Bolivian people, resource investors have high hopes as new government targets economic growth

The San Cristobal mine in Bolivia’s resource-rich Potosi region is a truly massive operation, the zinc, lead and silver it yields accounting for approximately half of the country’s exported minerals.  The jobs it provides and the revenue it creates for the government are important, to say the least. Run by no less a respected name than Japan’s Sumitomo Corp, San Cristobal illustrates both the exceptional quality of mineral deposits to be found in Bolivia and the spirit of partnership that makes things work for country and company alike. Problem is, of the 1,000 or so mines operating in Bolivia, none are cut out to be the next San Cristobal, in part because the federal government for years demanded so much financial benefit from resource extraction activity that it stood in the way of large-scale exploration and development. Few and far between were those arguing that the Bolivian people did not deserve a fair share of their own country’s resource wealth, but the balance was such that foreign capital concluded other countries were more attractive places to do business. It was around 2014 that things began to change, when Bolivian investment law 516 opened the door for private-sector companies to form joint ventures with Bolivian state entities, and law 535 in particular for mining companies to form them with state mining company Comibol.  But while this was a step in the right direction, the requirement for 55% of net profit to end up with Comibol for projects on state-owned land still served as a deterrent. Another important step took place in 2019, when the 55% net profit requirement was replaced by contracts calling for a percentage of gross revenue to be paid to Comibol.  As net profit is open to interpretation, so to speak, a framework under which a pre-determined portion of gross revenue is allocated to Comibol provides greater certainty to all parties.  What’s more, contracts under this system must be ratified by parliament, thus giving foreign capital peace of mind that any deal it signs has been reviewed by the federal government and has its full support. It is important to keep in mind that the aforementioned legislative changes only apply to mining companies that operate on state-owned property controlled by Comibol.  A project such as Silver Sand, for example, which is being developed by Canadian resource company New Pacific Metals Corp (CVE:NUAG) (OTCQX:NUPMF) (FRA:3N7), is located on 100% privately held ground.  This status precludes it from the obligation to make payments to Comibol. Which brings us to October 18, 2020, and the landslide general election win for Luis Arce and the MAS (Movement for Socialism) Party, which captured 55% of the vote and secured majorities in both chambers of the Plurinational Legislative Assembly.  MAS replaces an interim government that had overseen Bolivia for some 12 months, thus returning stability to national politics. MAS actually governed Bolivia for 14 years beginning in 2005 under Evo Morales, the country’s first indigenous president.  While it started out observing fairly strict socialist principles, the Morales administration gradually but tangibly came to adopt a balanced approach to national finances, acknowledging the need for foreign currency, the IMF, the World Bank, and a more conventional role in the global economy. A government seeking to lift a country from rural roots to urbanization and move people from poverty to middle class status, which Morales achieved, needs a consistent flow of capital over the long term to develop a reliable economic base, and infrastructure money for roads, schools and the like to support the new way of life. Arce played a central role in the Morales administration, serving as Minister of Economy and Public Finance from 2006 to 2017, as well as in 2019.  And while international media has widely reported his part in nationalizing resource projects pre-2010, it is important to acknowledge his more recent recognition as a steady hand who would oftentimes balance the left-leaning government’s view of global economics.  Because of his time as finance minister, Arce is remembered by the Bolivian people as the manager in charge of the financial controls – he headed the bank that built good things for the average person. Leading up to this year’s election, Arce spoke of an economic growth plan built, in part, on developing Bolivia’s resources.  While MAS puts people and country first in any decision it makes, its outlook has evolved over the years, as welcoming carefully chosen companies that bring expertise and capital is one sure way to realize the benefits that resource development can provide.  With Bolivia’s GDP expected to contract in 2020 for the first time in at least three decades and national finances continuing to deteriorate – Moody’s and Fitch Ratings both downgraded the country’s debt in September – a balanced approach is more important than ever. The president knows what it will take to generate the scale of investment required to make a meaningful difference to Bolivia’s treasury.  Jobs, new industries, regional development, infrastructure, and the taxes that flow from this activity – it is all there if the international mining and oil and gas communities conclude the door is open in a fair manner, as goodness knows Bolivia has rich, untapped deposits of natural resources. Arce was sworn in on November 8 and moved quickly to name Ramiro Villavicencio as Minister of Mining and Metallurgy.  As the former head of Vinto Metallurgical Company, Villavicencio has significant experience in metals processing, supply chain management and international operating standards.  With the administration now in place, it would be good to see the government begin to ratify some of the new style of contract between Comibol and foreign mining companies, as that would make clear the basic conditions private-sector mining companies should anticipate when considering Bolivian projects. It’s a win-win-win in the making, with Bolivian government finances, foreign companies looking for a good home for their capital, and the Bolivian people all positioned to benefit together from an increase in resource development activity.  Keep an eye on the news coming out of Bolivia – the world needs a feel-good story right now and this could be one of 2020’s best.