Somit Varma, Director IFC Oil, Gas, Mining and Chemicals Department

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1 IFC is pleased to receive this independent report from Apoyo on the economic impacts of the Yanacocha mine. The report clearly lays out the significant economic impacts of the mine in terms of its contribution to employment, taxes, local spending and GDP. Yanacoha's development has coincided in recent years with a period of fast growth in the Peruvian economy to which and increased natural resource investment and production generally has contributed. The country's overall macro-economic management and the world economy have allowed Peru to take advantage of the resources investment and production boom without suffering the consequences of a "macro-economic resources curse". Over the last five years, for example, Peru's real GDP has grown by an average of close to 7% pa. As the report notes, and those who are familiar with the development of resources in Peru are aware, the inter-relationships between communities and large mining and other resource development projects is complex and can be further impacted by ongoing changes such as urbanization and economic growth and development more generally. Communities are affected in a variety of ways, not all positive from their perspective, and they may appreciate some of the benefits that such developments and their community programs bring more than others. This complexity, emphasizes the importance of investors continuing to engage with stakeholders about their programs, as Yanacocha does in Peru. Somit Varma, Director IFC Oil, Gas, Mining and Chemicals Department

2 Study of the Yanacocha Mine s Economic Impacts: Final Report Prepared for the International Finance Corporation by Lima, September 2009

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4 Table of Contents EXECUTIVE SUMMARY... I INTRODUCTION... 1 METHODOLOGY... 4 CLASSIFICATION OF IMPACTS... 4 IMPACT ANALYSIS... 4 Impacts at the Macroeconomic Level... 4 Impacts at the Regional and Local Levels... 5 Impacts at the Socioeconomic Level... 6 INSTRUMENTS FOR IMPACT ANALYSIS... 7 LIMITATIONS OF THE STUDY... 8 ANALYSIS OF THE YANACOCHA MINE S IMPACTS IMPACTS AT THE MACROECONOMIC LEVEL Mine Production Fiscal Contribution Value Added Employment IMPACTS AT THE REGIONAL AND LOCAL LEVELS Mine Operations Effects of the Yanacocha Mine s Presence Mining Company Social Responsibility Programs Generation of Fiscal Revenues SOCIOECONOMIC IMPACTS Access to Basic Services Overcrowding Index Quality of Housing Education Per Capita Income CONCLUSIONS OVERALL IMPACTS THE MINE S DISTRIBUTIVE EFFECTS THE MINE S EFFECT ON POVERTY IN THE REGION APPENDIX: BACKGROUND ON METHODOLOGIES USED THE VALUE ADDED MULTIPLIER EMPLOYMENT MULTIPLIERS THE DOUBLE DIFFERENCE METHODOLOGY REFERENCES... 52

5 EXECUTIVE SUMMARY The economic impacts of the Yanacocha Mine are evident at the macroeconomic level, at the regional level, and locally in the mine s area of influence. These impacts are transmitted by means of four main channels. The first channel is related to the mine s operations and refers primarily to the impacts directly generated by the nature of the business, including its use of personnel, its procurement of goods and services, its construction and maintenance of roads, and its use of resources such as water and land. The second channel is the mine s presence, which refers to long-term impacts generated by the mine s existence, for example, the migration driven by the economic expectations generated by the mine, the strain on local public resources caused by the resulting population pressure, and the boost to the local economy resulting from expenditures by mine employees. The third impact channel refers to the mining company s social responsibility programs. The fourth impact channel is the generation of fiscal revenues. The overall economic impacts of the Yanacocha Mine are positive. At the macroeconomic level, the mine accounts for a significant contribution to national coffers, the demand for goods and services, and the availability of employment. The overall impacts at the regional and local levels are also positive, although interviews with focus groups identified some negative perceptions regarding the nature of mining activities and the socioeconomic conditions in the mine s area of influence. While the mine appears to account for significant improvements in nonmonetary indicators of well-being and the quality of life, monetary indicators show some improvement, but this improvement is not particularly different from that in comparable regions, possibly because Peru generally has grown relatively quickly in the period examined. Regional and local level impacts are transmitted through four different channels: the mine s operations, the mine s presence, the mining company s social responsibility programs, and the generation of fiscal revenues. Overall, the channel involving the mine s operations is positive, given its contribution to both the quantity and quality of work in the area and its boost to local businesses because of the mine s expenditures and the expenditures of its employees, who are paid significantly more than nonmine workers. Despite the mine s job creation, the extent of direct job creation is relatively low in relation to the mine s contribution to regional gross domestic product primarily i

6 because of the capital-intensive nature of mining. The local population interviewed perceives the mine s contributions to local infrastructure positively, but has an unfavorable view of the gap between the wages of mine workers and those of nonmine workers. Some interviewees also allege that the mine is responsible for water pollution and soil erosion. In so far as the second channel of regional and local impacts, the mine s presence, is concerned, the mine has attracted significant migration, especially to urban areas. This has led to some negative effects such as price increases in the city of Cajamarca brought about by increased demand, higher spending power of mine employees, and excessive demand for some public services plus some negative perceptions among local residents about the effects of the influx of migrants. The third channel refers to the social responsibility programs of the mining company, Minera Yanacocha. While these programs have made significant contributions in terms of roads and household water and sewage hookups, their contributions to health and education are relatively insignificant. The last channel of regional and local impacts refers to the generation of fiscal revenues, in particular, the mining canon (canon minero), a transfer of 50 percent of the income tax generated by mining operations to regional and local governments where mining operations are located. In 2006, these revenues accounted for more than 39 percent of central government transfers to regional governments and more than 23 percent of transfers to local governments. This channel has become an important source of resources, and if properly invested, could be a potential source of positive impacts for the region. In relation to the nonmonetary socioeconomic impacts, the population in the mine s area of influence has seen greater improvements in basic services, reductions in household overcrowding, and enhancements in literacy rates than populations in control districts, but lower levels of improvements in housing quality. Regarding monetary indicators, poverty and extreme poverty in the mine s area of influence improved between 2001 and 2007, but no more than in comparable districts elsewhere in the country. ii

7 INTRODUCTION Cajamarca is one of the 25 regions of Peru (figure 1) and includes part of the northern Andes and the northern Amazon jungle. Its population is about 1.4 million people, or 4.9 percent of Peru s total population of 28 million (2007 census). Each region is subdivided into provinces that are in turn subdivided into districts. Figure 1: The Regions of Peru 1

8 The region of Cajamarca is divided into 13 provinces that are in turn subdivided into a total of 128 districts. One of the provinces is also named Cajamarca and has a population of approximately 316,000 people. The capital of Cajamarca Province (and of the region) is the city of Cajamarca, which together with the district of Cajamarca has roughly 188,000 inhabitants. The region of Cajamarca is the sixth poorest region in Peru: in 2007, 65 percent of the population fell below the poverty line and 31 percent fell below the extreme poverty line, compared with national poverty rates of 39 percent and 13.7 percent, respectively (national household survey 2007). 1 In 2007, average annual per capita income in the region was equivalent to approximately US$700, compared with US$1,460 nationally (national household survey 2007). The projected infant mortality rate for is 37 per 1,000 births, compared with a projected national infant mortality rate of 29 per 1,000 births for the same period (Cuánto 2007). Finally, in 2007, the region had 3.5 doctors per 10,000 habitants compared with a national average of 15.2 doctors per 10,000 inhabitants (Cuánto 2008). Thus with respect to these indicators, the region of Cajamarca falls well below national averages. The Yanacocha Mine is a gold mine located in the Andes in the region of Cajamarca. The mine s concession occupies around 25,000 hectares (of which the mine site is about 5000 hectares), including four important hydrographic basins (Cajamarquino, Celendín, Jequetepeque, and Llaucano) located between 3,400 and 4,120 meters above sea level. The mine s area of influence is Cajamarca Province, specifically the districts of Baños Del Inca, Cajamarca, and La Encañada. The city of Cajamarca is located 2,720 meters above sea level and is the economic, tourist, industrial, commercial, cultural, and mining hub of the Northern Sierra of Peru. The investment partners of Minera Yanacocha, the Yanacocha mining company, are Newmont Mining Corporation (51.35 percent), Compañía Minera Buenaventura (43.65 percent), and the International Finance Corporation (IFC) (5.00 percent). Currently Newmont Peru Limited, a Peruvian subsidiary of Newmont Mining, manages the mine. Newmont Mining began exploration in the area in 1982 and identified the first ore deposits in Following successful viability studies, operations began at the 2 1 National household surveys are carried out by the National Institute of Statistics (Instituto Nacional de Estadística e Informática). 2 In addition to regions, provinces, and districts, geographic divisions (coast, Sierra, Amazon basin) are commonly used to compare regions. As the region of Cajamarca is located in the Northern Sierra, it is frequently compared with other regions in this geographical area. 2

