Peru's mining sector holds significant potential for economic growth, but social conflicts and inefficient fiscal decentralization have hindered its development. The country's fiscal decentralization framework, established in 2002, has failed to meet its objectives of improving public spending efficiency, reducing regional disparities, and strengthening local democratic processes.
Key issues include:
- High dependency on transfers: Regional and district governments rely heavily on central government transfers, leading to a high vertical imbalance and limited local autonomy.
- Inequitable resource distribution: The canon, a resource-based transfer, disproportionately benefits producing districts, exacerbating regional disparities.
- Low spending efficiency: District governments, particularly the smaller ones, struggle to complete investments due to limited capacity, leading to cost overruns and delays.
- Short-term political incentives: The four-year term without re-election limits the scope of investment projects, favoring smaller, less impactful initiatives.
Impact on public goods provision and social conflicts:
- Improved public goods: High canon and FONCOMUN districts have more municipal employees, police officers, and health care centers.
- Increased social conflicts: High canon districts experience more social conflicts, particularly those involving mining activities, suggesting low spending efficiency.
Recommendations:
- Reduce horizontal inequality: Adjust the canon formula to distribute resources more equitably and increase the size and effectiveness of FONCOMUN.
- Enhance medium-term planning: Replace discretionary transfers with rules-based transfers and use a 5-year average of mining tax revenues to reduce canon volatility.
- Increase investment scale and impact: Improve coordination across government levels, establish co-financing mechanisms, and strengthen subnational capacity for project formulation and implementation.
- Strengthen accountability and oversight: Enhance traceability of central government transfers and improve audit processes to promote efficient investment and prevent corruption.
Addressing these issues through a revamp of the fiscal decentralization framework is crucial for Peru to benefit from its mining wealth and ensure sustainable and inclusive development.
