ANÁLISIS QUINCENAL: Transparency and Extractives Update from Latin America

By Carlos Monge, RWI Latin America Regional Coordinator
With Claudia Viale and León Portocarrero

October 9 - October 24, 2008

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The effects of the international drop in major commodity prices are beginning to be felt in Latin America

Debating the constitutionality of legislative decrees that facilitate opening indigenous and peasant communal lands to large private investment

Regional reforms in energy policy

The effects of the international drop in major commodity prices are beginning to be felt in Latin America.

The deepening financial crisis and the collapse of stock exchange markets worldwide have led to a fall in key commodity prices, particularly oil and minerals such as zinc and copper. This has demonstrated the high dependence of Latin America on these goods as a source of tax revenue and regional exports. In the past weeks, the negative effects have started to become visible, as have government reactions to the crisis, such as fiscal adjustments and measures to support the most affected sectors.

In Bolivia, mining cooperatives declared a state of emergency in the regions of Oruro and Potosí, and are on the verge of ceasing operations. This sector depends mainly on zinc, which represents 50% of mining export revenues, and the price of which has suffered a significant reduction. In consequence, the extraction of minerals has already begun to diminish. For example, in Cerro Rico, Potosí, currently two thousand tonnes of poly-metallic load are being extracted daily, while some months ago the extraction amounted to five thousand tonnes. And some oil projects have already suffered delays in their development, such as the Carrasco-Cochabamba gas pipeline.

In Brazil, a 21.7% fall in the price of steel since July has paralyzed 20% of the blast furnaces in Minas Gerais, which are responsible for over 60% of national steel output. The effect of the decline was intensified because the reduction in the activity of the blast furnaces significantly reduced the country’s demand for coal, severely affecting businessmen and workers in the sector.

Government plans to confront the crisis have not taken long to emerge. One of the first reactions came on October 9th, when the state introduced a five-point program to mitigate the impacts of the crisis and promote growth. These new policies focus on increasing public spending in infrastructure and the promotion of small and medium-sized firms. However, the plan also includes structural reforms such as the reorganization of Pemex's investment scheme, changes in the structure of public finance and accounting, as well as the simplification of customs procedures. President Calderón emphasized that, "this program is not a financial rescue, but is focused on strengthening the domestic engines of the economy."

A different policy was announced by Evo Morales in Bolivia, on October 24th. Morales affirmed that the government was committed to establishing a fund that sustains the price of zinc, for which it would spend US$ 13 million this year and would guarantee US$ 5 million for 2009. In Chile, Codelco’s executive manager, Jose Pablo Arellano, announced that the company’s surplus would be significantly reduced and therefore they would activate a contingency plan. Arellano did not provide many details on the plan, but promised that it would not include any lay-offs.

One drastic effect of the fall in prices is the reduction in state income, especially in countries such as Venezuela and Ecuador, where oil revenues finance 50% and 40%, respectively, of the state’s budget. Following these trends, countries across Latin America announced budget adjustments for the upcoming years.

The president of Ecuador, Rafael Correa, said that if oil prices continue to fall, the state would have to revise the 2009 budget, cutting expenditures for external debt payment, and secondly postponing some investment projects. Meanwhile, on October 24th, Venezuela’s 2009 Budget Law was presented, featuring a 20% reduction from the 2008 budget. The cuts will effect several projects, as well resource allocation for housing, infrastructure and agriculture.

In Peru, it was reported that the fall in mineral prices would reduce  government revenues not only from income taxes paid by mining companies, but also potentially from companies' voluntary contributions to the state, should prices drop below the reference level set in 2006. This voluntary program was negotiated in December of 2006 as an alternative to state-imposed windfall taxes on the companies. There were no announced plans to adjust the budget, however, since the 2009 National Budget presented to the National Congress in September already reflected contractions in public spending that were proposed to combat inflationary pressures. The Ministry of Economy is also considering increasing the Excise Tax applied to fuels, since revenue from this tax has fallen over the last few months due to low oil prices.