9 Carachugo pit in The first gold bar was produced in August From that time, the Yanacocha Mine s production grew considerably until it became the most important producer of gold in South America. In 1994, mining activities began at the Maqui Maqui pit. By February 3, 1996, the mine had produced 1 million ounces of gold ore. That same year, the Yanacocha Mine began to operate at the San José pit, and in 1997 work began at the Cerro Yanacocha pit. The mine s location offered excellent opportunities for exploitation, which prompted the mine company to also begin to exploit the La Quinua pit in The two pits that are currently producing gold ore are La Quinua and Cerro Yanacocha. The Yanacocha Mine has performed well at a commercial and economic level, but has nevertheless faced some negative reactions from the local community. This may indicate that not everyone in the mine s area of influence has benefited from the mine s development, and subsequently, not everyone has perceived it positively. For this reason, IFC, which has been one of the mining company s partners since 1993, decided to undertake a study to assess the mine s impacts on economic development and poverty reduction. This study includes the following specific objectives: identifying the channels through which the mining company generates impacts nationally, regionally, and locally and determining the relative importance of each channel; evaluating whether the mine s area of influence has undergone significant changes as a result of the mine s development; differentiating between groups who have benefited from the presence and operations of the mine and those who have been adversely affected. 3 Newmont Mining was the first company to develop and apply the lixiviation process to exploit disseminated ore, whose grade is low. The Yanacocha Mine s production during the early 1990s was focused on applying this extraction technology. These efforts contributed to a substantial increase in Peru s gold production such that small-scale mining is currently replicating this technology. 3

10 METHODOLOGY APOYO Consultoría estimated the impacts of the Yanacocha Mine at three different levels using a different methodological approach for each level. Classification of Impacts Given the magnitude of the mine s operations, APOYO Consultoría decided to conduct its analysis at three levels: the macroeconomic level, the regional and local level, and the socioeconomic level. The impacts at the macroeconomic level refer primarily to the mine s aggregate effects on gross domestic product (GDP) growth, national fiscal revenues, and employment generation. The impacts at the regional and local level refer to aggregate impacts generated in the region, province, or districts in relation to the mining company s operations and social responsibility actions and to the fiscal revenues generated by the mining canon. 4 At the socioeconomic level, impact indicators refer to long-term effects on individuals well-being and quality of life, for example, access to infrastructure and services at the regional and local levels. Impact Analysis The following subsections explain the methodological approaches used for each level of analysis. Impacts at the Macroeconomic Level 4 The mining canon is the transfer from the central government of the equivalent of 50 percent of the income tax generated by mining operations to regional, provincial, and district governments where mining operations are located. These resources are to be spent on infrastructure projects. 4

11 We estimated impacts at the macroeconomic level by applying the economic multiplier methodology. This permits quantifying the total impact generated by a given sector, in this case, the mining sector, on the rest of the economy by identifying forward and backward linkages created with other industries. In the case of Peru, the National Institute of Statistics (Instituto Nacional de Estadística e Informática or INEI) constructed multipliers in 2001 based on the input-output matrix it had developed in 1994 (INEI 2001). Despite the limitations of the input-output matrix (the main limitation being that linkages between industries might have changed since 1994), it is currently the only instrument available for estimating the overall impacts of the mine at the macroeconomic level. The multipliers used for this assessment include the value added multiplier and the employment multiplier. The value added multiplier represents the effects that mining output has on GDP, which may be direct, indirect, or induced. Direct effects are produced by the value added of the mine, indirect effects correspond to the output generated by the demand for inputs required to operate the mine, and induced effects correspond to the economic activity generated by consumption by the mine s employees. According to INEI estimates and the multiplier methodology (explained in the appendix), each dollar of production generated by the Yanacocha Mine generates US$2.33 in the economy. The employment multiplier is based on the ratio of total jobs generated (directly, indirectly, or induced) and jobs directly generated in the mining sector. For each job generated by mining activity in Peru, 9.58 jobs are created at the macroeconomic level. This estimated number of total jobs created includes not only the direct employment generated by the mine, but also the indirect and induced jobs created in the national economy. Impacts at the Regional and Local Levels The impacts of the Yanacocha Mine s activities at the regional and local levels are manifested through different transmission channels. Part of the research process consisted of identifying and classifying these transmission channels. This was accomplished by means of focus groups in the mine s direct areas of influence, both urban and rural, and interviews with specialists. The impact analysis was conducted by 5

12 identifying impact indicators for each transmission channel and comparing them with developments in other regions to obtain an objective comparison of the results. Impacts at the Socioeconomic Level The main difficulty with impact evaluations is that one cannot know for sure what would have occurred to the group of beneficiaries in the absence of the intervention; in this case, the mine. We therefore needed to identify a group of individuals with characteristics similar to those of the beneficiary group, but who had not been affected by the mine. We refer to this group as the control group. We estimated the Yanacocha Mine s socioeconomic impacts using a methodology known as the difference-within-difference or double difference methodology (Blundell and Costa Dias 2002; Borland, Tseng, and Williams 2005), which is often used to evaluate the impacts of social programs or projects on beneficiaries. This methodology provides an objective measurement of the value generated by a project, because it attempts to attribute specific effects to the project being evaluated by comparing indicators for the treatment group and a control group at two points in time: before and after the intervention. To this end we compared residents of a number of districts directly influenced by the mine and a number of districts with similar characteristics not influenced by the mine. The objective was to isolate effects directly attributable to the Yanacocha Mine. The first step of this comparison was to identify all the districts in the Cajamarca region that belonged to the beneficiary (or treatment) group. The second step consisted of identifying Sierra districts that had not had any mining or other comparable large-scale projects, some of which would eventually be included in the control group. To this end, the third step was to identify key characteristics from the 1993 census for the beneficiary districts and the control districts (table 1). We then selected the control districts using the propensity score matching methodology (Caliendo and Kopeinig 2005; Rosenbaum and Rubin 1983, which facilitates the identification of statistically comparable entities. 6

13 Table 1: Characteristics of Beneficiary and Control Districts Percentage of the population that is rural Altitude of the capital city (meters above sea level) Percentage of professionals Employment rate (%) Average years of education Region District Group Population pscore a Ancash Ataquero Control 83 2, , Ancash Chavin de Huantar Control 83 3, , Ancash Parobamba Control 84 3, , Ayacucho Santiago de Pischa Control 80 3, Cajamarca Cajamarca Beneficiary 26 2, , Cajamarca La Encañada Beneficiary 96 3, , Cajamarca Los Baños del Inca Beneficiary 80 2, , Cajamarca San Juan Control 83 2, , Huancavelica Huancavelica Control 16 3, , Huánuco Quisqui Control 94 2, , La Libertad Quiruvilac Control 44 4, , Puno Sina Control 79 2, , Source: 1993 census. a. The pscore is an indicator used to identify the level of similarity between district groups. Disctricts with similar pscores can be compared. We used the double difference methodology at the district level to assess nonmonetary indicators of the mine s socioeconomic impacts. However, to assess the monetary indicators, we needed to use other comparators such as the Sierra or Northern Sierra because of the lack of information at the district level. In these cases, the accuracy of the analysis is limited, but it does provide some valuable insights into trends of the impacts. Instruments for Impact Analysis To analyze the main economic impacts of the Yanacocha Mine we used information provided by the mining company as well as secondary data sources, such as national censuses; information available from the Central Bank, the Ministry of Finance, the Ministry of Energy and Mines, and the INEI; and national household surveys. To strengthen the analysis we developed an expenditure survey of mine workers and also conducted several focus groups in the mine s area of influence. The objective of the expenditure survey was to characterize the expenditure patterns of Yanacocha Mine workers and contractors to determine the total contribution of this group to local consumption in the Cajamarca region. The total sample size was 383 (165 mine workers and 218 contractors), with a 5.5 percent sampling error and a 95 percent confidence level. We conducted the focus groups to identify the main channels of transmission of 7

14 impacts and to ascertain people s perceptions about different aspects of the mine and its operations. 5 We held these focus groups in three different areas: rural communities, semi-urban areas, and urban areas. We conducted the rural focus groups in various rural communities in the districts of Cajamarca and La Encañada (Aliso Colorado, Chilipampa, Hualtipampa, Huambocancha, La Ramada, Porcón, and Purhuay). We held the semi-urban focus groups in the districts of Baños del Inca (community of Santa Barbara) and La Encañada (community of San José). We ran the urban focus groups with middle-income residents of the city of Cajamarca. The eight focus groups consisted of men and women between the ages of 25 and 60. Limitations of the Study In an ideal scenario, the analysis of the Yanacocha Mine s impacts on development and poverty reduction would be based on a baseline study that would have provided impact indicators at the beginning of the mine project for both the beneficiary group and an adequate control group. Unfortunately, no such study was carried out, hence our use of secondary information and focus groups. Given study constraints, we were not able to analyze in detail the mine s disaggregated purchases by types of goods and services; the source of the purchases (abroad, national, or local); and the suppliers. This means that we could not directly identify the impacts derived from local purchases of goods and services, but have considered the general impacts of mine spending with local companies. The study was also limited by public data availability, particularly at the regional and local levels. The most significant restrictions in relation to secondary information were at the local level in that little information exists at this level. Census information provides the only database that has information on population centers at two points in time (1993 and 2005), but changes in census methodology and variations in the regions population structure make comparing information at the regional level impossible; however, the censuses do provide good information at the district level for some indicators. Nevertheless, information from the censuses did not permit us to conduct a more complete analysis of well-being variables such as people s health, 5 Note that the information generated by the focus groups may not be representative of all residents in a particular location. 8

