R 022154Z JUL 08
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC 8931
RUEHBR/AMEMBASSY BRASILIA 7899
RUEHRI/AMCONSUL RIO DE JANEIRO 0343
RUEHSG/AMEMBASSY SANTIAGO 1947
RUEHBU/AMEMBASSY BUENOS AIRES 3426
RUEHCV/AMEMBASSY CARACAS 1194
RUEHLP/AMEMBASSY LA PAZ JUL QUITO 1974
RUEHBO/AMEMBASSY BOGOTA 5847

UNCLAS LIMA 001130 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: OREP ENRG AMGT EMIN ASEC AFIN BR
CH, PE, EAID 
SUBJECT: SFRC STAFFDEL examines transparency 
in Peru's extractive industries 
 
SENSITIVE BUT UNCLASSIFIED HANDLE ACCORDINGLY 
 
¶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. 
 
EITI IN PERU 
------------ 
 
¶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 
year. 
 
¶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. 
 
COMMENT 
------- 
 
¶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. 
 
McKinley