Learning the Ropes in Peru: Chinese Companies Engage Local Communities

Chinese companies are learning how to navigate the tricky waters of community politics in perhaps the most unlikely of places: Peru. Here, Chinese businesses have found it next to impossible to buy their way into the local hearts and minds. Instead, companies must engage communities, offer tangible improvements in living conditions and be seen to respect the environment with more than just token gestures.

“The loopholes available to Chinese companies doing business in Africa are quite simply not present in South America where local communities often will have their interests looked after by an at times bewildering array of non-governmental organizations. These NGOs are no pushovers and cannot be bought off easily with a school or a road,” says Hongxiang Huang of the Dialogue for Chinese Investment in Africa and South America.

According to Mr Huang, most Chinese companies are used to conducting their business exclusively with national governments or even in face-to-face meetings with presidents. “Chinese businessmen have a penchant for reaching straightforward deals with those that hold power. This is how it works in Africa. However, power in South America is much more diffuse and the government’s say is by no means the last word. This has caused no small degree of confusion.”

Chinese mining companies are raising their stakes in Peru and have already committed to invest up to $7bn over the coming four years in a number of extractive projects. Even though Peru can stand to use the proceeds of its vast mineral wealth, mining projects are often plagued by serious delays due to vociferous local opposition.

“Chinese businessmen have a penchant for reaching straightforward deals with those that hold power. This is how it works in Africa. However, power in South America is much more diffuse and the government’s say is by no means the last word. This has caused no small degree of confusion.”

In 2009, a campaign of civil disobedience directed against oil exploration in the Peruvian Amazon Region got ugly and resulted in the death of 32 protesters and soldiers dispatched to restore order. Since then, the Lima government has pledged adherence to the International Labour Organization’s Convention 169 – a binding statute that gives indigenous people a say on extractive projects that may affect their way of life.

Last May, President Ollanta Humala also convinced parliament to pass a Prior Consultation Law that calls for a non-binding vote of approval to be sought in any community where a new mining project is underway. “Chinese companies now have to learn talk to possibly restive locals”, says Alana Tummino, a researcher of the Americas Society. “Operating within the confines of national law is no longer sufficient to ensure the execution of any given mining project; you have to convince local communities as well.”

Chinese companies have already felt the consequences of ignoring local opinions. In the Morococha District, Chinalco (China Aluminium Corporation) has faced bitter protests against its plans to move an entire village of some 5,000 inhabitants to make way for an open-pit mine estimated to hold about 5.7m tonnes of copper.

In all fairness to the Chinese, the idea for moving the village actually came from the previous concession holder PeruCopper. Even though Chinalco has pledged $50m for the move, protests continued. However, after hiring the social consultancy firm Social Capital Group to do the local negotiating, tempers cooled and the local community was won over.

Chinalco’s ultimately successful approach holds many lessons for other companies coveting Peru’s riches. As one of the first Chinese mining companies in Peru, Shougang did not possess the required finesse to manage local sentiment and, as a result, has suffered much hostility directed against its iron ore mine. The company was accused of ruthlessly exploiting its workers and dumping chemical waste into the sea.

“It is quite hard to find something, anything really, that Shougang did right in Peru. The company has received an avalanche of bad press which could have been easily avoided had its directors understood the need for public relations. Instead, they opted to stick to their guns and ride roughshod over local sentiment. This is not a wise, nor a lucrative, thing to do in South America,” says Kevin Gallagher, author of The Dragon in the Room: China and the Future of Latin American Industrialisation.

The need for dealing with communities on a local level – oftentimes absent in African countries – is essential if China is to reap benefits of its proposed mega-investments. Chinalco has paved the way and hopes to extract the first copper ore from its Morococha operation later this year.

This will be nothing less than a milestone for the Chinese in Peru: The Morococha mine is only the second one to enter operation after Shougang’s Marcona iron ore mine in Peru’s Ica Region opened in 1992.

Lima-based business consultant Mariana Costa thinks that Chinese companies are fast learning valuable lessons on community engagement in Peru: “This may in time also alter the way Chinese companies go about projects in other countries. They are the ones with the cash and it would indeed be a positive development should Chinese business become more attuned to the needs of the communities that host their operations.”