Legal reforms encourage more local and foreign investment

Over the past decade, Peru has experienced annual GDP growth of approximately 6.4%. This sustained economic growth is due in part to a series of legal and economic initiatives by the government to promote investment, while fostering an environment of trust and security for investors. However, economic growth has recently slowed down, partly as a result of a decrease in foreign investment. In light of this, the focus of the Peruvian government has been to promote private investment in the country.

Expediting Permits

In 2013 the Ministry of Economy and Finance (MEF), headed by former Minister Luis Miguel Castilla, announced certain measures to promote domestic and foreign investment in various sectors of Peru’s economy, a process which was initiated by the passing of Supreme Decrees No. 054-2013-PCM and No. 060-2013-PCM, under which the government sought to accelerate the administrative procedures to approve permits and certifications for investment projects. The following are the most relevant provisions that were passed:

• Ability to amend the environmental impact study (estudio de impacto ambiental, EIA) through a technical report. Prior to the approval of each of these Supreme Decrees, amendments to an EIA were not regulated, and so it was an ad hoc proceeding. Now, the government has made it possible for investors to amend EIAs through technical reports when such modifications: (i) have a minor environmental impact; and (ii) are considered an “evident improvement.” As a result, investors will not have to initiate a new administrative proceeding to amend an EIA, which could take at least a year in certain cases.

• Imposition of easements on public barren lands for investment projects. In the past, obtaining permits over public barren surface land for investment projects was a difficult, onerous and time-consuming task. With these new Supreme Decrees, investors can request easements over public barren lands to carry out investment projects from the Superintendence of National Properties. This should be a much more expeditious and cost-effective way to obtain required rights over public land. In early 2014, the Peruvian government also passed Law No. 30230, (“Law that establishes tax measures, simplifies procedures and permits for the promotion and revitalisation of investments in the country”), which has had a big impact. It has a special focus on environmental matters. The following are the most important environmental changes in the law:

• Warnings instead of sanctions. If a title-holder of a project commits a violation, the Environmental Protection Agency (Organismo de Evaluación y Fiscalización Ambiental, OEFA) will opt to issue corrective measures instead of imposing fines. The law discourages supervising entities, such as OEFA, from imposing fines by requiring that funds from collected fines be contributed to the Public Treasury, as opposed to each regulatory entity.

• Reduction of environmental fines. For a period of three years, OEFA may not impose fines that exceed 50% of the maximum amount contemplated for the relevant infraction. It is important to point out that this measure does not apply to infringements that are considered as “serious” by the law.

• Binding and non-binding opinions to expedite EIAs. Most of the time the approval of an EIA is subject to the opinion of other governmental entities. In these cases, Law No. 30230 reduces the time that these governmental entities have to issue their opinions to 45 days. If the opinion is not issued within that timeframe, the responsible public official may be subject to sanctions for failing to perform their responsibilities. These changes responsibly promote investment in Peru by expediting the permit process and reducing the bureaucracy of obtaining permits for projects, especially environmental permits. In September 2014 Luis Miguel Castilla stepped down as minister of economy and finance and was replaced by Alonso Segura, who has announced that he will continue approving measures to promote investments by reducing the requirements to obtain the permits necessary for carrying out projects. As evidence of these initiatives, the government is working on significant changes to further promote investments.

Promoting Private Investment

Recently, the Peruvian government has tried to promote private investments in projects of public interest by passing the new public-private partnership (PPP) regulations and the new Works for Taxes (Obras por Impuestos) regulations. With regard to PPPs, the new regulations seek to include new types of investment projects. In addition, the concept of co-financing has been modified, with the regulations also adding two new alternative dispute resolution mechanisms to offer greater legal security to new types of investment projects. Lastly, the regulations establish response times to evaluate sustainable private initiatives, giving investors greater clarity in the investment process.

The Works for Taxes regulation have also been amended to allow for a greater number of participants in the process of identifying and prioritising projects, as well as to eliminate investment bottlenecks, such as allowing investment certificates to be negotiable. The recently introduced amendments to these regulations are meant to promote investment in the country, expediting the process and giving greater assurances to private investors.

