Countless lessons can be learned from the recent rescue of 33 Chilean miners who were trapped 700 meters below the earth in the San José mine. Without a doubt, one of the key lessons for the government of Chile was the importance of relying on a capable ally. In this case, that ally was the state-owned mining company Codelco, which played such a strategic role that it is still a common topic of conversation in that country.
Not only did Codelco provide the rescue machinery on an ad hoc basis, but it also implemented the communications technology and directed the teams in the mine; constructed a series of civil engineering projects around the site; provided vehicles, and paid for the man-hours involved in the rescue operation. Altogether, that meant contributing US$15 million, the equivalent of 75% of the total $20 million cost of the rescue, according to the official figures of the government.
Codelco strengthened its position as the major player in this story by managing, with impeccable efficiency, all of the decisions and challenges involved in the complex operation of bringing out the miners alive — the results of which made headlines around the world. In so doing, the company’s skill at planning, executing and containing risks during a crisis proved the quality and experience of its managerial team. This has had a positive impact on the way the public views Codelco, notes Andrés Ibáñez, professor of marketing at the Catholic University of Chile. “Clearly, the image of the state-owned copper company emerged much stronger after the rescue.”
One of the most outstanding aspects of Codelco’s performance was its willingness to tackle a mission that was critical for the country, while contributing the best of its resources, notes Aldo Casalli, professor of mining engineering at the University of Chile.
Some believe that the leadership qualities demonstrated by the state-owned company during the rescue operation went far beyond that. “It blotted out the impression that some people had about its alleged inefficiency, and its [supposed] inability to manage its resources well,” said Julian Ortiz, professor of mining engineering at the University of Chile.
Ortiz argues that at the beginning of this year, when he was still the Chilean president-elect, Sebastian Piñera raised the hackles of many observers by announcing his intention to privatize 20% of the ownership of Codelco.
Reasons to Privatize
One of the reasons that Piñera gave for promoting the controversial privatization measure was an urgent need to increase the efficiency and competitiveness of the state-owned copper firm, which has a high cost structure.
Some experts, such as Hugo Moraga, professor of economics and business at the Andres Bello University, supported the position of the President-elect. Moraga argued in the local press that “Codelco’s operational costs now represent almost 47% of its total costs, in contrast to Escondida mining – a private company owned by Australia’s BHP Billiton – whose costs barely amount to 19%. So obviously something has to be done to improve Codelco’s competitiveness.”
Moraga’s comment led many economists, legislators and mining sector officials to defend the state-owned character of Codelco. They noted that between 2005 and 2008, Codelco contributed US$13.8 billion in income taxes to the government, according to Cochilco, the Chilean Copper Commission, which collects official statistics. Both individuals and corporations pay income taxes in Chile.
Piñera outlined another reason for making it easier for private capital to invest in the state-owned company: Such a measure would make it easier to manage Codelco, as well as increase its copper production, which has declined. In one of the televised speeches he gave before assuming the presidency, Piñera affirmed, “Because of Codelco’s poor management, Escondida has surpassed it in terms of copper production volumes.”
Nevertheless, representatives of Codelco were quick to correct the President-elect’s declarations. They clarified that Codelco produced 1.70 million tons of copper by the end of 2009, which represents an increase of 16% from the 1.47 million tons it produced the previous year. In contrast, Escondida only produced 1.1 million tons of copper last year, which is 12% less than the 1.2 million they produced in 2008, according to Escondida.
A Debate Resurfaces
Despite the debate that took place on that occasion, a consensus was not achieved, and that has continued to be the case ever since discussions about privatizing the state-owned company began years ago.
According to Cristián Leporati, director of the advertising department of Diego Portales University, there have always been arguments and counter-arguments about privatizing Codelco. "This debate is about the collective unconscious of all Chileans, including the general public, politicians and employees of the state-owned enterprise," he notes. "The debate comes to the attention of the public from time to time, depending on their mood and the current political condition."
In his view, the rescue of the 33 miners revived debate about privatization “so that those who were interested in showing that the state-owned company is managed efficiently achieved that goal empirically as a result of this landmark event, which had global attention.”