In Trinidad and Tobago, Minister of Energy Conrad Enill argued that, while the fall in oil prices reduced fiscal income, it also relieved pressure on the state by reducing the amount spent on domestic fuel subsidies. The cost of infrastructure projects also fell, allowing Trinidad and Tobago to continue developing important projects such as the International Financial Center. Despite these benefits, the price reduction will likely lead to a decline in the country’s ability to allocate savings for its Stabilization and Heritage Fund.

Clearly, countries across Latin America are experiencing the crisis differently, according to their specific circumstances, but in all cases indicating that significant policy changes are on the way.

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Debating the constitutionality of legislative decrees that facilitate opening indigenous and peasant communal lands to large private investment.

Some months ago, the Congress of the Republic of Peru granted the Central Government extraordinary legislative authority in order to adapt internal rules to the Free Trade Agreement with the U.S. The Central Government subsequently approved 99 legislative decrees, some of which have been criticized as endangering the rights of indigenous peoples and peasant communities from the coastal, highlands and Amazon regions.

Soon after the approval of the new decrees, and due to the massive protests by indigenous peoples, the National Congress repealed two decrees, legal decrees (L.D.) number 1015 and 1073, which put indigenous properties at risk by facilitating the sale of community lands. The repeal was made against the Executive’s opinion­.

However, other decrees that expose peasant and indigenous communities in the coastal, highlands, and Amazon regions to similar risks still remain valid. These include L.D. 1064, 1089 and 1020, related to the ownership of territories, and L.D. 1090, which concerns the use of deforested lands in the Amazon area.

Critics who denounce the unconstitutionality of these decrees point out that, to begin with, they were approved without consulting the affected communities, therefore infringing ILO Convention 169. This convention, having been ratified by the Peruvian State, has the strength of a law. Beyond the failure of the government to consult with the communities, debate continues over the content of the decrees.

According to experts convened by the Peruvian Network for Globalization with  Equity (RedGE) these decrees affect indigenous peoples’ right to territory, since they only exclude communal lands that have already been titled. But they don’t address the situation of those communities whose lands have not been titled yet or who have requested the expansion of their territory. Critics’ fear is that this omission deliberately aims at allowing these lands to be commercialized, affecting the integrity of future prospects of these communities. The situation for the communities is further compromised by the government's transfer of the power to award titles to communities to the national entity in charge of granting urban titles, COFOPRI, without providing it with needed additional resources. Therefore, there is no clear prospect for effectively completing the ongoing titling or considering new expansion requests.

L.D. 1064, which repealed Law Nº26505 on “Private Investment in lands of the national territory and of peasant and indigenous communities,”severely undermines community protections by overriding the mining operator’s obligation to achieve an agreement with the owner of the land before acting on mining rights and beginning extractive activities. The result will be replacing negotiations with land owners with a top-down imposition of mining rights that were unilaterally determined by the mining and hydrocarbon companies. Additionally, the procedure by which this L.D. was approved is illegal, since the Constitution holds that to repeal a Law (in this case Law Nº26505), it is necessary for the National Congress to issue a new legal norm of the same hierarchy. This procedure was not followed in this case.

In the Amazon area, L.D. 1090 (the new forestry and wild fauna law), excludes deforested jungle areas from the national forestry heritage and labels them as agricultural lands, and thereby eligible for sale. Specialists like Sandro Chávez, from the Forestry Collective, as well as the Ombudsman’s Office, warned that this decree could encourage deforestation. Chávez also noted that the Commercial Representative’s Office of the United States disapproved of the decree, and requested that it be changed, since it violates free trade (FTA) precepts regarding forest protection.

After a meeting with the Prime Minister in November, the indigenous organizations of the Amazon have already announced, that they are considering an indefinite strike to demand the repeal of the 12 remaining decrees that affect their communities.

It appears that the government’s plan to introduce measures favoring large private investments in peasant and indigenous lands, through adapted norms for the FTA, faces serious obstacles. The congress has already repealed those decrees that were most criticized by the indigenous peoples of the Amazon, while several sectors are now questioning another series of norms that point in the same direction. The conclusion of this conflict between the central government, the congress, interested companies, regional and local authorities of producing areas, and the populations involved, is as yet unclear.

