Cutting through red tape: Greater emphasis is being placed on streamlining logistics

Ranking 89th in the World Economic Forum’s 2012-13 “Global Competitiveness Report, Peru’s infrastructure is far behind that of neighbours like Chile (45th) and Brazil (70th). This can largely be attributed to shortcomings in the transportation sector, where Peru ranks 97th in the world and for which a multibillion-dollar upgrade programme has yet to start showing significant results. A recent report by the Ministry of Production revealed that 34% of the value of a product was related to logistics costs on average. This far exceeds the regional average of 24%.

Leaders from the public and private sectors alike generally agree that the transport and logistics infrastructure has not kept pace with the high level of economic growth. Indicators, such as those cited above, make clear the need for heavy investments in all areas of the transportation network from highways and airport terminals to public transportation in major urban centres like the capital city of Lima.

To address these needs, in 2011 the government launched a plan to invest $20.5bn in infrastructure over the following five years. Major efforts are currently being made to attract more private investment. For example, in May 2013 the government declared of national interest and priority the promotion and facilitation of investment in Peru, with special emphasis on procedures and the issue of permits and licences.

Apart from confronting the natural challenges posed by the nation’s rugged and mountainous terrain, leaders from the transportation and logistics sector believe the biggest challenge moving forward will be pushing investment plans through the lengthy bureaucratic approval processes in a timely fashion.

National Road Network

The expansion and upgrading of the national highway network is among the most important transportation projects under way. Major projects in this area include the Longitudinal de la Sierra road, the Longitudinal de la Selva, the Interoceanic Highway, the paving of the current highway network and the construction of a number of key bridges.

Upon completion, the Longitudinal de la Sierra will run the full length of Peru from north to south, beginning in Vado Grande on the country’s border with Ecuador and ending in Desguadero on the Peruvian-Bolivian border. The road will cover 3673 km.

The Ministry of Transport and Communications ( Ministerio de Transportación y Comunicación, MTC) has divided the project into five sections. Public officials, including President Ollanta Humala, held a ceremonial groundbreaking for the Longitudinal de la Sierra in October 2012, and the MTC is currently working with ProInversión, the national agency to promote private investment in Peru, to find investors for the co-financed project, particularly sections 2, 4 and 5.

As of October 2013, the second section of the project was up for public bid. This 875-km-long section of the Longitudinal de la Sierra connects Ciudad de Dios with Cajamarca and Chiple, and Cajamarca with Trujillo. Section 2 requires an estimated $552m in investment over a concession term of 25 years. The section 2 concession will be awarded to the party that requires the least amount of co-financing and also has the technical capacity to execute the project. Guillermo Rebagliati, the head of highway projects for ProInversión, told OBG that the concession for section 2 of the highway is likely to be awarded before the end of 2013. According to ProInversión’s website, sections 4 and 5 of the Longitudinal de la Sierra will be awarded in the second and third quarters of 2014.

The Longitudinal de la Selva, or “Jungle Highway”, is another important highway project on the national agenda. It runs deep through Peru’s Amazonian interior, connecting San Ignacio on the Peru-Ecuador border with Puerto Pardo on Peru’s border with Bolivia. While there is a “route” traversing this distance, it is mostly unpaved and in some places non-existent.

Rebagliati told OBG that as of January 2013, ProInversión had not received any requests from the MTC to begin work on the process to solicit investments for the Longitudinal de la Selva road project. According to Rebagliati, “We will have to see how this figures into the development strategy – if it will be co-financed or receive only public investment. There are ongoing studies in the jungle to determine what forms of intermodal transport projects can be implemented. But this road is not on ProInversión’s list of projects at the moment.”

Meanwhile, progress continues on the Interoceanica Highway, a massive ground transportation project started by the Initiative for the Integration of the Regional Infrastructure of South America. One of the project’s ultimate goals is to connect the Pacific coast of Peru with the Atlantic coast of Brazil, forming a multi-modal transportation network that will allow for the flow of goods from Peruvian ports along a multinational road network to Brazilian consumers, for example.

