Peru's presidential hopefuls want to tap into resource profits

By Robert Kozak

Last Update: 2:25 PM ET May 10, 2006

LIMA (MarketWatch) -- Rising commodities' prices have increased demands for the Peruvian government to raise its share of profits from natural resource companies, and those demands are resonating loudly during the president election campaign currently underway.

Profits from booming commodities have become a hot issue in Latin America, where governments in Venezuela and Bolivia are grabbing larger stakes from resource industries such as mining and petroleum.

In Peru, both candidates participating in the June 4 runoff vote represent a shift to the left; and both nationalist Ollanta Humala and former President Alan Garcia have said they want producers to share more of their profits.

Humala's program is clearly the more radical, and includes plans for the state to take ownership stakes in private-sector projects. Garcia is taking a much more limited approach, and has rejected any nationalization of resources.

Some of the populist policies are clearly aimed at quelling anger over rising consumer costs, but political analysts say that across Latin America there has been a backlash against an economic model that included lower taxes to attract investments.

"In many countries in Latin America that model is being questioned, and what has moved onto the agenda are plans to increase revenues from natural resources," said Humberto Campodonico, an economist.

Peru Has Attracted Investments

Peru has drawn in large amounts of foreign direct investments in recent years, especially in the mining sector, where companies such as Canada's Barrick Gold Corp.(ABX) and Denver-based Newmont Mining Corp. (NEM) have sunk hundreds of millions of dollars into developing new mines.

Energy and Mines Minister Glodomiro Sanchez recently said that foreign investment in mining reached more than $9 billion over the past decade.

Large-scale projects are also underway to tap natural gas reserves, especially in the Camisea fields in southern Peru, which came online in mid-2004. A related $2.5 billion project led by U.S.-based Hunt Oil Co. aims to turn Peru into an exporter of liquefied natural gas.

During the 1990s the government of now-jailed former President Alberto Fujimori locked in tax breaks for companies to boost investment at a time when the Andean nation was still recovering from domestic terrorism, and commodity prices were far lower than they are today.

But critics say the government was overly generous in the contracts signed with the consortium developing Camisea, and even some government officials has gone as far as to suggest they could be reexamined.

For instance, Prime Minister Pedro Pablo Kuczynski this week said that, while nationalization would be a step backwards, parts of the contract with the consortium running Camisea could be renegotiated, such as the methodology used to set natural gas prices.

Garcia Wants Some Renegotiations

While many foreign investors have concerns about Garcia, whose 1985 to 1990 government was widely recognized as an economic disaster, he is seen as the more acceptable option by many in the business community.

In a recent television interview, Garcia pointed to gold miners who are profiting from high prices, saying they could perhaps increase social projects in the area where they mine.

At a recent press conference, Garcia said the first priority for the natural gas sector is to supply customers in the domestic market. Only after that should gas be sold to overseas bidders.

Peru made mistakes in negotiating resource sector contracts in the last decade or so, he said.

"There are certain things that we have to renegotiate to make corrections, and one of those is clearly gas," he said.

Carlos Del Solar, general manager of Hunt Oil Co. in Peru, one of the main players in the Camisea project, told Dow Jones Newswires Wednesday that some clarifications can be made to existing contracts.

"Contracts are signed and these are long-term contracts and they can be adjusted. However, any change must be made with the agreement of the parties. Changes cannot be unilaterally imposed like they did in Bolivia," he said, adding he doesn't think Peru will follow Bolivia's path.

Humala Favors Greater State Role

Humala, however, has given special emphasis to the natural resources sector, with its heavy foreign ownership, saying that resource-extraction companies should pay a windfall tax on profits.

His party's governing plan says that strategic activities such as energy, hydrocarbons, and electricity will be at the service of the nation and of Peruvians. "In this strict sense they will be nationalized," the plan says.

But Humala says that nationalization doesn't mean expropriation, saying instead that the state has different alternatives for taking control, including the introduction of a so-called "golden share." These shares have been used in other countries, and usually provide the government with certain veto rights in strategic company decisions.

The 43-year-old ex-army officer also says that mining companies must pay all outstanding royalties and taxes, threatening to review their contracts if they don't pay.

He has also criticized the nation's constitution for favoring foreign investors over locals, and said it should be changed to allow the state a greater role.

More recently, Humala has said foreign companies would be welcome to invest in exploration and if they find petroleum then the state would take its share, paying for part of the exploration costs.

Humala has the backing of Venezuela's socialist President Hugo Chavez and is close to Bolivia's President Evo Morales, who last week nationalized Bolivia's gas and oil industry.