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[SANTIAGO] Chile's president, Ricardo Lagos, has proposed a controversial new law that would create a research fund from royalties paid by the mining industry.

According to a draft bill submitted by Lagos to Chile's congress, mining companies would be required to pay the government three per cent of sales of metallic minerals, and one per cent of sales of non-metallic minerals. Lagos suggests this would compensate the country for the 'loss' of exhaustible natural resources.

The government estimates that at least US$100 million would be collected in this way each year. It is proposing that a portion of this should be invested in a new research fund, the Innovation Fund for Competitiveness.

But the move is running into stiff opposition from government critics, who claim that it would have a negative effect on Chile's economy by distorting the allocation of resources, discriminating against the mining sector, and discouraging new investments by private companies.

Critics include the Production and Commerce Confederation, the business association that represents the country's primary industries, and the Chilean Mining Council, the national organisation representing the mining industry.

Under Chilean law, minerals are the property of the state. Following the restoration of democracy in Chile in 1990, however, the government encouraged private investments in the mining industry by granting extraction rights, creating a boom in mineral production and exports during the 1990s.

"The state does not receive any compensation for the extraction and sale of valuable resources that, according to the constitution, belong to it," says the president's bill.

The government's key argument is that, at present, private mining companies make free use of non-renewable resources. The royalty plan has been conceived as a way to compensate for the eventual exhaustion of mineral resources by turning a portion of the mining companies' profits into investments in science and technology.

In his written message to Congress, Lagos says that such investment is strongly needed, pointing out that only 0.6 per cent of Chile's gross domestic product (GDP) is currently spent on research and development, compared to an average of 2.8 per cent in developed countries.

The distribution of the Innovation Fund would be decided through a competitive process open to both research institutes and private companies. The details still have to be determined, but the main objective would be to boost the role of such companies in research and development, particularly in fields such as mining and agriculture in which Chile has a direct economic interest.

The government has also proposed that at least 80 per cent of the money distributed from the fund should have an identifiable impact on regions outside the Chilean capital of Santiago, particularly mining areas. Furthermore, at least 50 per cent of the funds would be given to institutions and companies based outside the capital.

Before the fund can be created, however, both legislative branches of the National Congress must approve the bill. For it to pass, the Chilean government needs at least partial support from the opposition parties. In the first debate in the lower house (Chamber of Deputies), however, opposition parties rejected the text.

In addition to claims that the government moves would impose an unfair and distorting tax on the mining industry, the Freedom and Development Institute (FDI), a conservative think tank, claims that the royalty bill is unconstitutional, as Chilean law does not in general allow the creation of taxes to cover specified expenditures,

Joaquin Lavin, leader of the opposition and presidential candidate, has proposed an alternative project based on an increase of patentes — the annual fees paid by mining companies for rights to exploit concessions — rather than a tax on sales.

Currently this fee is about US$4.60 per hectare, regardless of whether a mine is exploited or not. Lavin says that increasing it could raise an extra US$30 to 40 million each year, although he admits that in principle he would prefer to see this money spent on social programmes, rather than research.

"I do not like the idea of creating a fund for innovation, because there are many people waiting for social benefits and we must listen to them," said Lavin.

Those who have been closely involved in planning for the new fund say that it is loosely modelled on plans developed by Denmark in recent years, particularly for taxing the exploitation of its gas reserves.