The Executive Vice President of Chile's Foreign Investment Committee, Jorge Pizarro, talks about the new institutional framework for foreign direct investment (FDI) that will generate a shift from a passive policy of receiving investment to a proactive policy focused on attracting more and better quality FDI to Chile.
President Bachelet has announced a new institutional framework for foreign investment in Chile. Can you explain exactly what that means and what is the role of the Foreign Investments Committee (CIE Chile) in this change?
Firstly, up until now Chile has maintained a passive policy of receiving investment, and we need to move towards an active policy of attracting FDI. This means we cannot just sit and wait for our attributes to attract investments. We have to use the qualities we have, which provide long-term guarantees, to go out and search for more and better investment.
Secondly, even though CIE Chile has been able to attract very good foreign investment in considerable amounts, it is also important that this new policy allows us to attract better quality FDI. This basically means foreign investment that would have a greater impact on our economy and our society as a whole, and would allow a better impact of positive external factors. For example, we need foreign investment that would allow us to increase competitiveness in very concentrated markets.
What markets are you referring to? What are the sectors that Chile is most interested in developing at the moment?
For example, in the energy sector, we need foreign investment that brings higher levels of technology transfer and helps us to add value to our export offer, especially considering Chile is commercially very open. We need foreign investment that can reach the country’s different regions and help us diversify our productive matrix in the best way possible to add as much value as we can.
In that sense, we need an agency that is able to focus the work in sectors like energy, infrastructure and others, to improve the country’s productivity. An agency that is able to place investment offers in the market in regions that aren’t used to receiving foreign investments.
One of the government’s main reforms is the tax reform and its relation to this new institutional framework for foreign investment, which contemplates the elimination of the DL 600. What will this change entail?
Historically, CIE Chile has been the administrative agent for the DL 600, which is a mechanism for capital transfer between foreign investors and the State. It started operating in 1974, when Chile was a radically different country and it had to generate special rules and guarantees to be able to attract foreign investors.
Nonetheless, today Chile is a globally integrated country with over 20 trade agreements and, therefore, the DL 600 mechanism became very inefficient. This new institutional framework for foreign investment is going to replace the DL 600, transforming the Foreign Investments Committee into an effective selling force to attract more and better investments.
So you are going to start focusing fully on promotion…
That’s right, it will be our main focus. We will take care of the promotion abroad and the after care activities, which will make it possible to improve our selection and joint work with foreign investors and foreign companies already established in Chile. An important part of foreign investment in Chile is the reinvestments of the utilities from the companies that are already established here. We have to strengthen that aspect. We have to continue developing foreign investment by deepening the business plans of the companies that are already in Chile, such as mining companies, salmon producers, electricity companies, manufactures, technology and innovation companies, etc.
Today we have the Foundation Imagen de Chile dedicated to the promotion of our country brand. We have ProChile, which is in charge of positioning Chilean products that are exported to other markets. But we do not have any entity that is effectively focusing on attracting foreign direct investment into the country.
One of the most important aspects of promoting FDI is the public-private partnership (PPP). What are the sectors with the most potential and opportunities for PPPs?
Since the 1990s, Chile has been a great promoter of concession agreements, not only in Latin America but also on a global level. The President has announced a very important investment portfolio, both in the concessions model and in the bidding model, that reaches almost 30 billion USD between now and the next 6 to 8 years.
In the case of concessions, where most PPPs take place, we are talking about large investments in terms of ports, airports, roads and dams with dual use capable of generating investment and producing electricity. In other words, critical infrastructure that makes it possible to boost Chile as a business hub and a platform for exports. Infrastructure is a very common area for PPPs, but there are also opportunities in the energy sector. For example, the government will soon launch tenders for great electricity generating blocks for the next 20 years, where PPPs are fundamental and are already yielding great results.
The United States is the largest investor in Chile, contributing with over 17% to the country’s FDI. President Bachelet’s first economic mission outside of Latin America was to the United States and you accompanied her on this trip. What conclusions did you draw from that trip?
The President’s first official visit to the US was in June 2014, when she met with President Obama. Her second trip to the US was in September 2014, when she attended the UN Summit. I was lucky enough to be part of her delegation in both trips.
