Extractive Industries in LAC Key issues and approach of the Inter-American Development Bank

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1 Workshop on Best Practices on Mining Policies and Technologies Brussels, June 12-13, 2014 Extractive Industries in LAC Key issues and approach of the Inter-American Development Bank Nancy Jesurun-Clements Lead Energy Specialist Energy Division

2 2 Outline 1. Mineral Endowments Potential in the Latin America and the Caribbean Region (LAC) 2. Economic and Social Spillovers from Mining; Socio-Environmental Impacts 3. IDB s Role and Instruments 4. IDB s Approach to Sustainable Mineral Endowment-Based Development

3 3 Outline 1. Mineral Endowments Potential in the Latin America and the Caribbean Region (LAC) 2. Economic and Social Spillovers from Mining; Socio-Environmental Impacts 3. IDB s Role and Instruments 4. IDB s Approach to Sustainable Mineral Endowment-Based Development

4 4 LAC: Large Endowment of Mineral Resources LAC Mineral Reserves (2012: % Global Reserves ) USGS 2013 Data

5 Silver Copper Tin Bauxite Gold Iron Ore Nickel Lead Salt Gypsum Aluminium Cement Phosphate Steel 5 LAC: A Substantial Share of Global Production 70 Mineral Production in LAC (2010, % of Global Production) USGS Mining Yearbook 2012, MEM

Exploration Investment (2006-2011) Metals

6 LAC: Main Global Destination for Mineral Investment Global Non-Ferrous Metals Exploration Investment ( ) Metals Economic Group Worldwide Exploration Trends

7 7 LAC: Leads with 29% of Global Mineral Investment Portfolio Global Mineral Investment Pipeline (as of December 2012) Investment Total (US$ Billion) Share % Africa Asia Europe Latin America North America Oceania Total Raw Materials Data 2012

8 8 LAC: Share in Global Mineral Investment Investment in Select Minerals (Global and LAC, US$ Billion ) US$ Billion Iron ore, copper, gold and nickel: largest investment targets for mining companies Average mineral project investment in LAC: US$730 million, more than twice Asia s average of US$363 million Iron ore Copper Gold Nickel Uranium Lead/zinc PGMs Diamonds Silver Other 30 Investment Total (US$ Billion) Investment LAC Raw Materials Data, Stockholm, Sweden, July 2013

9 9 LAC: Mineral Exploration Investment by Country (2012) BNAmericas (July 2013). Mining Intelligence Series: Mexico in its Prime.

10 10 LAC Provides High Returns for Foreign Direct Investment (FDI) Returns on FDI Stock in Selected Economies (Average annual rates) ECLAC 2013

11 Important Share of the World s Mineral Production is from Artisanal Small-Scale Mining (ASM) Metal ASM % Share ASM % of LAC Total ASM Production (Thousand Tonnes) Total World Production (Thousand

11 11 Important Share of the World s Mineral Production is from Artisanal Small-Scale Mining (ASM) Metal ASM % Share ASM % of LAC Total ASM Production (Thousand Tonnes) Total World Production (Thousand Tonnes) Tantalum 26 0,205 0,790 Tin ,5 354 Gold , Tungsten >6 >4,32 78 Iron Ore <4 < Lead 3 140, Zinc 1 129, Copper , LAC ASM - Formal Gold Production Ratios Polinares, Raw Materials Data. Colombia 3:5 Ecuador 5:6 Peru 1:2

12 12 Outline 1. Mineral Endowments Potential in the Latin America and the Caribbean Region (LAC) 2. Economic and Social Spillovers from Mining; Socio-Environmental Impacts 3. IDB s Role and Instruments 4. IDB s Approach to Sustainable Mineral Endowment-Based Development

13 13 Mining creates Fiscal Revenue through Taxes and Royalties Peru: Mining contribution to fiscal revenue ( ) % of GDP Mining Taxes Mining Royalties Primary Commodity Revenue Total Revenue (% of GDP) (% of GDP) (% of GDP) (% of total fiscal revenue,) % of total fiscal revenue ICMM 2012; IMF 2012 Data;

14 Mining may be a Major Source of Employment Peru: Direct and Indirect Employment created by Mining ( Thousand) Indirect Employment Direct Employment IMF 2012 Data

15 15 Wages in Mining often Higher than Average in Other Sectors 6000 Peru: Average Wages per Economic Sector (2007, P$S) Average Wages (not including Mining): P$S Mining Manufacture Urban Wages Commerce Agriculture McKinsey 2013 (INEI; IPE; Macroconsult; Ministerio de Trabajo Data)

16 Mining produces Value through Economic Linkages 2009-2010: Infrastructure, Backward Forward Linkages, Supplier Development & Job Creation Averaged US$1.

