"The Peruvian State faces difficult challenges in the short and medium term; it needs a new way
of mining in its territory" Pedro Castillo. The current and controversial president of
Peru wanted to make his intentions clear with this phrase during his inauguration speech.
"a new way of mining". Not only that, Pedro
Castillo has promised a political and economic revolution for the country.
For example, during this same inaugural speech he also made it clear that from
now on the Peruvian state will require all mining and industrial projects to
pay more taxes and also to comply with a new criterion: social profitability.
In other words, for a project to be approved, it will not only have to be profitable and pay the
agreed taxes to the Peruvian state, but now it will also have to comply with other aspects such
as, boosting the surrounding economy, supporting local culture or preserving the environment.
[On the other hand, these are all things they are supposed to be doing with their activity,
with the taxes they pay and with the regulations and standards required by the state. Well,
all this about social profitability is something
that the new government is going to have to explain in detail].
("When [Pedro Castillo] talks about social profitability, it is easy to see that he
does not know the tax contribution of mining, nor the direct and indirect boost to the labor
force generated by mining projects, nor their level of innovation and technology transfer",
Carlos Gálvez, former president of the National Society of Mining, Petroleum and Energy).
The fact is that Pedro Castillo, a native of Cajamarca, one of Peru's most important mining
regions, has put the industry in his sights. ("Pedro Castillo says he will not allow mining
companies to "plunder" Peru". Milenio) ("Pedro Castillo: We will nationalize mining
companies if the people require it.” Exitosa) And remember we are talking about the most
important sector of the Peruvian economy. Peru is a global mining power and just counting the
projects currently underway, the total runs to tens and tens of billions of dollars.
And that, that has caused us at VisualPolitik to ask ourselves a few questions:
What role does mining really play in Peru? Why has Pedro Castillo put the mines under
the spotlight? How is it possible that this industry generates so much social disapproval?
How can this sector contribute to Peru's future? And perhaps the most important question of all:
What exactly is at stake? Listen up.
[By the way, if you want to keep up to date with everything that is happening in Latin America,
don't miss Latampolitik, our newsletter specifically dedicated to current events
in this region. We’ll leave you all the details in the description].
(MINING IN PERU: WANTED DEAD OR ALIVE)
Peru is one of the largest mining powers in the world.
For example, according to the US Geological Survey, in 2019 the country was the second largest
producer of copper, silver and zinc worldwide. It was also one of the largest producers of gold,
lead and tin among many other resources. Because if one thing is clear, it is that
the country has practically everything. ("Many other mining countries have mainly
one mineral and this adds additional risk when prices fluctuate. Peru has the advantage of being
able to smooth out some of the price fluctuations, based on this diversified
basket of metals". Diego Macera, general manager of the Peruvian Institute of Economics)
All this explains why mining accounts for around 10% of the country's GDP.
And not only that. It also generates, as we shall see, between 15 and 20% of all public revenue and
is responsible for almost 60% of Peruvian exports. To give you an idea, between 2010 and 2019 the
country earned an average of $25 billion dollars annually in mining exports. As you can imagine,
this is a vital source of foreign exchange for the Peruvian economy.And that's not the end of it.
The mining sector also directly employs some 200,000 formal workers
and is estimated to indirectly generate more than 1.3 million additional jobs.
This is due in part to the fact that jobs in the mining sector are more
productive and are characterized by paying much higher salaries,
slightly more than double those common in the rest of the Peruvian economy.
In addition, we would then have to take into account about half a million more people who
are estimated to work in what is known as informal mining, that is, mining that is
carried out illegally or outside of state permits and regulations. We will talk about this later.
Basically, mining is almost as important to the Peruvian economy as eggs are to making an omelet.
However, let’s put the brakes on, because despite all this, as we have seen, the new government has
put this industry squarely in the firing line. So the question we could all ask ourselves is,
why on earth would a government go for the jugular of an industry that
is of such importance to the country? Well, don't think for a moment that he
does it by chance or because he doesn’t know what he is doing. His move was extremely political.
And that’s because mining is a terribly unpopular industry in Peru.
