April 17, 2010 / 12:10 AM / 10 years ago

UPDATE 4-Chile to raise taxes, issue debt for quake rebuild

* To issue $1 bln sovereign bond, issue local debt

* Plan to raise royalty on miners, which voluntary

* Government to tap copper boom savings (Adds fresh Finance Minister, Mining minister comments)

By Alonso Soto

CORONEL, Chile, April 16 (Reuters) - Chile will raise $8.4 billion to rebuild towns and infrastructure ravaged by a massive Feb. 27 earthquake by tapping foreign markets, copper-boom savings and hiking taxes on companies, miners and tobacco, President Sebastian Pinera said on Friday.

Speaking near a pier in the quake-ravaged town of Coronel in south-central Chile, Pinera said the government would also make changes to the tax structure governing mining royalties in the world’s top copper producer, which Finance Minister Felipe Larrain said would be voluntary.

The mainstay mining industry emerged mostly unscathed from the quake and the government expects most of its firms to choose to pay higher royalties. For more, pls see [ID:nSAG002534]

Reconstruction will test the administration of conservative billionaire Pinera, who took power in March after the disaster killed hundreds, wrecked towns and roads, and hammered the wood pulp, fishing, fruit and wine industries. Pinera’s victory ended 20 years of center-left rule. [ID:nN16251678]

“The total cost of investment the state will face in the next four years to rebuild what the earthquake and (ensuing) tsunami is $8.43 billion,” Pinera said, as fishermen worked behind him by a badly damaged pier under a stormy sky.

His announcement was of little comfort to some residents in quake-battered areas who face the onset of winter in precarious conditions. Many are living in tents. A few dozen people staged a protest, holding up placards that read “Help urgently.”

One woman approached Pinera after he stopped speaking, shouting “It’s not enough!” before she was grabbed by security guards and whisked away.

“People here have been abandoned,” said Blanca Burgos, sitting on a bus near the pier where Pinera spoke. “While Pinera comes and gives a televised speech, the government has still yet to help the people.”

Pinera said the government would temporarily raise income tax rates on large corporations by 3 percentage points in 2011 to help fund reconstruction. The increase would then ease to 1.5 percentage points for 2012, and return to an original 17 percent in 2013.

Pinera said he would permanently raise the tax on tobacco, both to help fund reconstruction and to seek a healthier Chile, a measure the government estimates will raise an additional $990 million in revenue over four years.

The government said it would issue a $1 billion sovereign bond, but did not specify how much local peso debt it would issue. It said it would only “moderately” tap some $11 billion in copper boom savings held abroad in a sovereign wealth fund it would use, keeping markets guessing. See [ID:nN16128729]


Chile's peso CLP=CL was little changed following the announcements, and foreign exchange and bond traders said the market was waiting to see the breakdown of debt issuance and dollar inflows.

Government bond yields were steady after rising earlier in the day, in the absence of details on the scale of planned debt issuance and dollar inflows.

Analysts say the government was probably right to opt for a mix of ways to finance the state’s share of post-quake reconstruction. The plan was not expected to ruffle local markets, which have already priced in several elements. For more see [ID:nN15238699]

“President Pinera’s reconstruction plan is pretty balanced in terms of distributing the burden of financing between those who can, for the benefit of those who have less,” said Alfredo Coutino, Latin America director at Moody’s Economy.com.

“It is pretty balanced, so the impact on markets will be positive,” he added. “The impact on companies will be short-term, because the tax (increases) will be temporary.”

But industry bodies did not see the tax and royalty increases that way.

The National Chamber of Commerce said that while it felt solidarity with those affected by the quake, it believed tax increases were “unnecessary,” saying they generally hit investment, productivity, employment and growth.

The Mining Council, a trade group, said raising royalties discriminated against the the sector. [ID:SAG002535]

Mining Minister Laurence Golborne said the government would offer incentives such as longer periods of fixed tax rates for those miners who pay the higher royalty, and that the rates they pay would depend on their margins.

“We have sought a formula which is linked to mining cycles, so that there is no impact on investment plans,” Golborne told reporters. He said the royalty rate would vary from 3.5-9.0 percent for two years, compared to 4.0-5.0 percent at present. For more, see [ID:nN16179885] [ID:nN16140769]

The government has also reassigned revenue budgeted for government departments and regions, seeking to independently fund rebuilding after the disaster.

The government estimates total economic damage from the quake at around $30 billion, with the impact on the state and the private sector approaching $10 billion each. The rest is attributed to lost productivity as well as insurance. The figures are deemed reasonable by some, overplayed by others. (Additional reporting by Simon Gardner, Antonio de la Jara, Juana Casas, Fabian Cambero and Alvaro Tapia in SANTIAGO; Writing by Simon Gardner)

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