Partnerships

The new Public-Private Association Regulation was approved on May 31, 2014 and went into effect on September 1, 2014. PPPs allow the government and private investors to share the risk of undertaking a public-interest project. The following are highlights of the new regulation, as the original applied only to the development, maintenance and operation of public infrastructure projects and the provision of related public services. The new regulations expand the type of projects that may be conducted through PPPs to include:

• Public infrastructure projects;

• Public services;

• Services related to infrastructure or public services; and

• Research and technology projects. This expansion of qualified projects is designed to attract new private players to invest in projects that are of national interest and have a high social impact, such as those related to health, the environment and waste treatment, as well as applied research and technologically innovative projects.

Sustainable Initiatives

Sustainable private initiatives are those which require a minimum or no guarantee from the government, or which have a low probability of using public resources. Private initiatives may be presented by local or foreign entities or a combination of both. Private initiatives with a national reach are filed with ProInversión, the agency for the promotion of private investment. Meanwhile, initiatives that fall within regional or local jurisdictions are filed before the entities that promote private investment in the corresponding jurisdiction.

Sustainable private initiatives can be carried out over assets, companies, projects, public infrastructure, public services and services related to those provided by the government, as well as applied research projects or technology innovation projects. One important change in the regulations is the response time for the evaluation and declaration of a sustainable private initiative. Under the new regulations the evaluation and approval of an initiative must be declared within 180 business days and can be delayed by an additional 60 business days. Once these deadlines have lapsed, the government must decide whether to continue or file the private initiative.

Co-Financed Private Initiatives

With the passing of Law No. 29951 the private sector was allowed to present co-financed private initiatives if they qualified as “priority”, meaning those that:

• Were earmarked to cover the public and service infrastructure deficit;

• Have investment amounts above 15,000 tax units; and

• Would imply an implementation term of more than five years. Under the new regulations the private sector can propose projects for public infrastructure, public services, services related to the public infrastructure, and applied research projects or technologically innovative projects that require government co-financing. As a result, the private sector can propose through a co-financed private initiative: (i) new projects that require co-financing from the government; or (ii) the execution of public investment projects that have been declared viable within the framework of the System of National Public Investment (Sistema Nacional de Inversión Pública, SNIP). Proposals for co-financed initiatives may be submitted by domestic or foreign entities, or a combination of both.

To submit a co-financed private initiative, the private sector shall bear in mind the list of priorities for co-financed private initiatives published by ProInversión, which defines the sectors, objectives and strategies of each area in which the government is interested in investing its resources.

In other words, the list of priorities is a guide for private investors with respect to co-financed private initiatives that may be proposed in order to guarantee that the resources allocated to the co-financing will be properly used and will not exceed the budget of each governmental entity. While there is no set date for the publication of the priority list thus far, it shall be published reasonably in advance. Co-financed private initiatives can only be submitted within the first 45 days of each calendar year.

Dispute Resolutions

The new regulations have also added two dispute resolution mechanisms prior to arbitration in order to expedite the resolution of disputes. The first is an amicable mediation figure as an alternative dispute resolution. Parties may submit the dispute to a third party who will propose a resolution that, if accepted, will be binding and non-appealable. The second is a mechanism developed under Law No. 30114, whereby parties may submit disputes to a group of experts that will issue a binding decision, reviewable in arbitration proceedings.

Works For Taxes Regime

The Works for Taxes regime allows for the recovery of the total investment in a public project by deducting taxes payable due to the commercial activities of the company making the investment. It also allows companies to improve the efficiency of their social responsibility programmes and associate their corporate brand with projects that have a high social impact.

Through this mechanism private entities finance or execute the public investment projects of local or regional governments or universities that are viable within the framework of the SNIP in exchange for deducting tax payments in the subsequent fiscal year. As a result, taxes are paid by executing a project without the public entity having to use funds. The public entity selects the company that will finance or execute the project and establishes an agreement with the selected entity prior to investing. Once the company is assigned the project, the corresponding public entity requests that the Ministry of Finance issue a Certificate of Regional or Local Public Investment. Under the prior Works for Taxes regime regulations, the programme included local, regional and municipal projects. The new regulations expand the realm of projects to public universities. Moreover, under the prior regulations the order of priority of the projects was reserved for the regional and local governments; however, the new regulations allow the private sector to propose the order of priority of public investment to be executed under this regime.

The new regulations also allow the investor to recover costs and expenses when the feasibility study has been declared viable but is used to execute the project under a programme other than the Works for Taxes regime, such as when the public entity determines that there are other more efficient alternatives to carry out the project.