16 16 Mining produces Value through Economic Linkages : Infrastructure, Backward Forward Linkages, Supplier Development & Job Creation Averaged US$1.2 Billion/year Peru: Contribution to FDI from CAPEX and OPEX of 4 Gold Mines ( ) World Gold Council (2012) The Economic Contribution of Large-Scale Gold Mining in Perú Second Edition

17 17 Positive Impact on Poverty, Health, Education and Access to Community Infrastructure 68.4 Peru: Impact of Mining on Select Socio-Economic Variables 59.8 Without Mining With Mining Total Poverty (%) Extreme Poverty (%) Malnurishment (WHO Definition, %) Illiteracy (%) Female Illiteracy (%) Income and Income Development Health Education Based on Model developed by MACROCONSULT for the Sociedad Nacional de Minería, Petróleo y Energía de Perú (2007 INEI Data)

18 18 However, profits are repatriated and value captured in the region is limited LAC: Total, Reinvested and Repatriated Earnings of Transnational Firms ( , U$S Billions) Metals Economic Group Worldwide Exploration Trends

Mining by Region in Chile (2006-2010, Litres per

19 19 Mining creates pressure on other natural resources and land-uses Freshwater use in Copper Mining by Region in Chile ( , Litres per second) Source: BNAmericas (March 2012) Water and Mining in Chile

20 Improved planning and access to infrastructure for mining needed By 2020 Chile s copper mining industry will need an additional 3,000 MW of power capacity to produce 39.4 TWh: 80% more than in 2010 Copper Mine Production Capacity (Million Mt)

21 Industry sees numerous risks for future investment Socio-Economic Agreements Security Situation Labor challenges Infrastructure Corruption Disputed Land Claims Political Stability Taxation Regime Skills Geological Database Trade Barriers Legal System Administration Environmental Regulation Uncertainty Protected Areas Fraser Institute Mining Survey 2012 Brazil Chile Colombia Mexico Peru 21

22 The Mining Sector Challenge How do LAC countries maximize economic value while minimizing socio-environmental impacts?

23 23 What is needed? 1. Enabling Environment for Sustaining Investment (Reduced Country Risks) -Governance- Effective, transparency-inducing fiscal, legal and regulatory system Modern mining planning and management instruments for government agencies Engagement with stakeholders Reduce other Country Risks: labor, political

24 What is needed? 2. Increasing Economic Value to all Stakeholders Improving Operational Efficiency in Mining Financing Infrastructure: PPPs or Public Goods for energy, water, transport Technical training for a skilled local labor force Incentives for clean technology Promoting local content by development of peripheral economic activities such as local supplier chains Capturing value 24

25 What is needed? 3. Minimizing adverse socio-economic impact Improving land-use and environmental impact management Capacity-building and tools for natural resource planning; biodiversity and eco-system services; social impacts Provision of community infrastructure around mining hubs Formalization of small artisanal miners 25

26 26 Outline 1. Mineral Endowments Potential in the Latin America and the Caribbean Region (LAC) 2. Economic and Social Spillovers from Mining; Socio-Environmental Impacts 3. IDB s Role and Instruments 4. IDB s Approach to Sustainable Mineral Endowment-Based Development

27 27 The IDB Group Inter-American Development Bank Governments, large companies Inter-American Investment Corporation SMEs and small banks Multilateral Investment Fund Micro and small enterprises/private sector development

28 IDB Strategic Priorities for LAC

29 IDB s Partners According to Intervention Natural Resources Ministry Ministry of Energy & Mines Inclusion/Energy/Finance/ Ministry Mineral Rights Cadastre Geological Survey Mining Directorate Government Subnational Government (State/Province/Local) International Organizations Private Sector Domestic & International Civil Society Organizations Civil Society Academic institutions/experts Domestic & Multinational Companies Suppliers and Contractors Host communities, Indigenous & Afrodescendant Communities 29

30 IDB Support Through the Public Sector Instruments: Sovereign Guaranteed Loans & Technical Cooperation Grants Policy dialogue enhancement: Analytical work developed to assist governments in public policy and informed investment decisions for better working of the markets, correction of market failures, and access to knowledge and technology. Investments: Loans oriented towards ensuring long-term competitiveness of sector through the provision of public goods with high economic return, high coverage, and low level of distortions. Financing of subsidized delivery of services. When necessary, programs promoted to foster asccess to basic services, such as electricity access among small, poor populations mostly in remote areas.

