Participatory Monitoring of Mining Royalties, Peru

Background | Project Objectives | Description 

PROJECT STATUS: ACTIVE

PARTNER/CLIENT NAME: The Defensoría del Pueblo (Peruvian Ombudsman Office), Ministry of Energy and Mining, Department for International Development (DFID) and Canadian International Development Agency (CIDA).

COUNTRY/REGION: Peru, Latin America and Caribbean

COMMUNITY DEVELOPMENT FOCUS: Revenue Management

MINING SECTOR: N/A

BACKGROUND

The Evolution of the Mining Royalties

Peruvian law mandates that 50% of income taxes paid by mining companies to the national government be channeled back to regional (25%) and municipal (75%) governments under the denomination of mining royalties. Regional governments in turn transfer a small percentage (5%) to national universities in their region. The distribution of the mining royalties among municipalities is based on a formula that takes into account where the mining operations are located. The income municipalities receive from the mining royalties is earmarked for municipal investment.

Mining royalties transfers from the Central Government to municipal governments have grown exponentially since 2001 as a result of both increased production (associated with increased investment) and higher mineral prices in international markets. While mining royalties transfers amounted to S./ 81 million in 2001, they will reach S./ 1,746 million by 2006.

Little Recognition to the Generation of Public Resources

Communities do not clearly associate mining royalties resources, and the investment it finances, with mining activity. This can be attributed to two reasons: First, little effort has been made to provide information as to the nature of this source of municipal income and its significance (mayors have no incentive to disclose this information). Second, municipalities have not been able to invest these resources effectively to undertake the public works projects local communities have identified to meet their needs. In the absence of public disclosure mayors have been able to act without having been held accountable for their inefficiencies or lack of results.

As a consequence, public resources created by mining, while having the potential to make a significant positive impact on local development, are not fully taken advantage of and therefore, the people fail to take them (and their potential positive socio-economic impact) into account in their calculations of the significance of mining for their communities.

The Challenge of Turning Resources into Development

The accelerated growth in the use of mining royalties resources to finance municipal investment represents both an opportunity and a challenge to municipalities. Provincial municipal governments lack the structures needed to manage the size of investment projects that could now be financed with their mining royalties revenues. They now face the need to restructure and build capacities to rise to that challenge. While local governments have an incentive to change and increase their investment capacities, experience shows mayors are slow in adopting change, even when they have been identified and external support, in the form of capacity strengthening projects, is available to them.

It has become increasingly clear that for the needed improvement in investment capacity at the municipal level to take place at a reasonable pace municipal governments have to be held accountable to the population. Consequently, civil society has a role to play in ensuring resources are appropriately invested in a timely fashion. Such role consists in exercising well-informed and responsible oversight of mining royalties revenues and municipal investment. A mechanism inducing municipal governments to be more accountable and responsive to civil society can be of help in making municipal investment more effective and efficient.

PROJECT OBJECTIVES

The objective of this project is to improve the local development impact of extractive industries in Peru by helping build and train a sustainable mechanism – the Independent Monitoring Mechanism (MIM) for tracking municipal management of mining royalties flows.

This initiative is part of the National Program on Mining Royalties, that works in one hand directly withlocal governments to build capacity in investment management and execution and on the other hand with civil society organizations to establish effective transparency and social accountability mechanisms. The two-pronged approach generates complementary forces working in the same direction to build synergies that help improve local public investment and hence the impact of extractive industries related public resources.

The MIM aims to achieve this by:

• Informing ordinary citizens and civil society organizations of mining royalties flows and municipal investment;
• Encourage public debate about municipal investment;
• Establish voice channels - making it possible for the population to communicate its opinion on municipal management and municipal investment in general and on their degree of satisfaction with specific municipal services.
• Generate awareness among the population - on the importance of municipal investment so that there is an understanding of the great opportunity that the resources of the mining royalties represent, and the need for the population and civil society organizations to contribute with ideas and effective oversight.

The MIM’s efforts are meant to increase the social accountability of the monitored municipal governments. They are meant to induce local governments to make better informed decisions and increase their responsiveness to local population demands in terms of improving the quality (efficiency and effectiveness) and sustainability of municipal investments financed with the mining royalties generated by mining operations. Ultimately, the MIM should help improve the local development impact associated with extractive industries in Peru.

DESCRIPTION

The project will be applied in four new departments, Ancash, Tacna, Moquegua, and Puno, and will continue its operations in Cajamarca. The four new departments have been selected because, together with Cajamarca, they receive 80% of total mining royalties resources. The project will extend over 24 months. The first 6 months will be dedicated to the development of tools and to setting up the four MIMs. The remaining 18 months (three semesters) will be devoted to completing three full cycles with each MIM.

At the end of the project a set of tools for conforming MIMs, which will have been employed in the project, will be available to support the organization and initial operation of other MIMs. Four new MIMs will be operating in Peru monitoring mining royalties flows and municipal investment in twelve municipalities. Each MIM will have completed three cycles (Cajamarca’s MIM will complete an additional three) and will be actively contributing to the local discussion on local investment. Each cycle, in turn, will include the preparation and distribution of MIM bulletins and short reports, discussion workshops, ratings of municipal management and municipal investment, actions to promote awareness, preparation and discussion of citizens report cards on key municipal services, and a broad dissemination effort. Each cycle will also provide measures of the exposure, access to, and understanding of, mining royalties flows and municipal investment by the people.

By the completion of the third cycle the measures of exposure access and understanding will reveal an increased exposure and access to information with respect to the initial (baseline) measurement as well increased levels of understanding of mining royalties flows and municipal investment.

Sustainability Strategy

The project is structured with the idea that the MIMs established with the support of the project should continue operating after the project concludes. This will be possible to the extent that the necessary financial resources can be assured (financial sustainability), the involved institutions/organizations maintain their commitment, and the technical capacity can be maintained (institutional sustainability). This will be possible only to the extent that, throughout the life of the project, the MIMs achieve the expected impact and become the local referent to discuss mining royalties and municipal investment and to promote social accountability at the local level.