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PERU: Small Towns Face Challenge of Using Windfall Mining Revenues

Milagros Salazar

LIMA, Sep 5 2008 (IPS) - Peru is enjoying a mining boom. But while some areas lacking in minerals and oil have seen very little of the windfall profits, other districts have taken in so much money that they have only been able to actually use a tiny portion of it.

Take San Marcos, a highlands municipality of 12,000 people in one of the country’s poorest provinces, which has received the largest proportional amount of revenue from the “canon minero” mining industry tax, but only managed to spend four percent of the funds last year, and six percent so far this year.

As a result of the soaring international minerals prices, San Marcos’ share of the canon minero taxes skyrocketed from 200,000 dollars in 2005 to 73.5 million dollars in 2007.

The canon minero is the direct economic compensation received by the provinces 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 Peruvian state from the extractive industry must be transferred to the regions.

In San Marcos, in the northeastern coastal province of Ancash, more than 90 percent of the canon minero taxes come from Antamina, a mine operated by Canadian, British, Australian and Japanese corporations.

According to the governmental National Fund for Social Development (FONCODES), 42.5 percent of the population of Ancash lives in poverty, while 51 percent of the people of San Marcos are malnourished. In the past two years, the poor have been hit hard by the rise in food prices and cost of living.

Local residents point out that a meal that used to cost three soles now costs double that, close to prices in the capital, Lima.

Today, the town of San Marcos looks like a big wholesale market for products ranging from food and clothing to cell-phones and electronic appliances, although power outages are frequent because the local hydroelectric company is in a state of collapse.

Meanwhile, in the surrounding rural areas, the roads are not paved, water is only available on some days, and sanitation coverage is spotty.

“We want them to build roads and improve our basic services. What good is the money to us if it’s in the bank?” Gaspar Guerra, one of the local residents of San Marcos who are hoping to see some of the benefits of the windfall mining revenues, commented to IPS.

Local residents are so enthusiastic that in August 2007, the district’s four towns and villages approved, in participatory budget meetings, 400 different infrastructure and other projects – amounting to more than one a day over the course of a year.

“That’s impossible. We’re going to help the people understand that the largest number of projects we can carry out in a year is 100. The idea is to come up with a smaller number of big projects,” said the San Marcos municipal manager of budgets and planning, Damián Bernal.

The official reported that last year, only four percent of the budget was actually invested, mainly in projects to upgrade schools and expand sanitation, while so far this year, only six percent has been used.

The municipal Investment Planning Office (OPI) has declared viable 150 of the 220 projects presented from 2006 to 2008. But in 2007, only 37 public works actually got underway, and this year another 56 were put out to tender.

“There has been a lack of determination to move ahead with the public works projects, as well as a lack of sound criteria for avoiding the mushrooming of small projects, that end up splintering the funds,” said OPI head Eugenio Lugo.

To illustrate, he pointed out that local residents asked for improvements to 70 dirt roads, but instead of designing just six big projects to reduce the number put out to tender, and to cut the time needed to carry them out, each road was tackled as a separate project.

“The question here is how should we manage so much money? What is happening in this district serves as a test for the public administration at all levels of government,” said Lugo.

“If this municipality is only able to use a small part of the funds, that is also the responsibility of the national government, which should strengthen the local government’s capacity while setting limits on the budget based on what it can responsibly invest,” said Epifanio Baca, head of the Vigila Peru (Citizen Watch) section of the Grupo Propuesta Ciudadana, an umbrella group of non-governmental organisations.

He told IPS that a fund should be created which would allow tax revenues to be saved up for the years when the funds transferred to the regions and municipalities through the canon minero shrink.

The local authorities of San Marcos say the bottleneck is partly due to the technical guidelines set by the Economy Ministry’s National Investment System (SNIP), as well as the requisites put in place by the Superior Council for State Procurement and Contracting (CONSUCODE), which mean the public tender processes can stretch out to a year or longer.

Another factor is the shortage of skilled and trained personnel for designing and implementing the projects, despite the fact that more professionals were hired by the municipality this year.

Each area of the local government in charge of designing the projects and the public tender processes has on average just three specialists and technical experts. As a result, 90 percent of the proposed investment projects are in the hands of outside consultants.

With the influx of the enormous windfall profits in San Marcos, the effectiveness of local authorities has come under increased scrutiny. In March, some local residents began to make an effort to remove Mayor Félix Solórzano.

The mayor has hired more staff to move ahead with the public works, while creating a temporary employment programme: the Public Infrastructure Maintenance Project (PMIP), which has hired some 4,000 local residents, and is funded with 20 percent of the municipality’s canon minero revenues.

The full-time PMIP workers earn the equivalent of 300 dollars a month for tasks like sweeping the streets, removing stones from dirt roads, and cleaning cemeteries.

“But the solution is not to generate welfare-style solutions by giving temporary jobs to people, because that runs counter to development. The comptroller’s office should be overseeing this,” said Baca.

In his view, the local authorities of San Marcos should forge alliances with nearby municipalities and provincial authorities to carry out projects with a greater social impact. “They should not work in an isolated manner,” he said.

Mayor Solórzano said that not only is the local government providing jobs, but it is also moving ahead with the infrastructure works demanded by the local population. “It’s not easy to manage so much money, which is why we have reorganised, in order to put priority on works that have a major impact on people,” he told IPS.

The projects declared viable by OPI mainly involve small investments for paving dirt roads and installing piped water, sanitation and irrigation canals, as well as less urgent projects like the construction of five small sports complexes.

At times there has been greater enthusiasm for construction projects than for income-generating initiatives. New stadiums are quickly being built in Chavín de Huántar, a municipality near San Marcos, and in Uco, another nearby district, with just 1,800 inhabitants.

The head of the National Strategic Planning Centre (CEPLAN), Agustín Haya de la Torre, said it is important to foment the emergence of a “meritocracy” in the public administration, in order to improve the use of the canon minero funds.

To that end, he said that he would also review SNIP and CONSUCODE technical guidelines to negotiate improved application and enforcement with regional and local governments.

The Peruvian parliament is also studying ways to improve the distribution of the canon minero taxes, which is lopsided, with just five of Peru’s 25 provinces receiving 60 percent of the funds.

Huancavelica province, where more than 80 percent of the population lives in poverty, received a mere 13.4 million dollars from the canon minero fund last year, because unlike Ancash, it is not a major source of minerals like zinc, copper and molybdenum.

To reduce the inequalities inherent in the system of distribution of the funds, a multi-party parliamentary commission has proposed a series of modifications to the canon minero law, including a provision that 16.2 percent of the tax go to the provinces with the greatest unmet basic needs.