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Regional reforms in energy policy.

In response to the ever-changing situation of the oil sector in recent years, some countries in Latin America have modified the legislation regulating extractive activity. A key target of these reforms is legislation concerning state-owned hydrocarbon companies, which are assuming an increasingly relevant role in exploration and exploitation activities. These reforms are orientated differently, in accordance with each country’s history and immediate political reality.

For example, in Mexico the debate focused around the level of convenience of the private sector’s participation in oil exploration and exploitation and on Pemex’s management; in Ecuador, reforms point towards the consolidation of state control over the sector.

For several months now in Mexico, there has been a national debate on the pros and cons of opening up the oil sector – nationalized since the 1930s – to private investors. This debate has polarized the three main political parties, and led to a protest within the National Congress by members the Democratic Revolutionary Party (PRD) seeking to forestall any debate.

However, on October 13th, discussions started within the Congress about the proposals of the different parties on the Regulatory Act of Article 27 of the Constitution and the Organic Law of Petróleos Mexicanos (Pemex), the two laws considered to be the foundation of the energy reforms. Substantive disagreements remained over opening participation in different stages of the oil projects to private companies. Though the presidential initiative to privatize refineries was rejected, the Institutional Revolutionary Party (PRI) raised a proposal to develop Pemex subsidiaries specifically dedicated to oil refining activities, transport and distribution. The Frente Amplio Progresista (FAP), a coalition of left-wing parties formed by the PRD, the Worker Party (PT) and the Convergence Party (PC), however, considered the PRI proposal to be a continuation of President Calderón’s privatization plan.

The PRD also rejected a proposed law for the use of renewable resources, and the financing of the energy transition, arguing that these would allow grant concessions to the private sector for electricity generation. Despite the fact that these disagreements prolonged the negotiations, the seven aspects of the reform project were finally approved on October 21st. The reform agenda will exclude private firms from oil refining activities and oil distribution, but allow for the hiring of their services for exploration and exploitation activities, with the stipulation that payments will be cash-only, and without giving up any property rights on hydrocarbons, hydrocarbon output or utilities.

In summary, this reform did not “reform” very much, since it basically continues the block on privatizing strategic stages of oil production and distribution, and rejects the concession of property rights over particular reserves. However, it does represent limited progress towards greater autonomy for Pemex, since it approved the firm's use of its own surplus for expenditure purposes without the need to consult the Ministry of Finance. But this autonomy does not reach the level of the Petrobras model, where private participation in shareholding is allowed, and it also will only be implemented gradually and to the extent that government obtains alternative sources of income.

In Ecuador, the oil companies Petrobras from Brazil, and Perenco from France, agreed to renegotiate government contracts that would move the conditions of foreign participation in oil extraction toward a service system. President Correa declared that, Ecuador is “moving from these harmful contracts to service provision contracts … the oil is ours and what we do is hire a firm.”

However, the contracts that were signed are apparently only temporary. For example, Petrobras’ contract establishes that state participation in production only increases from 50% to 60%, and that 70% of windfall profits due to high oil prices are to be given to the state. In a year, this contract will become one of service provision.

In Peru, by contrast, the new Minister of Energy and Mines Pedro Sánchez argued that he would evaluate whether it is convenient for PetroPerú to go back to exploration and exploitation activities--an initiative that had gained strength before the recent corruption scandal over the alliance between the state company and the Norwegian firm Discover Petroleum. In fact, as we noted in a previous report, the motivation for PetroPerú to associate with this small Norwegian firm was its interest in resuming exploration and exploitation activities after almost 15 years of rigorous privatization left PetroPerú in charge only of gasoline refining and distribution in the least profitable domestic sectors. It seems that the new Minister – who was in charge of promoting the privatization of energy production in the nineties – leans more toward privatization than the previous Minister.

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Sources: El Universal, Correo, La Primera, El Comercio Peru, Elcomercio.com, El País, La Republica

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