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How to Spend It?

Codelco, Chile’s state-owned copper company, reports that it needs more than $20 billion for structural projects over the next decade. According to the country’s finance minister, Chile’s natural resource funds, otherwise known as sovereign wealth funds, could be asked to cough up the cash.

New research by the Revenue Watch Institute – Natural Resource Charter and the Vale Columbia Center finds that natural resource funds are usually intended as budget stabilization funds—places to ”park” money to stem wasteful spending, inflation or exchange rate appreciation—or as intergenerational savings instruments. Using such funds to meet short-term internal public investment needs is usually not advisable, as it can divert resources from established long-term priorities and lead to a lack of transparency, or to patronage or nepotism.

In Latin America, where the dominant tradition seems to have been to spend as quickly as possible all the income generated by the extractive sector, Chile is seen by some as a model of restraint and prudence, with not one but two natural resource funds: a pension reserve fund and an economic and social stabilization fund, together adding up to almost $23 billion. And the new research finds that the funds’ management hits all the marks when it comes to good governance fundamentals, with clear deposit, withdrawal and investment rules; effective oversight; a high degree of transparency; and publicly available audits.

Nevertheless, in a recent interview with Bloomberg, deputy finance minister Alejandro Micco signaled that Chile is ready to back Codelco with money from its sovereign wealth funds, sparing Codelco the task of raising money from international financial markets.

There is extended consensus in Chile around the need for a strong Codelco, and the second administration of President Michelle Bachelet seems to be on board. After all, there is precedent under Bachelet: in her first administration, the state-owned copper company was granted with $1 billion from the natural resources funds.

In that case, the capitalization was approved by both the congress and Codelco’s board. The president of Codelco, Thomas Keller, also backs the new initiative, saying it’s a fundamental step for the biggest investment plan in the history of the company. The Copper Workers Federation (FTC) president also celebrated the announcement, noted further that the FTC has proposed a bill for an annual capitalization from the funds of $1.2 million.

So, is it ok to use natural resource funds for domestic expenditures and not only for macroeconomic stabilization or external investments or intergenerational savings? The debate is open in Chile, and other Latin American countries that are planning to launch these funds should pay close attention.

Alonso Hidalgo is an information and communications assistant at the Revenue Watch Institute – Natural Resource Charter.

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