Boost from infrastructure is revamping housing development

Fuelled by Peru’s economic performance, the construction sector continues to see expansion at several levels. Mechanisms to attract private investments into infrastructure revamping are bringing essential facilities, such as ports and airports, up to standard. The utilities and energy sectors are seeing increased attention, which is needed to support urban expansion and economic growth. Additionally, activity in the construction sector is being led by the burgeoning need for housing, as well as commercial real estate, both resulting from improved living standards in Peruvian cities.

Sector Figures

Construction accounts for around 5% of GDP and, as a pillar of the Peruvian economy, has consistently exceeded overall annual GDP growth. In 2013 the sector grew by 8.9%; however, construction did slow down in the first half of 2014. Figures from the Peruvian Chamber of Construction for June 2014 show that the sector expanded by only 3.1% compared to the same period in 2013. This is also more sluggish than the growth rates experienced during the first halves of 2012 and 2011, when construction in Peru expanded by 19.7% and 7%, respectively.

Despite the overall rise in both general construction and major public works over the past decade, the country still suffers from a lack of infrastructure in key areas. This was detailed in a 2012 study by the Association for the Promotion of National Infrastructure (Asociación para el Fomento de la Infraestructura Nacional, AFIN) which underscored the need for $88bn – which is equivalent to 33% of GDP – in investments between 2012 and 2021 if Peru was to cover its infrastructure needs. While the gap covers basic areas, the amount of investment needed varies across different sectors, according to AFIN. Of the total amount, 37.5% is required for energy projects, followed by transport with 23.8%. Improving telecoms also requires heavy financial commitments, accounting for 21.8% of the need.

Rise Of The PPP

These requirements are being addressed partly by the government, through the attraction of private investment. Over the past few years, Peru has strengthened its public-private partnership (PPP) model, and even included other modalities that have allowed for private capital and management in public infrastructure. In some cases this has happened through enhanced government participation in the co-financing of projects. Several high-investment plans that are expected to have a massive role in helping to bridge infrastructure gaps were awarded in 2014. One of the biggest was the second line of Lima’s metro system, which is expected to cost $5.7bn. Another important development in the transport sector has been the awarding of the tender to build the new international airport at Chinchero in Cusco. Meanwhile, in energy, large gas pipeline infrastructure is planned for the coming years, as well as a batch of generation and transmission projects to help strengthen Peru’s electricity grid.

Alongside massive projects to improve transport and energy, the government has been implementing the PPP model in social sectors such as education and health care in an attempt to attract private investment to projects that usually fall under the radar of large, international contractors. In terms of costs, the infrastructure gaps in these sectors are less significant, amounting to $388m for education and $478m for health.

On The Move

The impetus to expand transport connections has been a priority following improved PPP regulations. Better roads, ports and airports are needed to reduce logistics costs across the country. Equally important will be efforts to enhance connections between different regions and reduce the isolation caused by Peru’s rugged geography. One of the most relevant projects in the transport sector to come out of 2014 is the construction of the new Chinchero airport in Cusco, arguably Peru’s most important tourism destination. The $658m project involves the building, maintenance and operation of the facility for a 40-year period and was awarded in April 2014 by ProInversión – the government body in charge of attracting private investment – to the Kuntur Wasi consortium, which is made up of Buenos Aires-based Corporación América and Peru’s Andino Investment Holding. The airport will have a 40,000-sq-metre terminal, with the capacity to handle 4.5m passengers. It will also include the possibility of expansion up to 5.7m passengers a year, according to how the facility’s needs evolve.

Moving Forward

Furthermore, large investments and extensive construction work are expected to go into the capital city’s metro system. After the work on Lima’s first metro line was completed in 2014, work began at the end of the year on the second line, expected to run for 35 km, linking the municipality of Callao to Ate. The $5.7bn project was awarded to Consórcio Nuevo Metro de Lima, a consortium composed of Spain-based companies Actividades de Construcción y Servicios and Fomento de Construcciones y Contratas, as well as two Italian construction groups, Salini Costruttori and Finmeccanica. Completion is expected by June 2019, although as has happened with several transport projects in the country, the deadlines might be delayed due to the lengthy period required to go through all land expropriation procedures.

