Peru: Run-off election unlikely to dramatically alter mining sector

13 Apr 2016

Peru: Run-off election unlikely to dramatically al...

  •   It remains too early to predict the outcome of Peru’s presidential run-off election between Pedro Pablo Kuzcynski and Keiko Fujimori on 5 June, but neither candidate is likely to radically alter the investment climate for mining companies.
  •   Both candidates have pledged to boost infrastructure spending and drive the formalisation of illegal mining, but neither has yet offered innovative solutions of how to tackle social disputes around mining.
  •   Moreover successive Peruvian presidents have either experienced political hurdles implementing reforms or lacked political will to do so, suggesting campaign pledges do not guarantee future policies for the mining sector.  

On 5 June, the Peruvian electorate will vote to elect either Keiko Fujimori or Pedro Pablo Kuzcynski as president after no candidate gained a majority in the first round on 10 April. Recent polls predict a seven-point victory for Kuzcynski ahead of Fujimori, a divisive political figure who may struggle to win votes beyond her established support base of approximately 30-40 percent of the electorate. Nevertheless, the result of the vote remains unpredictable and the campaign period will see fluctuations in the support base of both candidates. Past elections in Peru highlight the scope for significant differences between the first and second round as well as the inaccuracy of polling, with a typically high number of voters remaining undecided until just before the election date. Meanwhile, in legislative elections with 96 percent of the vote counted Fujimori’s Popular Strength party is on track to win an absolute majority in Congress.

The campaign and outcome of the presidential election will be closely monitored by mining investors in the country. Mining constitutes the largest source of foreign direct investment, as well as accounting for 58 percent of total exports, 16 percent of fiscal revenues and 14.4 percent of GDP in 2014. Although both candidates were considered among those most popular with the business community before the first round, their policy stances and differences merit attention.

Keiko Fujimori

If elected, Fujimori has pledged to stimulate economic growth through ambitious investment in transport infrastructure. Fujimori advocates ‘shock’ investment funded through USD 7 bn in emergency fiscal reserves as well as borrowing from international financial markets. Improvements to  transport infrastructure, which is poorly developed outside urban areas, could decrease the cost of the land transportation of minerals to ports. Major development projects will likely face oppositions from local communities in some rural areas, but are vital to reduce inhibitive supply chain and transportation costs and attract further investment in the mining sector. 

Fujimori’s pledge to formalise illegal miners could benefit both mining investors and government, although the process will likely be lengthy. The formalisation of illegal mining could provide investors with increased access to a larger share of Peru’s mineral exports, with gold exports from illegal mining alone accounting for 20 percent of all Peruvian gold exports.  Fujimori said she will revoke the current government’s largely unsuccessful procedure for formalising illegal miners, which since 2012 has seen the registration of only 7,000 of the estimated 400,000 illegal miners in the country, less than two percent of the estimated total. Her strong political support base in rural communities could reduce resistance to the formalisation process, which under past governments has provoked a violent backlash by those dependent on informal mining. Fujimori plans to allow local communities in mining zones to become shareholders in mining projects, fast-track the approval of mining projects with community backing, and create a new cabinet office to prevent and manage social conflicts.

However, Fujimori’s policy to formalise illegal mining and curb the social conflicts that have persistently plagued the mining sector will face key obstacles and create some regulatory uncertainty for existing mining operators in Peru. The initiatives would require investors to expend additional resources on social programmes, and the consultation of local communities has previously derailed or significantly delayed mining projects.

Furthermore, previous government have been unsuccessful in their efforts to stem social conflict by ensuring community backing through legislation, for example the 2011 law on Prior Consultation. Since the law was passed, both Southern Copper and Newmont Mining were forced to halt operations at their mines following violent protests by local communities. Far from improving the establishment of mining projects, Fujimori’s emphasis on community support could backfire and exacerbate the lengthy approval process of mining projects, without appeasing local opponents.

Also of potential concern to investors is a statement by Fujimori’s running mate, vice presidential candidate Jose Chlimper, indicating the corporate tax burden may not lessen under her presidency. According to Chlimper, outgoing President Ollanta Humala’s gradual lowering of the corporate tax rate from 30 percent in 2014 to 26 percent in 2019 could be altered. No firm policy commitment has yet been made on this and further statements of intent during the campaign will be a key indicator of her plans. 

Pedro Pablo Kuczynski

Billed as the most pro-business candidate, Kuczynski’s presidency would involve measures to stimulate economic growth and encourage private sector activity. Kuczynski has pledged to oversee a 4-5 percent increase in economic growth in his first year of government, after growth slowed from consistent rates of 6 percent to 3.2 percent in 2015. Among his key fiscal measures are the lowering of taxes, including a decrease in VAT from 18 to 15 percent in 2017, and commitment to lowering the corporate tax rate to 26 percent by 2019. Similarly to Fujimori, Kuczynski has pledged to drive public-private investment in transport infrastructure and create a dedicated Regional Development Ministry to overcome obstacles to operating in remote regions.

Kuczynski has proposed to continue with the current government’s registration of illegal miners by extending the deadline for registration, which is currently set for August 2017. He has not indicated whether he will make any changes to the registration process, which is burdened by a lack of funding, inadequate planning and bureaucratic delays. Kuczynski has vowed to reduce social conflicts surrounding mining by tasking senior officials with conflict resolution and emphasising the responsibilities of mining companies to communities and the environment. Such approaches are not new however and have persistently failed under previous administrations, thus suggesting that the onus for successful community engagement, communications and investment strategies will remain on project operators.

Obstacles to remain

Irrespective of the outcome of the election, investors in Peru’s mining sector will continue to face similar challenges, especially at a time of low prices for Peru’s main commodities, namely copper, gold, tin and silver. Both Fujimori and Kuczynski will maintain Peru’s commitment to free trade and commodity exports and despite some variances in policies, are unlikely to radically amend the operating environment for business.

Ultimately, it will be the next administration’s ability to implement policies, develop infrastructure and successfully overcome social tensions and conflicts that can halt major mining projects that will impact the outlook for the mining sector in Peru. In particular, civil unrest which has long impeded some of Peru’s largest planned projects will remain a vital consideration. Future mining policy will also remain subject to long-running demands from local community for more rigorous environment impact assessments that could lead to delays and increase costs. As yet, neither candidate has demonstrated they are fully willing to address the complexities of community relations in the mining sector, with both maintaining support for the 2011 law on prior consultation and its unclear definitions on what constitutes an indigenous community and sufficient levels of community consultation. This key area will remain a major consideration for investors in Peru’s mining sector well into the next administration. 

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