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PERU: ‘Voluntary Payment’ Instead of Taxes for Mining Firms

Milagros Salazar

LIMA, Aug 25 2006 (IPS) - Peruvian Prime Minister Jorge del Castillo told Congress that private mining companies operating in Peru would make a “voluntary payment” of 757.5 million dollars over the next five years, to go towards fighting poverty. However, they will not pay the tax on windfall profits that new President Alan García had promised in his campaign.

After the negotiations with more than 30 large mining companies, del Castillo announced Thursday that the amount set “respects the principle of legal stability.” He also said a portion of the funds would be immediately forthcoming.

The 757.5 million dollars will come in place of royalties and a tax on the windfall profits generated by high metal prices during García’s five-year term.

Only two of the 27 biggest mining companies operating in Peru currently pay royalties. The other companies signed legal stability contracts under president Alberto Fujimori (1990-2000), aimed at promoting private investment. The contracts lock in each firm’s tax status, in some cases until 2018.

Nearly all of the companies that do pay royalties are small and medium-sized operations.

Peru, which ranks fifth in the world in terms of gold production, second in silver, third in copper and zinc, and fourth in lead, “is a beggar seated on a throne of gold” – according to a popular local saying – as it is one of the countries in the region with the highest poverty rates.

Del Castillo said the payment would go into an “Equality Fund”, which will fight poverty, malnutrition and social exclusion in poor mining regions.

Fifty-one percent of Peru’s population of 27 million lives below the poverty line, and 24 percent lives in extreme poverty, according to the National Institute of Statistics (INEI).

The prime minister also said that some of the funds will go towards indemnification for the victims of the 1980-2000 armed conflict between the Sendero Luminoso Maoist guerrillas and the armed forces.

In addition, he reported that the mining companies promised to invest 10 billion dollars in exploration of new mining deposits over the next five years.

Minister of Energy and Mines Juan Valdivia told IPS that the companies would contribute 151.5 million dollars a year – similar to the amount that the big mining companies would pay if they were charged royalties.

He explained that the payment would be additional to the 150 million dollars a year that the companies already invest in infrastructure and other works in communities near mines, and to any usage fees and royalties paid by the firms. Furthermore, the voluntary contribution will not be tax-deductible.

He also said the total payment was set by the companies based on the current high prices of metals

According to the Bloomberg economic news agency, in the past two years prices have climbed 111 percent for copper, 42.5 percent for gold, 65.5 percent for silver, 150 percent for zinc, 36.5 percent for lead and 15 percent for tin.

“If prices keep rising, the amount of the total payment will probably increase too,” said Valdivia. But he admitted that no agreement was reached in the negotiations on what would occur if prices drop. “That hasn’t been decided yet. There are still pending details,” he added.

Economist Humberto Campodónico, a columnist with the daily La República, told IPS that “the government has not acted in a very transparent manner, as it has failed to explain what formula was used to set the total amount.” Thus, there is no guarantee that the payments will continue during times of crisis, he said.

The foreign mining companies operating in Peru have been raking in major profits in the past few years. According to government figures, the Yanacocha gold mine, the largest of its kind in Latin America, which is owned by the U.S. Newmont Mining Corp. and Peru’s Buenaventura firm, saw its net earnings soar 225 percent between 2002 and 2006.

By December, the company’s total earnings for the year should reach one billion dollars.

The combined net profits of the five largest foreign mining companies operating in Peru already amount to 2.76 billion dollars so far this year.

Minister Valdivia said the payments from the mining companies will benefit, in order of priority, communities near mines, the poorest areas of mining regions, and the victims of political violence in those areas.

That means victims of the armed conflict in the highlands region of Ayacucho, who make up more than 40 percent of the total number of victims according to the Truth and Reconciliation Commission, will not benefit from the funds because there are no mines in that area.

Sources close to the mining industry revealed that it was the companies themselves that set that condition.

Campodónico said that by allowing the mining industry to determine where the funds will be used, the state is relinquishing its obligation to set the country’s priorities. “I think it is unacceptable for your birthplace to be a criterion for determining whether or not you qualify for funds that belong to all Peruvians,” he argued.

The president of the National Mining Association, Carlos del Solar, told IPS that the amount established is “quite a bit higher than what everyone was expecting,” and that the firms are disbursing the funds “for the sake of the development of the country.”

“Many of us have stability contracts that have to be respected,” said del Solar, local manager of the Texas-based Hunt Oil, one of the companies in the consortium that built the controversial pipeline to carry natural gas from the jungles of southern Peru to the country’s Pacific coast. The pipeline has experienced five leaks in less than two years.

José de Echave, an activist with Cooperacción, a non-governmental organisation that specialises in mining and social issues, said the money should be invested in accordance with strategic plans designed for each region, and should go towards basic infrastructure as well as health and education.

“I believe it makes sense to mainly invest in the poor areas of mining regions, in projects that address basic needs. But we must not forget other poor regions of the country, which receive no benefits in the form of annual usage fees from concessionaires or royalties,” said de Echave.

While it is true that there are no mines operating in impoverished regions like Ayacucho and Huancavelica, there is also dire poverty in mining regions, even though they are rich in natural resources.

In Cajamarca, where the Yanacocha mine – the second largest gold mine in the world – is located, nearly 75 percent of the population is poor.

And in the region of Cusco, where the Tintaya copper mine – the country’s third-largest – is passing from the hands of the Anglo-Australian BHP Billiton to the Swiss-based Xstrata, nearly 60 percent of the population is poor, according to official statistics.

In the northern Andean region of Ancash, where Canadian mining giant Barrick Gold extracts tons of gold, 55 percent of the population lives in poverty, and 23 percent in extreme poverty.

To address these inequalities, President García said during his campaign that “a contract is a contract” – referring to the legal stability contracts – but suggested a new tax on windfall profits in order to spread the wealth around.

However, in his very first message to the nation, when he took office on Jul. 28, he changed his tune, saying “dialogue could lead us to an agreement on an extraordinary payment, instead of new taxes, which they (the companies) could object to on legal grounds.”

When asked by IPS about the unfulfilled campaign promise, Valdivia said the government had studied the matter more closely, and had realised that a fund to which the companies would voluntarily contribute was a better solution, given the legal straitjacket of the stability contracts.

“Besides,” he added, “if we charge a windfall tax, it would hurt the small mining operations that do not have stability contracts.”

The 151.5 million dollar annual payments will be administered by the companies, the beneficiary communities, and local and regional governments.

But analysts point to the need to speed up implementation of projects. Last year, nearly 300 million dollars were frozen in current accounts in the name of regional and local governments, according to the Economy Ministry, due to delays in approving public works projects.

Between 2001 and 2005, usage fees and royalties increased five-fold because of the surge in international metal prices. The Economy Ministry estimates that in 2006, mining regions will receive nearly one billion dollars in revenues through this channel.