15 household incomes, and the like. For this reason, we conducted much of the evaluation of socioeconomic impacts at the regional level using the national household survey and comparing the 1998 survey with the 2006 survey. 6 Given study constraints, we were not able to gather and assess quantitative information about the mining company s social responsibility activities at the local level in order to analyze the individual effectiveness of such activities. For this reason we based our analysis on figures obtained from the mining company s annual reports and individuals perceptions ascertained during focus group discussions. Finally, one of the main channels through which the mine can bring about changes in people s well-being and incomes comes from the mining canon, which goes directly to subnational governments (regional, provincial, and district) from the national government. However, most of the canon s impacts will depend on the quality of the expenditures and investments by subnational governments. 6 Even though the comparability of both surveys is not optimal, they provided sufficient information for us to obtain a good estimate of impact indicators. 9

16 ANALYSIS OF THE YANACOCHA MINE S IMPACTS Mining activity at the Yanacocha Mine began in Since that time, the mine has become an important source of value added, employment, and fiscal revenues. Impacts at the Macroeconomic Level The Yanacocha Mine s economic impact has been positive at the macroeconomic level as evidenced by its effects on the principal macroeconomic variables. Mine Production The main mineral the Yanacocha Mine produces is gold. Between 1994 and 2007, Peru produced 1,857 tons of gold, of which 42 percent, or 782 tons, was produced by the Yanacocha Mine (figure 2). Gold production at the mine grew at an average annual rate of 17 percent between 1993 and 2007, reaching its maximum level of 104 tons in However, the mine has reduced its production since 2006, primarily because the reserves at its main deposits have decreased significantly. Figure 2: National Gold Production, Percentage of total production Production by the Yanacocha Mine National production excluding the Yanacocha Mine Source: Yanacocha Mine and Central Bank data. 10

17 The Yanacocha Mine also produces silver as a byproduct of the gold extraction process. It produces approximately 48 tons of silver per year, or 3.5 percent of Peru s total silver production. Virtually all the mine s production is exported, making the mine an important component of the Peruvian mining sector s total exports. The mine s gold exports have accounted for 14.5 percent of total mining exports and 7 percent of total exports. Between 1993 and 2007, mining exports accounted for close to 54 percent of total exports (figure 3). This constituted an important source of foreign currency inflows that became even more valuable after 2002 with the boom in metal prices. Figure 3: Evolution of Total and Mining Exports, US$ billions Mining exports Total exports Source: Yanacocha Mine and Central Bank data. The cumulative value of the Yanacocha Mine s exports between 1993 and 2007 was US$10 billion (figure 4), representing 43 percent of total gold exports. Figure 4: Evolution of Gold Exports, US$ billions Yanacocha Mine All other Peruvian gold mines Source: Yanacocha Mine and Central Bank data. 11

18 Fiscal Contribution Tax payments by the mining industry as whole have grown substantially in recent years. The Yanacocha Mine has made an important contribution in this respect. During , the mining company paid US$1.150 billion in income tax, customs duties, and the National Housing Fund (Fondo Nacional de Vivienda) tax, the Solidarity Extraordinary Tax (Impuesto Extraordinario de Solidaridad IES), as well as US$18 million in contributions to the Social Security Scheme (table 2). The mining company s total tax contributions grew at an average annual rate of 47 percent during Table 2: Contributions to Fiscal Revenues by the Yanacocha Mine, (US$ thousands) Social Security National Housing Year Customs duties Income tax Scheme Fund tax Total a , , , , , , , , , , , , ,715 1, , ,328 16,481 1, , ,522 1, , ,162 1, , ,449 2, , ,495 2,926 n.a. 235, ,482 3,874 n.a. 260,939 Total 6,891 1,121,094 18,064 4,002 1,150,052 Source: Yanacocha Mine data. Note: n.a. = not applicable. a. Also including Solidarity Extraordinary Tax. Corporate tax payments by the mine increased significantly from 2003 because of increases in international metal prices. The Yanacocha Mine s corporate tax contribution between 2000 and 2006 averaged 28 percent of the corporate tax paid by the entire mining sector (figure 5). 12

19 Figure 5: Corporate Tax Collections from the Mining Sector 5 4 (US$ billions) Yanacocha mine Total Sector Source: Yanacocha mine and National Tax Administration data. During , the Yanacocha Mine s workers contributed directly to the national treasury with payments of US$$69.8 million for personal income tax (table 3), or an average of 0.7 percent of total personal income tax collections. This is in addition to payments of US$77 million to the Fund for Training and Job Promotion. Table 3: Employees' Contributions to Fiscal Revenues, (US$ thousands) Personal income tax Fund for Training Personal income tax Year (mine's own employees) and Job Promotion (contractors' employees) Total , , ,073 3, ,088 7, , ,984 5, , ,361 4,691 1,891 8, , ,158 6, , ,702 8, , ,377 10, ,928 13,199 3,425 24, ,260 15,018 3,401 27, ,097 19,395 3,682 34, ,131 10,339 3,964 28,434 Total 69,968 77,023 30, ,257 Source: : Yanacocha Mine data; : APOYO Consultoría estimates. 13

20 In addition, the mine s shareholders generated direct contributions of US$38 million in taxes withheld in years that dividends were paid. Value Added The Yanacocha Mine s value added was US$6.3 billion during (table 4), or an average of 0.8 percent of Peru s GDP, 26 percent of the Cajamarca region s GDP, and 15 percent of mining GDP. 7 Its total impact on GDP (including indirect and induced effects) is substantially larger. Based on the mining sector multiplier mentioned in the methodology section, each dollar of production generated by the Yanacocha Mine generates, on average, US$2.33 of GDP. Hence, given that between 1993 and 2006 the gross value of the Yanacocha Mine s production was approximately US$9.1 billion, the total value generated in the economy was approximately US$21.3 billion. Figure 6: The Yanacocha Mine s Contribution to GDP, Percentage of GDP Direct effect Indirect and induced effect Source: Yanacocha mine and INEI data; APOYO Consultoría estimates. 7 To estimate the value added by the Yanacocha Mine, we used the structure of the sector as registered in The value added by the mining sector represents approximately 68 percent of the gross value of production and the remainder corresponds to intermediate consumption. According to information provided by the mine in May 2008, the cash production cost of gold (excluding depreciation and other capital costs) was US$350 per ounce and the final product was worth US$890 per ounce. Taking into account that production costs include payments for factors of production and expenditures on inputs, we believe that the ratio suggested by the input-output matrix is a valid approximation. 14

21 Table 4: GDP and Value Added by the Yanacocha Mine, (Current US$ millions) Year National GDP GDP Cajamarca region GDP metal mining sector Value added by the mine a Indirect and induced impacts b , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,485.2 Total 824, , , , ,992.8 Source: Yanacocha Mine, INEI, and Ministry of Finance data. a. The mine's direct impat based on the INEI's input-output matrix. b. Indirect and induced impacts based on the INEI's input-output matrix. Employment The mine s contribution to job creation has increased over time. Between 1995 and 2006, this contribution increased 10-fold. By 2006, the mine had directly generated 10,000 jobs and had accounted for a total of more than 100,000 direct, indirect, or induced 8. jobs (table 5) This corresponded to 0.7 percent of Peru s economically active population. 8 This estimate uses an employment multiplier close to nine, based on the figures published by the National Institute of Statistics (see appendix). However, some studies use lower multipliers (ICMM used an overall multiplier that ranges between 6.5 and 8.5 when measuring the impact of Antamina s mining operations in Peru, see Peru: The Challenge of Mineral Wealth). 15

22 Table 5: The Yanacocha Mine's Impact on Job Creation, Total number of employees at the mine Total number of jobs generated by the mine a Year Number of employees Number of contractors ,035 9, ,357 1,592 15, ,042 3,358 32, ,134 3,575 34, ,118 2,496 3,614 34, ,242 5,112 6,354 60, ,571 3,700 5,271 50, ,810 4,620 6,430 61, ,866 6,931 8,797 84, ,256 6,345 8,601 82, ,935 7,877 10, , ,946 7,902 10, ,933 Total 16,961 53,326 70, ,418 Source: Yanacocha Mine data; APOYO Consultoría estimates. a. Includes the total number of direct, indirect, and induced jobs generated The total direct employment generated by the Yanacocha Mine represents 0.4 percent of Peru s total formal employment, almost 19 percent of formal employment in the mining sector, and 13 percent of formal employment in the Cajamarca region. This demonstrates the positive effect that the mine has had on employment in both the sector and the region. Impacts at the Regional and Local Levels To understand the economic impact of the Yanacocha Mine at the regional and local levels we start by identifying the channels (mechanisms) through which these impacts are transmitted. Channels are associated with a series of indicators used to evaluate their effects. For this purpose, we developed a typology of channels and secondary 16

23 channels by means of focus groups with those living in the mine s area of influence and in-depth interviews with specialists. Figure 7 shows the four main impact channels identified the mine s operations, the mine s presence, the mining company s social responsibility programs, and the generation of fiscal revenues along with secondary channels and indicators. Figure 7: Impact channels MINE OPERATIONS MINE PRESENCE MINING COMPANY SOCIAL RESPONSIBILITY PROGRAMS GENERATION OF FISCAL REVENUES EMPLOYMENT DEMAND Direct employment Mine region salary gap Presence of foreign experts MIGRATION Changes in social structure Insufficient service provision COMMUNITY ROADS Access to markets and services Productivity CANON Public investment Public expenditure PROCUREMENT OF GOODS AND SERVICES National purchases Local purchases PUBLIC SERVICES Demand for public investment RURAL ELECTRIFICION Quality of life Productivity ROAD CONSTRUCTION AND MAINTENANCE NATURAL RESOURCES Lower transaction costs Available water Standard of living among former landowners EXPENDITURES BY MINE WORKERS COST OF LIVING Demand for goods and services Impact on living costs of higher wages and higher demand SANITATION HEALTH AND EDUCATION DEVELOPMENT Service coverage quality Livestock and other industries Source: APOYO Consultoría. Overall impacts at the regional and local levels are positive. Nevertheless, the focus groups revealed a perception of some potentially negative effects derived from the nature of mining activity and the socioeconomic conditions in the mine s area of influence. Mine Operations The first channel, mine operations, refers to the mine s productive activities, which require a series of goods and services. In general, the effects of the mine s operations 17

