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«Unblocking Bottlenecks to Effective Resource Revenue Management in Peru Oxfam expert meeting report November 2014 CONTENTS Executive Summary ...»

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Unblocking

Bottlenecks to

Effective Resource

Revenue Management

in Peru

Oxfam expert meeting report

November 2014

CONTENTS

Executive Summary

Introduction and Background

Key Discussion Points

Government Decentralization

Inequalities of Funds Disbursement and Poverty Outcomes

Quality of Extractive Industries Revenue Investment

Implementation

Corruption, Government Accountability, and Transparency

Public Engagement

Human Capital and Institutional Capacity

Nongovernmental Participation

Opportunities and Solutions

Annex 1: Meeting Participants

1 Unblocking Bottlenecks to Effective Resource Revenue Management in Peru

EXECUTIVE SUMMARY

Oxfam America is working to examine and address issues that limit progress toward alleviating poverty in countries with large extractive industries (EI). Peru’s canon minero program requires distribution of substantial EI tax revenues to regional and local governments, yet social gains are inconsistent across the country.

Participants at a June 2014 meeting hosted by Oxfam in Washington, DC discussed the circumstances that impede effective use of canon revenue and offered suggestions for potential remedies.

Core impediments identified by the meeting participants include corruption at all levels of Peru’s government; misuse of canon disbursements at the regional and local level; and uneven institutional capacity to manage revenues in order to achieve equitable and meaningful social benefits.

Participants discussed a broad range of ideas that could help resolve these challenges. Strategies included developing alternative approaches to allocating and spending canon disbursements; promoting additional accountability and monitoring mechanisms; building necessary capacity at the individual and organizational levels; encouraging greater citizen engagement in the process;

and using the resources of the country’s academic institutions.

Unblocking Bottlenecks to Effective Revenue Management 2

INTRODUCTION

AND BACKGROUND

This report synthesizes the discussions had during the Expert Meeting on Impediments to Effective Resource Revenue Management in Peru, organized by Oxfam on June 26, 2014. The expert meeting was held under Chatham House rules. Thus, the report documents in bullet form the key points discussed, instead of offering a detailed meeting transcription. We share publicly the proceedings of this rich conversation among experts with the purpose of contributing ideas to the debates on improving resource revenue management for pro-poor development outcomes.

Many developing countries that rely heavily on the extraction of natural resources for revenue do not realize consistent and equitable economic benefits. In Peru, economic growth and exports have risen significantly, and the national rate of poverty has declined. Yet in some regions, including those where mining operations are located, poverty rates are stagnant or increasing.

Under Peru’s canon minero program, half of all EI tax revenues generated must be distributed in mining-affected areas, ostensibly to promote social and economic benefits. However, the national government does not always allocate these funds in accordance with the formula-based system to regional governments. In addition, regional and local governments often spend canon funds on projects that do not make a significant impact on poverty. Funds also are lost to widespread corruption.

Oxfam America is encouraging discussion of issues that limit the potential for resource revenues to decrease poverty and optimize social benefits in EIdependent countries. A conference convened by Oxfam America in May 2014, in Lima, brought together a range of stakeholders to discuss the country’s impediments to effective EI revenue management and to explore potential solutions. Stakeholders included participants from government, civil society organizations, and the corporate sector, among others. Oxfam hosted a follow-up meeting in Washington June 2014 to gather additional perspective on this challenging issue. A list of attendees appears at the end of this report.

Key points raised in the discussion are summarized in the next section.

3 Unblocking Bottlenecks to Effective Resource Revenue Management in Peru

KEY DISCUSSION POINTS

GOVERNMENT DECENTRALIZATION

1. Decentralization of Peru’s government is not in itself the problem.

Reinstituting centralized government is not the solution and may lead to conflict. The fight for decentralization in Peru has been going on for centuries.

2. The problems caused by decentralization must be addressed. However, reforming decentralization has not been a priority and in fact has been blocked in recent years.

3. Under decentralization, economic capacity-building programs shifted to regional governments, which were unable to recruit and train talent to implement the programs. Most programs have been abandoned. In this instance, recentralization may be necessary.

4. Peru’s central government will not necessarily manage EI revenues better than do regional governments. For example, some ministries have less capacity than the regional governments. Better approaches to decentralization must be identified.





INEQUALITIES OF FUNDS DISBURSEMENT

AND POVERTY OUTCOMES

5. In response to canon disbursement inequalities, the Ministry of Economy and Finance has been making compensatory transfers since 2007. Political considerations hamper further action. Local authorities resist disbursement policy changes, and the congress is hesitant to address the issue without an executive initiative.