31 IDB- Support through Private Sector (1) Structured and Corporate Finance Finances large banks and private sector and public and mixedcapital entities in nearly all economic sectors in LAC. Provides loans from IDB s own resources and works with banks and institutional investors to participate on a co-financing basis Loans and Guarantees between US$10.0 and US$200 million Sectors: Extractive (oil & gas, mining, forest products) Productive (agribusiness, biofuels, cement, steel, chemicals and others) and Service (tourism, education, healthcare) Focus on supporting green (e.g. energy efficiency, co-generation, environmental impact mitigation) and social (e.g. training, housing, income inequality) components in projects and investments

Multilateral Investment Fund (MIF) The MIF in numbers since 1993 Largest provider of technical assistance for private sector development in LAC 3 areas of focus: Access to Finance,

32 Multilateral Investment Fund (MIF) The MIF in numbers since 1993 Largest provider of technical assistance for private sector development in LAC 3 areas of focus: Access to Finance, Access to Basic Services, and Access to Markets and Capabilities Projects are carried out in partnership with other organizations, who contribute a significant portion of the project costs

33 IDB- Support through Private Sector (2) Opportunities for the Majority (OMJ) OMJ projects seek to Increase productivity, bring low-income populations into the formal economy, create jobs, address market failures that raise costs for those least able to afford them Bring quality goods and services to the 360 million people in Latin America and the Caribbean who are at the Base of the Pyramid (70% of population) OMJ offers loans, guarantees, and grant technical cooperation Since 2008 OMJ-IDB invested US$180 million and with donor participation up to US$300 million

34 IDB- Support through Private Sector (3) Inter-American Investment Corporation (IIC) Focuses on small and medium-sized companies that have difficulty accessing medium- and long-term financing Loans and investments for innovative, creative projects and enterprises with high developmental impact Provides direct loans, guarantees, equity investments, and credit lines to financial intermediaries. Catalyst for attracting technology, know-how, and additional project financing

35 35 Outline 1. Mineral Endowments Potential in the Latin America and the Caribbean Region (LAC) 2. Economic and Social Spillovers from Mining; Socio-Environmental Impacts 3. IDB s Role and Instruments 4. IDB s Approach to Sustainable Mineral Endowment-Based Development

36 36 Rationale for IDB s involvement Bank recognizes the potential of the extractive industries, and mining in special, as engine for economic development. Demand from minerals is projected to significantly grow globally. LAC can materialize its comparative advantage for supplying a good portion of that demand. Sharp increase in requests from Latin American countries to address challenges they face in their extractive industries. The Bank decided to be more involved and respond to these demands. We've been working on a variety of projects related to ensuring benefits from the extractive sector.

37 The IDB (Preliminary) Vision Ensuring LAC s Competitive Advantage in Mining is Materialized Improving Enabling Environment for Private Sector Investment Expanding Shared Economic Value Minimizing Adverse Social and Environmental Impacts An Integrated Sectorial Approach for Investments : Regional, National, Subnational, Resource-Corridor, or Community Level 37

38 38 IDB Approach to Sustainable Mineral-Based Development Key Pillars for IDB support

39 39 Examples: IDB Mining Projects in Development & Execution Legal/ Regulatory Review Modern Mining Mgt. Tools Infrst. Tech., Local Content Land-use Mgt. & Env. Services Community Engagement TRAINING Incentives for mercury abatement and ASM (CO) Certification of ASM Production (BO, CO. PE) Technical Training for Public Officials and Operators in the mining sector (GY) Social Environmental Impact on Indigenous Areas of Cauca (CO) FINANCING Strengthening Governance (RG) Supporting EITI (CO, TT, PE) Mineral Policy (JM) Royalties, Transparency & Investment (CO) CAPREM, Regional Centre for Mining Development (CAN) Lithium Mining (BO) Industrial Park Aluminum Smelter (PY) Sulphate Mining (MX) PV Power Plants in Atacama (CH) Environmental & Land Use Mgt. (GY) Territorial Development on Quellavaco Mine (PE) Biodiversity and Ecosystem Program on Mining (RG) Cooperation with ICMM and WEF (RG) Environmentally Development of a Community Owned Mine (CO) Support ASM in the Cauca region (CO) RESEARCH Governance (RG) Local Content Provisions & Performance of Extractive Industries (PE) Mining Cadastre Information Management (CID) Clean Tech. in Mining (PE, BO, GY) Local Content & Resource Corridors (BR, CH) EE in Mining (JM) Baseline on Informal Mining (CO, BO) Productive Development Support of Indigenous People - Sibundoy Valley (CO)