Peru is involved in the project through the construction of three routes running east to west, named the Interoceanica Sur (“south”), Interoceanica Norte (“north”) and Interoceanica Central. The Brazilian construction company Odebrecht has played a key role as a concession winner for the Interoceanica Sur and Interoceanica Norte. Rebagliati told OBG that construction of the southern and northern routes through Peru is nearing completion, bringing the Interoceanic Highway one step closer to becoming a reality.

Finally, Henry Zaira, director-general of the General Office of Planning and Budget at the MTC, told OBG that progress is being made in efforts to pave the country’s pre-existing road network. The MTC’s goal is to see that 85% of roads, or 19,000 km, are paved. This includes 100% of the Longitudinal de la Sierra. In January 2013, Zaira told OBG that 65% of roads were paved, which was up from 53% in 2012. Zaira also mentioned a plan to cooperate with regional governments to construct 1000 bridges throughout the country by 2016.

In The Port

While the paving work continues in the interior, business is booming on the coast. In August 2013, the Port of Callao handled 169,236 twenty-foot equivalent units, up 6.4% from the same month the previous year. According to the National Port Authority (Autoridad Portuaria Nacional, APN), overall container port traffic to Peru increased by more than 42% between 2008 and 2012. It is for this reason that Henrik Kristensen, the CEO of APM Terminals Callao, which was the winner of the concession for the Muelle Norte section of the Callao port, told OBG, “Execution of new infrastructure projects that improve access to the Port of Callao are fundamental to driving trade efficiencies.”

In 2013 ProInversión will award a 30-year concession for the design, financing, construction, operation and maintenance of the General San Martín Port Terminal located in Pisco province. Giancarlo Villafranqui, head of the project for ProInversión, told OBG “The General San Martín Port is only medium-sized, but it has some important growth projections. It’s not Callao, but we do expect to see substantial growth there.”

At the time of writing, the project had received substantial interest from the private sector. Villafranqui stated that 17 companies had purchased rights to participate in the bidding process, scheduled for completion in December 2013. A total of 12 companies still remained in this bidding round as of September 2013. Meanwhile, a project to modernise the Salaverry Port Terminal, located in the Libertad region 577 km north of Callao, is also under evaluation by ProInversión. The Salaverry project will be financed by the concession winner. The same private financing structure holds true for another project under evaluation for the San Juan de Marcona Port Terminal located in Nazca province.

The concession winner for this project will be responsible for the construction of a specialised mineral ore terminal at the docks. Villafranqui was not able to provide further details as of the time of writing as to when these projects may be up for tender.

APM Terminals Callao is progressing with upgrades. Alfredo Blondet, chief commercial officer at APM Terminals Callao, told OBG that since taking over the concession in 2011 the company has invested $35m in the port, with plans to invest an additional $750m in five phases. The first two phases of the project are a mandatory component of the concession that have to be completed by January 2015, while investment in the remaining three phases will be triggered by increases in container traffic to this section of the port. Container traffic to Muelle Norte remains relatively light at the moment due to infrastructure limitations.

Most containers to Callao pass through the Muelle Sur section, which is operated by DP World, the Dubai-based port operator. Muelle Sur is the largest dock and handles 70% of the port’s containerised cargo, according to DP World. The company completed a $600m expansion of the Muelle Sur pier in 2010 and at the end of July 2013 added three gantry cranes at a total cost of $6m, thereby boosting cargo-handling capacity by 75%. DP World may invest an additional $100m in 2014 to expand the dock, although the latter is currently waiting for negotiations to conclude with the country’s transport regulator, the Supervisory Authority for Investment in Public Transport Infrastructure (Organismo Supervisor de la Inversión en Infraestructura de Transporte de Uso Público, OSITRAN) and the APN. The investment would add access roads and dredge the harbour to speed up docking. “The potential for Callao is to become the ‘gateway’ port for all of Peru and for the western parts of Brazil and Bolivia,” Gerard van den Heuvel, CEO of DP World Callao, told OBG. “To achieve this and maintain cost effective transportation, the Peruvian government must make, and additionally encourage, private investment in new and upgraded infrastructure to ensure connectivity throughout Peru, and particularly in the Callao and Lima regions”.