Investment Certificate

The “Regional and Local Public Investment - Public Treasury” is a certificate issued by the Ministry of Economy and Finance to companies that finance a project with taxes. The certificate can be used from the following fiscal year for ten consecutive years to deduct taxes owed to the National Superintendence of Tax Administration for an amount equivalent to the total amount financed in the project. Under the prior regulations, the certificate was non-negotiable, meaning it could not be assigned to other entities. Under the new regulations, the certificate is negotiable, except when the company carrying out the construction is the same as the financing entity.

Employment

In the past few years, compliance with employment regulations has been a major concern for Peruvian authorities, triggering greater company supervision. The government’s biggest concern relates to employment contracts of indefinite duration. Under Peruvian employment law, every employment relationship should be of indefinite duration. Employers may only hire for a fixed-term in certain exceptional cases established by the law.

Naturally, companies have a strong preference to hire employees for a fixed-term and sometimes do so even if the situation does not fall within one of the exceptions that have been established by the law. In recent years Peruvian employment authorities have been more vigilant about ensuring that fixed-term contracts comply with the law.

In addition, the authorities are also carefully scrutinising compliance with health and safety regulations. In the past five years the health and safety rules and regulations have set strong sanctions for companies that do not comply with the relevant standards. The business community has been lobbying the government to find a reasonable way to ensure the fulfilment of labour regulations without creating undue obstacles to business development.

In response, in July 2014 Law No. 30222 entered into effect, which for a three-year term establishes certain measures to prevent and correct unlawful conduct, consistent with the possibility of ending an infringement procedure if the employer corrects the infractions during a labour inspection. Also, if infractions continue, the fine imposed shall not be greater than 35% of the total value of the fine, based on the principles of reasonableness, proportionality and the mitigation and/or aggravating circumstances, with the exception of special cases.

Since the new law entered into effect, the Labour Authority has been conducting labour inspections with a view to guiding employers, developing “orientation inspections” and giving them a chance to correct violations instead of imposing sanctions immediately. With this government initiative, employers will have better incentive to develop their business while complying with employment regulations, promoting the formalisation of businesses all over the country. In addition, the government is receiving diverse proposals from the business community to implement alternatives in order to promote the growth and development of the country, which includes labour law reform proposals that are being analysed to improve the labour system and ensure better protection of labour rights.

The government has also taken action in the public sector by creating the National Civil Service Authority to improve the skills and management of public servants, modernise public institutions and generally professionalise careers in the public sector. Part of the goal is to improve the performance evaluation system of public employees in order to improve public services and ultimately reduce the level of corruption that is present in Peru’s public system.

With the promulgation of the Civil Service Law (Law No. 30057), the government plans to reward employees according to merit, thereby raising the quality of services and increasing the salaries of the majority of public employees, encouraging their personal and professional growth. Surveys conducted by certain agencies reveal there is significant support for these changes and we believe this reform process will yield positive results because it will improve the public service of state entities as well as respect employee rights in the public sector.

Money Laundering & Anti-Terrorism Laws

undefined The first step taken by the legislation to regulate money laundering was the approval of Law No. 26702 in 1996, commonly known as the Banking Law. It contained a section regarding suspicious financial transactions, essentially requiring the corporations of the financial system to report any unusual transaction without any evident economic or legal foundation to the National Prosecutor if there were signs that such transaction was related to illegal activities.

In 2002 the Peruvian government created the Financial Intelligence Unit of Peru (Unidad de Inteligencia Financiera, UIF-Peru), which was later incorporated into the Superintendence of Banking, Insurance and Pension Funds (Superintendencia de Banca, Seguros y Administradora de Fondos de Pensiones, SBS), as a specialised unit in 2007. In addition to creating the UIF-PERU, the law also established the basic structure of the prevention system known as SILAFIT. Under this prevention system, the Public Ministry, the judicial power, UIF-Peru, supervising organs (SOs), control organs and the Peruvian national police must collaborate with each other and with any local or competent foreign entity. Any individuals or legal entities carrying out economic activities specified in the law are also required to collaborate, thereby broadening the scope of financial control beyond just the authorities. For example, stockbrokers, export/import firms, travel agencies, couriers or mining companies must report suspicious transactions that may be linked to illegal activities.

Compliance responsibility falls on the board of directors, the general manager and a compliance officer, which must be designated for the exclusive purpose of reporting to the UIF-Peru and supervising the system’s correct functioning. The law guarantees the confidentiality of the officer's identity.