6. Falling commodity prices have decreased EI tax revenue, while national economic growth has increased tax revenue. Canon funds now have less weight. Modifying canon distribution will not solve inequality; the entire government distribution system must be improved. This approach was recommended by a government report, but lack of political will hampers action.

7. Perspectives differ widely about EI’s role, specifically whether mining companies are causing the inequality or are aggravating existing inequality.

Unblocking Bottlenecks to Effective Revenue Management 4

8. Many incorrectly blame EI for inequalities. Companies operate in an environment where inequality already exists and then exacerbate it by hiring the most capable. Companies should be sensitive to this reality, but they are not able to hire all job applicants.

9. People living near mines benefit economically but may also face environmental concerns. Resource revenue impacts and environmental impacts must be considered separately.

10. Resolving inequality, promoting economic diversification, and driving targeted development may require using a more prescriptive method of distributing the canon.

11. Confusion about the scale of outcomes is a problem. Nationally, poverty has declined, but determining local outcomes is more complicated. Better data collection is needed; some areas are clear success stories, but in other areas there is a lack of agreement on performance. Urban migration issues also play a role on measuring local impact.

QUALITY OF EI REVENUE INVESTMENT

12. Local governments receiving canon revenue may not know how to use it to achieve broad benefits. The money will be spent on infrastructure, and some is used for political gain and corruption. There is a bias toward spending more with canon funds, which can lead to low-quality projects that do not support development plans. Processes should be developed to support effective use of canon revenue, including better controls that will help prevent accelerated spending.

13. Canon revenue is considered the property of the subnational institutions that receive it. By law, the local government has the money, and it cannot be transferred back if unspent. With other government transfers, unspent funds must be returned to the treasury.

14. In local governments, people work in silos, so monitoring is key.

Interdepartmental bodies should be set up to monitor resource use and determine where a project is in the cycle, information that is currently unavailable.

15. One problem is a lack of clarity about the use of canon funds, i.e., compensation versus development.

5 Unblocking Bottlenecks to Effective Resource Revenue Management in Peru

IMPLEMENTATION

16. It is important to examine how to create and implement good EI revenue policies. In Peru, policy design and implementation are different topics.

Sometimes reform and design has worked better than implementation and enforcement.

17. Some problems, such as the “human factor,” are deeply engrained and not easily addressed by policy. Mayors who don’t receive funds refuse to do other work. Some prefer to manage the money directly, requesting funds for specific projects. Local and regional governments view transfers as a personal quota. The conflict between national and regional government priorities erodes the implementation process.

18. Under the new tax scheme, communities without EI projects do not receive money, which creates a cycle of poverty. Ninety-nine percent of projects are for infrastructure. There is an urgent need for reform of the spending system, including switching to multiyear projects.

19. The intergovernmental fiscal transfer system must be examined, however existing policies do not need to be judged as good or bad. The main question is the extent to which transfers respond to government policy objectives.

20. Resource-rich regions receive substantial canon revenue yet have limited capacity to manage it. It is crucial to develop a structured, disciplined approach to managing revenue over time and achieving key objectives.

21. Boom-and-bust cycles cannot be avoided, but revenue predictability can eliminate the short-term incentive to spend quickly when money is available.

A recent law strengthening fiscal transparency included an objective to isolate the public budget from price/revenue volatility and to support a more constant and stable influx of resources.

22. People say they prefer economic development to infrastructure. Experiences in Africa demonstrate that infrastructure projects are effective as long as they don’t limit development and are part of a larger, focused plan.

23. Development roundtables permit greater alignment with participatory budgetary processes. Needs currently exist but canon funds will not be received for a few years, so ministries and departments try to fund certain projects identified at the roundtables.

24. Canon revenue should be allocated to priorities that target gaps at the local level. It is also important to analyze the results of canon expenditures.

25. Investment in education, research, science, and technology should be expanded to decrease canon dependence.

Unblocking Bottlenecks to Effective Revenue Management 6

26. Peru must improve not only management of canon revenue but also allocation of the public budget where gaps exist. The Ministry of the Economy and Finance must try to understand the gaps in each territory.

27. Peru is moving toward a results-based public-private expenditure model, and this approach must be enacted at all levels. Its implementation is complicated. Supervision is critical, particularly for social funds and voluntary contributions. There should be less self-regulation and more proactive state involvement.

28. Rural income and structural poverty must be addressed. Subnational governments provide three-quarters of resources allocated to this issue.

National strategies and expenditures are required. The national government must advise local governments about how to implement programs that best support farmers.

CORRUPTION, GOVERNMENT

ACCOUNTABILITY, AND TRANSPARENCY



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