“Petrogate in Peru

Peruvian President Alan Garcia is facing the most difficult moment in his presidential career. Last week, a local TV station played audio recordings and presented documents it had obtained from an anonymous source that revealed that Alberto Quimper, head of the state energy agency PeruPetro (appointed by the President) and Rómulo León, a prominent member of President Alan Garcia’s APRA party, made a deal to favor Discover Petroleum of Norway in oil block auctions. This oil company had won four exploration contracts after "bidding" for them in an auction this past September. These contracts would have allowed Discover to explore for oil in places such as Madre de Dios in the rainforest region and Pisco in the coast of Peru. The scandal has been dubbed "Petrogate" by the local media. 

The evidence that surfaced included a conversation between Mr. Quimper and Romulo Leon in which they apparently agreed to favor Discover Petroleum in a round of energy auctions. Discover, which partnered with PetroPerú, was awarded five blocs for exploration last month. The Prime Minister Jorge Del Castillo was implicated in the recordings as someone who could help facilitate the oil bidding process in Discover’s favor.

Since "Petrogate" broke out, President Garcia suspended all the contracts with Discover Petroleum.

Alberto Quimper, who is a board member of the state energy agency, PeruPetro, and who has responsibilities for overall regulation and licensing of the oil and gas industries as well as negotiating contracts with private companies for exploration and production was fired. Cesar Gutierrez, the president of the state oil and gas company PetroPerú (a separate state-owned company which runs refineries, pipelines and gasoline stations, often in partnership with private firms approved by PeruPetro) was also dismissed.  President Garcia also accepted the resignation of Juan Valdivia, the mining and energy minister after declaring, "I accept the resignation so that it is known that our administration is a politically responsible one." The only one that refuses to step down is Mr. León who has challenged the authorities to find him. So far, he is nowhere to be found.

Two days after the scandal became public, and understanding that Prime Minister Del Castillo refused to leave his post, Garcia’s entire cabinet resigned immediately before a Peruvian Congress vote to force them out of office. An investigation has been ordered by Congress but so far, Del Castillo, Discover, and all other parties involved have denied the accusations of corruption and bribery.

Discover released a statement saying that it made payments to Leon and Quimper, who was subcontracted by Discover’s law firm to provide tax advice. Between May and October, Discover reported paying $63,750 to Mr. Leon, and $60,000 to the law firm that hired Mr. Quimper. The company did not say if it knew that Mr. Quimper, who was providing its law firm with tax advice, was also a board member at PeruPetro. Still, it denied having paid bribes. In addition it alleges that they were victims of seedy Peruvian advisers and is voluntarily offering itself to the subjective scopes of The Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime and Transparency International to clear their organization of any wrong doings.

Alan Garcia has appointed Yehude Simon Maduro, a left-wing provincial governor with ties to the terrorist group, MRTA, as his new Prime Minister.

At Tuesday’s swearing-in ceremony, Garcia told Simon that his main challenges will be fighting corruption and poverty, and defending Peru’s economy from the effects of the global financial crisis. Garcia’s low approval ratings and an increasing number of protests and strikes clearly meant that Garcia had to consider charting a new course. The choice of Simon as president of the Cabinet certainly points that way. Simon is a popular leader among provincial presidents. He was re-elected president of the Lambayeque Region, once an APRA stronghold, and recently announced plans for a bid to replace García in the 2011 presidential election on the ticket of the Humanist Party, which he heads.

Simon ran for mayor of Chiclayo in 1983 as a member of United Left, an alliance of leftist parties in Peru founded in 1980 but did not win the elections. In 1985, the United Left House of Representatives elected Simon as the head of their Lambayeque region.  It was during this time that he served on the Human Rights Commission and the Congressional Justice Commission. In 1991, he formed a party known as the Partido Patria Libre, which was later accused of having ties with the MRTA terrorist group. In 1992 Simon was convicted and sentenced to 20 years in prison for supporting and for being the political arm of the terrorist group. But after only eight and a half years, in November 2000, during the transitional administration of leftist Valentín Paniagua, Simon was pardoned and freed by the Minister of Justice Diego García Sayán who shared similar political views as Paniagua. In 2003, Simon became governor of Lambayeque once again.

"I want to build a great alliance and friendship between sectors of the left and the government, and I have no doubt that businessmen of the so-called right will also draw near," Simon told Lima’s RPP radio upon accepting his current appointment. Members of his Peruvian Humanist Movement party say Simon is planning to run for president in 2011.

Although the President is trying to portray the incident as an isolated act of corruption, many Peruvians are interpreting the scandal as a return to the late 1980s when corruption was endemic. Garcia was elected for a second time in 2006 and many locals are not willing to give his party another chance. Garcia, himself, was once a fugitive accused of corruption after his first disastrous administration in 1987 which permitted Shining Path and MRTA terrorists to achieve enormous power. During this time the economy plummeted by epic proportions, leaving the nation with hyperinflation which, in turn, led to violent domestic conflict. In 1990, Garcia was accused of accepting illegal bribes and went into exile from 1992 until 2001 when the Peruvian courts led by the left dropped the charges.

