Cablegate: Sfrc Staffdel Examines Transparency

R 022154Z JUL 08



E.O. 12958: N/A
SUBJECT: SFRC STAFFDEL examines transparency
in Peru's extractive industries


1. (SBU) SUMMARY. Senate Foreign Relations Committee Staff Members
Carl Meacham and Brooke Daley visited Lima May 25-31 to discuss the
state of transparency in Peru's extractive industries. Meetings
with government officials, non-government organizations (NGO), and
private sector executives all emphasized that Peru is
making significant gains in supporting transparency and combating
corruption. The inability of local governments to effectively
invest the mining royalties being generated, however, is fueling
citizen frustration and
local conflicts. END SUMMARY.


2. (SBU) Meacham and Daley spent five days in Peru meeting with
Government of Peru (GOP) officials, civic watchdog groups, donors,
and mining company representatives to discuss the state of
transparency within Peru's extractive industry. Peru is one of four
countries piloting the Extractive Industries Transparency Initiative
(EITI). EITI was launched in 2002 by Prime Minister Tony Blair to
encourage resource-rich countries to publish and verify company
payments and revenues from oil, gas, and mining to improve
transparency and accountability.

3. (SBU) Peru's EITI program began in 2006. At the national level
the EITI Working Group, comprised of representatives from civil
society, the mining sector, and the Ministry of Energy and Mines, is
supported by the World Bank. The U.S. government-funded EITI
program, totaling $445,000 and launched in 2008, is a collaborative
effort that brings together USAID, Canada, Britain, the
International Finance Corporation, private sector companies, and
NGOs. Jointly funded efforts are focused in the five regions where
mining is most active and the majority of royalties are generated.
The program is designed to ensure that resources generated by the
extractive industries are invested transparently in programs that
meet citizens' needs. Staffers were interested in understanding the
impact of extractive industries on the Peruvian economy, the degree
of transparency in revenues being generated, and whether
U.S-supported efforts, such as EITI, are seen as effective.

4. (SBU) To date, EITI in Peru has focused almost exclusively on
mining, given that mining has long dominated the economy and in 2007
accounted for 62% of Peru's exports. With large investments in gas
andQl underway, however, Peru is expected to become a net
hydrocarbon exporter by as early as 2010. Many of these investments
are taking place in isolated jungle communities that have had
minimal contact with the modern world. The ability to use the
resources that will be generated from royalties remains limited in
these remote areas. While little attention has been paid to date on
Peru's oil and gas sector, this area is ripe for additional work
under EITI to head off potential conflict and plan in advance for
the effective, transparent, and sustainable use of resources that
will be generated.

Show Me the Money

5. (SBU) Peru is currently undergoing tectonic shifts as it moves to
decentralize resources and decisin-making to the regions while also
modernizing the state. A national integrated financial management
system, a new electronic public procurement process, and mandatory
government websites at all levels are effectively shedding light on
how government does business.

6. (SBU) With these new modern systems coming on line, both in Lima
and the regions, a greater emphasis is being placed on efficiency
and transparency. Staffers repeatedly heard that "big picture"
transparency is not a problem in Peru. GOP websites provide
information on how much the extractive industries provide in tax
revenues and how these funds are allocated between the different
levels of government. While there is variation among the level of
financial detail private companies report, with publicly traded
companies and larger firms being generally more open, an abundance
of information exists.

Is Transparency the Easiest Part?

7. (SBU) Of greater concern in Peru are the "downstream" problems
resulting from growing levels of transparency. Record mineral

prices in today's global market are generating unprecedented wealth
for Peru. Through the state's ongoing decentralization effort, 50%
of the royalties generated through extractive industries are made
available to the regions. According to the GOP, 2007 mining
royalties resulted in more than $1.8 billion being transferred to
regional and local governments, representing a budget increase of
more than 1,700% for some districts.

8. (SBU) While the transfer of much-needed resources to the regions
is seQ as a positive step, problems are emerging around the
perceived inequality of royalty distribution. Current legislation
mandates that royalties must be returned only to those regions where
the extractive companies operate. The regional government of
Ancash, for example, received $140 million in 2007 royalties. The
contiguous region of Lambayeque received 250 dollars in the same

9. (SBU) As the royalty pie grows larger each year, calls from
regional presidents in non-mining areas are becoming increasingly
strident for legislative revisions that more equitably divide the
funds among all of Peru's 25 regions. The natural wealth being
extracted, it is argued, belongs to the entire country of Peru, not
only to a handful of regions. In June, for example, a protest
between two regions over the distribution of mining royalties closed
the Pan-American Highway. Escalating violence eventually led to
dozens of police being taken as hostages. While the protest and
royalty issues have been resolved for the moment, tensions continue
to simmer beneath the surface.

Conflict at the Local Level

10. (SBU) While debate about how to divide resources continues at
the national and regional levels, the day-to-day impact of
increasing royalties and greater transparency is being played out in
the local municipalities. GOP officials and NGOs continually
expressed to the Staffdel their concern about the capacity of local
governments to effectively use the royalties to deliver benefits to
some of Peru's poorest citizens. Specifically, many questioned the
capacity of local officials to plan, develop, and implement public
investment projects.

11. (SBU) Although Peru is shifting towards a more decentralized
state model, the slow move away from a notoriously laborious and
burdensome public bureaucracy continues to impede local investment
projects. In addition, the capacity of municipal leaders,
especially in the most remote and least developed regions (i.e., the
Sierra Highlands), remains low. Local officials in these areas have
limited access to the technical expertise needed to plan and develop
sustainable projects. As royalties continue to expand each year,
governments in the richest regions are saddled with large surpluses
they cannot spend.

12. (SBU) Interlocutors positively emphasized that the system is
transparent enough for people to see the surpluses, which in turn
pts pressure on politicians to improve performance. It is also,
however, feeding resentment among some citizens who claim to see no
substantive change in their lives, despite the windfall of
resources. The Peruvian Office of the Ombudsman tracks ongoing
social conflicts in the country, and in June 2008 it reported that
more than 100 conflicts currently exist. Half of these are related
to the extractive industries.


13. (SBU) The difficulties Peru is facing in the extractive
industries Qhow to show tangible benefits on the ground from
booming mineral prices - is a microcosm of the broader challenges
that Peru faces. The relatively high degree of transparency and
modernizing e-governance systems bode well for Peru's management of
these issues. While the mining sector is moving along in its
efforts to address transparency and the efficient use of extractive
resources, the oil and gas industry remains at a more incipient
stage. EITI is one tool that can help address some of the
challenges identified. Perhaps its greatest value, now being
piloted, will lie in its ability to bring government, civil society,
and the private sector to the table to temper expectations and
better manage the potential for conflict. END COMMENT.


© Scoop Media

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