Peru: Few Benefits from Boom for Poorest Mining Districts

(IPS) – The poorest district in Peru is in an area of intense mining activity, in a country where the mining industry accounts for nearly 60 percent of all export revenues. But the people of Ongón receive no benefits from that activity.

Nearly 100 percent of Ongón’s 1,694 people live below the poverty line. A study by the National Institute of Statistics and Informatics (INEI), published in late February, which researched the living conditions in Peru’s 1,832 districts since 2007, found that the worst-off was Ongón.

Ongón is in the northwestern Pacific coastal department of La Libertad, where the Real Aventura gold mining company operates. But because it is not actually on the boundary of the area of production, the district only receives a tiny share of the "canon minero" funds distributed to local and regional governments to be used for social spending, public works and infrastructure.

The canon minero is the direct economic compensation received by areas where non-renewable resources like minerals, natural gas and oil are extracted. Under Peru’s current legislation, 50 percent of the taxes and royalties taken in by the state from the extractive industries must be transferred to the regions.

As a result of the boom in metals prices over the past few years, the canon minero climbed from 607 million dollars in 2006 to 1.85 billion dollars in 2008. But distribution of the funds is extremely lopsided.

In Ongón, 99.4 percent of the population lacks piped water, sanitation and public lighting outside of their homes. Nevertheless, the district receives just 0.21 percent of the canon minero distributed by the central government to the department of La Libertad, where several mining companies are active.

The second-poorest district in Peru, according to the INEI, is Bambamarca, population 3,537, also in La Libertad – and again, an area of heavy mining activity carried out by small and medium-sized companies.

But Bambamarca only receives 0.22 percent of the canon minero that goes to La Libertad.

A similar situation is seen in nearby Condomarca, where nearly 100 percent of the population is poor despite several mining operations in the immediate area.

Another of the country’s 10 poorest districts is Patambuco, in the southern highlands department of Puno, which watches the riches, mainly gold, extracted by mining companies pass it by.

Extraordinary riches

Puno is at the heart of production of tin in Peru, which is the third largest producer of the metal.

It is also the second largest producer of silver, the third producer of copper and zinc, the fourth producer of lead and the fifth producer of gold.

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, thanks to soaring prices and to tax exemptions and incentives granted by the state.

According to Peru’s mining industry association, mining and energy companies invested 24.15 billion dollars in the country from 1992 to 2007, and the industry provided the state coffers with three billion dollars in income taxes in 2006 and over 3.5 billion dollars in 2007.

The administration of Alberto Fujimori (1990-2000) signed legal stability contracts that locked in the tax status of private firms, with the aim of promoting investment. As a result, 25 large mining companies operating in Peru pay no royalties.

Their failure to pay royalties or a tax on windfall profits deprived the state coffers of nearly 2.7 billion dollars in 2006 and 2007, according to a report by the Grupo Propuesta Ciudadana, a coalition of local NGOs, based on official figures.

In his election campaign, President Alan García had promised to renegotiate the legal stability contracts and apply the tax on windfall earnings. But he has not done so since taking office in July 2006.

Now, as a result of the drop in demand and prices caused by the global economic crisis, taxes from mining exports are expected to shrink further.

The problem of distribution

The growing revenues from the mining industry over the past few years have not been used to address the pressing needs of people in a country where nearly half of the population lives below the poverty line, for various reasons, including the unequal distribution of the canon minero, say experts.

In 2007, 63 percent of the funds distributed by the central government from the canon minero and the "municipal compensation fund" went to just five of the country’s 24 departments: Ancash, Tacna, Cuzco, Cajamarca and Moquegua.

Distribution is also unequal within the different departments. In Ancash, for example, nearly half of the funds went to just one of the 20 provinces into which it is divided.

"It is of concern that after a decade of continuous growth of mining activity, the poverty rates and the living standards of the people living in communities near the mines have not significantly changed," economist José de Echave, the head of the mining and communities programme of CooperAcción, a local social development organisation, commented to IPS.

"There is no virtuous relationship with the mining industry, which has enjoyed a series of tax incentives since the 1990s; and mechanisms to guarantee the proper distribution of the benefits, so that they reach the neediest sectors of the population, have not been created," said de Echave.

"The government should draw lessons from the poverty statistics and create public policies to revert the situation," he added.

More than funds needed to pull out of poverty

Epifanio Baca, head of the project that monitors the extractive industries in Propuesta Ciudadana, said the failure to bring down poverty rates is the result of structural problems of the state, which are not only a result of how much tax revenue is collected from the mining industry.

"It would take 15 years of steady investment in a range of areas to reduce the poverty rate, because mining provides the fiscal resources to do things, but it does not create the conditions to generate development overnight," Baca told IPS.

"We have to consider the responsibility of companies in the areas where they are working, and the responsibility of the state, because if people in those areas are very poor, it is because there is little education and health coverage, among other aspects that it is up to the state to address," he said.

Economist Pedro Francke, an expert on poverty issues, said mining might have some positive impact, but does not resolve the problem of the extremely poor villages around the mining operations.

In many cases, the local populations cannot provide the skilled labour power required by the mining companies, he pointed out to IPS. Moreover, mining activity in and of itself does not generate production chains and indirect jobs, because the minerals are mainly exported, he added.