24 have been positive both in terms of the quantity and quality of work made directly available and the business generated by the procurement of goods and services for the mine. This has been reinforced by the Yanacocha Mine s contribution to local infrastructure, which the population looks upon favorably. Nevertheless, the focus groups identified two potentially negative aspects: the gap between the wages paid to mine workers and those paid to nonmine workers in the region, and the population s perception that the mine has contaminated rivers and caused soil erosion. The latter might require some additional studies to determine whether this is the case and the extent of any effects. Employment Demand Although mining is not intensive in terms of manual labor, the magnitude of the Yanacocha Mine s operations and its hiring policies have made it an important source of employment in the mine s area of influence. In 1995, the mine hired a total of 1,035 workers (table 5). Of these, 225 individuals were on the mine s regular payroll and the rest were contractors hired indirectly by third parties. By the end of 2006, the mine had 10,848 employees, including its own workers and contractors, 10 times the number in When the Yanacocha Mine began operations in 1993, given the region s reliance on agriculture and livestock, it had no education facilities for training highly qualified and specialized personnel, especially in the field of mining. Even though the region had a history of mining exploitation, it was generally small-scale in nature. As a result, the mine decided to hire personnel from other regions who already had experience in the sector. The mine also hired personnel from Lima and abroad for midlevel and executive management positions. In recent years, the mine revised its hiring policies to hire from among the local population. One of the goals was to progressively increase the proportion of local personnel in the total number of employees. 9 In absolute terms, while the number of employees from the Cajamarca region on the payroll did increase, as a percentage of 9 Likewise, the mining company requires that contractors hire a minimum number of Cajamarcan employees for their unskilled labor positions. According to the July 2007 expenditure survey conducted by APOYO Consultoría, 60.6 percent of the approximately 7,000 employees hired by contractors are from the Cajamarca region. 18

25 the workforce, their numbers remained relatively stable (table 6). At the end of 2006, the total number of employees on the mine s own payroll was 2,946. Of this number, 1,411 (47.9 percent) were natives of the Cajamarca region (table 6). This figure represents around 4.5 percent of the working-age population (those aged 14 through 65) in the mine s area of direct influence and 0.6 percent of the region s working-age population. According to the national household survey, the Cajamarca region has 150,933 employees on companies payrolls, 4.1 percent of whom work for the Yanacocha Mine. Table 6: Number of Native Cajamarcans on the Yanacocha Mine's Payroll, Number of employees on the payroll Number of Cajamarcans on the payroll Cajamarcans as a percentage of all employees Year , , , , , ,256 1, ,935 1, ,946 1, Total 16,961 8, Source: Yanacocha Mine data. While the mining company s employment of Cajamarcans is important, the number appears to be relatively low compared with the mine s contribution to the region s GDP, which was 37.4 percent in This is mainly because mining is capital intensive and technology intensive, but does not require large amounts of manual labor. According to the 1993 economic census, investment in mining activities is roughly 25 times that in commerce and 3 times as much as the average for all sectors per job created (figure.8). 19

26 Figure 8: Relative Costs of Creating a Job by Sector, 1993 US$ thousands Source: 1993 economic cesus. Note: Costs refer to investment in fixed assets. Mining requires a high level of specialization, which means that salaries must be attractive to those with the required expertise and sufficient to cover the opportunity costs of moving to the region. Thus mine salaries and wages tend to be higher than those paid in other sectors, which may give rise to negative perceptions in relation to the wage gap by those not employed by the mine. According to information provided by the mining company, the average compensation for those hired directly by the company was US$1,970 a month in 2006, which was about 10 times the amount of approximately US$184 per month paid to the average worker in the Cajamarca region (2006 national household survey). Between 1998 and 2006, the average compensation of employees on companies payrolls grew by around 69 percent in the Cajamarca region and 51 percent in the Northern Sierra, while mine workers compensation increased by 78 percent (table 7). 20

27 Table 7: Average Salaries Paid to Dependent Workers by Selected Location and the Yanacocha Mine, 1998 and Percentage Category (S/. per month) (S/. per month) change Cajamarca Northern Sierra Sierra Yanacocha Mine 3,618 6, Source: National household surveys; Yanacocha Mine data. Procurement of Goods and Services Another secondary impact channel derived from the mine s operations is the procurement of goods and services. These purchases affect the creation and development of local businesses that provide relevant products, inputs, and services to the mine. An estimate of the impact of such procurement is derived from an analysis of the volume and value of purchases and contracts, as well as their origin (local, national, or foreign). Information about the composition of purchases from suppliers and the origins of suppliers is important for understanding and quantifying the mine s impact on the rest of the economy in terms of its interaction with other productive sectors. Between 1993 and 2006, the mine purchased goods and services worth a total of US$5.1 billion in current dollars (table 8). This amount includes current and capital expenditures and procurement within the Cajamarca region, in the rest of the country, and imports. During the period under review, purchases in Cajamarca represented an average of 12 percent of total purchases, or US$628.6 million in current dollars; imports accounted for 16 percent of total purchases, and purchases from elsewhere in Peru accounted for the remaining 72 percent. 21

28 Table 8: Purchases of Goods and Services by the Yanacocha Mine, Purchases from the Cajamarca region Percentage Purchases from the rest of Peru Percentage Foreign purchases Percentage Total Year (current US$ millions) of total purchases (current US$ millions) of total puchases (current US$ millions) of total puchases (current US$ millions) Total , ,106.0 Source: Yanacocha Mine data. The share of purchases from the Cajamarca region has grown in recent years, rising from 3 percent of total purchases in 1993 to 17 percent in Note, however, that the analysis is based on the location of suppliers and not on the place of origin of the goods or services acquired. The mining company s procurement of goods and services has made a positive contribution to the development of commercial activity and service provision in the Cajamarca region. Even though completely isolating the effects of the mine is impossible, as table 9 shows, between 1993 and 2006, Cajamarca was the region with the highest growth rate in the commerce and services sectors compared with other regions with similar characteristics. 22

29 Table 9: Average Annual Growth of GDP by Economic Sector, Selected Regions, (percent) Region Commerce Services Construction Manufacturing Arequipa Ayacucho Cajamarca Cusco Huancavelica Huanuco Junin Pasco Source: INEI data. Road Construction and Maintenance One of the tasks that the mining company has had to undertake is building and maintaining the roads necessary to ensure that its production can be transported from the mine and that inputs can be transported to the mine. These roads are also useful to local residents in that they provide connections between rural and urban areas, in particular, the city of Cajamarca. These roads also facilitate transport between provinces in the region and between the region and other regions. The mining company s construction and maintenance of roads has generated positive impacts at an economic level and on rural communities perceptions. Rural communities in the mine s area of influence have benefited indirectly through improved access to markets for goods and services. These communities perceive the roads as a permanent contribution that local and regional governments will have to maintain once the mine is no longer operating. Use of Natural Resources We did not analyze problems associated with the use of natural resources in the area, but rather tried to understand the population s perceptions about such resource use. Mining uses two primary resources, water and land, and such use can give rise to 23

30 conflict between the mining company and rural communities in the mine s area of influence. Both are necessary for agriculture and livestock activities, which are the population s main sources of income, therefore rural inhabitants could perceive mining as competing with agriculture and livestock activities for such resources. The proximity of mining operations to the city of Cajamarca and the scope of mining activities, which cover large tracts of land and four river basins, make the mine s operations complicated in terms of relations with those living in areas of direct and indirect influence. This is exacerbated by the expansion of mining activity in general in Peru, which may have generated a negative perception among some people who believe that this activity may have adverse effects on their economic activities and way of life. Much of this conflict revolves around the use of natural resources. The focus groups indicated that the population s discontent was due particularly to the alleged increase in the acidity and murkiness of rivers located near mining operations and the subsequent negative effects on trout fishing and water resources. 10 The focus group participants also believe that the mine s activities have negative impacts on the ecosystem, alter river flows, and may have caused some lakes to dry up. This negative perception is present even though some reputable studies, such as that by Stratus Consulting (2004), 11 report that even though the mine has negatively altered the quality and quantity of water in some locations and at certain times, these changes have not been significant in the city of Cajamarca and have not generated contamination at levels significant enough to cause illness or death in humans, livestock, or crops. Nevertheless, the Stratus Consulting study recognizes the effects on water quality and even mentions that water quality is below minimum levels according to international standards. The study also suggests that the mine s operations increased soil erosion and sediment levels in streams, something that the Yanacocha mining company considers has been completely addressed subsequent to the Stratus report. APOYO Consultoría strongly recommends that IFC carries out studies that will provide a clear understanding of the effects of the mine s operations on water quality and 10 In the case of the Yanacocha Mine, antagonism to the mine rose considerably after a mercury spill in Choropampa District in 2000 and subsequent events. 11 This study was conducted between January and October 2003 with participation by local communities and institutions. It was carried out after a formal complaint had been lodged with respect to environmental damage said to be caused by the mine. 24

