TED Case Studies

Trade and Environment: Peru Mining



CASE NAME: Peruvian Mining

I. Identification

1. The Issue

Mining has been an important sector of the Peruvian economy since the Spanish Conquest. Traditionally it has contributed about half of the Country's export revenue. After over twenty years of isolation from direct foreign investment, the mining scene is changing. Political and economic stability have brought renewed interest in Peru as a resource rich investment opportunity for foreign companies. Peru has also been very active in pursuing foreign exploration partners and mining joint ventures through a variety of incentives and the removal of restrictions. The mining industry boom is exemplified by the excavation of iron resources. The purchase in late 1992 of the state iron producer by the Shougang Corporation of China resulted in an immediate 35% increase in iron output by the year 1993. As other entrants to the iron mining promise to flood this market, long neglected environmental issues, both past and present, must be confronted by the Peruvian government.

2. Description

The Peruvian economy, heavily dependent upon exports of naturally occurring resources, must insure that the use of the mining sector as a major source of foreign exchange and industrial growth will be sustainable and not lead to exploitation and degradation of the environment. The mining industry has been virtually unregulated for decades. As the government continues to invite foreign investment, there are some questions as to where the liability lies for past environmental abuses, and what plans will be put in place to insure future behavior is responsible and not environmentally damaging.

As Peru's economy experiences a new awareness in the value of industrial privatization, it must reconcile environmental concerns while it continues to lure foreign investment. The mining industry has long been recognized as causing major environmental problems. The most pronounced affect it has had is on the quality of the water in the principal river systems. There has been, to date, no organized effort to determine the size or the gravity of the problems caused by mining, nor has the Peruvian government articulated any solutions or priorities for cleanup or future interventions. As President Fujimori continues to privatize all state-owned enterprises and eliminate barriers to trade and investment, the government must become environmentally savvy and insist on the same from the foreign operators investing in the Peruvian mining sector.

The mining industry in Peru accounts for only about 2.5% of its labor force. Employment is mainly found in the agricultural sector and the underground economy. Mining makes up close to 3% of the gross domestic product. (A Country Profile 1994, 17) This percentage promises to grow if you take Carlos Diez-Canseco's word for it. As the general manager of Sonaminper, Peru's mining and petroleum association, he sees Peru as almost virgin territory for exploration, "All the deposits we know of now have been known for 30 years. With new exploration techniques, more investment, and modern technology, there's no real limit to future development." During the 20 months to June, 1994 there have been over 8,000 new claims staked by Peruvian and foreign companies, covering some 5.8 hectares.(Wall Street Journal 1995, A15)

This increase in investment is actively being promoted by the Peruvian government. Fujimori and his government claim to be taking on a new role with the new found political stability. It has eliminated subsidies on imported foodstuffs, simplified and reduced import tariffs, eliminated export subsidies and removed many of the restrictions on private capital transactions. President Fujimori now insists that investment in Peru has been secured through legislation and international guarantees. What has yet to be secured is protection for the environment. Because of these reforms the Peruvian government expects to have valid claims cover almost 15 million hectares very soon, this representing only one-third of the mineral bearing land of Peru's coast and highlands. Exploration activity is unrestricted, except on cultivated land. Peru's mining ministry estimates that the sector will see some $8.4 billion of investment between 1996 and 2003 - $1.8 billion going toward exploration. $2.2 billion going to expansion, and $4.4 billion to developing new projects and prospects.(Wall Street Journal 1995, A15)

Iron mining is symbolic of the overall growth in the mining industry in Peru today. Iron mining production per ton increased by 36.9% between 1993 and 1994. The government of Peru is the first and most important party involved in the future of the mining industry and its effects on the environment. In a recent advertisement sponsored by the government, in the New York Times, environmental activists may find little solace. In describing the new government role it states, "Today, public administration in Peru is limited to tasks relating to health care, education, justice, infrastructure and safety, as well as social development in regions affected by poverty.(Wall Street Journal 1995, A13) This may be a ploy to attract investment, but nowhere is there a mention of protecting environmental concerns.

The second major party involved is the foreign investors. These companies seek to take advantage of Peru's wealth of natural resources as well as avoid the stringent regulations of their home countries.(see BOLGOLD case) With corruption still very prominent throughout Latin America, the future of the environment will depend much upon the responsible behavior of these firms. As Peru experiences a revision of its economy, it has not developed concrete standards and regulations that are based on environmental sustainability. It has also not addressed the issue of liability new buyers will have for past environmental abuses and problems created before their purchases.