APM Terminal Callao’s Blondet voiced similar sentiments. “It has a lot of advantages. We are well-located in relation to the Pacific trade between Asia and Brazil. We believe that in the future, commerce between Asia and Brazil will go through Callao,” Blondet told OBG.

The major barriers to this type of development will be completion of the Interoceanic Highway, which would allow for the easy transfer of goods overland from Peru to Brazil and competition from the Panama Canal. The $5.25bn Panama Canal expansion project scheduled for completion in 2015 is supposed to make room for boats that are three times the size of those which are making the passage today.

Blondet believes that APM’s work in Callao is timed perfectly, as the port will be able to accept shipments from vessels that use the new Panama Canal infrastructure as early as 2014. “I do not believe shipping companies will switch from the Panama Canal to Lima overnight, but I think it is possible that we will receive some of the trans-shipment that would normally go through Panama. Meanwhile, we are particularly focused on becoming the logistics hub for South America’s west coast,” Blondet added.

Another factor that has the potential to help Callao pick up business from Panama is delays in the expansion of the Panama Canal. Construction, which was originally scheduled for completion in October 2014, is already at least six months behind.

And yet another reason that Blondet believes would help Callao to grow as a logistics hub is the revision of the cabotage law. Currently, all transport of goods by sea along the Peruvian coast is limited to domestic carriers. Blondet spoke of using the “blue highway” that is Peru’s coast to transport goods, instead of having to resort to transportation inland by truck.

In early March 2013 the APN announced a proposal that would eliminate the national cabotage law, thereby allowing foreign operators to transport goods along Peruvian shores. However, there was no additional news concerning the outcome of the proposal as of October 2013.

Air Traffic & Airports

As Peru works to upgrade and expand its port infrastructure, air travel is on the rise. Alberto Huby, the former general manager at Aeropuertos del Perú (ADP), the airport operator for Peru’s northern airports, told OBG that air cargo has been increasing at a rate of around 12% annually over the past five years. Passenger travel has increased at a similar rate, according to Huby.

In 2012 the lead operators in terms of international air cargo were LAN Perú, which accounted for 21.5% of total international cargo transport, followed by Atlas Air with 9.43%, LAN Airlines with 9.24% and LAN Cargo with 8.11%. Leaders in domestic air cargo transport included LAN Perú with 46.64% of market share, Aero Transporte with 22.21% and Star Up with 11.37%.

LAN Perú is also a leader in terms of both national and international passenger transport, with 62.16% and 32.55% of the total, respectively. At the domestic level, Taca, Star Up and Peruvian Airlines are the other major leading players, each accounting for around 10% of the market. Taca and LAN Airlines, which was formerly LAN Chile, are the next largest players after LAN Perú, accounting for 12.05% and 11.63% of international passengers, respectively.

As cargo and passenger traffic continue to rise, several of the country’s airports have surpassed capacity and are in need of upgrades. In particular, Huby cited airports in Iquitos, Piura and Tumbes. “Iquitos is experiencing increased passenger flows due to tourism to the Amazon and bird watching,” explained Huby. Tumbes is popular for connecting tourists with beaches in the north of the country and Piura has experienced significant commercial growth. ADP has works planned in the near future for Iquitos and Piura. Zaira told OBG that growth in passenger and cargo traffic has also surpassed expectations for the airport in the southern city of Arequipa, signalling a need to speed up infrastructure work in the mix there.

Meanwhile, the two big airport projects on the agenda include a new airport at Chinchero, located near Cusco, and the Jorge Chávez International Airport in Lima. At present, the existing Alejandro Velasco Astete International Airport in Cusco has limited capacity to support any further increases in travellers.