31 availability, as well as on soil erosion. Effects of the Yanacocha Mine s Presence This section analyzes the effects generated by the mine s presence in the area of influence. In particular, it refers to effects derived from the mere existence of the mine, including migration to the area of influence, effects on public services, increased expenditure by mine employees, and effects on the cost of living. Migration The employment expectations associated with the mine s presence, whether involving the possibility of obtaining a job at the mine or setting up a business that could benefit from the mine s presence, have prompted migration to the mine s area of influence. Understanding the extent and effects of this influx of people is fundamental to understand changes in the local social structure and in access to and use of public services. The population in the districts of Los Baños del Inca and Cajamarca, both of which are in the mine s area of influence, grew 27.8 and 33.5 percent, respectively, between 1993 and 2005 (table 10). These figures are well above the population growth rate in the other districts in Cajamarca Province. Population growth in the districts of Los Baños del Inca and Cajamarca accounted for approximately 70 percent of total population growth in the region of Cajamarca. An interesting feature of the growth in these two districts is that it was more pronounced in urban areas than in rural areas (table 10). 25

32 Table 10: Population Growth, Selected Locations, 1993 and 2005 Locations Urban Rural Total Percentage change Percentage change Percentage change Districts Los Baños del Inca 5,057 8, ,807 22, ,864 31, Cajamarca 87, , ,119 38, , , La Encañada 804 1, ,313 21, ,117 22, Other 8,376 8, ,183 58, ,559 66, Cajamarca Province 101, , , , , , Source: 1993 census; 2005 cecsus. Those who participated in the focus groups had a negative view of the population influx. They see the migrants as creating problems related to safety and civil order, such as increases in crime, prostitution, and drug and alcohol consumption, which affect the customs and tranquility of the area s inhabitants; however, strong quantitative evidence to support these claims is not available. APOYO Consultoría recommends that IFC develop some studies to examine this issue. Public Services One effect of the migration is increased demand for public investment. In the region of Cajamarca, this effect has limited access to and diminished the quality of public services. This is due primarily to the increase in the urban population in the mine s area of influence in conjunction with inadequate planning for urban growth and insufficient resources to provide the necessary infrastructure. Thus, between 2001 and 2006, the number of households with access to potable water provided by companies in the region of Cajamarca increased by 5.1 percent. At the same time, however, the continuity of the water supply fell from 22 to 19 hours a day. These figures suggest that the supply of potable water in the Cajamarca region has not kept pace with demand as the population grew as a result of natural population growth and inward migration by people attracted by economic opportunities, made available by the mine and other activities. 26

33 In relation to households with electric lights, coverage in the region of Cajamarca grew by more than 87 percent between 1993 and 2006; however, this change is significantly lower than in other comparable regions, such as Huancavelica, where coverage grew by almost 185 percent. With respect to the density of telephone lines, the almost 95 percent growth in the region of Cajamarca between 1998 and 2006 was significantly higher than in other comparable regions. Information on mobile telephone penetration indicates outstanding growth in all reviewed districts of the Cajamarca region, but the growth in this region as a whole between 2003 and 2007 was nevertheless significantly below that in other regions such as Ayacucho and Huancavelica. Expenditure by Mine Workers The proximity of the mine s operations to the city of Cajamarca allows for closer contact between mine workers and the rest of the population than would normally be the case with mining activities in Peru. This means that workers can live close to the city rather than in mining camps, thereby boosting the local economy through the creation of new businesses that offer goods and services to meet the needs of mine workers and their families. In 2006, the Yanacocha mining company employed 7,902 contractors and 2,946 individuals directly. According to APOYO Consultoría s 2007 expenditure survey, contractors and workers on the payroll together spend a total of US$9.1 million per month (US$109 million per year), of which approximately 61 percent is attributable to contractors. According to this same survey, individual contractors spend an average of US$704 a month in the area, equivalent to 86 percent of their total expenditure (and 14 percent outside the region), while mine workers on the payroll spend approximately US$1,200 a month, 83 percent of it in the region and 17 percent elsewhere. According to estimates by APOYO Consultoría based on the 2006 national household survey, average household expenditure in the Cajamarca region is approximately US$150 per month, which contrasts with the US$704 spent by the average mine contractor and the US$1,200 spent by the average mine employee on the payroll. 27

34 These figures imply that the households of those employed by the mine have a better standard of living than other households in the region. We therefore estimate that overall, the mine s presence generates total additional annual expenditures of US$89 million in the Cajamarca region. Cost of Living Migration to the mine s direct area of influence, as well as expenditures by mine employees and other economic activity factors, have spurred changes in the population s cost of living that have resulted in price increases in the city of Cajamarca. INEI data show that between 1995 and 2006, the consumer price index grew more in the city of Cajamarca than in other cities of the Sierra. Food, which accounts for 50 percent of the basic consumption basket in the city of Cajamarca, increased 0.6 percentage points more per year than in other cities in the Sierra (3.3 percent versus 2.7 percent). The items whose prices increased the most included fruit, vegetables, and seafood. Housing and home maintenance, which accounts for 13 percent of the basic consumption basket in Cajamarca, increased 2.4 percentage points more per year than in other cities of the Sierra. Finally, in the area of transport and communications, which accounts for 9 percent of the region s basic consumption basket, local transport became more expensive than in other cities of the Sierra, increasing by 7.1 percent per year compared with 3.6 percent per year, while the cost of interprovincial transport increased by 1.8 percentage points less than in other cities of the Sierra. Middle-income and lower-income focus group participants confirmed the INEI s finding that the cost of living for residents of the city of Cajamarca had increased significantly. Mining Company Social Responsibility Programs This section describes the mining company s social responsibility programs and focus groups perceptions about these programs. The mining company s social responsibility programs are of two types. The first is programs to develop rural infrastructure. These programs include building and maintaining rural roads and undertaking rural electrification projects that are developed through formal agreements between the 28

35 mining company and rural communities. The second type is programs to develop production activities to improve and maximize farming and livestock activities in the Cajamarca region, with particular emphasis on communities located in the mine s area of influence. These activities are conducted through the Credit Fund for Agricultural and Forestry Development (Fondo de Crédito para el Desarrollo Agroforestal) 12 and the Andes of Cajamarca Association (Asociación Los Andes de Cajamarca), an organization whose purpose is to generate business capacities and institutions that will contribute to the well-being of the population in the mine s area of influence by cofinancing projects. Even though the mining company s social responsibility programs have produced some solid achievements, an increase in the budget for these programs has not necessarily resulted in favorable perceptions of the mine at the community level. The focus groups indicated that this may be due to the social tensions resulting from the mine s presence; the lack of a social responsibility strategy agreed on ahead of time with local and regional governments, businesses, and civil society; and the existence of many different agreements between the mining company and communities that did not allow it to focus on fewer high-impact projects. Projects to Develop Rural Infrastructure During , the mining company invested approximately US$52 million, or 86 percent of the total amount invested in development projects in the Cajamarca region, in building rural roads and schools. Investment in such projects by the Yanacocha Mine has risen significantly in recent years, rising from US$6,121 per community in 1993 to approximately US$178,834 in This went hand-in-hand with an increase in the number of beneficiary communities, which increased from 33 to 133. Between 1993 and 2005, the mining company funded the construction of 63 percent, or 635 kilometers, of the 1,008 kilometers of neighborhood routes and rural roads that were developed through agreements between the company and rural communities in the districts of Cajamarca and La Encañada. This contributed to the increase of the total asphalted road network in the Cajamarca region from 3,386 kilometers in 1993 to 12 A nonprofit association that was established in 2000 and undertakes development programs related to dairy cattle in the provinces of Cajamarca, Hualgayoc, San Miguel, and San Pablo. It provides training in grass production, fodder, animal health, milking, and artificial insemination. 29

36 4,394 kilometers in Rural and urban populations appear to perceive the mining company s investment in rural roads as its most important contribution in terms of its development activities. Focus group participants indicated that the rural roads have facilitated economic exchanges between communities, which have resulted in more trade at town markets, complementing the markets held in the city of Cajamarca. The importance of rural roads can be measured by lower transaction costs (i.e. the cost of reaching markets and establishing transactions in them). For instance, transaction costs are 12 pp. lower among potato producers in Huancavelica the poorest region in Peru when they have access to rural roads. 13. The participants also mentioned the reduction in their travel time, which has enhanced their access to health and education services. Rural electrification in the Cajamarca region rose from 3 percent of rural households in 1993 (1993 census) to 39 percent in 2007 (according to the Ministry of Mines and Energy). A significant portion of this is due to the mining company s efforts. Focus group participants mentioned that the electrification of their communities had increased their productivity and their economic activities, as they were now able to use machinery and reduce the number of person-hours needed to complete tasks. With regard to sanitation, the mining company contributed significantly to improved access to water and sewage services by building latrines and providing residential connections to potable water systems. Between 1995 and 2006, in the district of Cajamarca, the mining company funded connections to potable water systems for 6,394 households and latrines or other waste disposal systems for 1,527 households. In the district of La Encañada, the mining company funded connections to potable water systems for 1,866 households and latrines or other waste disposal systems for 678 households. The focus groups opinions with regard to the provision of water and sewage connections were mixed. Some participants perceived positive changes in their communities health as a result of these projects, but other participants indicated that the provision of potable water would have been unnecessary if they did not face the risk of their water sources being contaminated by the mine s activities. Finally, the mining company s health and education programs have consisted of 13 Escobal (2005) 30

