they are located, and governments must ensure that
they receive a fair share from their sale. However, it is important to
avoid creating perceptions of uncertainty and instability. Therefore,
changes should be incremental, transparent and have limited
applicability to foreign investors established under previous

Chile provides a positive example of how to find the
appropriate balance between stability and flexibility to
accommodate changing circumstances. Issues such as the
environment, labour rights, and the government's share of mineral
rents, have become more important since the mid-1990s, and Chile
has been modifying its policies in these areas. For example, EIAs
have been made mandatory for all projects. In light of rising higher
copper prices, the taxation regime has also been reformed over the
past decade to include a specific tax on mineral extraction, and to
limit the availability of tax incentives. The government is also
reviewing their foreign investment law to phase out the availability
of tax and regulatory stability agreements.

Despite these changes, Chile has, for the most part,
maintained perceptions of policy stability among foreign investors.
Policy changes over the past decade have not been drastic, and they
have been publicly debated, with the input of the industry taken into
consideration. Moreover, companies party to existing stability
agreements with the government have been exempted from some of
the new measures.

Use multi-stakeholder consultations to create social and political
consensus on general direction of mining policy.

The contents of laws and regulations mean little if they
constantly change along with changes in the government or political

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regime. In Chile, for example, the strong legal provision protecting
foreign investors were imposed by the military government, making
their long-term stability questionable. Only when democracy
returned in the early 1990s, while the laws remained unchanged, did
FDI flows begin to expand rapidly.

To help build social and political consensus, governments in
mineral-rich countries should therefore seek agreement between key
stakeholders around a set of tax and regulatory policies. One way is
to conduct public consultations with stakeholder representatives,
who then agree to a final document that can guide future policy. It is
important to involve both the industry and its critics in order to find
lasting compromises. Typically, company and industry
representatives will be eager to engage in these processes to limit
regulatory risks in the future, and may therefore contribute financial
support to these efforts.

The Canadian case provides a best practice example of the
use of multi-stakeholder policy formulation. By the 1990s,
environmental and other public concerns about the mining industry
had created an uncertain policy climate. In response, the industry
and federal government cooperated to launch the WMI, a year-long
process resulting in an Accord signed by stakeholder representatives
to guide future government policy. The scope was comprehensive,
covering everything from tax to environmental policy, and involved
representatives of the federal and provincial governments, the
industry, environment groups, labour unions and indigenous
communities. Not only did the accord create guidelines for
politically sustainable mining policies, the WMI process also
fostered long-lasting relationships and partnerships across


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3. How to tax the mining industry

Consider geological features affecting profitability when setting tax

The profitability of a given mining project highly depends
on the quality of the deposit. High-grade deposits, with high
concentrations of the target mineral have more limited production
costs. Thus, the government can tax these projects at higher rates,
while still leaving enough profits to justify TNC investments in
mine development.1 It is important for countries to have adequate
information on their geological potential so as to be able to set their
tax rates at optimal levels. Mineral-rich developing countries with
limited administrative capacity and mining expertise can rely on
technical assistance from international organizations such as the
World Bank, as well as bilateral development agencies.

Canada and Chile have both tried to set their taxation levels
according to the quality of mineral deposits. In most Canadian
jurisdictions, base metals and gold are subject to lower tax rates than
other minerals, due to historically high production costs. On the
other hand, the discovery of highly profitable diamond deposits in
Northern Ontario prompted the government to create a separate and
higher tax on diamonds, without which it would have foregone
significant rents. In Chile, the recently imposed specific mining tax
applies higher tax rates to companies with higher levels of output.
This design ensures that the government takes a larger share of the
profits of higher production copper mines, which are typically those
extracting very concentrated (i.e., high quality) deposits.

Prioritize profit-based taxation, yet combine this with
proactive tax enforcement and management of financial risks that
the government faces.

Since mineral deposits are typically property of the
government, many countries have traditionally charged a royalty or
tax based on the volume or value of output. However, profit-based

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royalties or taxes, which apply a rate to a company's net income, not
their level of production, have several distinct advantages. By
sharing some of the financial risks facing mining investors, it
improves investment attractiveness of a jurisdiction. It also
automatically adjusts, to a certain extent, for changes in project
profitability due to factors such as high mineral prices.2

Nearly every Canadian jurisdictions has moved towards this
form of taxation in recent years. For years, Chile relied exclusively
on corporate income tax (a form of profit taxes) as a source of
revenue from mining activities. Its recently imposed specific mining
tax can also be broadly characterized as a tax on mining profits,
although certain tax deductions under the general income tax regime
are not applicable.