However, work is already advancing in regards to the third metro line. French group Ingerop and the Spanish bureau of consultancy PwC were awarded the $17.5m feasibility studies contract for the project, with construction expected to begin in 2016. The remaining metro lines will be tendered over the coming two years and will require the construction of an additional 86 km of track. For lines 3 and 4, the Ministry of Transportation and Communications has already estimated it will need up to a total of $10bn in investments.

Alongside spending on improving urban mobility, Peru is continuing with large-scale road schemes to connect several of its most isolated areas, as well as to alleviate traffic along its main corridors. One of the most significant projects will be the Longitudinal de La Sierra road, which will link the country from north to south, through the central Andes Mountains chain. Due to the size of the road, the government has divided the project into five sections. Three will be built and operated by private concession holders, while the other two sections will be constructed as standard public works projects. The contract to build and operate the 875-km section 2 of the road, the first to be built under a concession agreement, was won in December 2013 by a consortium composed of Spanish companies Sacyr Concessiones and Constructora Málaga Hnos, and is estimated to cost up to $552m. Sections 4 and 5 of the highway are expected to be awarded by early 2015.

Some new developments are also expected to affect the railway sector over the coming years. China and Peru are negotiating the construction of a train link connecting the Atlantic coast of Brazil to the Pacific Ocean through Peru. The railway should run for 3500 km, although no specific route has been decided on so far (see Transport chapter). Pressure from the private sector has revived another railway project, Tren de la Costa, or the Coastal Train, which will link Peru from north to south along the shoreline, easing transport costs and traffic on some of the country’s most congested roads. Transport authorities, however, have stated that with an estimated cost of more than $9bn, building the railway is not a pressing issue in the short term.


As strategic for the country as improved transport connections are strengthened energy production and distribution capabilities. According to the AFIN report, energy is classified as one of the neediest sectors in terms of infrastructure. This is largely the result of economic expansion, which has put pressure on power consumption and led to gaps in generation and distribution. Additionally, the authorities are aiming to increase gas distribution systems in order to tap into abundant natural gas reserves and increase its usage across the country. Impressive for its size and amount of investment, the Gasoducto Sur Peruano (GSP) pipeline will likely be the most relevant project in the energy sector for years to come. The pipeline will run more than 1000 km, linking natural gas fields in the Anta region, close to Cusco, to southern cities, export routes, and thermoelectric power and petrochemicals plants.

The GSP pipeline itself is expected to cost up to $3.6bn, but the whole project was awarded with additional costs of maintenance and operation for the duration of the concession, amounting to a total value of $7.3bn, according to ProInversión. The project was awarded in June 2014 to a consortium made up of Inversiones en Infraestructura de Transporte por Ductos, a subsidiary of Brazilian company Odebrecht, with a 75% stake, and Spanish firm Enagás, and involves the concession to build and manage the GSP for 34 years. This is a considerable increase over the original concession period, which had been set at 20 years. The winner of the tender was one of three pre-qualified consortia, of which only two ended up bidding for the contract in the end.

The construction process will employ 5000 people, according to the Ministry of Energy and Mines. In addition to the positive impact in terms of jobs, it is also expected to require creative engineering solutions. The GSP, which will be done in three different sections, will run through the provinces of Cusco, Arequipa and Moquegua, covering the mountainous Andean region of central Peru, as well the tropical lowlands. The pipeline project includes engineering studies for future expansion into major cities close to its path, allowing it to service a larger number of customers with natural gas and to more easily recoup the large investment involved. Future links are planned for Chiquintirca, the city of Abancay, the Apurimac region and the city of Cusco. Further south, the cities of Puno, Arequipa, Moquegua and Tacna are also expected to be linked up to the GSP pipeline.

Serving Communities

Much attention is also being paid to transmission capacity and new electricity generation, with several transmission lines and substation projects expected to be tendered between the end of 2014 and 2015. One of the biggest electricity projects hitting the market over the second quarter of 2015 is the concession to build and operate the new thermoelectric plant at Quillabamba in the Cusco region. The simple cycle gas-powered plant will cost an estimated $200m and have a 200-MW capacity.