37 providing specific support, such as school supplies, school bus services, transport for teachers, medical services, and investment in infrastructure and equipment, by means of such activities as building classrooms, electrifying schools and health centers, equipping medical posts, and installing stoves for cooking and cafeterias in schools. Focus group participants indicated that these projects have not resulted in significant changes in their communities health and education because they were not accompanied by efforts to effectively implement health or education services. For example, the participants mentioned cases where medical posts existed, but no doctors or nurses were available, so people still had to travel to the closest urban centers to receive care. Production Development Projects No records of the mining company s production development projects were available and the projects elicited neither positive nor negative comments from the focus groups. This may suggest that these projects went unnoticed by the focus group participants, possibly because they attached little value to them as these projects did not benefit all households in the mine s area of influence. In terms of evaluating the effectiveness of the production development strategy, the focus group participants referred to the negative effects of a perceived lack of water as the result of the mine, accentuated by the tendency of agricultural properties to become smaller. Thus an assessment of these latter issues might be beneficial even though they are not under the control of the mining company. Generation of Fiscal Revenues The generation of fiscal revenues impact channel refers specifically to the resources generated for the region through the mining canon paid by the mining company. As previously explained, the mining canon is derived from the mining companies corporate tax and is allotted directly to districts and provinces where mines are located, as well as the whole region. The analysis of this channel focuses on the canon s importance to public investment. It does not evaluate the effectiveness of the public 31

38 investment given the lack of appropriate data. The mining canon assumed importance for subnational (district, provincial, and regional) governments in 2004, when the legal framework regulating the canon was modified. This modification stipulated that 50 percent of corporate tax was to be transferred to the region that generated the resource for subsequent investment in construction and infrastructure maintenance. The mining canon is distributed as follows: 10 percent is equally divided among the local governments of the district in which the mining operation is located; 25 percent is divided among the local governments in the province or provinces in which the mine is located, including the districts in which the mine operates. This percentage is distributed taking into account each province s population, incidence of poverty, and availability of infrastructure; 40 percent is distributed among the local governments in the region in which the mine is located, including provinces and districts in which the mine operates. This percentage is also distributed taking into account each province s population, incidence of poverty, and availability of infrastructure; 20 percent is distributed to the government of the region in which the mine operates; 5 percent is distributed to public universities in the region in which the mine operates. The mining canon has increased significantly since its legal framework was modified in 2004 and has also benefited from higher international prices for minerals. Between 2004 and 2007, the total transfer of resources to district, provincial, and regional governments from the canon amounted to US$2.57 billion. Figure 9 shows the evolution of the mining canon from 2004 through 2007 in Peruvian currency. 32

39 Figure 9: Evolution of the Mining Canon, (S/. billions) District canon Province canon Source: Ministry of Finance data. In 2006, the canon represented more than 39 percent of total transfers from the central government to regional governments and more than 23 percent of transfers to all local governments, including provinces and districts. Given the magnitude of these funds, and assuming that they are properly invested, the mining canon has the potential to significantly benefit the region of Cajamarca. Thus the Yanacocha mining company contributes to public investment indirectly by means of the mining canon. In 2007, the canon increased 65 percent compared with 2006 and public investment in the Cajamarca region increased by 82 percent over the previous year (figure 10). 33

40 Figure 10: Growth of the MIning Canon and of Public Investment, Region of Cajamarca, Percentage change Mining canon Public investment Source: Ministry of Finance data. Even though local government budgets have increased substantially and projects are under way, the population has yet to give its approval. Focus group participants indicated that these projects are often executed without prior analysis of their pertinence. A 2006 survey by APOYO Opinión y Mercado revealed that in 2006 in the city of Cajamarca, 60 percent of those surveyed believed that the mining canon was being used ineffectively. Nevertheless, it has the potential to be the main driver of development at the regional and local level. It could also be the main impact channel resulting from activities related to the mine given the magnitude of the funds transferred. Socioeconomic Impacts The interrelations between the main channels through which the Yanacocha Mine generates impacts at the macroeconomic, regional, and districts levels and the secondary channels have direct effects on the population s well-being and quality of life, indicated through what we have termed socioeconomic impact indicators. To analyze these impacts, we used monetary and nonmonetary indicators to obtain a picture of the multiple dimensions of the population s socioeconomic development. The nonmonetary indicators refer to indicators of access to basic services, housing quality, overcrowding, and education. For the monetary indicators we work with indexes of 34

41 poverty and extreme poverty. 14 The socioeconomic impacts are not necessarily attributable exclusively to the Yanacocha Mine s activities given the existence of other factors such as the development of sectors other than mining. To identify effects that were specifically attributable to the Yanacocha Mine we compared a group of districts in the mine s direct area of influence with another group of Sierra districts with similar characteristics outside the mine s area of influence. We made this comparison using the double difference methodology previously explained. Access to Basic Services We constructed the index that measures access to basic services using three ordinal variables: (a) access to a domestic water supply (for example, access to a public network inside the home, access to a public network outside the home, access to a well); (b) access to domestic sewer services (for instance, access to a public network inside the home, access to a public network outside the home, use of an irrigation ditch or canal); and (c) access to electricity within the home. We ranked each component of this index according to the percentage of houses that have access to each service. The results demonstrate that during , both the beneficiary group and the control group had achieved significant improvements in access to basic services, but that the improvement was greater for the beneficiary group (table 11). 14 Because of information limitations, we applied the monetary indicators at the regional level. This could bias the results, because the impacts will tend to be concentrated in the mine s area of influence. 35

42 Table 11: Indexes of Nonmonetary Impacts, 1993 and 2005 (percentage of the population) Indexes Group Change Access to basic Beneficiary services Control Beneficiary Overcrowding Control Beneficiary Quality of housing Control Beneficiary Illiteracy Control Primary school Beneficiary completion Control University Beneficiary graduates Control Source: 1993 census; 2005 census. Difference between the beneficiary and control groups Overcrowding Index According to the INEI, a household is overcrowded when, on average, more than 3.4 individuals share a room. This index takes a value of 0 in the case of no overcrowding and 1 in the case of overcrowding. As table 11 shows, housing conditions have improved significantly for both the beneficiary and control groups, but the improvement was more pronounced in the mine s direct area of influence. This is probably due to urban growth in districts such as Los Baños del Inca, where most of the mine s employees live. Quality of Housing To analyze the changes in housing quality, we developed a compound index to capture information about the quality of the materials used for floor, wall, and roof construction. 36

43 We ranked the quality of the materials from best to worst in which the best materials had a value of 1 and the worst materials had a value of 0. We repeated this procedure for each component of the index (roof, floor, wall). Finally, we weighted and standardized each component using statistical weightings obtained through multivariate analysis. As such, the index takes a value of 1 when housing is of better quality and a value of 0 when housing uses the worst possible materials for all three elements. Finally, the index takes intermediate values depending on the combination of materials used in each household for each element of the index. The housing quality index indicates that both the beneficiary group and the control group experienced a significant improvement in housing quality, but that the improvement was greater for the control group (table 11). This is probably due to the effect of migration on some districts such as Cajamarca. Education If we analyze the percentage of the population that is literate in both groups, we find that the literacy rate has improved (the illiteracy rate decreased) slightly more for the beneficiary group than the control group (table 11). Overall, the literacy rate improved significantly for both groups. Similarly, primary school completion rates improved for both groups, with the improvement being slightly better for the beneficiary group (table 11). Similar results are apparent with respect to the number of university graduates (table 11). Per Capita Income One indication of the population s quality of life, albeit an imperfect one, is per capita income. Although this indicator demonstrated a nominal increase of 34.6 percent in the Cajamarca region between 1998 and 2006 (table 12), this was lower than that 37

44 registered in the Northern Sierra (44.2 percent) and slightly higher than that of all Sierra regions (32.6 percent). Table 12: Per Capita Income by Location, 1998 and 2006 (S/. per month) Location % confidence interval % confidence interval Percentage change, Urban Cajamarca Northern Sierra Sierra Peru Rural Cajamarca Northern Sierra Sierra Peru Total Cajamarca Northern Sierra Sierra Peru Source: national household surveys 1998, When we analyze changes in per capita incomes deflating with the consumer price index (real per capita income), the results show a positive change of 12.9 percent in the Cajamarca region compared with 11.7 percent in the Sierra and -2.6 percent in Peru as a whole. Nevertheless, when evaluated within their respective confidence intervals, these figures provide insufficient evidence that real per capita incomes have increased. Finally, in absolute terms, poverty in the Cajamarca region declined from 77 percent in 2001 to around 64 percent in 2006, a reduction of 13.6 percent, according to national household surveys. Nevertheless, this reduction in poverty is less than in the region of Cusco (23.1 percent), but is higher than in the Sierra (7.6 percent). Extreme poverty in the Cajamarca region declined from 56 to 29 percent between 2001 and 2006, a reduction of 27 percent. This reduction is higher than that in the Sierra (9.6 percent), but lower than that in the region of Cusco (27.2 percent). 38