Strategies

To address these limitations, a new high-volume airport is planned for Chinchero, just under 30 km away from Cusco. ProInversión is advertising a concession for the construction and operation of the airport. The winner of the agreement should be announced in February 2014, though the project has been impacted by delays in land procurement, which leaves this timeline in doubt. As well, plans for the construction of a second runway at the Jorge Chávez Lima International Airport were recently put on hold until 2020, due to the MTC’s failure to successfully deliver the land that had been identified for the project to the concession winner, Lima Airport Partners (see analysis).

Logistics Upgrades & Expansion

Many of the projects and investments described above are part of an expansive plan launched by the MTC to upgrade Peru’s logistics corridors just as the sector begins to experience significant growth. In 2011 the MTC identified 57 logistics chains related to the 57 most important products in Peru. The idea behind this study was to examine all of the transport needs related to each of these products throughout the entire supply chain – from moving primary materials to exporting the final product. In this study, the MTC identified 22 logistics corridors covering a total of 25,000 km. These corridors have since become a major focus for investment in transportation and logistics infrastructure.

This investment comes at a time when Peruvian logistics companies are also experiencing significant growth. Ransa, a logistics service provider and subsidiary of the Peruvian holding company Grupo Romero, experienced a 35% increase in sales in 2008 alone. Since then, the company has made large investments in expanding its storage areas near Callao, increasing plant capacity and implementing a national cold chain. In 2012 the company’s sales exceeded $295m, up 18% over the previous year. In late 2012 Ransa announced plans to enter the Colombian market at some point in 2013, while the company’s management is also exploring entry options for Chile.

In April 2013, both domestic and international leaders from the logistics sector attended the second annual Peru Cargo Week. The event, which was held in Lima, brought together more than 10,000 participants in the logistics sector to discuss innovations and opportunities for cargo transport. Talks on how to take advantage of new free trade agreements with the EU, Japan, Thailand and Mexico were hot topics on the agenda.

Lima Transport

Apart from investments in the national transportation infrastructure, efforts are also being made to improve traffic flows and upgrade public transportation services within Lima. The first of two phases of the new Lima metro opened in April 2012. The elevated metro line runs from Villa El Salvador in the city’s south to Lima’s centre – a distance of 22 km. The second phase, being carried out by the same consortium, Consorcio Metro de Lima, will run onwards to San Juan de Lurigancho and is set to open in April 2014, five months ahead of schedule.

The idea for the metro was originally conceived in 1986, but the project suffered many stops and starts thereafter. Now, with the first metro line up and running, public leaders, including Mayor of Lima Susana Villarán, appear serious about continuing with the effort by supporting the construction of four additional metro lines. Adding further support to this, Zaira told OBG that the concession for the second metro line and a branch of the fourth line would be awarded in December 2013; thus far, 35 companies have acquired participation rights for the $6.5bn project. The second line will traverse a distance of 27 km running east to west across the city from Ate District Council to Callao Port. Additionally, 8 km of the fourth line will go through Faucett Avenue from Colonial Avenue to Gambetta Avenue. ProInversión will be managing the tender process.

Protransporte, the unit of the Lima city government which manages the bus rapid transit (BRT) system known as the Metropolitano, has plans for expansions and upgrades. Nicolás Rodríguez, commercial manager of Protransporte, told OBG that the organisation was recently charged with implementing a series of corredores complementarios (“complementary corridors”) that serve as formalised bus routes through Lima (see analysis). Protransporte has published the final version for the concession of five new bus corridors expected to draw investments totalling $850m. The winner of the tender will be announced in November 2013, while the contract will be signed in March 2014.

The development of these complementary corridors will begin in 2014, with the first set to start operation in June that year. Some of them will serve the same areas covered by the future second line of the metro, but it is Protransporte’s responsibility to move the corridors when metro lines with overlapped routes start operations. Once the expanded network is up and running, the Metropolitano will be able to handle a total of 4m5m passenger trips per day.