Although 97% of Peru’s energy is generated through hydro and thermoelectric sources, efforts to diversify energy supply have received increased interest. Financing is also being channelled towards wind power generation. The Inter-American Development Bank has awarded a $67.3m loan to Cobra Energia, a Peruvian energy company, for the construction of two wind farm projects. The Marcona wind farm project, which was completed in March 2014, will get $23.2m for its 32-MW capacity park. Another of the company’s projects, the Tres Hermanas wind farm, will receive $44.1m, and is expected to start operations in September 2015 with a total production capacity of 97 MW.

Meeting A Need

Besides power, efforts to expand the reach of public services, such as water and sanitation, are underlining big government commitments in the sector. The World Bank has said that as of 2012 Peru had 87% coverage in terms of access to potable water; however, the regional average for South America is around 95%. As much as $18.7bn in investments was announced by the Peruvian government for the water sector over the course of 2014-21. This comes on the back of previous investments, which resulted in an improvement in sanitation coverage from 76% to 81% between 2011 and 2013.

Making Progress

However, several challenges remain. In Lima and surrounding areas, much of the effort rests on Sedapal, the state-owned company that manages the water network in the capital and neighbouring province of El Callao. The company is currently implementing a plan to increase water access to 100% by 2017. This will be done through 148 projects for a total investment of around PEN9bn ($3.21bn). It will include the installation of 300,000 water links to homes and the rehabilitation of 2400 km of water pipes and 2100 km of sewer pipes.

Access to water has been a longstanding issue and the influx of real estate has also been a problem, leading to the need to upgrade existing infrastructure that used to connect one or two units to adapt to vertical construction and a much-increased demand for water. Included in the works is a $500m, 30-year concession contract to improve availability of potable water in Lima. The project, currently undergoing the tendering process, involves capacity extensions at the Huallacocha and Pomacocha dams and the construction of a 10-km tunnel that will connect the Pomacocha Lagoon to the Blanco River in order to increase the raw water volume of the Rimac River for further purification. In addition, the winner of the tender will be responsible for increasing the capacity of the Huachipa Treatment Plant and building Ramal Sur, which is a main pipeline that will extend for 40 km to distribute drinking water to the southern area of Lima. ProInversión has predicted that the winner of the tender will be announced during the second quarter of 2015.

Financing has been a major issue in the management of utilities and has been particularly prevalent in the case of Sedapal. The government is trying to address this by attracting private investment through a relaunching of Sedapal on the exchange market. Although the company was registered with the Lima Stock Exchange in 2004, its shares have never been traded. The Peruvian government is planning to price the company’s shares and allow for up to 49% of it to be acquired by private investors. This might be a step towards the right direction, as Sedapal is in need of cash to renovate and expand existing water infrastructure.


Although heavy infrastructure projects are set to guide the bulk of construction projects in the years to come, the government’s PPP programme is increasingly moving into social sectors. In November 2014 President Ollanta Humala announced a total portfolio of PEN8.4bn ($3bn) for construction and renovations in the health care sector. This would be secured from a range of sources including public financing, co-financed PPP deals, private investment and the Obras por Impuestos, or Works for Taxes, scheme, which allows companies to invest part of their taxes in specific localised projects instead of making payment to the Treasury. These new investments will be a definite boost for the sector as it faces a deficit of 5000 beds and serves only 73% of the population, according to local media. Investment will be channelled into 206 projects, which will involve renovation of some health facilities, as well as the construction of new ones. Hospitals will get a relevant slice of planned investments, especially in the provinces where the infrastructure gaps in health care are most felt. An investment of $370m will go to 13 national hospitals, $801m to 23 regional hospitals and $1.8bn will be spent on 170 provincial hospitals, according to local media reports.

While involving private investment in the health sector has the potential to create controversy, the government has made it clear that far from privatising public hospitals, new investment contracts will be based on concessions between 10 and 20 years. Another potential challenge will be to determine how effective these projects will be in attracting private investors. With maintenance costs for health infrastructure expected to be high, PPPs involving health care facilities will be competing for with more traditional concessions.