45 39

46 CONCLUSIONS This consultancy s terms of reference indicated that APOYO Consultoría should include three of IFC s central focuses in its conclusions: the overall impact, the mine s distributive effects, and the mine s impact on poverty reduction in the area (table 13). Table 13: Conclusions of the Study of the Yanacocha Mine's Economic Impacts Category Economic Impact Reference period Strong evidence Impacts at the macroeconomic level Mine's contribution to gross 0.8% direct effect on average GDP domestic product (GDP) 2.6% total average effect on GDP Mine's contribution to the national budget 28% of total income taxes generated by the mining sector Mine's contribution to national exports 7% on average Mine s contribution to job creation 0.7% of the working-age population, considering direct, indirect, and induced effects on national jobs Evidence Weak evidence: perceptions of focus group Impacts at the regional and local level Mine's Employment 8.2% of the working-age population in the operations area of influence % of the working-age population in Cajamarca region Low job creation in comparison with impact on the region s GDP Wages 10 times higher than in any other location industry generating demand-driven dynamics in the region Income inequality generated by salaries in the mine Presence of the mine Procurement of goods and services Road construction and maintenance Use of natural resources Migration Expenditures by employees Large contribution to growth in commercial and services sectors, which grew more than in other regions Access to markets and reduced transaction costs Perception of negative economic and social impacts Reduction in public water provision from 22 hours to 19 hours a day on average Increase in access to telecommunications (land lines and mobile telephones) High standards of living of employees due to high salaries paid by the mine Increase in average cost of living, up to 4% higher than in other regions Increase in food price index, 8% more than in other regions, which disproportionately affects the poor, who spend more of their income on food Good perception of economic linkages generated by employee expenditures

47 Social Responsibility Mining canon Category Socioeconomic impacts Rural infrastructure projects Production development projects Local government's use of the mining canon Reference period Strong evidence Weak evidence: perceptions of focus group Economic Impact Evidence Negative perception of income inequality generated by high salaries in the mine Increase in the number of local communities benefiting from social responsibility actions from 33 to Social responsibility infrastructure budget rose more than 30-fold km of local road infrastructure % increase in number of electrified households ,200 households benefited from potable water services ,200 households benefited from sewage services Some participants in focus groups consider the support from the mine insufficient considering the damage caused to the environment Peasants place little value on these projects, as they consider other negative effects on water availability and soil degradation as relevant issues that have not been tackled Represented more than 59% of transfers to provincial governments and more than 80% of transfers to local governments Potentially the strongest channel of impact transmission ? Nonmonetary indicators 1.9% growth in access to public services Monetary indicators Source: APOYO Consultoría. 7.0% decrease in overcrowding index % below control group in adequate home index % growth in literacy rate over control group % growth in primary school attainment over control group % growth in rate of university graduates over control group Urban per capita income increase similar to Sierra and lower than Northern Sierra Rural per capita income increase higher than Sierra and North Sierra, but not statistically significant /? Total per-capita income increase similar to Sierra and than Northern Sierra Rear per-capita income increase higher than Sierra, but not statistically significant /? Poverty reduction lower than in other regions Extreme poverty reduction higher than in other regions, but not statistically significant /? Note: We categorize the impacts based on the availability of information gathered. Strong evidence is where the impacts are supported by strong quantitative date. Evidence is where we find some quantitative data that support our findings; more accurate data is unavailable. Weak evidence is from the focus groups, which are not necessarily representative of the population. The symbol + refers to the positive impact of a fact, whereas - refers to the negative impact.? Means that the sign of the impact (positive or negative) is not clear. 41

48 Overall Impacts The impacts of the Yanacocha Mine at the macroeconomic level are generally positive, both in terms of the mine s contribution to national GDP and its contribution to employment and to fiscal revenues. In relation to the regional and local level, each of the four impact channels has positive impacts as well as ambiguous, or even negative, impacts whose relative weights reflect APOYO Consultoría s opinion based on the available information. The channels order of importance according to the net benefits generated for the population is as follows: 1. the mine s operations, 2. the mining company s social responsibility programs, 3. the mine s presence, 4. the generation of fiscal revenues. The importance of the mine s operations is due to the business generated by the mine s purchase of goods and services. This economic dynamic is expressed in the significant growth of the services and trade sectors, which in turn has stimulated regional growth. In terms of employment, while the figures indicate that the mine has made a significant contribution to job creation, the number of jobs created appears to be relatively low in comparison with the mine s contribution to regional GDP, which is attributable primarily to the capital-intensive, rather than labor-intensive, nature of mining activity. While mine workers earn more than nonmine workers and their expenditure in the local area is significant, some resentment is apparent among those who have not benefited directly from the mine s operations. Focus group interviews indicated that perceptions of the mining company s construction and maintenance of roads are positive, but that attitudes toward the mine in relation to its alleged effects on water quality and land erosion are negative. The second most important channel is the mining company s social responsibility programs. Its investment in development projects increased significantly between 1993 and 2006, as did the number of beneficiary communities. While the population has positive perceptions of the rural road construction and electrification projects because they have enhanced their quality of life and productivity, they believe that the mining company s efforts in relation to health and education have not necessarily been followed by an effort to implement the corresponding services effectively. 42

49 The third most important channel is the mine s presence. It has attracted migrants as demonstrated by the high rate of population growth in the areas of the mine s influence, especially urban areas. This had led to some negative perceptions with regard to safety and cultural influences by long-time residents. It has also led to a number of problems regarding access to and deterioration of some basic services. Nevertheless, the benefits of this channel are significant and are related primarily to expenditures by mine workers, who have a much higher standard of living than nonmine workers. Expenditures by mine workers, together with the mine s procurement of goods and services, have driven growth in the trade and services sectors, but at the same time, these expenditures have tended to increase the prices of goods and services in the city of Cajamarca. While the prices of many items rose more than in other cities in the Sierra, such as those of food, housing rentals, and hospitalization, some prices rose less, for example, for education and energy. The final channel of regional and local impacts is the generation of fiscal revenues. The increase in mining production and the high international prices for gold have generated a significant resource flow for subnational governments in the region. In particular, the mining canon, especially following the changes to its legal framework in 2004, has provided significant resources for public investment. However, despite the resource flow to the region, this channel s effectiveness depends significantly on subnational governments ability to transform resources into socially and economically profitable projects, which is low, and therefore the region has not benefited as much as it might have from this flow of funds. To this end, the governments of the region, provinces, and districts of Cajamarca have been attempting to improve their capacity to plan and manage investments, as well as to enhance the transparency of fund management. The Mine s Distributive Effects The mine s employees, particularly those on the payroll, have benefited from the mine s operations. Profit-sharing payouts between 1993 and 2006 amounted to US$287 million, which is more than total payments for compensation during the same period (US$285 million). In 2006 alone, the mine s employees received an average monthly salary equivalent to US$3,740, which is 24 times higher than the national average, meaning that they had one of the highest standards of living in the country. Contract 43

50 workers have also experienced significant wage increases compared with the positions they held prior to working for the mine. Note that most mine workers are male, therefore men are likely to have benefited more from the mine s presence than women. Other entities that have benefited directly from the mine s operations have been national goods and services suppliers, which made sales of more than US$654 million to the mine in Local businesses also benefited from expenditures by the mine s employees as evidenced by the relatively higher growth of the local trade and services sector. Between 1993 and 2006, the mine accounted for approximately 26 percent of regional GDP. Yet despite the scale of the mine s operations, it has had no significant effects either on employment or on real per capita incomes for the bulk of the population in the region. At the same time, the increase in the price index in the city of Cajamarca during might have enlarged the gap between rich and poor, especially because of the increase in food prices and because poorer households spend a larger proportion of their total incomes on food. An important mechanism for resource redistribution comes from the mining canon, which, if used efficiently, could constitute a significant source of development for rural areas. This mechanism has become an important source of resources for both local and provincial governments, and in 2006 represented 39 and 23 percent, respectively, of transfers from the central government. The mine s direct beneficiaries include the inhabitants of the 133 communities that received benefits from the mining company s social responsibility programs. This group has benefited from rural infrastructure projects such as road construction, increased household electrification, and increased coverage by sewage and potable water systems. Communities not in the area of influence have benefited from the roads that the mining company has built for its own operations, which constitute a public good that all citizens are free to use. The city s residents, in particular those who do not benefit directly from the mine, have been adversely affected by the increase in the cost of living. The change in relative prices in Cajamarca can be attributed to the increased demand created by a small group of workers with significant buying power. The increase in the cost of living has, on average, been slightly higher than the increase in income. The increase in migration to the area and the resulting population growth and urbanization has led to some claims of increased civic disorder. Another group that claims to be adversely affected by the Yanacocha Mine includes individuals who 44

51 compete with the mine for the use of natural resources, especially water, including farmers, cattle breeders, and rural residents. The Mine s Effect on Poverty in the Region In absolute terms, poverty in the Cajamarca region declined by 3.4 percent, which is higher than in some, but not all, comparable regions. Likewise, extreme poverty in the Cajamarca region declined by 19.5 percent, which again was higher than in some, but not all, comparable regions. Nevertheless, in the districts located in the mine s direct area of influence, significant changes are evident that are higher than those in comparable districts for indicators related to access to basic services, overcrowding, illiteracy, and education. Figures for the quality of housing are positive, but are lower than those for comparable districts. An overall review of the mine s impact on poverty reduction does not necessarily indicate a sizable correlation between the mine s size and its impacts at the regional and local levels. Nevertheless, when nonmonetary indicators of poverty are analyzed, positive changes are higher than those apparent for comparable groups. 45