The use of profit-based mineral taxation must be combined
with strong tax enforcement measures. Profit-based taxes can be
more complicated than those based on production, due to the need to
accurately calculate eligible tax deductions and distinguish mineral
income from other streams of income. Until recently, Chile
experienced problems with companies manipulating transfer prices
and the use of loans from parent companies to limit their income tax
liabilities. New rules for transfer pricing and borrowing from related
companies have helped address these loopholes.

Given the relative size of the copper industry in Chile, it
makes up a substantial portion of government tax revenues. The
exposure of the government to higher levels of financial risk due to
profit-based taxation makes tax revenues highly volatile. To address
this, the country has maintained a fund to stabilize government
budgets. Fiscal surpluses above a certain level are automatically
deposited in the fund, which can be drawn on in times of low copper

Due to tax enforcement issues and financial risk exposure,
profit-based taxes or royalties may not be ideal for all situations.
Mineral-rich developing countries that lack capacity to administer
complex tax regimes and to develop effectively managed public


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investment funds may want to resort to production-based taxation,
which is easier to enforce and provides a more stable revenue

Provide tax deductions and exceptions that allow capital
costs to be recuperated quickly and that recognize the cyclical nature
of the industry.

Many mining projects have long investment horizons and
project lead times. There are large upfront expenses and investments
related to exploration and mine construction. As a result, it may take
years before production begins, and even longer before capital costs
can be recovered. Moreover, mining projects are exposed to volatile
mineral prices. Special tax deductions and exceptions for the mining
industry can be used to accommodate these issues and improve the
competitiveness of a jurisdiction. Both Canada and Chile use a
variety of these, including:

 Accelerated depreciation, which allows mining projects
to recover their capital costs in the early years of mine

 Carry-forward of exploration expenses to be deducted
from tax liabilities once a mine is in operation;

 Carry-forward of losses, which allows firms to
accumulate losses incurred during times of low prices to
reduce their tax burden when prices recover;

 Reduced import tariffs on foreign capital goods not
available locally, such as equipment and machinery for
mine construction and operation.

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4. How to encourage industry efficiency and local enterprise

Rely on the capabilities of global mining TNCs for mineral

Recent years have seen major consolidations among mining
TNCs, and the emergence of a handful of global leaders involved in
the majority of large-scale mining projects. Compared with most
national firms, these companies have higher levels of technical
expertise, easier access to project finance, and possess significant
economies of scale. Given these advantages, mineral-rich
developing countries may need to rely on them for mine
construction, production and processing. This does not preclude the
development of competitive domestic mining enterprises, but it does
caution against promoting them over their foreign counterparts, or
protecting them from takeover bids.

Canada, which has historically relied on domestic firms to
develop the mining industry, has recently approved the sale of
several of its largest mining TNCs to global leaders, including
Xstrata, Vale and Rio Tinto. These acquisitions were deemed to
provide net benefits to Canada, in part due to the belief that they
would be able to undertake higher levels of investment and develop
Canada's mineral deposits at a lower cost. This view is supported by
industry data demonstrating higher levels of operating profits among
foreign affiliates when compared with their Canadian-owned
counterparts. In Chile, state-owned CODELCO has been unable to
keep up with the level of investment and output growth of private
TNCs in the country. This, however, is at least partly related to the
high levels of mandatory financial contributions it must make to the

Nonetheless, both countries have some major national firms
that have become global leaders in their respective markets. These
include, notably, Barrick Gold, Goldcorp, Teck Resources in


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Canada, and Antofagasta in Chile. These firms have thrived despite
their exposure to potential takeover bids under their countries'
liberal investment regimes.

