06 Jul Preliminary Study: Processing of Investment Permits Exceeds Legal Norms, and the Critical Path for Some Projects Takes Up to 11 Years

06/JUL/2023

• Preliminary Study: Processing of Investment Permits Exceeds Legal Norms, and the Critical Path for Some Projects Takes Up to 11 Years
• Preliminary results from the National Commission for Evaluation and Productivity’s (CNEP) study titled “Analysis of Priority Sectoral Permits for Investment in Chile” reveal 439 procedures that affect the investment process between 2018 and 2022.
• The study focuses on identifying potential barriers among these procedures. Among the 309 permits required for a project to become an investment, 63 critical permits are the primary focus, as they can halt project processing.
• In many cases, the review periods for these procedures significantly surpass the maximum time prescribed by law.
• Consequently, extended delays have resulted in a significant backlog of pending permit approvals. Notably, four institutions, including the Under-secretariat of the Armed Forces, General Directorate of Water, Council of National Monuments, and National Electrical Coordinator, account for 5,517 pending procedures as of December 31, 2022. These figures are noteworthy, considering that 8,881 permits were submitted for approval between 2018 and 2022.
• To address these challenges, proposed measures currently under consideration aim to reduce processing times by nearly one-third compared to the current situation.
• Recommendations being analyzed include establishing an institutional framework based on an enabling governance model, promoting cost transfers through public-private collaboration, strengthening digitalization efforts, eliminating the requirement for prior relevance consultations before authorizing sectoral permits, optimizing and streamlining the favorable construction report (IFC), and expediting maritime concessions, among other potential solutions.

Thursday, July 6, 2023. Preliminary data and analysis from the CNEP’s study “Analysis of Priority Sectoral Permits for Investment in Chile” are now available, providing a robust complement to the CNEP’s previous investigation in 2019. The previous investigation focused on the regulatory review of strategic sectors, identifying 400 unique permits required for investments across various industries. For this particular study, the CNEP prioritized 23 essential permits.

Scope of the Study, Diagnosis, and Findings

In this report, the CNEP conducted a comprehensive analysis beyond the initial focus on the 23 essential permits. The study identifies all sector-specific permits that investment projects must consider, regardless of the sector they belong to, as well as specific permits relevant to the most important sectors of the national economy. The objective is to analyze deficiencies in permit processing that act as barriers to investment and propose public policy recommendations for improvement.

For this study, permits were categorized into three classes: 1, 2, and 3, representing low, medium, and high complexity respectively. Covering the period from 2018 to 2022, the investigation identified 439 procedures that affect the investment process, with a particular focus on those that could potentially become barriers. Out of the 309 permits required for a project to become an investment, 63 critical permits were identified as they have the power to halt project processing.

The findings of the study reveal heterogeneity in the behavior of priority sectoral permits for investment development in Chile. Complex dynamics were observed in the processing of class 2 and 3 permits, which can have a negative impact on investments in various economic sectors and industries, both for existing projects and new ventures. Additionally, there is a need for increased availability of information from governmental administrative bodies.

Permits of lower complexity (class 1) are widely utilized and processed within relatively short timeframes, typically averaging around two months. However, it is important to note that these permits also experience a rejection rate of 15%.

As the complexity of permits increases, there is a significant extension in processing times. The most complex permits (class 3) have an average processing time of 17 months and an increased rejection rate of 30%. This situation becomes particularly problematic due to the large number of pending procedures.

Furthermore, the study highlights inadequate adoption of good practices. Despite some advancements, including various digitization initiatives, significant improvement is yet to be achieved for the most complex permits.

Moreover, there are cases with exceptional complexity due to the high backlog of pending procedures, lengthy processing times, and a high potential for rejection based on project typology.

When examining the actual processing times of permits, it is observed that, in general, they exceed the legal deadlines. For instance, between 2008 and 2022, maritime concession permits, which should be processed within four months according to the legal norm, take an average of 34 months. Delays are also evident in permits from the National Geology and Mining Service (SERNAGEOMIN):

• Waste dump permits take ten months (legal deadline two months).