At present, apart from the limited service offered by the Metropolitano BRT, most bus operators in Lima are informal. The informal system has led to a proliferation of traffic as well as the creation of transit safety concerns. Plans to construct a second line for the Metropolitano running from Ate to Callao have been put on hold, however, as this route was significantly similar to the second line proposed for the Lima metro.

The challenge going forward will be for Protransporte to work together to coordinate bus and metro connections with the Autonomous Authority of Mass Transit for Lima and Callao (Autoridad Autónoma del Sistema Eléctrico de Transporte Masivo de Lima y Callao, AATE), which is in charge of the design and implementation of the Lima metro. A bus and metro network with well-planned transfer points throughout the city could go a long way towards helping to reduce congestion on Lima’s notoriously busy streets.

Oversight

The MTC is the main public body that is in charge of developing the overall strategy, planning, and implementation of transportation infrastructure at the national level. OSITRAN is the primary regulator for the public transport sector, and is in charge of setting tariffs for public transport, resolving disputes between public transport providers and users, and supervising concession contracts to make sure that services are properly rendered according to previously defined schedules. ProInversión also plays a major role in the transport sector by promoting investment as well as organising tenders for various large infrastructure projects throughout the country.

The main agencies supervising Peru’s ports are the APN and the General Directorate of Aquatic Transportation. Empresa Nacional de Puertos (ENAPU) is a major player in the port business. As a public company, it operates 11 of Peru’s regional ports. In January 2011, ENAPU ceded port operations in Callao to APM Terminals Callao, the consortium that won a 30-year concession agreement to upgrade and operate Muelle Norte. DP World won the tender for Muelle Sur in May 2006 and started operations in May 2010.

The General Directorate of Civil Aviation is charged with supervising activities in the aviation sector, while the Peruvian Corporation of Airports and Commercial Aviation (Corporación Peruana de Aeropuertos y Aviación Comercial, CORPAC) is charged with equipping and maintaining airports, establishing and upgrading aerial navigation equipment, as well as supervising aerial transport. CORPAC has provided several concession agreements to other airport operators.

Lima Airport Partners serves as the operator for the Jorge Chávez International Airport in Lima, the capital. ADP is the main operator for regional airports in the north of the country, while Aeropuertos Andinos del Perú serves a similar role as operator for facilities in the south. Roads and railways are managed by the General Directorate of Roads and Railway and the General Directorate of Land Transport.

Challenges

One of the main challenges cited by leaders from the transportation sector is the need for a reform of the National System of Public Investment (Sistema Nacional de Inversión Pública, SNIP). According to a report by the local news outlet RPP, in August 2012 César Villanueva, the-then president of the Assembly of Regional Governments, called for a reform of the SNIP, which he blamed for frequently slowing down public investment projects. Villanueva claimed that many regional governments with the funds to execute projects were unable to do so because of the red tape imposed by SNIP, citing as an example the region of San Martín, where PEN1.1bn ($414.3m) in projects were nearly at a standstill.

Huby also told OBG that ADP is unable to progress with airport infrastructure projects at its desired pace due to delays brought on by SNIP. “We need to make these processes more agile,” Huby said. “There are sectors of the government that are unable to spend their budgets because they are slowed down by this system.”

Outlook

In addition to the challenges described above, continued economic growth is likely to put more pressure on Peru’s transportation infrastructure. In October 2012, the Association to Promote National Infrastructure (Asociación para el Fomento de la Infraestructura Nacional, AFIN) released a report analysing the need for infrastructure investment and its potential impact in the period 2012 to 2021. The report, entitled the “National Infrastructure Plan 2012-21”, estimates that Peru will require nearly $88bn in infrastructure investment over this time period.

Arturo Delgado, the general manager of AFIN, said, “The good news is that the lack of infrastructure described in the report is heavy on the minds of public officials. The challenge, of course, will be execution.” Thus, it appears that enhancing the efficiency of the infrastructure investment process will be key to improving the country’s transportation and logistics network.

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The Report: Peru 2014

Transport & Logistics chapter from The Report: Peru 2014

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