Progress Through Listening
© Minsur S.A.
Peru’s extractive-industry challenges are far from over. Public memories linger of poor mining practices, billions of dollars in royalties left unspent rather than invested in better infrastructure and unfulfilled promises of jobs and growth.  But improved revenue management and concerted efforts by companies to engage local communities have generated valuable lessons about how investments in extractives can be harnessed for inclusive growth.

Take-off growth

Peru’s rich mineral deposits—putting it in the world’s top five producers of copper (with 13% of the world’s reserves), silver (22% of global reserves), tin, and zinc—have powered economic expansion. Over the past five years, real GDP growth has taken off, at an astonishing 7% a year.

“Mining has been the driving force behind Peru’s growth in recent years,” says Alvaro Quijandria, IFC Practice Manager. “And it has brought enormous resources both to regional and national governments.” In 2013 alone, $10 billion was invested in Peru’s mining sector. By 2020, another $60 billion is expected.

Progressive policies

To harness the development potential of Peru’s resources, the government has introduced a number of progressive policy measures. For example, mining companies must obtain water and land rights. And through the Indigenous People’s Consultation Law, passed in 2011, the government must consult with indigenous people on projects that may affect them.

Meanwhile, since 2011, local governments in mining areas now receive 20% of the royalties companies paid to the state, with 50% of this going to the communities located around the mine.

Challenges and criticism

Delivering on potential, however, does present tremendous challenges.

Firstly, large sums of money are flowing to local administrations that often lack the capacity and skills needed to make appropriate infrastructure investments.

Resentment at the failure to turn royalty dollars into roads, schools, or hospitals is not only directed at local governments. Even though companies cannot control this spending, communities often blame them for the absence of improvements.

“They’re looking at resources coming in and mines being built. So a pretty big challenge is unmet expectations,” explains Quijandria.

Secondly, extractives sector companies in Peru face hostility arising from past incidents. In 2000, for example, conflicts between local communities and Minera Yanacocha (a joint venture between Newmont and Minas Buenaventura in which IFC has a small equity stake) arose after a mercury spill along a section of road that passed through three villages.

While the company cleaned up after the spill and compensated those affected, such incidents have undermined trust between communities and mining companies.

Moreover, despite the passing of the People’s Consultation Law, how the Peruvian government will implement the law is still unclear.

“By 2015, law will be applied in the mining sector,” says Antonio Bernales, Executive Director of Futuro Sostenible, a Peruvian non-profit supporting environmental negotiation, consensus building, and mediation. “It remains to be seen how the government will do that.”

James Anaya, Professor of Human Rights Law and Policy at the University of Arizona, agrees. “If it’s implemented adequately, the law could help these communities enormously,” says Anaya, Former UN Special Rapporteur on the Rights of Indigenous Peoples.  “If not, it’s business as usual,”

Moreover, debates have arisen over which communities can be considered indigenous under the law, particularly in the mining areas of the Andes, where communities are less isolated than those in the Amazon, where oil and gas companies operate.

Further lack of clarity surrounds private sector participation. While companies must report on indigenous communities in their environmental impact assessments, the consultation law does not cover companies.

Anaya argues that indigenous communities should be able to engage with companies, too. “They need to be involved in critical decision that determine the character of the projects,” he says.

Capacity building

Despite all the challenges, progress has been made in improving relations between companies and communities and in ensuring mining investments create shared prosperity.

“The first thing we had to do was to help local governments to invest the money,” says Javier Velarde, Vice President, General Manager (Peru) and Corporate Affairs at Newmont.

He explains that royalty management programs, which IFC has supported, have helped local authorities to identify priorities and plan infrastructure projects more efficiently.

Meanwhile, some companies are working to address the needs of indigenous communities. For Minsur, one of the world’s largest tin mining companies, this involved conducting a study to identify the communities living around its operations.

Part of this was driven by legal requirements. But the company also sees this as a way to help communities access better services. “We cannot be the government,” says Juan Luis Kruger, CEO of Minsur. “But at least our presence can be a way to ensure some of the social services provided by the government reach these communities.”

Listening and learning

One unique approach to community engagement has been the efforts made by Newmont. After moving the Yanacocha corporate office from Lima to Cajamarca, the city nearest its operations, it commissioned the Centre for Social Responsibility in Mining (CSRM) and CCPM Grupo Consultor to conduct research into local needs.

The study, “Listening to the city of Cajamarca,” produced insights from which the company could learn. “What came out loud and clear was that they resented the fact that we were not providing enough opportunities for local communities,” says Velarde.

As a result, the company worked with the Chamber of Commerce to create opportunities for local contractors and to establish transparency in selection processes. “In less than two years, we increased the level of local contractors more than 120%,” says Velarde.

Another critical lesson to emerge from the study was the need to communicate more effectively with local communities. “And not only through one or two people,” says Velarde. “Having the whole regional team engaging with communities makes a big difference. It sends a message that we want to be part of Cajamarca and to listen to what they have to say.”

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