40 Projects currently in development (selected countries) Issue-Area Legal/Regulatory Review Modern Mining Management tools Infrastructure, Technology Local Content Land-use Management Community Engagement JAMAICA X X X X X COLOMBIA X X X X GUYANA X X X X X PERU X X X HONDURAS X X X X X MEXICO X X X X CHILE X X DOMINICAN REPUBLIC REGIONAL X X X X X X

41 41 Additional Support from IDB Preparation of specialized knowledge products to be used by industry and governments alike. For example, publishing studies on different transparency policies for revenue management, on taxation and institutional challenges, on the environmental impact of different mining operations; on the issues posed by informal mining. Exploring policy options and strategies to cope with key sector issues. Pursuing partnerships with other bilateral and multilateral organizations in support of LAC needs. Consultations efforts with governments, industry, and civil society, for identifying the best ways the Bank can help.

42 Our role continues to evolve towards an effective support to achieve maximum overall benefit from extractives for the endowment-rich countries 42

43 Thank you / Merci 1300 New York Ave., N.W. Washington, DC 20577

44 Contacts IDB Energy Division Nancy Jesurun-Clements Malaika Masson The Inter-American Development Bank Discussion Papers and Presentations are documents prepared by both Bank and non-bank personnel as supporting materials for events and are often produced on an expedited publication schedule without formal editing or review. The information and opinions presented in these publications are entirely those of the author(s), and no endorsement by the Inter-American Development Bank, its Board of Executive Directors, or the countries they represent is expressed or implied. This presentation may be reproduced with prior written consent of the author.

Jamaica Client: Ministry of Science, Technology, Energy and Mining Current Projects Revision of existing Mineral Policy Framework Dialogues on improved Energy Efficiency in Mining Projected

45 Jamaica Client: Ministry of Science, Technology, Energy and Mining Current Projects Revision of existing Mineral Policy Framework Dialogues on improved Energy Efficiency in Mining Projected activities Implementation of Mineral Development Plan to identify and coordinate government & private sector roles & responsibilities on mineral policy framework Identifying regulatory instruments for the development of the Rare Earths and industrial minerals Mineral-Infrastructure corridors Mining Indicators 2.4% of GDP (2012) 41% of Exports (2012) Main Minerals Limestone, alumina, bauxite, mineral fuels, gypsum, marble, gold, clay, salt, sand, gravel, and silica sand. Rare Earth mineral reserves

Colombia Client: Department of National Planning; Ministry of Energy & Mines Current Activities Supporting formalization processes for informal, small-scale mining Extractive Industry royalties and

46 Colombia Client: Department of National Planning; Ministry of Energy & Mines Current Activities Supporting formalization processes for informal, small-scale mining Extractive Industry royalties and strengthening the public investment system (MapAmericas) Projected Activities Supporting candidacy to the EITI Development of a Mineral Information Platform (MapAmericas) Institutional strengthening of the National Agency of Minerals and the Geological Service Mining Indicators 2.4 % of GDP (2012) <21.9 % of total Exports (2012) Main Minerals Coal, nickel, gold, platinum, silver, copper, iron ore, and bauxite. Nonmetallic minerals including salt, limestone, sulfur, gypsum, dolomite, barite, feldspar, clay, magnetite, mica, talcum, and marble. Most of the world's emeralds

Guyana Client: Ministry of Natural Resources & Environment Current activities Environmental Strengthening in Mining Policy Incentivizing Clean Technology in Mining Technical & Vocational Training in

47 Guyana Client: Ministry of Natural Resources & Environment Current activities Environmental Strengthening in Mining Policy Incentivizing Clean Technology in Mining Technical & Vocational Training in Extractive Industries Projected activities Mining Policy Review (i.e. EPA Act, Mining provisions) Tools for Improved Land Use Management Financial support for the wider use of Clean Technology and Technical Training for Mining Mining Indicators 10% of GDP (2012) 61.6% of Exports (2012) Main Minerals Bauxite, diamond, and gold (laterite, sand, and stone exist in more limited quantities)

