Reconstruction of public infrastructure brings about positive expectations in Peru

After two years of contraction and a slow first half of 2017, the construction sector recorded much-welcomed growth at the end of the year. As a response to the political challenges and natural disasters of 2017, the government passed two milestone documents that look ahead to the coming years: an anti-corruption law and the ambitious Reconstruction Plan budgeted at PEN25.7bn ($7.9bn).

Although the private segment of the construction sector contracted through the end of 2017, positive results may follow from the anticipated public sector revitalisation. Overall, the construction sector is expected to be a primary mobilising force in 2018.

Industry Layout

Peru’s politically challenging year impacted its overall and sector-specific global competitiveness. According to the World Economic Forum, Peru ranked 72nd place, a decrease in ranking compared to 2016’s 67th place out of 137 countries in the Global Competitiveness Index (GCI). Corruption, inefficient government bureaucracy and tax rates were ranked as the most challenging factors for doing business. In the first quarter of 2017 Peru was ranked 29th out of 50 countries in the Construction Intelligence Centre’s Construction Risk Index (CRI), after a market, operating, economic, financial and political risk analysis. In a country where the majority of investment in construction is private, at approximately 80%, a positive perception is key.

Despite the impression of a challenging business environment, the construction sector managed to grow by 2.2% in 2017 after two years of losses. This is the highest growth achieved by the sector in Peru since it achieved growth of 9.4% in 2013, according to the National Institute of Computing and Statistics (Instituto Nacional de Estadística e Informática, INEI).

The short term appears promising due to the planned public investment from the Reconstruction Plan and the upcoming Pan American games. The Central Reserve Bank of Peru (Banco Central de Reserva del Perú, BCRP) forecasts construction growth of 8.9% by December 2018 and 9.5% the same month the following year. This projection is echoed by the private sector. “The Pan American games, a growing demand for malls, a pipe of mining projects between 2018 and 2021, and the reconstruction of the north of the country will be the main drivers for the construction sector,” Jorge Luis Reátegui, general manager of international engineering and scaffolding firm Layher, told OBG. In 2017 the Peruvian Chamber of Construction (Cámara Peruana de la Construcción, CAPECO) conducted a survey of construction companies, identifying materials and services providers as the best performing construction subsector, with 76% of its companies performing positively, followed by real estate at 57% and infrastructure at 27%. Real estate had the highest growth expectation for 2018 at 85%. However, across subsectors it is believed that public infrastructure will have the best performance. “Approximately 45% of the construction sector in the country belongs to the transport sector in road infrastructure,” Francisco Dumler, executive president of Grupo Invertir, told OBG. “The remaining 55% is divided into two components; approximately 40% is for housing construction and 15% is for the retail sector.”

Currently Peru’s road infrastructure quality is ranked at 108th place out of the 137 countries in the GCI. However, with the majority of the Reconstruction Plan’s public investment budget set to be managed by the Ministry of Transport and Communications (MTC) and with an estimated 68% of developer’s profits earmarked to come from departments outside of Lima, 2018 and 2019 are expected to produce a significant number of road infrastructure projects, resulting in the overall improvement of road quality.


Between January and April of 2017 the weather cycle known as El Niño Costero affected the coasts of Peru and Ecuador. The climate phenomenon describes the surface water temperature rising over the eastern Pacific Ocean, resulting in increased rainfall, and is often accompanied by flooding and landslides. In April 2017 hundreds of thousands of people were affected as a significant number of houses, schools, hospitals, bridges and roads were destroyed. In response, the Peruvian government approved the Reconstruction Plan with Changes in September to repair and rebuild the affected areas, with supplementary work planned to take preventative action for future disasters.

The government entity charged with reconstruction, the Authority for Reconstruction with Changes (ARCC), estimated that over 3500 infrastructure projects would begin in 2018 including the construction of 37,600 homes. The programme budget is divided into three main categories: PEN19.7bn ($6.1bn) for reconstruction; PEN5.5bn ($1.7bn) for disaster prevention and urban development; and PEN450m ($138.6m) on institutional strengthening. After the identification of bureaucratic delays in the initial procurement process, a modification to the law was passed on March 2018, although changes to the execution structure, if any, remain unpublished. That said, it appears that the projects will continue to be divvied up among ministries, regional governments and local governments, albeit with a stronger emphasis on the leadership of regional and local governments.

While the MTC has proposed an aggressive pace of beginning one project every two days until 2020, some critics have questioned the feasibility of such a schedule, suggesting that the proposed timeline has too many projects in too short a time frame given the current resources and systems in place. For example, from the law’s inception in August 2017 to the end of April 2018, ARCC has said it transferred over PEN2.6bn ($800.5m) to finance 624 projects, of which 346 were completed, 220 were in process, three were about to begin and the remaining 55 holding different statuses. Compared to the 3500 projects ARCC set out to complete, it describes a slow start.