The flipside of relying primarily on TNCs for mine
development is that the refining and processing of minerals will
often not take place locally. As shown in the Chilean case, TNC
investments in extraction may be partly motivated by the need to
supply foreign refineries and smelters with significant economies of
scale. Even in Canada, international competition has reduced
employment in certain refining and smelting activities. Absent a
strong comparative advantage in this area, government efforts to
induce these value-added activities locally through incentives may
be prohibitively costly, and local processing requirements could
limit investment in the mining industry, resulting in reduced
production levels and tax revenues.

Ensure that mineral title and concession laws facilitate competitive
mineral development.

Mineral rights in Canada and Chile, as well as many other
countries, are typically granted on a first-come first-served basis
during the exploration phase. This model opens up the possibility of
companies acquiring and holding exploration concessions for
speculative or anti-competitive purposes, resulting in reduced
industry investment and mine development.

Canada and Chile have dealt with this challenge by
attaching various conditions to the acquisition of exploration
concessions, while avoiding specific performance requirements.
Examples include:

 Imposing regular fees based on the area of exploration
concessions to reduce the incentive to accumulate and
hold land without developing it.

 Requiring concessionaires to engage in continuous
exploration activities. In Canada, this is monitored by

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requiring the deposit of exploration results with the
relevant public geological agency.

 Limiting the lifespan of exploration concessions. In
Chile, exploration concessions are valid for only two
years. Renewal is possible for an additional two years,
but the land under concession is reduced by half in that

Assist the efforts of TNCs to develop local workforce and supplier
capabilities, and facilitate the development of mining clusters.

Mining projects are often criticized for their limited links to
the local economy, due to their capital intensity and reliance on
imported machinery and equipment. However, the cases of Canada
and Chile show that mining TNCs will often use local employees
and local suppliers to reduce their investment and operating costs.
To improve the quality of these local inputs, TNCs often train
employees and work closely with suppliers. Foreign TNCs in Chile
have made strong contributions in this way. Mining TNCs have
traditionally employed local workers, helping them develop mining
expertise. Since the 1980s, foreign TNCs have increasingly
outsourced aspects of their mining activities to local service

In time, FDI may help create a mining industry cluster. A
cluster consists of a mass of related firms that complement each
other and produce and share collective goods. Within clusters, there
is significant potential for spillovers of knowledge and technology
to local workers and firms. In Canada, mining clusters have emerged
in several regions; the best example being the extensive networks of
firms and suppliers in and around the nickel industry in Sudbury,
Ontario. Despite the acquisition of Canadian firms operating in the
region by foreign investors, the subsidiaries have retained their
sponsorship of local training and R&D programmes. In Chile, the
increased outsourcing of mining services by foreign affiliates has
led to similar trends in the Antofagasta region in the North of the


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country, where cooperation between foreign affiliates and local
suppliers and educational institutions has been increasing.

Governments are typically unable to independently create
clusters, which depend primarily on associated decisions by firms,
workers and local institutions. Public efforts in this area should
therefore facilitate co-ordination between private actors through the
provision of services. These can include, for example, information
on opportunities for TNCs to build linkages with local firms, or
public funds for skill development and R&D that firms require but
do not have an incentive to produce privately due to their
appropriation by other companies.

Specific examples of policy tools employed in Canada and
Chile with varying degrees of success include:

 The creation of public-private networks to disseminate
information and formulate collective industry action,
such as the Ontario Mineral Industry Cluster Council or
Chile's National Cluster Council;

 Government cooperation with the mining industry to
create specialized training and research institutions.
Examples include NORCAT and CANMET in Canada,
and CIMM in Chile;

 Public financing of mining R&D, such as the dedicated
fund create by Chile to invest revenues from the
country's specific mining tax.

The development of competitive clusters may build up a
country as a mining hub, making it an attractive place for TNCs to
base their regional head office operations. Chile has encouraged
mining TNCs to use the country as a regional hub through its 2002
Investment Platform law. This law allows foreign affiliates
established in Chile to invest in third countries without being liable
for taxes on income generated by these activities. Evidence from

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Canada suggests that outward FDI boosts demand for local financial
and professional services, and can connect local suppliers to foreign
markets through TNC networks. The development of an
international mining hub has helped Canada maintain a vibrant
mining industry despite declining levels of domestic mineral

Despite evidence of linkage and cluster development in
Canada and Chile's mining industries, policymakers in mineral-rich
developing countries should maintain realistic expectations in this
area. As Chile's experience shows, many supplier linkages are
limited to the provision of basic goods and services to mine sites.
Machinery and equipment inputs continue to be predominantly
sourced from abroad. While these basic linkages can help spread
economic impacts of mining investment through increased local
demand and employment, they remain dependent on local mining
investment and are unlikely to develop into innovative firms with
international operations and broad customer bases.