Some experts are hopeful that the high profile rescue has made the government’s position more flexible. In this regard, Casalli is hopeful that the successful outcome of all the efforts to bring the miners out alive has helped authorities understand “the advisability of relying on the ‘flagship’ that is Codelco. This will permit us to be one of the main players in the global mining industry.”
Nevertheless, others are not at all sure that the rescue tale, with its happy ending, has changed the government’s privatization agenda. Ortiz says that the only certainty is that the public image of Codelco has improved a great deal, and that this will act as a wall of pressure in case the authorities decide to take some action that makes it easier for private capital to enter the state-owned copper firm.
However, Ibáñez has the totally opposite view. He argues that the point about whether or not Codelco should be state-owned “is no longer important. Nor do I believe that the public is paying attention to that. Don’t forget that private enterprise also played an important role in the rescue.”
In effect, the private companies – Escondidas; Collahuasi (which is owned by South Africa’s Anglo American Mining and Switzerland’s Xtrata); Chile’s Antofagasta Minerals; Caserones, owned by Japan’s Lumina Copper; and Canada’s Precision Drilling – all cooperated in a significant way in the rescue operation. They contributed the T-130 driller – a machine that managed to reach up to 630 meters below the surface – and the five machines that undertook the first boring into the earth, as well as 50,000 rations of food for the rescuers who participated in the rescue process. All this involved making contributions of US$5 million, which amounted to 25% of the total cost of the operation.
A Discussion That Has No End
In the opinion of Ibáñez, Codelco is a world-class organization, which was proven during the rescue. As such, the company must be open to partnerships, associations and an infusion of private-sector capital.
Nevertheless, Leporatti notes, “You have to consider that copper and Codelco – like the miners – are part of our culture and our national identity. As much as the chueca, a traditional game; the [Chilean-style] empanada, a typical meal; la cuenca, the national dance, and other such cultural landmarks. None of these things can be privatized. They are part of our national patrimony, and for the same reason I believe it is practically impossible for any government that is not permanent to dare to take a decision to privatize [Codelco].”
The consensus in academia is that the debate about privatizing Codelco will continue for a long time. The most likely thing is that with the passage of time, public opinion will forget this “heroic act” of Codelco, notes Ortiz, and the discussions about privatization will regain momentum, because the political groups who promote privatization have not changed their agenda.
In addition, an ideological component helps explain the progress of the debate, notes Casilli. “Some politicians think that the role of the State must be as small as possible, and that it must not be involved in business activity or production. In contrast, other politicians have a completely opposite vision.”
A Burden for Codelco
Some experts have argued that the rescue has opened the way for Codelco to forge new strategic alliances that will help the company manage its business. However, Ibáñez discards the idea that the rescue operation in itself has had any impact on Codelco’s activity as a business. “Its positive business results are because of its sound management and its ability to generate growing demand … not its ability to carry out a skillful rescue.”
What has probably changed for the better, adds Casalli, is the image of Codelco in international public opinion. However, that may not last long. For years, the state-owned company has had a high tax burden. According to Juan Carlos Guajardo, executive director of Cesco – Chile’s center for copper and mining research – this has had negative repercussions on its image in the international community.
According to the Copper Reserve Law, promulgated by the military dictatorship in 1976, Codelco must set aside 10% of its total revenues to finance the costs of the country’s armed forces. That is an extremely high figure, considering that copper recently reached a record-high price of US$4.01 a pound on the London Metal Exchange.
“Despite the fact that Chile generally has a positive international image,” Guajardo told the press, “the particular topic of the Copper Reserve Law is viewed very negatively. That’s because Codelco has to explain to its potential partners and competitors that it is directly financing the country’s arms with its own sales. It is very hard for the market to understand that there is a mechanism that directly links the state-owned company with military financing.”
In September 2009, the government of ex-president Michelle Bachelet (2006-10) proposed a bill to its parliament that would repeal that law and replace it with a new system for financing the armed forces. However, Chile’s National Congress has not made much progress in that area since then. If the government resolves this issue, the most likely thing is that Codelco will have a better corporate risk rating, which will help its competitiveness, experts note. Perhaps that could turn the miner rescue into a milestone that marks the end of the debate about its privatization.