Why? Well, for several reasons. Firstly, because it has a very high impact on the terrain.
Mining activity occupies enormous amounts of land. For example, a single operation
such as Yanacocha, the largest gold mine in South America, occupies an area of 6.2 mile
(10 km) long by 3.1 mile (5 km) wide. That’s 19.2 square miles (50 km2).
And, of course, it's not just about the land. It also requires enormous amounts
of water in areas where, in many cases, the inhabitants have serious supply problems.
Then usually the movement of trucks and heavy machinery also affects life,
crops and pastures in rural areas due to the large amount of dust that is raised and, in addition,
if things are not done properly, the risk of contamination is very high, with serious
implications, even for people's health. On top of all this, the biggest problem,
problem number 1, is the feeling that rural communities have of being "robbed". That is
to say, that the enormous business that the mining companies make with the exploitations
in Peru does not end up translating into a clear improvement in the living conditions of
locals. And that’s without taking into account those that experience clear disadvantages.
For example, we have the case of Cajamarca, Pedro Castillo's native home and the poorest region
in the country despite having a powerful mining industry and
plenty of natural resources to exploit. Despite this, roads and infrastructure
are deplorable, and almost half of the population exists in severe poverty.
("They don't even pay taxes in a fair way; from here they take out the gold that is
sent to all parts of the world and the communities of Cajamarca continue to live
in misery". Juan Chillón, Peruvian left-wing activist and politician)
The distrust of the mining industry is so great that despite being such a poor region,
the authorities have put the brakes on multi-million dollar
mining projects in recent years. This was the case with the Conga Project,
a huge gold mining project with an initial investment of almost US$5 billion.
And, take note because we are talking about a feeling that has been spreading throughout the
country, particularly in the mining regions. And all this helps to explain why there are
so many social conflicts. For example, according to the Ombudsman's Office,
during the first quarter of 2021 alone, 80 active mining-related conflicts were registered.
Now, where is the truth in all this? Is it true that mining companies are so irresponsible? Is it
true that they pay hardly any taxes? Well, just as in any good story,
there are going to be some murky areas. Regarding environmental impact and labor
exploitation, it must be said that most of the problems are associated with illegal mining
or the malpractice of officials who have the duty to control compliance with established
regulations or to prosecute illegal exploitation. And remember these are not minor issues...
To give you an idea, according to estimates by the consulting firm Macroconsult,
almost 30% of all gold production was carried out in illegal mines. Mines,
which, of course, do not comply with environmental,
occupational safety, public health protection requirements, or any basic requirements at all.
Illegal mining has been responsible for the deforestation of huge amounts of forests,
poisoning soil and endangering the health of thousands and thousands of people. This
is because mining uses highly toxic reagents that, if not managed correctly, can cause many problems.
And now we come to the key question: Are Pedro Castillo and so many other Peruvian
activists and politicians right in declaring that mining multinationals pay hardly any taxes?
Is it true that Peru's wealth is being plundered? Why on earth is it so hard to see economic
progress in mining environments? Listen up.
(THE MONEY THAT DOES NOT COME)
Let's see, is it true that large mining companies hardly pay taxes in Peru?
Well... to answer this question the first thing we have to take into account is that,
in Peru, mining is subject to several main taxes:
Firstly, like any other company, they have to pay income tax, that is, the tax on profits.
But then they also face mining royalties, the special mining tax and the special mining levy.
As a result, according to calculations by the Peruvian Institute of Economics,
mining companies operating in Peru face a tax burden of at least 47.07% of their profits.
This is higher than the average set by the main mining countries. In other words,
mining companies in Peru pay more than what is customary in countries such as Canada,
Australia, Chile or the United States, among many others.
Between 2009 and 2019 alone, mining companies in Peru paid 85 billion soles in taxes. That’s
roughly $25 billion dollars given the exchange rate at the time.And, take note, because
to this tax burden we have to add the money that the mining companies pay in salaries, social
contributions and contracts with local companies. If we put everything into the equation,
it is clear that Peru earns much, much more from mining operations than any other company
that exploits deposits in the country. [Come on, looting, looting, how can you
call that looting?, well, I don't think so]. But then, why on earth do communities seem
to struggle to move forward? Why is it that in many cases the local population
feels that the multinationals take the resources and they are left with nothing?