Peru Client: Ministry of Energy and Mines Current Activities Applied research: Local Content Provisions and the Performance of the Extractive Industries Incentivizing Clean Technology in Mining

48 Peru Client: Ministry of Energy and Mines Current Activities Applied research: Local Content Provisions and the Performance of the Extractive Industries Incentivizing Clean Technology in Mining Projected Activities High-level Strategic Dialogue with Peruvian Stakeholders on Mining & Development Exploring linkages between mining, agriculture and education sectors Environmental remediation and Mining byproduct development Mining Indicators 10% of GDP (2012) 63% of Exports (2013) Main Minerals Third-largest global producer of copper, silver, zinc and tin; and within Latin America, is the largest producer of gold, zinc, tin and lead

Honduras Client: Ministry of Energy by Secretary of Natural Recourses and Environment/ INHGEOMIN Current activities Institutional/Regulatory/Technological Assessment of the Mining Sector Mining

49 Honduras Client: Ministry of Energy by Secretary of Natural Recourses and Environment/ INHGEOMIN Current activities Institutional/Regulatory/Technological Assessment of the Mining Sector Mining Indicators >1% of GDP (2012) 7.2% of exports (2010) Main Minerals Lead, gold, silver and zinc Projected activities Support for the implementation of the Mineral Development Action Plan Capacity-building for improved Mineral Resource Management Infrastructure Strengthening for enhanced Sectoral Effectiveness Introduction of tools for operational auditing in the Extractive Industries

Mexico Client: Mining Secretariat in the Ministry of the Economy Current Activities Private Sector Loan (Sodium Sulphate Mine) Location: Village of Bacadéhuachi North-East of the Sonora Province at

50 Mexico Client: Mining Secretariat in the Ministry of the Economy Current Activities Private Sector Loan (Sodium Sulphate Mine) Location: Village of Bacadéhuachi North-East of the Sonora Province at about 265 km of the city of Hermosillo; Population: 2000 $28.2 million Projected Activities Support for Candidacy to the EITI Mining Cluster development Mining Indicators 4.9% of GDP (2013) U$D 17.1 Billion in Exports (2013) Main Minerals Largest producer of silver and the second largest producer of fluorite, accounting for more than 20 per cent of the world s silver production. Produces fluorite, celestite, bismuth, as well as gold, wollastonite, cadmium, lead, diatomite, molybdenum, zinc, barite, graphite, salt and copper, among others. Technical and Vocational training, Institutional strengthening and PPP related to Sodium Sulphate Mining in the State of Sonora

Chile Client: National Service of Geology and Mines (SERNAGEOMIN) Current Activities Aurus III Investment Fund, Venture Capital for SME in the Copper value chains Energy infrastructure investments in

51 Chile Client: National Service of Geology and Mines (SERNAGEOMIN) Current Activities Aurus III Investment Fund, Venture Capital for SME in the Copper value chains Energy infrastructure investments in Calama Mining Indicators 20% of GDP (2013) 60% of Exports (2013) Main Minerals Largest global producer of copper. Chile also produces significant volumes of gold, silver, molybdenum, iron and coal. Projected Activities Additional support for Local content development increasing efficiency in mining operations through investments enhancing input efficiency. 51

Dominican Republic Client: General Mines Directorate Projected Activities development of industrial minerals and precious stones Improving land use management and mining cadastre tools.

52 Dominican Republic Client: General Mines Directorate Projected Activities development of industrial minerals and precious stones Improving land use management and mining cadastre tools. Mining Indicators 0.4% of GDP (strongest growth rate at 79.7%), 2013 Mineral exports (2011) US$290 million, 3.4% of the total and ahead of the traditional exports of sugar, coffee, cacao and tobacco. Main Minerals Produces gold, silver, copper and nickel, as well as industrial minerals 52

53 Regional Ongoing Activities Research on incentivizing Clean Technology in Mining, focused on the role of the public sector Strengthening Governance in the Extractive Industries Mining Cadastre Management in Central America Projected Activities Knowledge exchange and dissemination events on the major topics of intervention Creation of platforms for regional level technical capacity building with public officials and key stakeholders. 53

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