5. How to improve the environmental and social impact of mining

Require comprehensive EIAs for project approval and ensure
government follow-up on commitments by project developers.

Given the unique characteristics of individual mining
projects, it is difficult for general environmental laws and
regulations to cover all possible contingencies. As a result, countries
seeking to develop their mining industry should have in place an
EIA process that establishes project-specific standards to be met and
maintained through the life of the project.

The Canadian and Chilean EIAs have similar procedures.
Project developers are required to submit detailed plans about
potential environmental impacts associated with a project, as well as
the actions to be taken to mitigate them. These plans are then
assessed by the relevant government agency, which assembles a
panel of experts for this purpose. The input of affected stakeholders
is sought to incorporate additional impacts that are of concern. The


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EIA is given a broad scope, allowing consideration of some certain
socio-economic issues as well. If the project is approved, a final
document is created with legally binding commitments on the part
of the developer.

It is important that EIAs cover the full life-cycle of a mining
project, including mine closure and environmental reclamation.
Mine closure requires the cleanup of leftover toxic substances and
active efforts to restore vegetation and biodiversity. As a result,
significant financial commitments and plans should be in place from
early on. In most Canadian jurisdictions, project developers are
required to maintain an investment-grade credit rating or to post a
security with a third party trustee.

Another important element of effective EIAs relates to
government follow-up on commitments made by project developers.
This requires significant institutional resources and expertise. In
Chile, to address concerns of inadequate enforcement, the
government recently created a dedicated Environmental Assessment
Service to takeover the role of monitoring and following-up on EIA
commitments. In Canada, many EIAs have led to agreements
between government, company and local stakeholders to create a
permanent monitoring board involving representatives from each

Implement a legal framework that protects the rights of local
communities and ensures their participation in mineral

Although many TNCs have advanced stakeholder
consultation policies, they also require a legal framework that
addresses interactions between mining companies and local and
indigenous communities affected by their projects. A well-designed
framework that outlines the land and resource rights of
communities, the duties of companies to consult and seek consent
for mineral development, and the role of the government in
overseeing these processes, can limit tensions or conflicts that may

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arise during the development of a mining project. This works to the
benefit of both investors and communities. TNCs lower their
exposure to project risks due to dissatisfied local stakeholders, while
the latter share the benefits of mineral development and receive
compensation for some of the negative effects.

However, as the cases of Canada and Chile show, arriving at
an acceptable framework for all parties is a long and challenging
process. On the one hand, relations between local communities and
mining companies have improved in recent years. In Canada, the
courts have identified a "legal duty to consult" indigenous
communities when mining companies are seeking to explore or
exploit mineral deposits near their lands. Since the mid-1990s, the
increased use of legally-enforceable private agreements (e.g. IBAs)
between indigenous communities and mining companies have
provided stability to many projects and improved the flow of
economic benefits to the local economy. In Chile, as demonstrated
by the Pascua Lama project (see box III.4), public consultations
during the EIA process have given a voice to local communities and
provided an incentive for mining TNCs to satisfy some of their

On the other hand, gaps remain, leading to sub-optimal
outcomes for both companies and communities. In Canada, the IBA
process is largely unsupervised by the government, sometimes
resulting in unequal bargaining power between companies and
communities. A large portion of indigenous land claims are
unsettled, creating significant uncertainty for mining companies
hoping to develop mineral deposits. Moreover, it is not always clear
what the "legal duty to consult" entails, and specifically whether it
involves a requirement to seek consent from communities. In Chile,
the resource rights of indigenous communities remain limited and
there are no legal obligations in place for the private sector to
consult with them prior to developing mineral deposits. Both
countries continue to work towards a more complete framework to
address these issues.


