PPK’s Dilemma: Balancing Business & Social Protections in Resource-rich PeruJun 14 2016 Voces
Elected by a historically thin margin in the second round of Peru’s presidential elections, Pedro Pablo Kuczynski will take office as Peru’s new president on July 28th. The arrival of business-friendly Kuczynski, more commonly known as PPK, promises to bring important changes to the energy and mining sectors. However, implementing his ambitious plans to streamline regulatory approval for extractives projects, reduce social conflicts and community opposition, and formalize Peru’s large illegal and informal mining sectors may prove difficult, as his party controls only 18 out of 130 seats in congress. In order to follow through on these campaign promises, encourage industry, and boost economic growth, PPK will have to work with legislators from Fuerza Popular, the party of his former opponent Keiko Fujimori.
The most pervasive problems hampering growth in the energy and mining sectors are Peru’s cumbersome regulatory approval processes, bureaucratic inefficiency, and widespread local community opposition, which have delayed extractives projects across Peru and threatened the country’s competitiveness. These challenges have slowed the development of large projects and in some cases scared off new investors altogether, hurting tax revenue and slowing infrastructure development in a country where extractives represent more than 60% of exports.
Part of the difficulty in navigating Peru’s regulatory red tape is the duplicative nature of the approval processes. Consulta previa, or prior consultation, legally required in Peru since 2011, calls for all projects to be discussed and planned with local indigenous communities who will be directly affected. Peru has a separate environmental approval process, but environmental concerns are often part of consulta previa discussions, leading to longer approval times and forcing operators to repeat an already completed process. Overlapping jurisdictions also contribute to delays. Projects must be registered, for instance, in both national and local registries with the same information, and individual communities often also claim the right to assess and approve projects. These inefficiencies are exacerbated by a lack of qualified professionals willing to work for low government salaries, understaffing, corruption, and a dearth of information technology that could prevent the unnecessary duplication of information.
Peru has long faced tensions between its government looking to monetize the nation’s mineral and hydrocarbons resources and local communities concerned about environmental and social degradation on their lands. Local conflicts stemming from this opposition to extractives projects are another common source of delay for the industry. As of May 2016 there were 212 ongoing social conflicts in the country, more than 70% of which were socio-environmental. These delays have interrupted several major mining projects, like Nemont’s Minas Conga project and Southern Copper’s Tia Maria project, and the early stages of these developments have dragged on for years with little progress. Even oil and gas exploration, which accounts for only a small part of Peru’s economy, is hindered by these delays, and this industry is unlikely to expand even in the medium term as a result.
Streamlining duplicative processes and stemming the flow of social conflicts will not be an easy task, but PPK has vowed to try, pledging to continue consulta previa while expediting project approval and implementing flexible and simple procedures as part of a new, modern, and efficient model of public management. To reduce social conflicts, the new president has proposed creating a National Social Conflict Prevention System and strengthening the National Office of Dialogue and Sustainability. More broadly, PPK plans to incorporate these bodies into a coordinated intervention system that will identify conflicts before they happen, instructing police in appropriate use of force, and installing a complaint system to alert law enforcement to potential community violence.
Another campaign priority for both PPK and his competitors was illegal and informal mining, which generates $1 billion to $3 billion every year and produced about 20% of Peru’s gold last year. PPK campaigned on the promise of formalizing the sector by providing incentives and local support, setting his strategy apart from the current administration’s punitive approach to informal activity that focused on policing and arrests. The issue is important to the Peruvian people since illegal and informal mining contributes to environmental contamination and mineral trafficking, and often has ties to criminal organizations. In May, the government declared a state of emergency due to widespread contamination from mercury used in the gold mining process, in several jungle regions that are home to indigenous communities. PPK has put forth a number of proposals to alleviate these problems. The cornerstone of his formalization plan is the creation of a Mining Promotion Bank, which would provide training to miners through trade associations, buy gold at 75-80% of the market cost, ensure that all workers receive pensions, and make small loans to miners that comply with environmental standards. PPK has also suggested lowering the national sales tax from 18% to 15% and temporarily decreasing the income tax from 28% to 10% in order to ease the transition of small producers to the formal system. If successful, these measures could bring in an additional $305 million in tax revenue while reducing crime and safeguarding the environment.
Another important campaign issue in the recent presidential elections was the Southern Natural Gas Pipeline, a project designed to bring natural gas from the abundant Camisea field in Cusco to the south, as part of a larger government plan to increase gas demand in Peru. The pipeline, only one-third complete, has been stalled since 2014, when Brazilian company Odebrecht, a 55% stakeholder, was implicated in a major corruption scandal in Brazil and compelled to sell its shares. PPK has repeatedly vowed to help find a new company to replace Odebrecht and finish the pipeline. But attracting a company willing to work through Peru’s regulatory complexities, complicated environmental regulations, and likely opposition from local groups remains a challenge. Once the pipeline is constructed, PPK proposes to extend the pipeline even beyond its originally planned route, holding a tender for regional sub-pipelines to connect nearby towns, an important campaign issue for the Peruvian South.
When PPK takes office on June 28th, the most significant challenge he will face is balancing the needs of companies and his citizens in order to support economic growth without alienating communities and special interest groups. PPK’s business experience should mean that he has the connections and expertise to expedite these projects, but congressional approval is necessary for almost all the regulatory reforms he has proposed, and his party holds a tiny minority in congress. He will need the support of Keiko Fujimori’s party, Fuerza Popular, which holds more than half of the seats in congress, in order to implement any of these changes, but some of the rhetoric he used against her during the campaign has tarnished his relationship with members of her party and may limit his ability to follow through on his proposals. It remains to be seen how many promises PPK can keep, but his supporters are embracing what they view as his technocratic pragmatism, and are hopeful for progress during his administration.