Chilean defense spending at risk from poor copper trade

Jan. 22, 2014 at 8:34 PM
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SANTIAGO, Chile, Jan. 22 (UPI) -- Chile's defense regeneration program is at risk of a major funding shakeup because of new legislation and fading fortunes of some of the Latin American country's copper trade.

Chile's military currently benefits from generous deductions from copper export earnings, but this is about to change in two ways, Chile news media reported. An industry long regarded as Chile's cash cow, a major contributor to national budget, warned the government and military leaders of trouble ahead.

One of the ways in which Chile's defense spending will likely be affected will be a final vote on a legislation two successive presidents have sought, and failed, to push through Chilean congress.

The proposed legislation aims to scrap the law requiring the copper industry to fund a military procurement fund that has often been criticized for lacking a coherent vision and for being left unspent.

Outgoing President Sebastian Pinera, who took over from Michele Bachelet in 2010 and is soon to be succeeded by her after her election to a new term, is hoping a military funding reform will be one of his crowning successes before he leaves office. Analysts cited by Chilean news media doubt that will happen.

Bachelet was elected president in November for a new term and will take office in March. The country's copper lobby, in particular the state-owned Codelco, is lining up to urge Bachelet to scrap existing legislation that requires the copper industry to contribute automatically to a military acquisition fund.

As the presidential term of Sebastian Pinera winds down, there are plans to eradicate the copper tax that provides Chile's military with billions of dollars, the Chilean defense blog said.

Replacing the tax will be a four-year spending program that will respond to the military's strategic needs.

But, the Chiledefense blog said, the proposed military budget is flawed as it lacks flexibility, citing a Spanish-language report by analyst Eduardo Santos quoted by the Chilean CNN.

Meanwhile, the copper industry wants to spend its earnings on its own much planned but long delayed industrial upgrades rather than handing the cash over to the military. Codelco, the world's largest copper producer, says it needs to upgrade its aging mines to reverse loss of earnings from declining copper prices.

Codelco says it needs to expand production by at least 10 percent to sustain its profitability and head off a potential loss of its investment-grade credit rating. To do so, Codelco says, it needs to keep more of its earnings and spend at least $24 billion on upgrades over a long term.

Codelco Chief Executive Officer Thomas Keller said he expected incoming Bachelet will give the company more cash back to invest in upgrades, El Mercurio newspaper reported. Immediate plans for industrial generation at the copper complex show a $1 billion shortfall in a $5 billion medium-term upgrade program.

Codelco's financing arrangements with the government and the military's largely unquestioned sharing of the proceeds have generated frequent debate in Chile.

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