Nov. 9 (Bloomberg) -- As an army captain in the early 1990s, Ollanta Humala fought the Shining Path guerrillas in the Peruvian jungle to end one of Latin America’s bloodiest civil conflicts.
Now president of the region’s fastest-growing economy, Humala is looking to finish the job, re-equipping the nation’s armed forces and police to capture holdout members of the Maoist-inspired insurgency and deal a blow to the cocaine trade that funds their activities.
The government will boost defense and counter-narcotic spending next year as it taps record tax revenue from copper and gold exports to halt a boom in the coca crop that the United Nations says now rivals Colombia’s as the world’s largest. In Humala’s sights is the valley of the Apurimac, Ene and Mantaro Rivers, or VRAEM, the last bastion of the Shining Path. The group has stepped up attacks against companies working on a natural gas pipeline crossing the country’s largest coca-growing area, threatening $1.5 billion in annual gas exports and 40 percent of the country’s power supply.
“Shining Path remnants pretty much have a free rein over the area and want to keep it that way to support their main interest, drugs,” said Jaime Garcia, a former deputy interior minister, in an Oct. 15 phone interview from Lima. “They’ve placed in jeopardy gas exports as well as supplies to the rest of the country.”
At risk is an $850 million plan to double the capacity of the pipeline that crosses the VRAEM on its way from the Camisea gas fields to the capital, Lima. The project will help prolong an economic boom that has seen the economy expand an average 6.4 percent over the past 10 years.
Transportadora de Gas del Peru, owned in part by Italian billionaire Paulo Rocca through Techint SA, and closely held Texas-based Hunt Oil Co. and Buenos Aires-based Pluspetrol SA, built and operate the pipeline under a 33-year concession that started in 2000.
The conduit runs through the heart of the VRAEM, more than 30,000 square kilometers (11,580 square miles) of mountains and forests near the cities of Ayacucho and Cuzco.
Mounting violence in the region means the expansion project is already a year behind schedule and won’t start operating before 2016, Barbara Bruce, country manager for Hunt Oil, said by phone on Oct. 30.
“If there was ever any doubt about how vital this project is, that’s been dissipated,” by the government’s determination to protect the installations, Bruce said.
Work to expand the pipeline has slowed since April after guerillas abducted 40 people, mostly employees of Swedish construction company Skanska AB, in the jungle adjacent to the VRAEM.
Eight police and military officers were killed during an operation to free the kidnapped workers, who were released unharmed after five days. The government’s failure to capture any rebels led the defense and interior ministers to resign.
Transportadora temporarily stopped maintenance work on the pipeline on Oct. 6 after rebels broke into an airfield at Kiteni in Cuzco and blew up three helicopters used to inspect the conduit.
The incidents raise the possibility of an attack on the pipeline itself and the loss of power in Lima, which accounts for about half of Peru’s gross domestic product, said Humberto Speziani, president of the country’s business confederation, in an Oct. 22 phone interview.
The mounting threat has goaded Humala into action, Speziani said. In September, the government budgeted a 68 percent increase in spending on the VRAEM to 2.75 billion soles ($1.1 billion) next year, including new military bases and night vision equipment.
Defense Minister Pedro Cateriano said Oct. 13 the government is also seeking to purchase 20 helicopters for operations in the region, while police officers will receive new firearms for the first time in 25 years.
The Shining Path has about 400 fighters in VRAEM and a smaller faction in the Alto Huallaga valley to the north, another coca-producing region, according to Ricardo Soberon, a Lima-based drugs specialist and former adviser on drug issues to Humala.
They are the remnants of a Maoist-inspired movement that had an estimated 2,700 fighters in 1990, before a series of arrests and military setbacks in the 1990s.
The Shining Path has survived by collaborating with drug traffickers, overseeing a 25 percent increase in Peru’s coca production in the past six years, according to the United Nations.
The Shining Path have increased their attacks in the past five years as drug output booms, with about 84 members of the security forces killed since 2008, according to Jaime Antezana, an independent analyst on the drug trade. That compares with a government-estimated death toll of about 69,000 in the civil war between 1980 and 2000, including 1,674 police and military officers.