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Ontario's new mining regime (see box II.6) contains some
promising elements. These include:

 Requiring private prospectors to notify communities,
submit exploration plans, and acquire a government
permit prior to undertaking exploration activities on
private and indigenous lands;

 Developing mandatory community awareness
programs for holders of prospectors licenses;

 Foregoing State mineral rights over certain private and
indigenous lands;

 Requiring government approval of a community land
use plan prior to mine development;

 Creation of a government-administered dispute
resolution process to address conflicts between
indigenous communities and mining projects.

Mineral-rich developing countries should take note of the

difficulties associated with impacts of mining projects on local
communities and proactively address these issues early on. Ideally,
this would be done in tandem with the relevant legislation to
introduce private investment into the industry.

Incorporate TNCs with leading environmental and social practices
into private sector organizations and government policy processes.

The largest private mining TNCs often follow international
best practices in environmental and social performance. Reasons for
this include strong regulatory regimes in home countries, scrutiny by
non-governmental organizations (NGOs), pressure from major
investors, and the need to secure the consent of host governments
and local communities for mining project development. Most of
these firms therefore abide by a range of self-regulatory frameworks
that often go beyond the legal requirements of the jurisdictions in
which they operate. Examples at the international level include the

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ICMM's Sustainable Development Framework (compliance is
mandatory for all 18 corporate members), the International Financial
Corporation's (IFC) Performance Standards, and ISO 14001. To
level the playing field, mining TNCs have an incentive to
disseminate their practices to local firms and government agencies.

Evidence from Chile suggests that mining TNCs have
undertaken stricter environmental measures and have had more
advanced environmental management practices than their domestic
counterparts, often going beyond the level mandated under Chilean
law. Foreign TNCs were the first to employ EIAs and mine closure
plans in the 1990s and early 2000s. To avoid competitive
disadvantages stemming from domestic mining firms employing
less stringent practices, and to clarify their own obligations, foreign
TNCs pushed for the Chilean government to upgrade their
environmental legislation. Environmental legislation passed in the
1990s was partly based on the desire of policymakers to provide a
coherent framework for foreign investors. In particular, the new EIA
system drew from the experience of voluntary EIAs that TNCs had
submitted to the government.

One way to transfer the environmental and social practices
of foreign TNCs to domestic firms is by encouraging their
membership in local private sector associations. In Canada, the
MAC has created mandatory performance and reporting
requirements for all its members, which includes foreign mining
TNCs. In Chile, foreign TNCs make up a significant share of the
private sector Mining Council, which has, in tandem with the
government, created a Framework Accord for Cleaner Production to
guide future voluntary and regulatory initiatives in this realm.
Foreign affiliates may draw off their parent companies' experiences
with international best practices and push to incorporate elements
into these types of frameworks.

Although mining TNCs party to international CSR
frameworks can be expected to import international best practices,
this does not preclude the need for government action in this area.
Emerging TNCs with limited international experience, or TNCs not


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subject to home government, investor, or civil society pressures,
require significant regulatory guidance to improve their internal
practices. Even companies with the most advanced practices still
have an incentive to avoid certain costly regulations that may
nonetheless by essential to improving their impact on the host


1 Although the taxation of mineral rents (i.e., profits that go beyond the
level necessary to justify investment in mine development) may not have
an effect on behaviour of mining TNCs involved in mine construction and
production, it can limit the incentive to engage in exploration activities
(Box I.2).
2 Although profit-based taxes ensure that the state receives higher payments
from high-grade deposits or during times of high mineral prices, this does
not eliminate the issue of excess mineral rents, which may continue to exist
even at high tax rates.


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Lagos, Gustavo and Patricio Velasco (1999). "Environmental
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Natural Resources Canada (2009). Canadian Minerals Yearbook
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Newbold, Jane (2006). "Chile's environmental momentum: ISO
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Urkidi, Leire (2010). "A glocal environmental movement against
gold mining: Pascua Lama in Chile." Ecological Economics, 2(15).

UNCTAD (2007). World Investment Report 2007: Transnational
Corporations, Extractive Industries and Development. New York
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Wise, Holly and Sokol Shtylla (2007). The Role of the Extractive
Sector in Expanding Economic Opportunity. Corporate Social
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World Bank (2009). Clusters for Competitiveness: A Practical
Guide & Policy Implications for Developing Cluster Initiatives.
Available online at http:// siteresources.worldbank.org



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