Chile's new Constitution: where is Chile now, and where is it heading?

As discussed in our last Latin America Note on Chile, for many, the constitutional re-write process and the election of Gabriel Boric as President represent an opportunity to reshape Chile’s political, economic, and social structures by increasing social investment and environmental protection. However, for others (including foreign investors), this period of uncertainty has triggered significant concern about the future of doing business in the country.

The Chilean Constitutional Assembly has been considering different proposals from its thematic commissions, and some of them now form part of the final draft of the new Constitution. We discuss below those that are key for foreign investments and the next steps in the constitutional re-write process.

The horizon for the constitutional process

The Chilean Constitutional Assembly (elected on May 16, 2021) concluded its mandate on June 28, 2022, when it approved a final draft of Chile's potential new Constitution, which will be presented to President Boric on July 4, 2022. Following the publication of the first draft on May 14, 2022, and after ten months of intense debate, the Harmonization Commission reviewed the text proposed to avoid repetition and ensure consistency and coherence across the text: a significant task given the nearly 500 provisions that the first draft contained. By approving the final draft, the Constitutional Convention met its deadline of July 5: if the text had not been approved by then, the constitutional re-write process would have ended.

Now that the final text has been approved, Chileans have roughly two months to review the content of the new Constitution. On September 4, 2022, they will vote on whether they agree with the new constitutional text. If a majority of voters choose to support the new Constitution, it will replace the current one from 1980; however, if this threshold is not reached, the current Constitution will remain in place.

The likelihood of the new Constitution being approved by the population remains unclear. However, a recent poll has shown a trend against the new text. In particular, a survey conducted on June 27, 2022, showed that 51% of the population would vote against the new text in September, whereas 33% plan to vote in favor of approving it. Meanwhile, 16% said they remained undecided. This represents a significant reversal in public sentiment over the course of the past six months: on 28 January 2022, 56% favored approval and 33% favored rejection. This degree of volatility suggests that public opinion could shift again in the upcoming two months, particularly now that the final text is available for Chilean voters to review. Consequently, there is still a high degree of unpredictability about the outcome of the September 4 referendum.

Even if the new Constitution is rejected on September 4 (particularly if this occurs by a narrow margin), the uncertainty will likely not end. Indeed, rating agencies have noted that the rejection of the text could itself generate further uncertainty for investors given the political pressure that would be subsequently exerted by those who support the approval of the new text.

The final draft of the new Constitution

Although some of the most controversial proposals originated in the thematic commissions from the Constitutional Assembly appear to have been tabled, others remained, which continue to generate concern.

The final draft of the Constitution has provided some respite to the mining sector as it has not marginalized the private sector to the extent initially expected – the initial proposals had provided for the nationalization of the country’s national resources. Although the new Constitution includes a wide array of environmental regulations, industry representatives have remarked that these do not differ significantly from what mining companies have already done (and what is required under the current legal framework). Nonetheless, the new restrictions on mining near glaciers could impact around 20-25% of the current annual copper production and threaten several expansion projects.

Regarding the proposed nationalization of the copper mining industry (which accounts for roughly half of Chile's exports), some of the more controversial articles did not make it into the final draft. In particular, a concern voiced by mining industry representatives was that if the new Constitution is silent on issues such as mining concessions, this would then have to be determined by the new mining code that would have to be drafted. Thus, the shift from concessions to administrative authorizations could be imposed through another piece of legislation rather than the new Constitution. Although this carries the respite of the mining code being more easily amendable than a constitution, it still represents a significant source of uncertainty for miners in Chile.

Likewise, the Chilean new Constitution’s final draft establishes that water is a "natural common good" that would not carry property rights for those who receive usage authorizations. Therefore, the final draft of the Constitution (if approved) would end the current system of water rights and replace it with authorizations. This would significantly impact many sectors (e.g., mining, agriculture, utilities) given that new institutions would now handle water management, and its access could be limited.

Finally, the possibility of an excessive "mining royalty" remains in place given that, on July 1, 2022, Chile's Government submitted to Congress a tax reform proposal that includes a "mining royalty" provision. In parallel to the tax reform proposal, a separate "mining royalty" introduced in 2018 is still under review by the Finance Commission of Chile's Senate. Consequently, there are two clear avenues through which the "mining royalty" could be introduced (i.e., if the tax reform fails, the "mining royalty" standalone bill could still pass).

The main takeaways

Overall, the Constitutional Convention has rejected some of the most extreme proposals advanced by the thematic commissions, including nationalizing the copper mining industry and replacing the concessions system with administrative authorizations.

Nonetheless, the new text does reduce the legal certainty enjoyed by some of Chile's critical actors across the industries (such as mining). The framework invites more radical measures that could be introduced later on through legislation that would align with the new Constitution. Thus, the assessment of the impact of the constitutional process does not end on September 4 if it is approved; instead, the door remains open for legislation to be enacted affecting the business in the country.

We will continue to monitor developments in Chile and encourage you to subscribe to be kept informed of the latest developments. Please contact the authors or your usual Herbert Smith Freehills contacts for more information.

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