• Ventilation permits take 12 months (legal deadline two months).

• Beneficiation plant permits take 13 months (legal deadline two months).

• Electrification permits take 15 months (legal deadline three months).

Permits from the Directorate General of Civil Aviation (DGA) for major hydraulic works experience delays of 49 months (legal deadline six months), while the reception of major hydraulic works takes 34 months (legal deadline six months). Permits from the Ministry of National Assets for onerous use concessions take 14 months (legal deadline six months).

The extended processing times lead to a significant backlog of pending permit approvals. As of December 31, 2022, four institutions (Undersecretary of the Armed Forces, Directorate General of Civil Aviation, Council of National Monuments, and National Electrical Coordinator) accounted for 5,517 pending procedures. Considering that 8,881 permits were submitted for approval in these public services between 2018 and 2022, this number is notable.

Consequently, projects face a critical path with approval processes taking years. For example, a primary distribution center in a rural area takes two years, a photovoltaic plant takes four years and two months, a desalination plant takes 11 years and four months, and a mining operation takes eight years and seven months.

Causes

The study has identified three main causes contributing to the challenges in permit processing:

1. Fragmented Regulatory Design and Implementation: The regulatory process is often fragmented, leading to coordination gaps and contradictions among different regulatory bodies. Each agency focuses on a sector-specific perspective without a comprehensive understanding of the project as a whole.

2. Accumulation of Regulations: Over time, regulations accumulate, resulting in overlaps and contradictions with new norms. This accumulation creates a complex and convoluted regulatory environment.

3. Dynamic Nature of Regulations: Regulations are not static; they change, evolve, and expand over time as new elements are incorporated through judicial or administrative jurisprudence and the criteria developed by public services when resolving specific cases.

Recommendations

Although the recommendations are still being studied and analyzed, certain guiding principles, such as transparency, predictability, and efficiency while maintaining environmental protection standards, are being considered to address the identified problems. The proposals under consideration include:

1. Establishing an Institutional Framework: An enabling governance model can prevent iterations during permit processing, avoiding delays in approval timelines and reducing the high rejection rates for complex permits.

2. Cost Transfer Mechanisms: Promoting and expanding the use of cost transfer mechanisms based on public-private collaboration can help address the lengthy processing times associated with complex permits.

To address the imbalances in permit processing, it is essential to allocate resources and tools adequately. This involves considering the capacities of agencies responsible for analyzing complex permits, the technical complexity of each permit, the current rates of new permit applications, and the number of pending review requests that agencies need to address. It is also crucial to focus on allocating resources to services with higher pending backlogs, which may require establishing a permanent tool for a strategic and coordinating public entity.

Given the high number of permits involved in the investment process, the study suggests optimizing and simplifying approval schemes. This includes developing a regulatory review strategy that considers the efficiency and effectiveness variables of existing permits. A coordinating body will develop a review guideline outlining a methodology for addressing regulated risks in sector-specific regulations.

The study highlights the significance of permit digitization. Implementing robust digital platforms can expedite the processing of permit applications, streamline procedures, and eliminate the need for in-person transactions. However, there is currently a low adoption of “intelligent” or “full web” electronic processes for permit processing, hindering efficiency. It is essential to encourage government administrative bodies to adopt technologies that improve and optimize the permit authorization process. This should go beyond superficial changes, such as a shift from paper to digital formats, to fully leveraging the benefits of digital platforms.

Other specific recommendations being considered include eliminating the practice of requiring prior relevance consultations before authorizing sectoral permits, optimizing and streamlining the favorable construction report (IFC), and expediting and relieving the maritime concession process. These measures aim to address the identified challenges and improve the efficiency of permit processing.

The proposed recommendations, which are still under revision, have the potential to reduce the processing time for complex permits to within a 12-month timeframe, representing a significant reduction compared to the current situation.