Bridging the communication gap: New legislation introduced as part of the effort to settle disputes

After the second term of former President Alan García saw an estimated 250 social conflicts nationwide, incumbent President Ollanta Humala campaigned on promises of social inclusion programmes funded by an increase in royalties from mining activities, as well as stricter oversight of the sector. Thus far his government has taken significant strides in keeping both of those promises while also striving to reassure the mining community it will be dealt a fair hand. Yet by taking the middle road and endeavouring to appease both sides the current administration has opened itself to fresh criticism and is now faced with the daunting challenge of resolving the most serious conflict seen to date, that of Newmont’s Minas Conga project in the northern province of Cajamarca. How the government handles the situation will affect its reputation among both voters and the international investment community.

BACKGROUND: Estimates vary as to exactly how many social conflicts there are currently, although the figure most commonly cited is around 200. Conflicts during President Alan García’s last term resulted in the deaths of 191 people. While protests over mining projects tend to receive the most publicity, they have also had an impact on several major energy, infrastructure and irrigation projects, most notably the suspension of the $4.9bn Inambari Dam project. Like the conflicts themselves, the source of dissent is not rooted in one but many different causes. Daigoro Chagua León, community relations manager of local mining company Aruntani, told OBG, “Peru differs from many countries in that we have a tremendous diversity of conflicts resulting from environmental, economic and societal concerns.”

However, he went on to clarify that although public apprehension to mining projects may vary from concern over local water supplies to economic benefits for the community, the true foundation of social conflict often originates from misinformation and at times a lack of communication between parties.

CONSULTATION: Within two months of taking office Humala pushed through his first major piece of legislation, the Law of Prior Consultation (Ley de Consulta Previa, LCP). The new piece of legislation requires government consultation of indigenous or native peoples before approving any mining or energy projects. It has thus far drawn criticism from both indigenous groups and the mining community. On one hand, despite complying with International Labour Convention (ILO) 169, some anti-mining groups are unhappy the law will not be applied retroactively and are concerned about the details and requirements of prior consultation.

The mining community is also apprehensive about the nature of the new law and exactly how, where and to whom it will be applied. At the centre of the debate is the term “indigenous peoples” with neither side aware of precisely what criteria will be used to define this. Rural residents in the Andes may claim themselves as “native” or “indigenous”, yet most mountainous regions have experienced significantly more migration and integration when compared to rural communities in the Amazonian regions. Nelson Cacho, the secretary-general of Lima’s National University of Engineering, told OBG, “The new LCP is a necessary law. However, it needs to be clarified and to be very specific if its implementation is to be successful.” In February 2012 workshops were set up around the country for local community leaders to gather and consolidate thoughts on the LPC, the results of which were to be handed to the Humala administration later in the month prior to a national meeting on the subject. The implementation of new regulatory plan was completed in February. At the time of writing appeals from Peru’s largest indigenous association, the National Organisation of the Amazon Indigenous People of Peru, were ongoing and could lead to potential new amendments during 2012.

NEW ROYALTY SCHEME: Almost immediately after passing the LPC, the Humala administration restructured royalties paid by mining companies, with the goal of boosting government revenues. The additional funds will go to support social programmes and anti-poverty initiatives, as promised during Humala’s campaign. Government negotiations with the private sector took place before enacting the law. The new royalty scheme is based on a windfall tax on profit and is expected to bring in $1.1bn annually, based on mineral production and commodity prices from the first half of 2011. The old system taxed 1-3% of sales, and in 2010 royalties amounted to $646m. This was an important aspect in garnering the support of the private sector, although there is an associated risk should global commodities prices fall drastically, leaving mining companies with less profit – and government less revenue. While some companies, such as Xstrata and BHP Billiton, have tax-stability agreements with the government, they will still be required pay a “special contribution tax” that will also be calculated based on operating profits.

SHUFFLING THE DECK: In the past four years two key ministries have been added to the government’s portfolio, the first of which is the Ministry of the Environment (Ministerio del Ambiente, MINAM), which was established in 2008. While MINAM has been given the authority to direct environmental policy, environmental impact assessments (EIAs) still fall under the purview of the Ministry of Energy and Mines (Ministerio de Energía y Minas, MEM). Anti-mining groups have persistently called for EIAs to be moved to MINAM, and in late November 2011 the deputy environmental minister, José de Echave, resigned, citing dissatisfaction with the current EIA setup. His resignation was followed by that of former Prime Minister Lerner in December, who did not provide a rationale for his decision, which came just weeks after protests erupted in the Cajamarca region. This resulted in a cabinet reshuffle that saw the former environmental minister, Ricardo Giesecke, replaced by Manuel Pulgar-Vidal. More recently, the Ministry of Development and Social Inclusion ( Ministerio de Desarrollo e Inclusión Social, MIDIS) was established under President Humala in August 2011 and charged with enacting social programmes to combat poverty and inequality in the country.

MINAS CONGA: At $4.8bn the Minas Conga project represents the largest mining investment in Peru’s history and as such its suspension after a series of protests in November 2011 has brought the issue of social conflict in extractive industries to a head. Local residents in Cajamarca, who have repeatedly demanded a new EIA, cited concerns over the supply and quality of water coming from proposed artificial reservoirs, which will be replacing existing mountain lakes. The project, of which Newmont Mining Corporation has the majority 51.3% share, with Compañía de Minas Buenaventura and the International Finance Corporation as minority stakeholders, had its EIA approved under former President García. The government has subsequently hired two international engineers to act as unbiased consultants and review Conga’s EIA. Upon seeing the review, Newmont Mining said it spend $440m on the project until around the end of 2013, about two-thirds less than the $1.5bn initially budgeted. Minas Conga was slated to begin operating in 2015, producing 580,000-680,000 oz of gold and 70m-115m kg of copper per year, as well as generating revenues of up to $30bn in 20 years.

During his campaign visit to Cajamarca, Humala promised residents a clean supply of water, reciting his slogan, “El oro no se puede beber” or “You can’t drink gold”. This statement came back to haunt him as he has since clarified his stance, declaring it is indeed possible for the residents of Cajamarca to have both gold and water, a assertion they steadfastly contest.

The increased frequency of protests has threatened MEM’s projections, which suggest investment of $51.5bn will be poured into the sector over the next decade. Investor confidence can be finicky and should Peru lose vast amounts of mining investment to social unrest, the ramifications would indeed be felt throughout the economy. So far, Humala has shown he is willing to deliver on campaign promises through the new LCP, the renegotiation of royalties and the establishment of MIDIS. With so much apparently hinging on the judgment of international, and more importantly independent, consultants, the government appears to have at least partly shielded itself from the repercussions should the report fail to back the approved EIA.