Between 2003 and 2008, Latin America enjoyed a period of economic growth that led to an increase in the region’s domestic consumption and a generalized decrease of poverty levels. This was mainly due to the increase in the international pricing of mineral commodities and fossil fuels experienced during this time. Meanwhile, this boom also highlighted the importance of commodities extraction and export to the national economies of Latin America, which led to a debate surrounding the type of management and legal concessions that should be employed to manage the region’s natural resources. Thus, most Latin American countries currently operate hybrid industries with both public state-run companies and private concessions to multinational companies. Consequently, with the increased activity in the commodities sector, preoccupations about proper soil management and adverse environmental externalities mitigation have come about in recent decades.
Striking Regulatory Balance, the Key to Investment Growth
In Latin America, state governments own the subsoil and all of the resources therein, which they can extract through their own national company or co-produce with publicly-traded corporations. By contrast, in more developed regions such as the United States, Canada, and Europe, the government completely leases through concessions the exploitation of commodities to private companies, which become owners of the resources that they produce. In the case of Latin America, regional governments that are worried about the sovereignty of their natural resources must tread a fine line in order not to discourage much needed foreign investment and technology transfers. Specifically, private capital corporations must be confident that their ventures into the region’s extractive industry will be profitable, given the high upfront costs, the volatility of international prices, the additional costs of exploration, and the inherent political risk. After years with state-run monopolies in extractive industries, several Latin American countries are opening themselves up in the search for foreign investment injection. For example, in 2013, Mexico’s government legislated in favor of private sector involvement in the supply chain of its fossil fuels industry, which includes exploration and extraction, as well as the downstream ladder, including refining, transportation, and storage. Within the oil and gas sector in Latin America, one of the most commonly used mechanisms for the state to capitalize from the production of private corporation is by charging royalties, which can be based either on the quantity of resources extracted or their market price. Likewise, the multinational companies operating within each country are taxed at the corporate income level. Simultaneously, many governments offer multinational corporations tax breaks and other types of financial incentives to draw them into operating within their country.
While the oil and gas industry in Latin America tends to be managed in close coordination with the central government and its state company, the extraction of other metallic mineral resources is usually managed through full concessions of a determined territory and for a specific time. This is because most countries in the region do not have state-run companies for their precious metals and other earth mineral sectors, with the notable exception of the National Copper Corporation in Chile (the largest copper producer in the world).