Presidential Vacancy

Despite the effects of El Niño and the first motion for presidential vacancy in December 2017, in which then-President Pedro Pablo Kuczynski was implicated in relation to the Odebrecht corruption scandal, the construction sector was able to grow to 2.2% in 2017 with the BCRP projecting growth of 8.9% by the end of 2018.

However, after a second motion for presidential vacancy in March 2018 due to the emerging corruption case that resulted in the resignation of President Kuczynski, sector analysts such as CAPECO have estimated the projected growth could reduce that possible growth by half, down to 4%. In the midst of the second presidential vacancy process, Peru’s government proposed and approved Law 30737 to allow for the immediate civil reparation in favour of the state in corruption cases or connected crimes. This new law replaced Urgency Decree No. 003-2017. Passed in early 2017, the law impeded the exit of companies’ funds – acquired through corruption – from the country while allowing for construction projects to remain active.


A host of projects, varied in scope, budget or national significance were discussed, delayed and kicked-off throughout 2017. The third-largest sports event in the world, the Pan American Games, will be hosted by the capital city in 2019, requiring an investment of $1.5bn from the Peruvian government to subsidise the construction of living quarters to hold over 10,000 athletes and games officials, the construction of three sports complexes, and the remodelling and expansion of two existing sports complexes. Although there are concerns in regards to the projected return on investment, the government estimates that costs can be recovered through the sales of the living quarters as apartments after the games. A total revenue of PEN5bn ($1.5bn) is expected as a result of the Pan American games through sectors other than construction. As of April 2018, an estimated 62% of the Pan American Games construction has been completed.

In terms of expanding urban public transportation infrastructure, Peru’s first underground metro line project, the 34-km Metro Line 2 in Lima, resumed construction after a year-and-a-half-long pause due to technical and contractual disagreements. In May 2018 the MTC announced that 12 km of the line will be in operation by 2021 with the remainder of the project to be completed by the end of 2022.

As for the third and fourth lines, in April 2018 transportation minister Edmer Trujillo told press that subscribed contracts were in place with the necessary pre-construction studies under way.

On Hold

However, some notable and existing airport infrastructure projects are also stalled; Lima’s $1.5bn Jorge Chavez International Airport expansion still needs to overcome land access challenges before construction can begin, while Cusco’s International Airport of Chinchero, due to open in 2021, had yet to break ground as of summer 2018.

Although the Amazon waterway (Hidrovía Amazónica) concession contract – a project that will improve the navigability of 2600 km of the Amazon River and allow for easier mobility and trade – was signed in 2017 by Sinohydro and Construccion y Administracion and the MTC, the public-private partnership (PPP) is expected to experience delays as it failed to follow local participation processes or review the potential environmental impacts of construction.

In regards to oil and gas, a project that has not yet regained momentum is the Southern Peru Gas Pipeline, which has been on hold since January 2017 due to its implementers, Graña y Montero, being involved in the Odebrecht corruption case. Currently Graña y Montero is obliged to repay the outstanding costs related to the unfinished project.

A key sector mobiliser, Proinversión, is the public organisation responsible for promoting private investment in public services primarily through PPPs. Proinversión has prioritised 19 projects for its 2018 pipeline at a total value of approximately $4.36bn. Projects include the rehabilitation of the Huancayo-Huancavelica railroad at $235m, electricity transmission line projects across the country worth $744m and ongoing telecommunications projects to increase broadband access for an estimated $359m.

Private & Foreign Investment

The government has forecast a 3.5% private investment growth rate for 2018, propelled by increased activity in the construction and mining sectors. Proinversión’s PPP portfolio and the state’s promotion of social housing, which also demands the private sector’s participation, may help to drive private investment into positive growth. The BCRP also forecasts credit assigned to the private sector to grow to 7% by 2019, which could serve to enable further investments.

Overall there is continued interest in foreign private investment opportunities in the country. “Upon Brazilian companies’ exit from Peru, a space for other Latin American companies to enter the market opened up. Mexico, Colombia and Chile are now entering the country, and in particular, those companies dealing with water and sanitation infrastructure,” Dumler told OBG. “Even non-Brazilian companies involved in the Odebrecht case are reformulating themselves through acquisitions with foreign entities, as is the case with Ashmore Group and STRACON”.

The country has also been working to position itself as a global player through a number of bilateral free trade agreements (FTAs). “FTAs with the EU have benefitted the construction and real estate sectors in general and the scaffolding segment in particular. FTAs have enabled the import of technologically advantageous products, making it harder for informal companies to compete,” Reátegui told OBG.


Despite political instability in Peru, the construction sector outperformed expectations. Confidence in the sector is being rebuilt through the passing of the anti-corruption law, with further regulatory policies and standards expected to follow.

It is the planned and approved public sector investments that will drive sector growth in the short term and guide local and foreign private investment. Overall, this will lead to continued growth in 2018 and 2019 and foster a favourable business environment.


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The Report: Peru 2018

Construction & Real Estate chapter from The Report: Peru 2018

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