52 APPENDIX: BACKGROUND ON METHODOLOGIES USED The Value Added Multiplier The Yanacocha Mine s direct aggregate value added between 1993 and 2006 has been estimated at US$6.3 billion. This amount represents the mine s direct impact on the country s total aggregated value added during this period. The mine s production also generated other impacts on total aggregated value that should be taken into consideration. First, the mine s operations required the use of inputs produced by other industries. The increased production by the mine s suppliers increased the value added in those industries. Likewise, the suppliers of those suppliers produced more and generated more value added. These backward linkages represent the mine s indirect impacts on the whole economy (figure A1). Figure A1: The Mining Sector s Linkages with the Economy Public expenditures Public expenditures Rest of the economy Mining sector's production value Industry 1 Industry 2 Industry 3 Backward linkages Use of inputs requiered required to to operate the mine Value added Forward Forward linkages linkages Taxes Taxes Mine s profits Mine Wages Wages Consumption Consumption Source: APOYO Consultoría. 46

53 Second, the value added in the mining sector generated more employee compensation and taxes. The consequent rise in household and government consumption generated more demand and production in other industries, which also increased their value added. These forward linkages represent the mine s induced impacts on the rest of the economy (figure A1). Obviously the mine s indirect and induced impacts depend on the links among and the intensity of the economic relationships in the productive chain associated with the mine. In other words, the mine s impacts depend on the economy s structure. To estimate the mine s impact on total aggregate value, we assumed that the economy s structure is the same as in 1994 and as represented in the input-output table published by National Institute of Statistics. This table quantifies how much the mining sector needs from other sectors to produce a specific quantity of minerals. According to the National Institute of Statistics estimates, an increase equivalent to S/. 1 in mining production (valued at 1994 prices) generates a total aggregate value (direct, indirect, and induced) of S/ (at 1994 prices) in the rest of the economy. Between 1993 and 2006, the gross value of the Yanacocha Mine s production was approximately US$9.1 billion. However, we needed to estimate the gross value of production in nuevos soles (at 1994 prices) to apply the multiplier and estimate the total aggregate value generated in the economy. Using a price index for the mine s production, we estimated that the gross value of its production was approximately S/ billion (at 1994 prices) during Therefore the total aggregate value generated by the Yanacocha Mine during the period was S/ billion (at 1994 prices) (20.31 x 2.22 = 45.14). Finally, to estimate the value of this total aggregate impact in current dollars, we used both the price index of the Yanacocha Mine s production and the price index of the total gross domestic product of Peru. We applied the first to convert the direct impact from nuevos soles (at 1994 prices) into current dollars. We applied the second to the indirect and induced impacts. As a result, we estimate that the total aggregate value generated by the Yanacocha Mine during was US$21.3 billion. As the gross value of the mine s production was approximately US$9.1 billion, the implicit multiplier in current dollars was 2.33 (9.12 x 2.33 = 21.27). 47

54 Employment Multipliers The employment multiplier is similar to the value added multiplier but focuses on the number of jobs generated in the entire economy, as a result of a specific economic activity. In our case it measures how many new jobs are generated in the economy for each worker directly employed in the mining sector, which can be used to estimate the overall impact of the Yanacocha Mine in terms of jobs created. This multiplier takes into account the linkages among several industries in the economy. For example, if the mining sector s production increases: This industry will require more workers. Compared with other industries, this direct impact on employment is low because mining is not labor intensive. Also, there will be an increase in the demand of inputs provided by other industries, thus firms that produce those inputs will also require more workers and inputs, and so on. This effect is called the indirect impact on employment. Finally, the new workers - resulting from both the direct and indirect impacts - will consume more goods and services, and therefore the producers of these goods and services will also require more workers and inputs. This is the induced effect of mining production on employment. According to the National Institute of Statistics (NIS) estimates, for each new worker directly employed in the mining sector, approximately 9.58 new jobs are created in the whole economy (including the new mine worker). Therefore to estimate the number of jobs that the Yanacocha Mine has generated in the economy we multiplied the total number of mine workers by In mining, the employment multiplier (total employment generated / direct employment generated) is higher than in other industries, which means that in this sector, the indirect and induced effects on employment are significantly higher than the direct impact. This can be explained by the following two reasons: First, as it has been mentioned before, the mining sector is less intensive in labor than other industries. Hence for a given number of workers in the mining sector there is more value added/spending than in many other sectors and 48

55 therefore incremental spending and thus indirect job creation per job in the mining sector may be higher than in other industries. Second, the wages in the mining sector are higher than the average wages in the whole economy. This implies that the induced effect on employment can be strong. For example, if a mine worker s salary more than doubles the average salary in other industries, his consumption could create more than one job in those other industries. It should be clear that the employment multiplier used in this study cannot be compared directly with the value added multiplier, given that they are expressed in different units (number of jobs and monetary units, respectively). The following formula shows how these two multipliers are related: EM industry = VAM industry W * W industry total LP * LP total industry *α Where: EM VAM W W LP LP α : industry total industry total : : industry : : : industry : Employment multiplier of the analyzed industry. Value added multiplier in the analyzed industry. Average wages paid in the industry. Average wages paid in the entire economy. Labor participation on the value added in the economy. Labor participation on the value added in the industry. Constant greater than one, equivalent to the inverse of the participation of value added on the gross value of production in the industry. From the formula above, the cases in which the employment multiplier is higher than the value added multiplier may be deduced: basically, this occurs when the analyzed industry analyzed pays higher average wages (when W industry /W total is greater than one) and is less labor intensive than the rest of the economy (when LP total /LP industry is greater 49

56 than one), on average. These two conditions are satisfied in the case of mining activity. While it is believed that the NIS estimate of the multiplier is a reasonable one (allowing for the relatively dated underlying input-output analysis), other studies have used different numbers. For example, the International Council on Mining and Metals (ICMM) study, Peru The Challenge of Mineral Wealth: Using resource endowments to foster sustainable development June 2008, used a multiplier between 6.5 and 8.5 for its estimate of the total impact on employment of the Antamina mine. The Double Difference Methodology Figure A2 illustrates the general characteristics of this methodology on the assumption that the project aims to produce a specific impact on variable Y. Figure A2: General Characteristics of the Double Difference Methodology Y, impact variable Y 2b (Y 2b Y 1b ) Change of impact variable on beneficiary Y 1b Y 1c Y 2c (Y 2c Y ) 1c Change not attributed to intervention Beginning of project End of project Source: APOYO Consultoría. In figure A2, b represents the beneficiary group and c represents the control group. At the beginning of the project (period 1), both groups have an average value of Y 1 (Y 1b for the beneficiary group and Y 1c for the control group). Note that the beneficiary group and the control group do not need to have the same average values for impact 50

57 variables at the beginning of the project, although both groups should ideally have similar characteristics in terms of the attributes that influence anticipated impacts, such as access to public services and income. At the end of the project (period 2), the impact variables are measured again for both groups to obtain Y 2b and Y 2c. The impact on Y attributable to the project is estimated according to the following formula: IMPACT = ( YNET ) = ( Y2 b Y1 b) ( Y2 c Y1 c). The estimation of the net impact ( Y NET ) involves looking at the changes in the beneficiary group and the control group and ascribing the difference between these to the mine. As the control group, by definition, is not affected by the project, changes in the control group cannot be attributable to the project. This nonattributable impact (Y 2c Y 1c ) is subtracted from the impact observed among the beneficiary group (Y 2b Y 1b ). This requires measurement of the impact variables at the beginning and end of the project (or at another time) for both the beneficiary group and the control group. 51

58 REFERENCES Blundell, R., and M. Costa Dias Alternative Approaches to Evaluation in Empirical Microeconomics. Working Paper CWP10/02, University College London and Institute for Fiscal Studies, London Borland, J., Y. Tseng, and R. Williams Experimental and Quasi-Experimental Methods of Microeconomic Program and Policy Evaluation. Melbourne, Australia: University of Melbourne, Department of Economics. Caliendo, M., and S. Kopeinig Some Practical Guidance for the Implementation of Propensity Score Matching. Discussion Paper 1588, Institute for the Study of Labor, Bonn. Cuánto Anuario estadistico: Perú en números Lima: Cuánto. Cuánto Anuario estadistico: Perú en números Lima: Cuánto. Escobal, The Role of Public Infraestructure in Market Development in Rural Peru.Wageningen University. ICMM (International Council on Mining and Metals) Peru The Challenge of Mineral Wealth: Using resource endowments to foster sustainable development. INEI (Instituto Nacional de Estadística e Informática) Multiplicadores de la economía Peruana. Lima: Dirección Nacional de Cuentas Nacionales. Rosenbaum, P., and D. Rubin The Central Role of the Propensity Score in Observational Studies for Causal Effects. Biometrika 70: Stratus Consulting Resumen de Reporte de Evaluación Independiente de la Calidad del Agua en la Cercanía del Distrito Minero Yanacocha, Cajamarca, Perú. Report prepared for the International Finance Corporation and the Multilateral Investment Guarantee Agency. Washington, DC. 52