Chavista follower, Ollanta Humala, is already trying to benefit from "Petrogate" by saying that the government’s troubles are deeper than a debate over the oil scandal. "Yehude Simon must understand that the problem with Del Castillo’s cabinet wasn’t just a problem of the tapes," Humala said in a statement. "Things will start on a bad note unless he understands the problem was the failure to fix the economic model, to make redistributing wealth a priority and to help poor, marginalized people." Mr. Humala clearly wants to advance his personal agenda in favor of socialism, pressuring Garcia to change the economic model Peru was following in order to enforce a Chavista model.  He is polarizing the population even organizing a demonstration to demand the resignation of the President’s entire cabinet and suggesting that Garcia himself should end his mandate.

Some argue that since key officials like Finance Minister, Luis Valdivieso, Foreign Trade Minister, Mercedes Aráoz and Foreign Minister, Jose Antonio Garcia Belaunde will remain, the President plans to keep his market-friendly policies. However, Garcia’s approval rating has fallen to 19%, a new low for his current term as president, as critics say surging economic growth of 9% a year has failed to lift millions out of poverty. His choice of Yehude Simon is seen by many as a shift away from market economic policies to populist measures, putting greater emphasis on social programs, in order to neutralize his critics on the left and regain support in the provinces.

Garcia’s first term as president ended in economic disaster after adopting the same policies he is about to embrace again. A sign of things to come is that Simon has chosen ultra-leftist Oscar Ugarte as Minister of Health. Ugarte is a physician and surgeon who was vice-minister of health in Alejandro Toledo’s presidency. He is also secretary general of Simon’s Humanist Party. In addition, the new Prime Minister has said that many of the ministers will remain in their posts only until the end of this year so we could see other surprises in months to come.

The scandal comes at a time when Peru plans to attract more foreign investment through Free Trade Agreements (FTA) and International Tourism projects. Various laws have been passed to eliminate bureaucratic processes and create more transparency in government. In addition, Peru has maintained a stable development process amidst political chaos in other Andean countries like Bolivia, Venezuela and Ecuador. All along Mr. García has been highly unpopular with approval ratings of around 20%. Many attribute this slide in the polls to the implementation of market oriented policies.  The left led by Ollanta Humala and financed by Hugo Chavez has wasted no time in campaigning throughout the country to discredit President Garcia, his policies and his regime.

Garcia’s choice could achieve some results in the very short term; Simon is very popular in the regions and with the left; has good relations with union leaders and regional presidents. Since being tapped for the top ministerial post last week, Simon has been visiting opposition party leaders, groups such as the medical federation, which is still on strike after 20 days, (who offered to resume negotiations) and the Congress to shore up support for this new stage in Garcia’s administration. One of the most important meetings held by Simon was early Tuesday morning with the senior leaders of Garcia’s ruling Aprista party. Their support, both as a party and in Congress, is essential to make this new stage a success. The problem is that this occurs while reports of another attack by a terrorist group left two soldiers killed and five wounded. This is the second bloody clash in less than a week, according to the Peruvian military. The attack was attributed to the Shinning Path guerrilla group and took place in the Vizcatan region in the coca-growing valleys of Apurimac and Ene. Last Thursday, fifteen people were killed when Shining Path guerrillas ambushed a military convoy. It was the deadliest battle with suspected rebels since President Alan Garcia took office in July 2006. President Garcia has been sending soldiers to the country’s coca-rich regions since August in an effort to destroy what is left of the Shining Path, which security officials say includes about 300 guerrillas.

At first glance, the appointment of Yehude Simon as Prime Minister means a major setback for the aspirations of Chavez ally, Ollanta Humala.  Though both Simon and Humala share similar ideologies, many supporters of Humala could find in Simon an alternative. If Simon is successful during his time in office then he will run for President in 2011 which would be extremely dangerous since he has ties to terrorist organizations, specifically the MRTA. He could decide to recognize and legalize these organizations by allowing them to form a political party and run for public office; a demand major terror groups have made in recent times.

If Mr. Simon is not successful then Humala will run for President with Chavez’s support and free to carry out his Bolivarian Revolution, another problematic alternative.  It is not clear if Simon is a Chavista. Many consider him to belong to the "Caviar – Left," a group of leftists who consider themselves intellectuals, live off human rights organizations and only end up benefiting themselves. If this is the case, then Chavez won’t find a friend in Simon. 

The sad reality is that both scenarios are grave and only time will tell what the future holds for Peru. 

Nicole M. Ferrand is a research analyst and editor of "The Americas Report" of the Menges Hemispheric Security Project from the Center for Security Policy. She is a graduate of Columbia University in Economics and Political Science with a background in Law from Peruvian University, UNIFE and in Corporate Finance from Georgetown University.