The privatization of Centromin is one example of where these issues need to be addressed. "Who is going to pay for the ecological degradation of Junin Lake and Mantaro Valley," asks writer Gonzalo Castro. Although there isn't a completed study on the amount to repair the damage to these two areas, estimates run up to $500 million. To have a company be financially responsible for this in entirety would be overwhelming. This would have long reaching effects on future investment, and with it the economy. Still, environmentalists within Peru and outside have called for companies to take a certain amount of responsibility in these cases.

First and foremost, pressure must be put on these companies ( as well as the Peruvian government) to avoid contributing to the degradation of these areas. Environmental groups as well as other nations could play a large part in reducing the demand for products that come from a company operating at a high cost to the environment.

The second responsibility being placed on new buyers is that of incrementally reversing the deteriorated areas. Lake Junin is one of many landmarks that need to be improved. USAID considers intervening, with the help of the World Bank to insure that the government holds the new foreign investors to these ideals, a measuring stick tying environmental protection to AID has yet to be worked out. Pressure should also be applied by outside countries to expect this of their multinationals.

At this moment there is no clear official environmental protection agency. Various bills for the creation of a national authority or national environmental council have been proposed.(USAID 1995, 15) For this reason outside influences as well as domestic movements are very important in promoting certain guidelines for foreign investors to follow. Private organizations have been collecting funds to improve the environment as well as put pressure on the Peruvian government and private industry. As all the holdings of Mineroperu have been disposed of, as well as many state run refineries and unexploited deposits of copper and gold, and Peru continues towards privatization, a new relationship must be forged between government and business.

The government is attempting to address past abuses by drafting new environmental regulations, but these regulations address end-of-pipe effluence rather than creating incentives to reduce the production of pollutants and future degradation that sustainability requires. The waste generated by the mining industry consists of mining tailings, smelter gases, overburden, flotation chemicals and oxidation products including acids, air pollutants and sludge.(USAID 1995, 12)

The process that metals go through to win the metal from the ore has been virtually unregulated for decades. Through the processes known as smeltering, zone temperature separation and electrorefining the metals are concentrated and purified. During this process a large amount of water is used and a huge amount of expended ore, called tailings, need to be disposed of. Sulfur dioxides, carbon dioxides and other air pollutants are emitted along with other liquid and solid wastes. Theses wastes have impacted not only the drinking water as far away as Lima (the nation's capital), but have affected other sectors of the economy as well. Heavy metal has been found in virtually every sediment analyzed along the coast as well as in marine life caught along the coast.(USAID 1995, 6)

Tailings and water runoff are found downstream from most mining locations. They have affected the Rimac river, upstream of Lima, which supplies 70% of the drinking water through the city's La Atarjea drinking water plant. Even though many plants take in water with Lead concentrations of up to 15 ppm, officials claim that through flocculation and precipitation the lead is removed before reaching the tap- water user. Most experts are quick to disagree, citing this as a controversy that needs to be resolved.

No extensive studies have been done, but USAID officials as well as other experts fear that heavy metals are pervasive throughout the eco-system and can influence the possible contamination of seafood and also sludge and agricultural products.(USAID 1995, 7) Recent advances in operations have made it possible to drastically reduce if not virtually eliminate discharges, while recycling some of the tailings back into the spent part of the mines. This process has been seen in the mining operation of PERUBAR, the challenge will be to insure other plants follow suit.

Another potential problem related to mining is the usage of highly toxic mercury for the separation of gold in marginal or outlaw mining operations.(USAID 1995, 14) Uncontrolled, mercury has been released into the aquatic environment. Other parts of Latin America have had similar problems due to clandestine gold operations. Because of this there have been reports of hazardous levels of Mercury in fish and mother's milk. There have even been reports of neurological damage due to vapor and food exposure. Mercury releases have the potential to affect many people among the rural populations residing close to the affected water courses, and river basins.

The Mining Ministry (MEM) lists three critical environmental areas in need of study. These are the Ilo/Lacumba basin, the Montero Basin, and the Rimac basin. To prevent greater collateral damage to the water systems and eco-tourist sites, there must be an understanding of baseline problems as well as a monitoring program on potential mining emissions.

Overall the mining industry has been a major contributor to the environmental degradation of Peru. Much damage has already been done, and as of today the damage continues. Steps have been taken in the right direction, but much more needs to be done. The Peruvian government, having created a stable economic environment, is now the key party to regulate an environmentally sound system. Responsible foreign mining operations are another party in this system, and because their is no history of environmental regulation or present structure of enforcement, International organizations such as the IMF, WWF and World bank will be important to create a sense of urgency.