Well, this is when we come to what is known as the mining canon.
Let me explain. The sub-national entities, the regions, municipalities and districts
where there is mining activity receive 50% of the revenues collected by the state each year,
to be spent, in theory, on public investment. And together with the mining canon we also find
the gas canon, the oil canon and the mining royalties. In other words, the subnational
entities in the areas where natural resources are exploited receive a lot of income every year.
We are talking about more than $2 billion dollars a year for regions that are
generally very poor. Despite this, social dissatisfaction seems more than evident.
("Municipalities that received the most mining
canon voted for Perú Libre". La República) Well, do you know what the problem is?
Because of the low level of the Peruvian political class – which by the way we already
covered in a recent video I’ll link for you in the description – they spend the money badly,
and that is when they manage to spend it at all.
According to data from the MEF, between 2009 and 2019 they barely managed to allocate a
little more than 60% of the available budget. This means that the main mining regions are
leaving more than 1,800 million soles per year in the drawer paid by the mining industry.
In other words, these sub-national entities have billions and billions of soles sitting in
national bank accounts, while their regions lack all kinds of basic infrastructure.
And that, what can I say, is not so much the fault of the mines but of the policy.
("There is plenty of money here. Sub-national authorities do not have to ask for more resources.
What they have to work on is how to better manage those resources. The discourse that
companies contribute very little, as some claim, ignores the excess of resources
that these authorities have". Luis Miguel Castilla, Director of Videnza Consultores)
In 2020, due to the coronavirus crisis, the royalty was much lower, only 4.5 million soles.
In spite of this, subnational governments and municipalities still barely allocated a little
more than 50% of this amount. And then you have to subtract
corruption from what they do manage to spend. Earlier for example, we saw the case of Cajamarca,
the poorest region of Peru and the birthplace of Pedro Castillo.
Cajamarca is a province of 1.3 million inhabitants
where almost 50% of the population lives in conditions of severe poverty, where 20%
of the homes do not have electricity, 26% do not have running water and 62%
are not connected to sanitation networks. Well between 2009 and 2018 alone this region
received almost 1.2 billion dollars to carry out public investment from the mining canon
and royalties. Of this total amount almost half, 47% was not allocated, it was not spent.
In spite of this, almost 30% of the public budget of all sub-national entities in this region was
financed by the Canon Minero and royalties. So clearly it is here and in illegal mining,
which obviously pays nothing, where the big problem lies and why so many Peruvians have the
impression that the mining companies pay much less than they really do.
Now, we come to the last big question: What repercussions could Castillo have
for the future of Peruvian mining? Listen up.
(AUSTRALIA OR VENEZUELA? THE LATIN AMERICAN ALTERNATIVE)
The development of green energy is driving up demand for mineral products of all kinds,
such as copper, which is increasing in price. This is a real opportunity for countries like Peru.
For example, the Andean, Pacific and Amazonian country currently has a portfolio of mining
projects with estimated investments totalling almost $60 billion dollars.
Projects that, according to estimates by the Peruvian Institute of Economics,
could translate into tax revenues of millions and billions of dollars over the next few years.
The problem is that many of these projects are at a standstill and to make matters
worse, the arrival of Castillo with all his threats may slow them down
even more. This is exactly what is at stake in Peru.
In the past things have not been well managed in many cases. The laziness of many companies,
corruption and the incompetence of local governments have slowed
down the development of the country. But these are all things that can be solved.
Peru needs investment and the mineral industry, as is the case in, for example, Australia,
could be a great driver of prosperity. In any case, at this point, it's your turn:
What impact do you think Castillo's arrival will have on Peru's most important industry? Will he
make good on his threats or will he ultimately be much more pragmatic than he appears to be?
Leave us your answer in the comments and if you found this video interesting don't forget to
like and subscribe to VisualPolitik. All the best and see you next time.