June 14, 2012 / 4:25 PM / in 6 years

Insight: Peru provinces sit on cash from mines; discontent grows

LIMA (Reuters) - Peru’s provincial governments are sitting on billions of dollars in mining tax revenue earmarked for new roads, schools and water projects - an institutional failure contributing to anti-mining protests nationwide.

Regional and local governments had 9.5 billion soles ($3.5 billion) from natural resources taxes collected over the last decade lying dormant in bank accounts as of December, according to a Reuters analysis of finance ministry data. The swollen coffers represent a fortune in poor provinces where the poverty rate is around 60 percent despite Peru’s decade-long boom fueled by minerals exports to a rising China.

Most of the receipts come from mining, though a fraction come from energy or commercial fishing companies.

The central government blames a lack of administrative capacity in the provinces - a polite way of saying incompetence - for the spending shortfalls that contribute to a cauldron of discontent in the hinterlands and feed anti-mining sentiment.

Congress passed a law in 2001 requiring local governments to spend their income from mining taxes on infrastructure projects. It was part of a broader push to decentralize decision-making after centuries of concentrating power in the capital. But failing to comply with the law doesn’t carry penalties for rural officials.

Under rules designed to let provinces share in Peru’s resource wealth, the central government keeps half of the cash from income taxes it levies on mining companies and distributes the rest, known as the mining canon, to local governments. Peru’s corporate income tax rate is 30 percent.

Funds from the canon could help defuse hundreds of conflicts in Peru over the spoils of natural resources. The disputes threaten to halt some of the $53 billion in mining projects planned by the private sector. Mediating the conflicts - there is usually at least one violent protest a month, with several others brewing - has become President Ollanta Humala’s biggest challenge.

But none of the 16 regions and local governments within them that receive the mining canon have spent all of their funds in recent years, finance ministry data shows. On average, less than half of the money available to spend in 2011 was spent on sorely needed projects like water, sewage and electricity systems.

Even as the national poverty rate has fallen by half since 2004 to 27.8 percent, many rural communities near mines have been left behind. Frustrated residents often turn against mining companies, instead of local politicians, to vent their woes. Others block roads to demand more tax revenues and voice fears that mines will soak up scarce water supplies and pollute.

“In the zones that receive the canon, people see a ton of money coming in and say ‘at the end of the day, this doesn’t do anything for me,’” said Carlos Casas, a former deputy finance minister. “This contributes to greater social unrest ... the money is there, but what is missing are capable players in the regional and local governments.”

Failure to spend the tax revenue puts greater pressure on Humala to fulfill key campaign promises like improving wealth distribution, slashing extreme poverty, and calming conflicts.

One dispute the government has struggled to manage is over U.S.-based Newmont Mining’s (NEM.N) $4.8 billion Conga gold and copper project. Work on the mine in the northern region of Cajamarca has been on hold since November as townspeople say it would hurt water supplies.

Conga is the largest mining investment ever proposed in Peru, the world’s second largest copper, silver and zinc producer and the No. 6 gold producer, and Humala is committed to seeing it built to keep the economy humming at 6 percent a year.

His government blames the protests on left-wing extremists, while public prosecutors have opened an investigation into the alleged use of public funds in anti-mining demonstrations by Gregorio Santos, the region’s president.

Santos, who has denied the allegations, said on Monday he spends the canon money wisely. But he spent only 34 percent of the region’s canon on infrastructure last year, according to data from the finance ministry.

“Contracts with miners and their contributions must be renegotiated,” Santos said in Congress this week. “We need to teach companies what real social responsibility and economic inclusion is - not like today’s irrational profiteering.”

To shell out money faster, the government is considering a plan that would ramp up spending on new infrastructure projects by paying for them using future mining tax receipts. It is also trying to define how to give regions without mines access to the mining canon.

“We have to see how we can move towards a better use of these resources. They tend to be locked away in bank accounts and not used on projects the country needs,” Finance Minister Luis Miguel Castilla said recently.

Peru’s human rights office has said there are some 250 conflicts over natural resources in the country. The regions with the most conflicts are Ancash, Puno, Cajamarca and Cusco - all home to mining projects and recipients of canon funding.


Some projects funded by the canon are often run inefficiently or are of little use to local populations, authorities said. In some of Peru’s poorest regions, marble plazas and heated Olympic-size swimming pools have been built.

“The regional government does not invest in infrastructure. We need hospitals and roads, we need a regional leader capable of building these things,” said Juan Villanueva, 57, a businessman in the northern region of Cajamarca.

Cajamarca is one of the poorest regions in the country with some 49 percent of its population living below the poverty line even though it is home to one of Latin America’s largest gold mines: Yanacocha, also run by Newmont.

Carlos Monge, regional coordinator of the NGO Revenue Watch, said local governments are getting better at spending money that surged from a trickle to a flood in the last decade.

“You have to understand ... The municipality of San Marcos, in Ancash, when Antamina started paying, that municipality was spending 500,000 soles per year. The following year they received 210 million soles.”

But spending problems persist in most parts of Peru.

In the southern region of Tacna, where global supplier Southern Copper (SCCO.N) operates, the regional government invested only 28 percent of its canon funds in 2011.

The central coastal region of Ica, home to iron producer Shougang Hierro Peru, spent just 13 percent of its funds on infrastructure investment last year even though many of the city’s buildings were never rebuilt after a devastating earthquake in 2007.

The regional presidents of Ica and Tacna did not respond to multiple requests for comment.

“The regions don’t spend well, and when money is spent badly you don’t see the benefits in public services,” said Miguel Santillana of the Universidad de San Martin de Porres.

“There’s a whole issue of quality and supervision, the comptroller is not able to control 26 regions and 1,839 districts and provinces,” he said.

The money from the mining canon is divided among the regional governments, which receive 25 percent, and smaller provincial and district level governments, which get the remaining 75 percent.

Some regional presidents blame the central government for taking too long to authorize local infrastructure projects and for not giving them enough autonomy.

“We have 60 or 70 million soles ($22 or $26 million) saved up because we are waiting on approval from the transport ministry for an important road,” said Jose Murgia, president of the region of La Libertad, where Barrick (ABX.TO), the world’s largest gold producer, operates.

Nearby Ancash receives the most funds from the canon of any region, thanks to taxes paid by Antamina, BHP Billiton and Xstrata. It also has the most active social conflicts of any region - 30.

Ancash’s president, Cesar Alvarez, is one of Peru’s most efficient spenders of the canon, with 48 percent going for infrastructure. He keeps money in reserve in case tax receipts fall and said local governments are the worst spenders.

“There are mayors who build bullrings or cock fighting rings, but they are independent so I can’t do anything about it,” Alvarez said.

Monge of Revenue Watch said infrastructure spending must be accompanied by the government’s beefed up social programs, which are targeting the very poor. Humala has increased spending on programs for infants, the elderly and families with school-age children in a bid to cut extreme poverty in the provinces, but the canon often dwarfs social spending.

Castilla, the finance minister, said past governments neglected the highlands for decades. Peruvians joke that the state suffers from altitude sickness.

“Recent conflicts show that unfortunately in our country the state has been absent from places where it ought to be and where it should be effective,” said Castilla, the finance minister.

“Populations in the area of influence of mining projects tend to attribute their problems and the lack of basic services to the mining firms because there is no one else to blame.”

Additional reporting by Dante Alva; Writing by Caroline Stauffer; Editing by Terry Wade, Kieran Murray and Sofina Mirza-Reid

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