3. Related Cases

GUANO case
PAPUA case

Keyword Clusters

(1): Trade Product = Mining
(2): Environmental Problem = HABITat
(3): Forum: PERU

4. Draft Author:Kenneth Baker (August, 1996)

II. Legal Clusters

5. Discourse and Status: DISagreement and INPROGress

Peruvian environmental interest groups as well as outside groups such as the WWF are trying to exert pressure and persuade the government to adapt stronger legislation to control both past and present abuses created by the mining industry. The government of Peru is presently lobbying vigorously to increase foreign investment in the mining industry, and is therefore apprehensive about implementing new regulations and radical environmental reforms.

After the approval of NAFTA Latin American countries are increasingly organizing themselves to compete effectively in international markets. USAID finds the implications of free trade to environmental-related obstacles that might be required as preconditions for adoption of international trade agreements.(USAID 1995, 1)

6. Forum and Scope: Peru and MULTIlateral

7. Decision Breadth: 1

8. Legal Standing: LAW

In a recent advertisement in the Wall Street Journal, the Peruvian government boasts, "The bulls are on the rampage in Peru, where the economy is hot and the government continues to redefine its role." These bulls (investors), as the government calls them approvingly, must be forced to maintain sustainable growth and deal with past environmental degradation. The only way to enforce this is through national law and regulations at the country level, but also enforced at the provincial level. This can be helped along by the NGO's and powerful trading partners such as the United States.

Labor safety at mining sites is and will continue to be an important issue in the future. Due to a lack of safety regulations Peruvian mines have been consistently prone to accidents harming the lives of many workers. These issues are brought into question in the BOLGOLD case. Although they are also prevalent in Peru, these issues are taken up in greater detail in the BOLGOLD case.

III. Geographic Clusters

9. Geographic Locations

a. Geographic Domain: South America

b. Geographic Site: The ANDES

c. Geographic Impact: Peru

10. Sub-National Factors: NO

The government of Peru at the federal level is where the legal power stands. The interests of regions of the country outside of Lima are dependent on the decisions made there. Foreign investment, likewise seeks to influence the government at the federal level, as do environmental groups. Provincial entities have limited power in making far reaching legislation.

11. Type of Habitat: TEMPerate

IV. Trade Clusters

12. Type of Measure: Regulatory Standard

The Peruvian government, with substantial power vested in President Fujimori, both regulates foreign investment and environmental standards. Regulatory measures are necessary, as shown by the US industry in 1985, to support cleaner technology and prevention of pollution. Government imposed regulations must take into account past abuses and legitimate power and credibility must be given any new Peruvian environmental protection agency, such as CONAM (Commission Nacional del Medio Ambiente).

13. Direct v. Indirect Impacts: INDirect

14. Relation of Trade Measure to Environmental Impact

a. Directly Related to Product: NO

b. Indirectly Related to Product: YES MINE

c. Not Related to Product: NO

d. Related to Process: YES Land Pollution

15. Trade Product Identification: MINE

16. Economic Data

The mining sector can be broken down into six major minerals: the most substantial is iron with 780.7 million metric tons (mmt), followed by Copper at 27.3 mmt, Zinc with 10.1 mmt, Lead with 2.7 mmt, Silver at 657.4 million ounces, and gold at 23.4 million ounces. While manufacturing still dominates the industrial origin of gross domestic product at %23.8, mining is at %2.6 and stands to grow.(A Country Profile 1994, 16) For example, a recent advertisement attempting to lure more investment(in the Wall Street Journal) brags that refined copper output should rise about 10% due to technological improvements.

Mining's importance in other sectors of the economy also promises to grow. As far as employment, mining made up 2.5% in 1992 and has grown .4 between 1993 and 1994. This began with the Newmont Corporation's decision to invest $40 million in developing the gold deposits of Yanacocha, the first new foreign investment in Peruvian mining for over 20 years. The USA's Southern Copper Corporation has recently entered the top five revenue grossing companies in Peru.

17. Impact of Trade Restriction: LOW

Although measures must be taken to control the inflow of foreign investment and the outflow of natural resources, any measures taken by this pro-business government will have a low to medium impact on the trade competitiveness. As Peru becomes more dependent on foreign investment and tries to remain a more attractive alternative to other South American countries, major environmental action at the expense of competitiveness becomes less likely. The government may take measures to tie in environmental improvements to modernization efforts of inefficient mines. In the case of Southern Peru Copper Corp (SPCC), which is majority owned by a U.S. interest, it sees technology and renewed efficiency as the most promising way towards a cleaner safer Peru.

