Bolivia was founded on foreign direct investment. The Spanish conquistadores arrived in the 16th century and, seeing the immense mineral riches that lay beneath their feet, put money and slave labour into digging out the silver ore and then smelting it locally. The Cerro Rico de Potosí, the rich hill of the town of Potosí, became famous throughout the Spanish-speaking world and anything that yielded big and immediate profits was named a potosí.

Later, tin became the staple mineral export of the country but the future seems to suggest that dull iron ore in immense quantities in conjunction with FDI might be the source of Bolivia’s fortune in the 21st century.

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Energy populism

Since January of last year, selling Bolivia to investors has been a tough job, even though overall economic results have been extremely promising. In his bid to make clear to Bolivian voters that a page had been turned with his election, president Evo Morales imposed what he called the “nationalisation” of the energy industries last year, and newspapers worldwide carried pictures of Bolivian soldiers occupying oil and gas installations up and down the country.

The main investors in Bolivia’s gas industry include Petrobras of Brazil – which controls nearly half Bolivia’s gas fields -- Spain’s Repsol YPF, France’s Total and the UK’s BG.

But all was not quite what it seemed. In legal terms, oil and gas industries had, in theory at least, been subject to the state company Yacimientos Petroliferos Fiscales Bolivianos, though in practice successive right-wing governments had stripped that company, known as YPFB, of most of its powers.

But in the realm of domestic politics, which the president was keenest on, ‘nationalisation’ had a better ring than ‘an adjustment of the taxes being paid by private oil companies’. The use of the army was also a political move by Mr Morales, as it demonstrated that the troops and their officers – who had in the past been inclined to overthrow civilian governments they did not like – were with him.

Forceable repossession

There was another headache in the big metal smelter of Vinto, which after many operational difficulties was being run by the Swiss company Glencore when Mr Morales assumed office. On February 9, Mr Morales’ government sent troops into the Vinto metallurgical complex to take the country’s main foundry back into public ownership.

The government said that there would be no compensation to Glencore, Vinto’s owners since 2004, as the government said it was merely taking back state property that had been illegally transferred to the private sector.

Vinto began operations in 1971 as part of the state metallurgical company ENAF (Empresa Nacional de Fundiciones). Bolivia thus began to earn more by processing its minerals locally instead of sending metal concentrates abroad.

Although Vinto can refine different metals, such as antimony, it has principally been used for preparing tin ingots for export. It is currently operating at about half its installed capacity (12,000 out of a possible 20,000 fine metric tonnes a year). Though estimates vary widely, it was valued in the 1990s at between $54m and $140m.

In December 1999, Vinto was privatised and sold to an Anglo-Indian firm, Allied Deals. This firm passed its holdings to RBG, another UK-based company, which then went bankrupt. Vinto ended up in the hands of accountants Grant Thornton. According to the original agreement, Vinto should then have returned to state administration.

The government’s argument now is that the handling of the 1999 sale was illegal and that the contract was never approved by Congress. At the time of writing, all parties remained locked in discussions about the situation.

In fact, Vinto was sold in 2002 to COMSUR, the mining company owed by Gonzalo Sánchez de Lozada, Bolivia’s president at the time, reportedly for no more than $6m.

Lack of investment

The government points out that Glencore International, which acquired Vinto in 2004 as part of a package that Mr Sánchez de Lozada sold off after he was forced to resign the presidency in 2003, has made little subsequent investment. According to government sources, two of the big foundry ovens lie unused, and the antimony oven is no longer operating.

Bolivia and Switzerland signed a bilateral investment protection agreement in 1991 providing the legal framework for handling disputes, and Switzerland has given Bolivia 12 months to enter into dialogue.

Despite this, FDI flows, which had fallen sharply in recent years, picked up somewhat last year, with inflows equivalent to 2.2% of GDP. And in spite of rows and tensions, the terms of new operating conditions for the industry were agreed in April.

Indian investment

In 2006, the Indian steel firm Jindal Steel & Power announced its decision to put $2.3bn. into the development of the Mutún iron ore deposit in the far south east of Bolivia, the biggest single project in the country’s history, after a race with its Indian rival Mittal Steel.

The 60 square kilometre Mutún site, which lies near the Brazilian border near the river port of Puerto Suárez, is estimated to contain reserves of more than 40 billion tonnes – though they are said to be of medium-grade quality – which would, when developed, dwarf the giant Carajás mine in northern Brazil, which has 1.5 billion tonnes of proven reserves.

The contract to exploit Mutún lasts 40 years, with Jindal controlling the project for the first two decades and thereafter control being shared with COMIBOL, the state mining company.

Officials say the project will create 10,000 jobs and help develop a lightly populated and geographically isolated region.

 

IN FOCUS

FDI head honcho

At 44, Luis Alberto Arce, finance minister in the government of Evo Morales, has some of the responsibility for ensuring Bolivia gets the FDI it needs to develop Bolivia’s vast natural resources. He also cannot forget the great agricultural promise the country offers.

Mr Alberto confesses to be a little surprised at how things have turned out for him: “I was in the Central Bank and I taught at the university and helped Evo with his economic plans for the future when he was standing for the presidency. Now here I am helping to put them into operation.”

He is certainly well prepared academically. He took his first degree in the UMSA, the large state university in La Paz, before going to the Central Bank where he became head of the balance of payments department, and then to the University of Warwick in the UK for postgraduate studies.