ALLOCATION OF FUNDS TO LOCAL COMMUNITIES

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development and Investment
(Apr 2009)
CHAPTER 2B
ALLOCATION OF FUNDS TO LOCAL COMMUNITIES
Antonio Pinilla Cisneros
Compania Minera Antamina
Lima

Antonio Pinilla Cisneros has been legal manager and general counsel of Compañía Minera Antamina S.A. since 1999. In this position, he has been involved in the creation and organization of the legal department of the Company, supporting the process of constructing the mine and putting it in operation on time and under budget. Also in this position, he has worked in the development of a contractual system, managing litigation, giving legal advice to all areas of the company, supporting the legal completion for the project finance, among many others legal matters. Antamina is world class mining operation owned by the Xstrata group, BHPBilliton, Teck and Mitsubishi Corporation that involved an investment of more that 2,400 Million through a project finance in year 1999. The deposit is located in Ancash, Peru. Before this position, he was legal counsel for the Peruvian branch of Occidental Peruana Inc, a related company of Occidental Petroleum. Here he was involved in giving general legal advice to other areas of the company specially supporting the contractual process. Before joining Oxy, from 1992 to 1994 he worked as a lawyer and as Legal Coordinator of the National Superintendence of Tax (SUNAT), public entity in charge of collecting and administrating internal taxes, taking the responsibility to legally support the internal purchase processes and the acquisition of offices all around the country. He graduated from the Catholic University of Peru in year 1991 and has a Masters Degree in Corporate Law with the University of Lima in 1998. He has published articles in mining specialized gazettes and a book titled "Los Contratos Ley en la Legislación Peruana" where he analyses the importance of the stability agreements for attracting investment to Peru. He has also attended specialized courses in management in Peru and the Program Management for Lawyers at the University of Yale in New Haven, Connecticut, USA.

1. BACKGROUND

In this paper, we will analyze the mechanisms currently available to allocate funds to communities and populations located in the areas surrounding mining properties in Peru. We will first discuss why we believe that these allocation mechanisms have been developed to benefit some specific stakeholders, both by the State, as entity in charge of redistributing State revenues, as well as by mining companies, which share their revenues, briefly discussing the existing fund allocation mechanisms. We will also assess the impact of these mechanisms and determine whether or not we can conclude that it has been a successful experience.

2. WHY ARE FUNDS ALLOCATED TO COMMUNITIES?

Economic resource allocation mechanisms are aimed at having people living close to the mine benefit from the positive economic impact of mining operations in surrounding areas. Accordingly, they are intended to have the benefits of mining activities reach nearby communities quicker and more efficiently, thereby facilitating mining operations while contributing to the sustainable development of local populations.

As far as the State is concerned, we should bear in mind that the State is not obliged to allocate funds to these specific populations because, according to the Constitution of Peru, natural resources belong to the nation and, therefore, the revenue obtained from their exploitation belongs to all Peruvians taken as a whole.¹ However, mechanisms have been designed to allow the State to channel these resources to populations located in the vicinity of mines. Accordingly, if social license is understood to mean tacit acceptance or approval of mining operations by people living close to the mine in order for the project owner to be able to carry out or move along with its mining project, which is reflected in the attitudes shown, actions taken or activities performed by said people to show their acceptance of mining or business activities and requires the combination of efforts by the State, the company and the community or social environment,² then the localized distribution of funds among these populations proves the State's intention to help mining project owners obtain the approval of surrounding communities in order to be able to operate and therefore contribute to the country's development.

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In turn, as far as companies are concerned, we will see later on in this paper that many of them not only pay taxes to or comply with other obligations with the State, but also make voluntary contributions directly to neighboring communities and populations. Accordingly, we believe that this behavior shows a high sense of social responsibility, understood as a business philosophy that makes companies serve a purpose that involves more than the pursuit of profits for the benefit of their shareholders. In fact, it implies understanding that what a company does has consequences beyond the company. It requires comprehensive business planning. It is not a standalone company issue; it requires willingness.³

However, and we believe that this issue is particularly important to understand the problems currently faced by mining in Peru, and maybe in other countries as well, the allocation of economic resources to these populations does not guarantee the operation of a mining project. The interaction between mining companies and nearby communities often stirs conflicts for many reasons, such as the use of surface land, environmental impacts, reduced State presence, employment generation, etc. The economic aspect is only part of the problem; interaction implies much more complex issues the real dimension of which is often misunderstood. Dealing exclusively with the economic aspect of the problem implies monetarizing an issue that has far-reaching implications and thinking that the social license can be bought with money.⁴

Accordingly, we will now discuss some of the most important economic resource allocation mechanisms currently used. Some of these mechanisms are more successful than the others, but the truth is that all of them are actually incomplete if we do not allocate non-monetary resources like trust, dialogue, and development of management capabilities to build a more horizontal relationship between the parties.

3. HOW DO MINING COMPANIES ALLOCATE FUNDS TO NEARBY COMMUNITIES AND POPULATIONS?

3.1 INDIRECT RESOURCE ALLOCATION MECHANISMS

We call them indirect allocation mechanisms because they do not involve the direct disbursement of funds by mining companies; instead, the State redirects the revenues it receives, which it could use for any other purpose, to people living close to mining operations. It should be pointed out that these revenues are channeled through Regional and Local Governments.

The following indirect resource allocation mechanisms currently exist in Peru:

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a) "Mining canon": It consists of the distribution of 50% of the 3^rd -category Income Tax paid by mining companies to Regional and Local Governments.⁵ This 50% is redistributed as follows:

— 10% to the District Municipality where the mine is located;

— 25% to the Provincial Municipality where the mine is located;

— 40% to Regional Municipalities;

— 25% to the Regional Government.

Some restrictions exist with regard to the use of the "mining canon" funds distributed among district and provincial municipalities and regional and local governments. As a matter of fact, Law 28077 provides that the "mining canon" funds received by regional and local governments should be exclusively used for funding or co-funding regional and local impact infrastructure projects, respectively. In turn, regional governments are obliged to deliver 20% (twenty percent) of the total "mining canon" funds they receive to State universities falling within their sphere of jurisdiction, to be exclusively invested in scientific and technological research projects that boost regional development.

The following graphs show the "mining canon" funds distributed among Regional and Local Governments. As we can see, large amounts of money have been distributed among Regional and Local Governments, particularly during the last few years, in view that the international increase in metal prices resulted in higher Income Tax payments:

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Canon Minero Distribuido (Millones de Soles)

Following are the total amounts distributed among Regional and Local Governments in 2008:

Source Ministry of Economy and Finance

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Percentage held by each region from the total amount distributed in 2008:

b) Excess Profit Distribution: Companies generating 3^rd -category income are obliged to distribute part of their profits among their workers. In the specific case of mining companies, the distribution percentage stands at 8%. When this system was first established, this percentage (8%) was fully distributed among the company's workers. However, in 1999, due to the large profits then being distributed among company workers, Legislative Decree No. 892 was enacted to limit the percentage that each worker was entitled to receive to 18 remunerations.

As a result of the issuance of the above legal rule, which we believe is unconstitutional, during periods of high metal prices there is a difference between the percentage that mining companies are obliged to distribute among their workers and the aforesaid limit of 18 remunerations. We will call this difference "Excess Profit Distribution". The Excess Profit Distribution is to be delivered to FONDOEMPLEO and if this payment exceeds 2200 Tax Units, then the difference is to be delivered to the Regional Government.... This money can only be invested in infrastructure projects.

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We don't have exact figures showing the total amounts distributed nationwide; however, from 2006 to date Compañía Minera...