Four years ago, SPCC embarked on a $300 million investment program in environmental improvement and new solvent extraction/electrowinning plants at its two largest mines.(Wall Street Journal 1995. A17)

The result has been a pronounced increase in the amount of copper produced. Still, consideration is given to industrial production and employment concerns, and therefore any measures taken will not be permitted to have a high impact on trade competitiveness.

18. Industry Sector: MINE

19. Exporters and Importers:

V. Environment Clusters

20. Environmental Problem Type: Land Pollution

Solid waste containing caustic soda, iron, metal shavings, lubricating oils, sulfuric acids, and sludge with iron oxides have been the most prevalent in the mining of iron. Non-ferrous foundries such as slags containing nonferrous metals and ashes, metal dirt, and gaseous emissions are also associated with the iron mining.

The mining industry in general impacts cities, drinking water, ecologically sensitive parks and coastal areas. Toxic pollutants can be attributed to damage health and eco-tourism, as well as an overall economic decline from associated illness and loss in productivity.(USAID 1995, 12)

Peru was a signatory to the Basel convention which aimed to prevent inter-country hazardous waste, of which silver mining solid waste is a main part. These wastes are defined as waste that can cause acute or chronic toxicity to humans, ignitability, infectious disease and potential extensive ecological damage. This treaty has been virtually ignored by Peru and those who should be enforcing it through trade sanctions.

21. Name, Type, and Diversity of Species

22. Resource Impact and Effect: Product and Scale

The mining industry is considered to be high by some, many (USAID) consider it to still be in the medium range. If regulations and foreign investment provisions (incorporating the reconciliation of past abuses) are imposed on this sector, the impact will be less. Production improvements can also produce a positive impact leading to a cleaner and more efficient way of operating. But if the government continues to put investment priorities ahead of environmental concerns, the impact could become very high.

Peru with its large and unregulated "informal" labor sector (those not officially seen as employed) is considered very vulnerable to wastes and abuses. There is also very little information about thousands of hazardous materials and chemicals being dumped into Peru's waterways. Large discoveries (as happened in the U.S.) of abandoned hazardous waste dumps, dating back decades, could also increase the known impact of iron mining abuses.

23. Urgency and Lifetime: Low and 100s of years

The problems of air and sea pollution are just recently being given extensive study. With a resurgence of new activity in this sector, and continued discovery of past and lasting abuses, it is difficult to estimate the extent or pace of the loss. The most important intervention that USAID/Lima can do is to conduct a baseline inventory of the extent of the waste and this in turn will be a good way to know of the urgency and which areas to address first. (USAID 1995, 5)

24. Substitutes: RECYCling

VI. Other Factors

25. Culture: NO

26. Trans-Boundary Issues: NO

27. Rights: YES

Peasants in the frontiers, who typically work for mining concerns, are subject to unequal economic and political treatment and are subjected to many hazards in their working environment because of this. The death of 7 mining workers in Peru just a month ago in April is an example of the unsafe, unmonitored conditions encountered by Peruvian miners. The points articulated in the BOLGOLD case illustrate some of the other problems faced by Peruvian miners.

28. Relevant Literature

Becker, David. "The New Bourgeoisie and the limits of dependency; mining, class, and power in Revolutionary Peru". Latin American Research Review, v 24, 1989, 184 - 208.

Cunningham, Patrick. "The other side of the coin". The Geographical Magazine, v 62, September 1990, 30 - 34.

Godfrey, Brian. "Migration to the gold-mining frontier in Brazilian Amazonia". The Geographical Review, v 82, October 1992, 458 - 69.

Godoy, Ricardo. "Production Strategies of Bolivian miners". Human Organization, v 46, Spring 1987, 48 -54.

Kline, Harvey. "The Columbian debates about coal, Exxon, and themselves". Inter-American Economic Affairs, v 36, Spring 1983, 3-28.

Lipske, Michael, "Cracking down on mining pollution". National Wildlife,v 33, June/July 1995, 20 -23.

Moffatt, Anne. "Microbial mining, boosts the environment, bottom line". Science, v 264, May 1994, 770.

Journal of Environmental Health. "EPA salutes clean up efforts of Wyoming mining pollution". July/August 1995, 36.

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