“The remnants of the Shining path have become stronger in the last few years as they’ve narcoticized,” Garcia said. “They’ve no real political agenda or ambition for power. They exist at the moment because of the drug trade.”
Responding to calls for the release of those imprisoned during the years of terror, Humala said on Nov. 6 that the government won’t drop its guard. “Peru has suffered terrible violence in the past decades and that’s why we’re committed to fight against terrorism.”
The attack in Kiteni was probably a warning to the authorities after police killed a senior member of the group in the VRAEM in September, Speziani said.
Still, government measures to boost security along the most vulnerable parts of the pipeline are reassuring and the attacks are unlikely to dent private investment, he said.
The Lima Stock Exchange’s benchmark index has advanced 8.4 percent this year and the sol has appreciated 3.4 percent against the U.S. dollar. The extra yield investors demand to own Peruvian government dollar bonds instead of U.S. Treasuries has decreased 92 basis points to 124 basis points, according to JPMorgan Chase & Co. Annual inflation was 3.25 percent last month, the slowest since June 2011.
Colombia’s Cano Limon pipeline, operated by Los Angeles-based Occidental Petroleum Corp. and state-run Ecopetrol SA, has been attacked more than 1,000 times since it was built in 1986, causing oil spills and curbing exports and tax revenue. The pace of attacks slowed after the U.S. government increased military aid to Colombia under a 2000 accord.
Peru lured $1.6 billion of foreign investment to develop the Camisea fields in 2000, at the time Peru’s biggest-ever investment project. Since 2004, revenue from the Camisea fields and a mining boom have tripled Peru’s gross domestic product to about $200 billion this year.
About half of Camisea’s gas is exported to Mexico and the remainder fuels power plants and factories outside Lima. The expansion of the pipeline will boost supplies to industry and the government expects it to spur as much as $16 billion of investment in petrochemical complexes and power plants over the next decade.
“It’s incredible the government’s not provided the necessary security to protect such a strategic infrastructure investment,” Garcia said.
Transportadora spokesman Rafael Guarderas, didn’t respond to phone calls and an e-mail seeking comment. Alejandro Lujan, a spokesman for the armed forces, wasn’t immediately able to comment.
‘Resting on Its Laurels’
Humala, whose family hails from Ayacucho, the region where the Shining Path began its insurrection, says previous governments ignored the threat posed by the guerillas in the VRAEM. Police stations and military bases have fallen into disrepair and the local population lacks basic public services and infrastructure, he told reporters Sept. 12.
“The state has been resting on its laurels,” he said. “Our troops are in a precarious situation.”
Farms in the VRAEM and the region around Cuzco accounted for half of the country’s 62,500 hectares of coca crop last year, the United Nations Office on Drugs and Crime said Sept. 26. Peru’s output has increased for six straight years to meet demand for crack and cocaine in Europe and Brazil, which is the largest market in the Americas after the U.S.
Yet, until now, the government had focused its drug eradication efforts on the Alto Huallaga valley, uprooting about 10,000 hectares a year of coca in a campaign partially financed by the U.S.
The government won’t stop the guerillas or halt the traffic of drugs through Peru’s southern borders if it gives priority to a military solution to pacify the VRAEM, said Soberon in a Sept. 24 interview. More money should be spent on public works and improving police intelligence, he said. Soberon was replaced as Humala’s drugs czar after five months as the government took a harder line on coca eradication, a practice he had criticized.
Eradication and programs to provide farmers with alternatives to growing coca are the most effective ways of limiting Peru’s coca production and weakening the guerrilla’s grip on the VRAEM, said Carmen Masias, who took over from Soberon in January. The government has increased the counter-narcotics budget to $223 million, from 13 million soles ($5 million) a decade ago to boost eradication, aid crop substitution and tighten the control of chemicals used to produce cocaine, she said in an Oct. 26 interview in Lima.
“This government is putting more money into the drugs fight than any before it,” Masias said. “The Shining Path have taken it to another level by attacking strategic targets so the government’s following a new strategy to deal with the threat.”
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