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 achieve its goals 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.
- Revenue inequality and volatility: The canon, a resource-based transfer, disproportionately benefits producing districts, exacerbating inequality. Its reliance on volatile natural resource revenues also creates budget instability.
- Low investment efficiency: Despite high public investment levels, efficiency is low due to limited local capacity, project management challenges, and short-term political horizons. Districts struggle to complete projects, often undertaking small-scale initiatives with limited transformative potential.
- Mixed impact on development: While canon transfers positively impact public goods provision, their effect on economic development is mixed and uneven. High canon districts experience more social conflicts, suggesting low spending efficiency.
To address these issues and secure Peru's position as a leading critical mineral exporter, the report recommends:
- Reforming the canon: Adjusting its formula to reduce concentration in producing districts and increasing the size and equalizing role of the FONCOMUN.
- Enhancing medium-term planning: Replacing discretionary transfers with rules-based transfers and using a 5-year average of mining tax revenues to reduce canon volatility.
- Improving investment scale and impact: Strengthening coordination across government levels, establishing co-financing mechanisms, and increasing subnational capacity for project formulation and implementation.
- Strengthening accountability and oversight: Enhancing traceability of central government transfers and improving audit processes to promote efficient investment and prevent corruption.
By revamping the fiscal decentralization framework and implementing these recommendations, Peru can better benefit from its mining wealth and ensure that mining dividends translate into sustainable and inclusive development for all citizens.