During the first trip we were processing the tax reform in the Parliament. Chile is ranked among the leading developing countries in the world and we have to be able to overcome the famous mid-income trap. Therefore, we had to make the necessary adjustments to account for the human and social development in the country, while at the same time continue invigorating our economy to reach relevant growth levels. In that sense, both the US government and the American businessmen understood perfectly well that this reform is, in the first place, a bid to bring greater stability to the country and continue developing long-term policies. Within that context, the visit was very positive because they understood the objective behind this reform.
Regarding the President’s second visit to the US, during which we met with many businessmen, the tax reform had just been approved and, therefore, many of the technical doubts the investors could have had, have already been cleared. It was a strong sign of confidence and long-term commitment with the American investors and they understood it that way. Therefore, the President’s invitation to continue investing in Chile and continue looking at the country as a long-term partner was very well received, confirmed, and reaffirmed by the American businessmen.
Now that those doubts about the tax reform where dispersed, what are the most common questions you get from American investors?
Obviously for larger projects the questions are related to productivity. The second thing has to do with human capital, because Chile has the highest human development level in the region. They are also interested in the cost of the human capital and the potential it has.
Another important matter has to do with permits and regulations. As the President stated, we are working together with the government to cut the red tape as much as possible in order to be more efficient in allowing the projects to effectively meet the necessary requirements in the shortest possible period of time.
Another important element is to maintain the continuity in Chile’s policy of opening up new markets. Nowadays, Chile has trade agreements with 85% of the global GDP, which provides very important comparative advantages for investors that want to establish themselves in the country and reach out other markets from here. Chile has strengthened a State policy of opening up new markets, integrating double taxation agreements and investment protection agreements aside from the existing ones in order to continue developing the country’s economic openness.
In what sectors are American investors interested the most?
Today, the US investors are present in many sectors, but I would say the most interesting and dynamic is the energy sector. Chile has an important challenge in terms of energy: it has to lower its prices (we have the highest energy cost in Latin America), diversify our energy sources and make them more sustainable and clean. All these goals have opened many business opportunities for foreign investors.
Today, American companies are developing large projects in solar, wind and water energy in Chile. Therefore they have contributed greatly to the impressive investment figures that we see in the energy sector. Between January and September 2014 alone, investments in energy have increased 44% compared to the same period of time last year.
The infrastructure sector also generates many resources. Due to its fiscal surplus policy, Chile has the possibility to generate counter cyclical measures in times of deceleration of the global economy. Therefore, the State has enough resources to generate greater investments in infrastructure and make it a dynamic sector in the next 4 to 5 years. This has generated a great interest from foreign investors in general, and American investors in particular.
Lastly, another interesting sector is the mining services. Chile has a very developed mining industry that moves over 11 billion USD per year only in mining services. Therefore, a number of American companies have found very good business opportunities in this area. This isn’t just because of the size of this segment in Chile, but also because Chile provides the necessary guarantees for companies to establish themselves here and operate in the local market, while also being able to absorb the needs of the emerging mining markets in the region, such as Peru, Bolivia and Argentina.
What are the main incentives Chile offers to American investors?
On one side, we have the guarantees of a dynamic market and a strong private sector. On the other, we have policies focused on supporting innovative investments that are able to develop high levels of human capital and generate technology transfer.
In September 2014, foreign investments in Chile had increased by 12% in comparison to last year. Even when we are facing a difficult global situation, Chile is still an important market for foreign investment.
Looking at 2015, what will be the strategic focus of CIE Chile in the United States, considering the current global economic and political context?
As part of the new institutional framework, we have to complement the work ProChile is doing. We have reached a work agreement, so that ProChile’s offices in the US are able to attract solid investments next year. We are also analyzing the possibility of establishing CIE Chile representatives in American cities. We still haven’t decided which cities, as it will depend on our market research.
On the other hand, we want to attract American energy companies to our country. We must not forget that Chile will be one of the first countries to receive American gas exports. This is a great reflection of the trust that the American companies have in Chile in the energy sector, as well as the commitment between the two States to continue working together.
Furthermore, we will have a very busy agenda with numerous events and we hope to count with the support of the country’s authorities. And, of course, we have to be able to attract American investors to the not so traditional sectors that are also fundamental for our development.
What message would you like to convey to our American readers?
Chile is undergoing a reform process with a full commitment to stability and long-term development, which is something that American investors understand particularly well.