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Peru: Increased Contract Risk

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There is increased risk of contract cancellations in Peru with president-elect Ollanta Humala.


LBC SPECIAL
Exclusive Analysis

 

President-elect Humala likely to yield to strong community unrest - increased contract cancellation risk to mining, oil and infrastructure projects in Peru.


There are about 16 mining projects, from firms such as Xstrata and Newmont, worth $16 billion scheduled to take place in the upcoming years in
Peru. Some of these projects are likely to be delayed or cancelled, as President-elect Humala will likely yield to strong community unrest. Although Humala appears to have moderated his former left-wing nationalist rhetoric by distancing himself from Venezuela's President Chávez, he has stated that communities should have a say in the future of key projects affecting their land or territories. Because of his left-wing background, increasing unrest and the strength of local communities, Exclusive Analysis forecasts that the president will likely yield to future protester's demands, increasing the risks of project delays or cancellation.


The arrival of a new president is expected to encourage fresh protests in the next few months, as local and indigenous communities put pressure on Humala to meet his pre-election promises to cancel projects perceived as affecting their wellbeing. The grievances range from concerns about depletion of water and environmental pollution to demands for social investments. Claims by many local communities that they are not being adequately consulted prior to projects being approved is another persistent complaint. The issue of consultation is likely to prove a major hurdle for companies sponsoring new projects, as draft national legislation that would give communities the right to veto projects is likely to receive approval under the new administration.


As FDI in
Peru continues to accrue into mining, oil and infrastructure, the number of projects likely to be targeted by unrest is certain to increase. However, at the moment, the main hotspots for protests are the provinces of Ancash, Puno, Cajamarca, Cusco, Tacna and Arequipa. The Amazon region, where indigenous communities oppose oil projects on the grounds that they are encroaching on their ancestral lands, is also likely to see renewed unrest.

Concerns about environmental damage account for more than 50 percent of the grievances behind the protests.


According to official statistics, the majority of social conflicts 117 (52 percent) concern social environmental issues, followed by 24 (10 percent) local government disputes and 23 disputes with central government. The regions with the greatest number of conflicts run the length of Peru from the northern department of Piura with 12 conflicts (8 of which are active) and Cajamarca with 17 conflicts (12 of which are active) down along the coast towards the capital Lima where the Ancash reported the greatest number of conflicts at 27 cases (15 of which are active), and the department of Lima with 19 conflicts (10 of which are active). The range of departments facing conflict extends east from
Lima to the central and southern highland departments. These include Junin, with 11 conflicts (8 of them active), Ayacucho 13 conflicts (6 active), Cusco with 13 conflicts (10 active) and finally Puno with the second largest number of conflicts at 21 (of which 12 are active).


The expected approval by Congress of a law mandating consultation with local communities prior to starting mining and oil operations pose serious risk for cancellation of existing and future natural resources-based and infrastructure projects.


On
June 27, 2011, a Congressional commission called for a session to approve the consultation law for 6-7 July 2011. The Latin America team at Exclusive Analysis assesses that this law is likely to be passed by Congress once Humala assumes office, probably by the end of 2011. This is because on 27 August 2010, the Constitutional Court ordered the government to comply with international conventions which oblige it to seek prior and informed consultation with indigenous peoples before approving extractive industry projects. The right to be consulted is included in the International Labour Organisation (ILO) Convention 169 - of which Peru is a signatory. Such a law had already been approved by Congress in May 2010, but President Garcia then vetoed it, arguing that it would put the development of Peru's mining and oil industry at risk. Key oil, mining and infrastructure projects face the risk of cancellation and delays if this law is passed. They will also face higher social investment costs, which will be needed to satisfy local communities.

This commentary was provided by specialist intelligence company Exclusive Analysis.

 

 

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