Tax-Paved Roads

The Works for Taxes scheme seems well-fitted to finance the expansion and renovation of health care facilities in rural areas. In fact, the programme has gained momentum in recent years, allowing companies to earn a good reputation with local communities, especially in areas where large extracting companies operate. Works for Taxes projects are generally suggested to the companies by local governments and have been a good way to finance facilities, such as access roads, benefitting both the population and firms. From a timid start of nearly PEN6m ($2.14m) when it was first implemented in 2009, the Works for Taxes scheme attracted PEN405m ($144.59m) in 2013 and is expected to reach PEN500m ($178.5m) by the end of 2014. Understandably, due to the nature of the scheme and the companies that are using it, 48% of investment has been directed to the transport sector. Water and sanitation projects received only 26% of funds, followed by health and education with 15% each.

Existing Challenges

Financing is expected to continue to flow into construction for years to come. Yet the sector remains somewhat susceptible to bureaucratic difficulties that can slow activity. Road management is an example of this. Under Peruvian law, roads can be national, provincial or local, which means that a different government body will be in charge of maintenance, expansion and operation.

This has at times created problems for expansion work, such as in the case of Gambetta Avenue, which links northern Lima to the port of Callao, and has seen administrative issues delaying renovation work. Although the road falls under the municipality of Callao, its impact is national because of the importance of the thoroughfare in connecting the capital to Peru’s most important link with international trade.

Another issue impacted by the lack of coordination among different levels of government is access to land by concession holders, which is key to expanding infrastructure. In several privately managed airports in the north, which have included surrounding land plots for their construction plans since they took over concessions, expansion plans have been blocked. Despite having signed deals that included these additional plots of land, regional governments often want to develop these areas themselves as part of their own urban plans, resulting in conflict. The situation is further worsened by the long waiting period for the government to expropriate land for construction, allowing regional governments to take charge and develop land under their jurisdiction in other ways.

Better long-term planning and advance announcements of which infrastructure projects are being tendered would help both development efforts, as well as domestic and foreign contractors better prepare documentation and financing plans. Under current practice, ministries decide which projects to tender and, as documentation becomes available, coordinate efforts with ProInversión to attract potential bidders. However, there is not a nationwide, multi-sector plan anticipating which construction project will be tendered by the government. “The best way to improve a country’s infrastructure is to create a national plan that lays down a long-term strategy,” Fernando Castillo Dibós, general manager of local construction firm Ingenieros Civiles y Contratistas Generales, told OBG. “Though the private sector can act as a promoter, in the end the framework needs to come from the public sector.”


The construction sector is bound to benefit in the coming years from a series of major projects that are in the pipeline. These involve more than general construction projects for residential and commercial areas that are benefitting from better economic performance. The authorities have combined private interest to renovate and manage public structures, with the country’s need to improve its basic infrastructure. The continued interest from Peruvian and international contractors in a variety of necessary large-scale projects, despite how challenging they are, is a testament to that. However, it might be useful for the government to align its concession projects with a medium-term perspective. Under current procedures, projects are announced as they are ready to be tendered. But to take such initiatives to market effectively, a national long-term strategy for infrastructure development would allow time to facilitate preparation and allocate financing for both public and private stakeholders.

These projects will make a deep impact on the Peruvian economy, creating jobs and making a positive contribution to the well-being of several regions. But they are also shedding light on some of the difficulties faced by the state and private operators that also negatively affect the economy. Coordination between central and municipal authorities, as well as a clear specification of jurisprudence, in the area of land uses needs to be improved to facilitate project completion. Ministerial teams to oversee project execution and focus on land use disputes and other institutional conflicts that might be blocking projects would help. The construction industry is all but guaranteed a high level of activity for many years. The output will be faster, better and bigger if the wheels of the bureaucracy were well-oiled.

You have reached the limit of premium articles you can view for free. 

Choose from the options below to purchase print or digital editions of our Reports. You can also purchase a website subscription giving you unlimited access to all of our Reports online for 12 months.

If you have already purchased this Report or have a website subscription, please login to continue.

The Report: Peru 2015

Construction & Real Estate chapter from The Report: Peru 2015

Cover of The Report: Peru 2015

The Report

This article is from the Construction & Real Estate chapter of The Report: Peru 2015. Explore other chapters from this report.

Covid-19 Economic Impact Assessments

Stay updated on how some of the world’s most promising markets are being affected by the Covid-19 pandemic, and what actions governments and private businesses are taking to mitigate challenges and ensure their long-term growth story continues.

Register now and also receive a complimentary 2-month licence to the OBG Research Terminal.

Register Here×

Product successfully added to shopping cart