Battle over mining tax for regions as elections near

28 FEBRUARY 2014

With regional, provincial and district elections scheduled for October, there is keen interest in this year’s distribution of the mining tax canon, money which funds a large slice of local government expenditure.

The amounts available may be considerably less in many places than in previous years, a reflection of the decline in mineral prices during 2013 and thus company profits. According to Grupo Propuesta Ciudadana, a Lima-based NGO that works on local government issues, the money from the mining canon could be down this year by as much as 40 per cent.

The canon minero is a transfer from central government to sub-regional tiers of government. It comes mainly from a proportion of the corporate income tax paid by firms in the extractive industry sector (predominantly mining and hydrocarbons) and is channelled chiefly to those parts of the country where those activities are sited. The Ley de Canon was approved in 2001, shortly after the fall of the Fujimori administration. The detailed legislation governing the gas canon was passed in 2001, whilst the regulation of the mining canon dates from 2004. The latter responded to a deliberate attempt to provide incentives for local people to approve large mining investment projects.

The introduction of the canon system and other transfer arrangements was also designed to fund decentralisation, following the concentration of power in Fujimori’s administration in the 1990s. As such it was a welcome initiative that helped foster more democratic government. Historically, local government had had little importance in Peru, lacking any meaningful funding. The decentralisation of local government finance went hand-in-hand with innovative proposals to create spaces at the local level for citizen participation in budgeting and in the oversight of the funds used.

Unfortunately, as the system developed, it has produced absurd anomalies in local government funding, particularly as the increase in the market prices of Peru’s minerals inflated the size of the sums transferred to those areas with mining operations. A large proportion of the funds made available through the mining canon system went to a just a handful of regions: Ancash, La Libertad, Arequipa and Cajamarca (in that order).

Add in the gas canon, and the distribution became even more skewed. With most of gas originating in the region of Cusco (where Camisea is located), that region received far more money than anywhere else. In 2012, for instance, Cusco received 28 per cent of all the money derived from the canon, of which 85 per cent came from Camisea. The money was then distributed with little or no consideration of the ability of local administrations to use the money effectively. Not surprisingly then – at least in some places – the legacy has been one of mega-corruption.

Faced with this reality, proposals have been mooted to introduce changes into the canon system. But predictably, those regions, provinces and districts that have been favoured by the system, are determined to block reform. In an election year, it is even more difficult to suggest changes to the way that these public funds are distributed.

The decline in canon transfers this year (and last) is already producing political reactions from local governments that are most affected. According to Eduardo Ballón, the technical advisor to the National Association of Regional Governments, “In Ancash and several other regions, regional presidents and mayors are beginning to talk of the risk of [public investment]projects become paralysed,” as a way of mobilising support for their re-election campaigns. Ancash is the region that is probably most affected. Local governments accuse the central government of failing to release the funds to which they feel entitled.

What is needed is a thorough overhaul over the whole system of local government funding so that the flows are no longer excessively skewed to a few areas where the capacity to spend such large amounts is almost wholly lacking. But the beneficiaries of the present system will fight tooth and nail to stop this happening.

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