Harris Gomez Group

You Are Viewing

A Blog Post

Peru Mining: Work for Taxes is a crucial tool to help ease social conflict

Peru has been a hotspot for mining investment over the last 10 years. The country has a strong project pipeline with some notable mines being built.

Over this same period, Peru has faced serious community opposition to mining projects. Social conflicts at various projects has forced the Peruvian Government to declare a state of emergencies a number of times over the years. These instances have been so serious that they have delayed projects considerably and garnered international media attention.

Social conflict around ming projects in Peru is not a simple subject, in fact, it is quite complicated as there are many underlying issues. A common theme is that communities in the interior of Peru where these projects are being built feel that they are not benefiting from the tax dollars being generated.

In response to this, the Peruvian Government has focused more in these last years to ensure tax dollars are being distributed to these interior province.

Peru – Financing Public Works

The Ministry of Energy and Mines recently provided an overview of how the mining sector continues to be one of Peru’s engines for the financing of public works.

So far this year 8,187 investment projects have been totally or partially financed with different funds from the country’s mining canon and royalties from 906 mining concessions that are in the production stage, according to sector investment platform MapaInversiones Perú País Minero, of the ministry of energy and mines. 

Since 2012, Peru has financed 53,364 public works projects with funds from those levies and other sector-related funds, totaling 66.7bn soles (US$18.8bn), according to data from the platform. The projects include expansion and improvement of drinking water systems, installation of educational and sanitary infrastructure, and solid waste management and public lighting works.

Last year, the central government transferred 6.51bn soles to regional and local governments as a result of the levies.

¨Work for Taxes¨ Program

Tax dollars from royalties is not to be confused with ¨Work for Taxes¨ program that has also helped local communities with public work projects.

In 2008 the Peruvian government devised a unique public investment mechanism called “Works for Taxes” that allows private firms to “pay” a portion of their income taxes in advance in the form of public works—from public buildings to transport infrastructure and beyond. The goal of the mechanism is to accelerate and improve the quality of investment in public works and services, many of which have been severely underfunded.

Works for Taxes offered those and other companies a new level of accountability and an opportunity to incorporate public works into their social responsibility efforts, while at the same time ensuring that their tax payments directly benefited local communities.

The Works for Taxes mechanism benefits multiple stakeholders, including:

  • The government – Works for Taxes provides government entities with access to financial resources in advance, allowing them to provide quality public works and services within a shorter timeframe. In addition, it liberates human and physical resources for use in other relevant projects.
  • The financing firm (Mining Companies) – By providing public works and services, firms can have a direct impact on their communities and can improve relationships with stakeholders. In addition, companies can invest in works that facilitate their operations or bring positive externalities such as greater local competitiveness or crime reduction.
  • The local community – The improved execution of public works provides local communities with better public infrastructure and services, including roads, bridges, and schools. These in turn can improvethe local labor force and raise household revenues. In addition, construction projects generate local employment.

A key reason for the Works for Taxes mechanism’s success has been the Peruvian government’s receptiveness and willingness to connect with the private sector, while regularly improving the processes and regulation of the mechanism based on private-sector feedback.

Between 2009 and 2017, approximately $1.25 billion was pledged or invested in 318 Works for Taxes projects, with the participation of 82 private enterprises, six ministries, 14 regional governments, and 114 local governments. 

Since 2017, there has been even more focus on this program given the social conflict issues that have arose these past years. Companies are eager to ensure that local communities benefit from the taxes generated from their mining projects.

The program has been so successful that recently the Peruvian Government has announced plans to carry out 20 water projects worth 278mn soles (US$78mn) under the ‘works for taxes’ model, benefitting 127,000 residents.

Four of the projects have already been awarded, namely wastewater treatment plants for Huarmey (137mn soles) and San Marcos (16.5mn soles) in Áncash region, the upgrade of the potable water and sewer systems in Chinchero in Cusco (35mn soles) and improvements to the sanitation system in Antauta in Puno (13mn soles), state news agency Andina reported.

Conclusion:

Works for Taxes is considered an overall success in Peru but it still has its limitations as it is not a perfect program by any means. It is wishful thinking to believe that it can solve the social conflict issues. Public works is simply one part of a very complicated issue around community engagement.

The hope is that at a minimum communities will be able to better see improvements, therefore, be more receptive to new projects being developed. Trust needs to be built between communities, the government, and the mining companies. This will take time but the Works for Taxes program is a good step in the right direction.

Harris Gomez Group is a Common Law firm, with offices in Santiago, Bogotá, and Sydney. We also have legal teams in Mexico, Peru, Ecuador, Brazil, and Argentina. Over the last 19 years, our team of English speaking Lawyers and Attorneys have been supporting foreign companies with their growth in Latin America. Many of our clients are technology companies, service providers and engineering companies that focus on the mining, energy and infrastructure markets. 

To better understand how we can support your management team in the Region, please contact Cody Mcfarlane at cmm@hgomezgroup.com