Linking the hinterland: Major road developments continue in an effort to better facilitate economic growth

Despite the advantages of several Pacific ports allowing fast links to international markets, Peru’s logistics performance remains constricted by insufficient road development and weak links between the coast and the Andean hinterland. In addition to its high mountain ranges, the country’s large swathes of Amazon rainforest, which account for 60% of the total land area, has also made building roads difficult.

The World Economic Forum’s “Global Competitiveness Report 2015/16” ranked Peru 111th out of 140 economies for road quality. Authorities expect this position to improve following a series of large-scale highway projects to connect the interior. One of the sectors to benefit the most from this is the fast growing agricultural sector. Gabriel Graf, general manager at UNIMAR, a Peruvian logistics company, told OBG, “The export-driven growth of the agro-industrial sector has led to a surge in demand for cold-treatment transportation. Developing a robust cold chain is an important to increase agriculture exports.”

Along The Andes

Extensive rehabilitation work has been progressing on the Longitudinal de la Sierra Road, a 3503-km link expected to connect Peru from north to south along the Andean region. The road, most of which already exists, will open up several long-isolated regions to more economic development and serve as a viable option for cargo transport.

The Ministry of Transport and Communications (Ministerio de Transportes y Comunicaciones, MTC) has divided the project into five sections. Three sections will be constructed through private-public partnerships (PPPs), while the remaining two will be built by the government, as public works projects. The whole project is expected to receive close to $3.5bn in private and public investment.

Private Concessions

The 875-km section two of the Longitudinal de la Sierra was awarded to Consierra Tramo II, a consortium made up of two Spanish companies, Constructora Málaga Hnos and Sacyr Concesiones, in December 2013. This segment of road links Cutervo to Huamachuco in the Cajamarca region and is to receive a total investment of $552m.

Also to be built through a private concession is section four of the highway project, which will link the central and southern cities of Huancayo, Izcuchaca, Ayacucho and Abancay, as well as the coastal city Pisco, where a $230m revamp operation is adding capacity to the city’s port. Tendered in February 2015, the announcement of the winner for this section of the project has been delayed until the second quarter of 2016. The contract will include the rehabilitation maintenance work on just under 400 km of road on a total extension of 970 km. According to ProInversión, the government’s investment promotion agency, the concession contract will be established for at least 25 years and will involve co-financing by the state.

ProInversión has also announced that it will tender the contract for the PPP concession of section five of the highway in first quarter of 2017. At a distance of 422 km, this part of the project will also involve government co-financing and a contract length of at least 25 years. The winning consortium will rehabilitate parts of the road which link Urcos to the city of Puno and Desaguadero, on the border with Bolivia.

Co-Financing Strategy

A number of Peru’s PPP road concession deals involve co-financing from the state in order to make the largest projects more attractive for private investment as well as to allow for greater long-term sustainability. The amount of co-financing required for each of the road projects tendered for PPP concessions is initially suggested by the bidder and also has a substantial impact on the overall competitiveness of each proposal. This is essential to ensuring that the service level of the privately operated roads remains high. At the same time, it will certainly create challenges for the government in terms of the long-term fiscal impact of allocating yearly financing to the upcoming road projects.