According to the law, each party that is subject to the law must maintain a registry of operations that exceed $10,000, or its equivalent in local currency, or transactions that in total exceed $50,000 – so long as they were performed in the same month and were related to the same person. Furthermore, the registry of the operations must include information, such as the client’s identity, address, legal capacity and occupation or corporate purpose. The UIF-Peru may also request, at any time, to access this registry.

When encountering any suspicious transactions, regardless of the amount, all SOs have the duty to report to the UIF-Peru within 30 days. In this event, the compliance officer issues a report of suspicious transactions (Reporte de Operaciones Sospechosas) to the UIF-Peru containing all relevant information related to the transaction. In addition, every six months the compliance officer must issue a report on the level of compliance with the system. The law also establishes that all SOs must have a prevention manual comprising the policies, mechanisms and internal procedures to be followed with regards to the detection of transactions linked to money laundering or financing of terrorist activities.

In order to help the UIF-Peru and make the system more efficient, the law makes a distinction between supervised and non-supervised persons. In principle, the UIF-Peru focuses on directly supervising persons that are not regulated by a supervising entity. For example, mining companies are supervised by the Ministry of Energy and Mines or regulated by the Superintendence of Securities; however, these regulators must coordinate with the UIF-Peru and report all suspicious transactions they have encountered.

In 2008 the SBS issued Resolution No. 486-2008, establishing specific regulations applicable to compliance officers, the registry of operations, the prevention manual, and added the requirement to have a code of conduct. To complement this regulation, the SBS approved models for the prevention manual and the code of conduct. In practice, these models are also used as guidelines, as a way to facilitate compliance with the system.

In 2012 the SBS established a new regulation for infractions and sanctions to prevent money laundering and the financing of terrorist activities. The characteristics of disciplinary procedures, the types of sanctions, reductions of fines and other matters were regulated. The application of sanctions is carried out by the supervising regulators or by the UIFPeru, depending on the kind of person.

The SBS issued a resolution in October 2014, extending the list of those subject to the law to those individuals or legal entities that do business or lease machinery and equipment used in illegal mining or logging, as well as extending it to those that produce, distribute, transport or commercialise chemical inputs used in such illegal activities.

Pension Fund Regulatory Changes

In Peru private pension funds are managed by pension fund administrators (administradoras de fondos de pensiones, AFPs) and are subject to SBS supervision. Under Article 25 of the AFPs Law, AFPs may invest in debt, equity and certain derivatives and other instruments. Prior to recent regulatory changes, each investment had to be previously approved by the SBS in order to qualify as an “eligible investment.”

This investment process has now changed with the recently enacted regulations regarding the local and foreign investments of pension funds. Under SBS Resolution No. 1293-2014, pension funds managed by AFPs are now allowed to invest in plain vanilla instruments (such as stocks, short term instruments and mutual funds) without prior authorisation from the SBS. However, for more complex instruments, such as derivatives or other alternative investments, AFPs still require prior authorisation from the SBS. This new regulation has essentially shifted the responsibility of assessing investments from the SBS to the AFPs. The new regulations require each AFP to follow its own internal procedures that have been approved by its board of directors and investment committee to determine whether the instrument is eligible under AFP investment regulations.

In order to do so, each AFP must create an investment file documenting each investment transaction according to established specifications. The files must consist of, among other things, supporting documentation for the investment process, information on counterparties and other information showing that the AFP performed a risk analysis to determine that each investment qualified as an eligible investment under AFP regulations.

The purpose of these recent regulatory changes is primarily to expedite the investment process, allowing each AFP to become more competitive and efficient, while still maintaining a rigorous investment control system that protects the funds contributed by employees. Even though the SBS will no longer be approving every investment for plain vanilla transactions, the regulations require each AFP to give the SBS access to documents and files so that it can monitor the investment process, allowing it to ensure that AFPs are indeed applying the correct criteria to determine investment eligibility.

These new regulatory changes are a positive step forward in allowing pension funds to make investment decisions efficiently. Under the prior rules, SBS approval delayed transactions and sometimes forced AFPs to miss investment opportunities. The SBS has relaxed the investment procedure for plain vanilla instruments for now but more changes for other more complex instruments are expected in the future.

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The Report: Peru 2015

Legal Framework chapter from The Report: Peru 2015

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