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PERU: The Price of Mining Competitiveness

Milagros Salazar

LIMA, Mar 27 2008 (IPS) - Peru has climbed from the 52nd to the 28th position in an international study on competitiveness in the global mining industry, surpassing Brazil, Argentina, Russia, South Africa and Bolivia. But how much is the local population in mineral-rich zones benefiting from the growth in competitiveness, and how does this phenomenon impact the environment?

The survey by the Canada-based Fraser Institute assesses the effects on mining investment of factors like concession policies, taxation and regulation. The results of the surveys carried out since 1997 reflect the views of executives and managers in mining and consulting companies operating around the world.

This year’s survey was carried out among 372 executives and others in 68 jurisdictions (countries, states, provinces, etc) on every continent except Antarctica.

In Peru, the entire village of La Encañada in the northern region of Cajamarca was granted in concession to mining companies, including the town hall, the parks and even the cemetery.

As in La Encañada, the subsoil of a number of indigenous highland villages has been granted in concession to mining companies as part of a policy aimed at fomenting mining investment in a context of high international mineral prices.

Peru’s "investment attractiveness" has grown due to increased confidence in political stability and taxation policies, says the Survey of Mining Companies 2007/2008, which was released by the Fraser Institute on Feb. 28.

Peru is the top producer of gold, silver, zinc, lead and tin in Latin America, and mining accounts for 60 percent of its export revenues.

But not every aspect has improved at the same pace as competitiveness. According to a 2006 World Bank report, the cost of environmental degradation in Peru amounts to 3.9 percent of gross domestic product (GDP), while the state invests a mere 0.3 percent of GDP in preventing or remedying environmental damages.

"Without a doubt, the terms and conditions offered to the companies have improved, but unfortunately at the expense of environmental protection and local residents, who do not benefit from the windfall profits taken in by the companies as a result of the rise in prices," said economist José de Echave, the head of the Mining and Communities programme of CooperAcción, a local social development organisation.

Meanwhile, the draft law aimed at creating an environment ministry does not provide the new ministry with the authority to oversee the mining industry, non-governmental organisations (NGOs) complain.

With respect to taxation, one of the variables assessed by the Fraser Institute survey, respondents said that although there has been a growing tendency in the last two years to demand the payment of royalties, they were confident that in the near future there would be no change in the taxes paid by the industry.

In his election campaign, President Alan García promised to renegotiate the legal stability contracts that locked in each firm’s tax status when they were signed under the administration of Alberto Fujimori (1990-2000) with the aim of promoting investment, and to instead charge royalties and a tax on windfall profits.

But after García took office in July 2006, he said that was impossible, because renegotiations with the foreign companies could cause legal problems for Peru.

Instead, his administration negotiated with the companies, which agreed to make a "voluntary payment" of 172.4 million dollars a year during his five-year term, to go towards fighting poverty – as long as mineral prices remain high.

As a result of the legal stability contracts, 25 large mining companies operating in Peru pay no royalties.

The state’s tax revenues shrank by nearly 2.7 billion dollars in 2006 and 2007 because of the decision not to charge royalties or the promised windfall tax, says a report by the Grupo Propuesta Ciudadana, a coalition of local NGOs, which was based on official figures.

Propuesta Ciudadana estimated that large mining companies in Peru took in windfall earnings of nearly 3.45 billion dollars in 2006, and close to 4.14 billion dollars in 2007.

The president of Peru’s association of mining companies, Ysaac Cruz, said the stability contracts signed under Fujimori were an "important tool" that turned Peru into "one of the most attractive nations for investment in Latin America."

From 1992 to 2007, mining and energy companies invested 24.15 billion dollars in the country, and the industry provided the state coffers with three billion dollars in income taxes in 2006 and over 3.5 billion dollars in 2007, said Cruz.

Half of the taxes paid by the companies are supposed to be distributed among the regions, through usage fees. But the statistics show that poverty levels have not gone down in mining areas.

In Cajamarca, where Yanacocha – the largest gold mine in Latin America, and the second largest in the world – is operated by U.S.-based Newmont Mining Corporation and Buenaventura of Peru, 75 percent of the population is poor and 50 percent extremely poor.

"Perhaps we should understand the concept of competitiveness in terms of the wellbeing of nations, in order to place the economy at the service of society without putting the rights of people below the interests of business," Catholic priest Marco Arana told IPS from Cajamarca.

Arana is the founder of GRUFIDES, a Cajamarca-based environmental, sustainable development and social justice organisation that is an Oxfam partner.

Although local residents are opposed to the Majaz mining project in the northern highlands region of Piura, the García administration signed a legal stability contract in 2007 with China’s Xiamen Zijin Tongguan Investment Development Co., which took over the project last year.

The conflict between the local community and Minera Majaz has left two demonstrators dead and a number of others wounded, and legal charges have been brought against more than 200 villagers who took part in protests against the mining company’s activities, according to the Ecumenical Foundation for Development and Peace (FEDEPAZ).

As the government’s interest in promoting mining industry investment has grown, so has opposition by local communities living near mining projects, who point to the risk of pollution of their rivers and crops.

Between 2002 and May 2007, the total land area in which the central government has approved mining projects grew 77 percent, reported CooperAcción, while environmental conflicts increased by 40 percent, according to the Defensoría del Pueblo (ombudsman’s office).

The executives surveyed by the Fraser Institute pointed to a setback in the handling of social conflicts, which has made it more difficult to establish improved channels of communication among the various concerned parties.

The sudden increase in revenues has caught many local and regional governments off-guard. For example, the town of San Marcos, in the western region of Ancash, has seen its usage rights fees skyrocket from just under 204,000 dollars in 2005 to more than 75 million dollars in 2007. But very little of that income has been invested in infrastructure and other aspects that would improve the lives of the town’s 12,000 residents.

"To justify itself, the government blames the regions for failing to use the usage rights fees for public works and social spending aimed at reducing poverty, when what it should do is strengthen regional governments to make spending more effective and efficient," Nilton Quiñones, an expert on the extractive industries with Propuesta Ciudadana, told IPS.

"That’s why the challenge facing the state today is to see what can be done to turn the interests of investors into benefits for society at large," said Quiñones.