Social conflicts jeopardize Peru’s growth engine

By Terry Wade and Patricia Velez

MOROCOCHA, Peru (BestGrowthStock) – Peru has lured mining companies to pour $35 billion into new projects over the next decade, but more and more investors are facing unpredictable local opposition and the threat of violence or lawsuits.

Building the mines, almost all financed by foreign companies, will bolster Peru’s position as a top global minerals exporter and strengthen the engine that made it the fastest growing economy in Latin America for much of the past decade.

The country has won investment grade ratings, has a sound banking system, and polls suggest voters will elect a centrist or conservative for president next year.

Yet economists and investors are increasingly concerned about “social risks” that could hurt long-term growth. Poverty runs deep and outside of the big cities many people feel left behind by the boom.

Rural towns are currently organized against 100 mining or oil projects, according to Peru’s human rights agency. In the last couple of years, more than three dozen people have died in conflicts over the natural resource policies of President Alan Garcia, who has worked hard to sell oil concessions and to lure mining investments.

Six people were killed last month when police clashed with wildcat miners and days later farmers blocked roads to halt a mine planned by a firm with Mexican roots. Chinese miner Zijin’s $1.4 billion Rio Blanco copper project has been all but paralyzed by two deadly clashes.

“The first thing I would do if I were an investor is reevaluate the risks,” said Antonio Bernales, who mediates social and environmental conflicts for his consultancy, Futuro Sostenible, and the World Bank. “The context of each specific place matters.”

Bernales says some companies, especially swashbuckling upstarts, have ignored crucial questions at their own peril: Is it a greenfield project in a farming valley or a brownfield site next to old mines? Is there a history of mining near the site? If so, does it go back centuries or only decades? Will the mine’s neighbors be farmers worried about water shortages, or indigenous groups who feel mistreated by outsiders?

Most of the projects planned by multinational corporations intent on tapping into the world’s growing demand for commodities would be developed high in the Andes or deep in the Amazon jungle.

FILLING VACUUM LEFT BY STATE

In most rural towns, the state is all but absent. When foreign mining companies show up, they often are asked to build schools, hospitals, and police stations, and give everybody jobs. Though they aren’t elected, they routinely find themselves trying to do things that governments normally do.

Often, they struggle to persuade people they won’t take their water, pollute their environment or trample on ancestral lands. Critics worry about toxic tailings or poor safety practices.

As conflicts mount amid poverty, high commodities prices and the arrival of investors from countries with no track record in Peru, the fate of new mines also depends on the personalities of leaders from all sides on the ground.

Gerald Wolfe, the chief executive of the $2.2 billion Toromocho copper project owned by Chinalco, one of several Chinese firms that have recently bought mining projects here, says companies operating in Peru often find themselves filling a vacuum left by central government.

“Companies are not designed to be the state and they’re in a very difficult situation because essentially the only thing a mining company has is money,” he said.

To build its mine, Chinalco first must relocate 5,000 people who live in a ramshackle town called Morococha that sits in the middle of what will be a copper pit 15,000 feet up in the Andes.

Families in the new town Chinalco is developing will own their homes and enjoy conveniences that Morococha lacks such as water, sewage services, and around-the-clock electricity.

“I’d say any company today would be thinking seriously about the potential for social conflicts and trying to estimate what those would be,” Wolfe said.

When Peru’s finance minister, Mercedes Araoz, took office six months ago she said the government must do more to avert social conflicts, which she blamed for delaying investments.

But the government spent much of April trying to break roadblocks set along Peru’s main highway by wildcat miners upset about more stringent tax and environmental laws, and by farmers who said Southern Copper’s (SCCO.N: ) $1 billion Tia Maria project would sap their water supplies.

The unrest was a reminder that Garcia has made little headway preventing violence since last year, when more than 30 people died as Amazon tribes protested to demand Congress strike down laws designed to lure mining and oil firms to the rain forest. The clashes were the bloodiest of Garcia’s term and prompted legislators to revoke key bills.

“Obviously, risks that are generated by social conflicts still exist,” Araoz told Reuters, adding they would increase ahead of local elections in October as many politicians design their campaigns around denouncing or supporting mines.

A MINING CAMP TORCHED

Rosa Elvira Figueroa, now an official at mining regulator Osinergmin, worked in community relations at the Tintaya copper mine in 2005 when residents, angry that the company was taking too long to build public works, set the mine buildings ablaze.

“The community we had gotten along with so well, took over the camp, set it on fire and nearly lynched us,” she said, adding that companies have to provide real benefits for local residents if they want a stable operating environment.

Ivan Lanegra, a director at Peru’s human rights agency, said the government is becoming a better regulator but needs to pass two reforms to help avert violent protests — have the environment ministry approve environmental impact statements instead of the mines and energy ministry which has a clear mandate to get projects built; and pass a law giving indigenous groups the right to be consulted about extraction projects on their lands.

He also said companies must go the extra mile if they hope to see their projects supported by communities.

Non-profit groups are also pushing for Amazon tribes to be given more of a say in how their lands are used.

“We’re worried because laws that favor investment come up all the time and the government and investors see the Amazon as just a big market of resources” said Daysi Zapata, the leader of Aidesep, a powerful group representing Amazon tribes.

Without stronger rules for public participation and clearer ways of showing the benefits from mining, Antonio Bernales, the mediator, says a vexing riddle will continue to nag Peru’s government and its oil and mining industries.

“How is it that a country that is increasingly well positioned in the global economy and has attracted loads of investment finds itself with so little public support for the projects on which it depends?”

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(Reporting by Terry Wade and Patricia Velez; Editing by Kieran Murray)

Social conflicts jeopardize Peru’s growth engine