The construction sector has both benefitted from and sustained Peru’s macroeconomic growth, as private and public building projects together have allowed the sector to experience repeated years of expansion. Though this rhythm has seen a deceleration recently, the sector continues to be an integral part of the Peruvian economy, and will be part of ongoing efforts to improve housing, develop new urban areas and engage in large-scale infrastructure projects to improve competitiveness.

By The Numbers

Sector activity is divided between infrastructure and general construction comprising 45% and 65% of the sector, respectively, according to the Peruvian Chamber of Construction ( Cámara Peruana de la Construcción, CAPECO). The construction sector has seen a slowdown in the rate of growth, falling from a few years of double-digit growth to more conservative figures in 2014 and 2015. Much of the trend is marked by a reduction in public expenditure. According to government figures, local and regional public investment fell 40.2% and 31.3%, respectively, in the first half of 2015. Collectively, local and regional public investment account for 63% of total public investment in Peru. The impact of this decrease was only partly offset by a 16.4% increase in investment by the central government over the same period.

Domino Effect

Part of this is related to a changing economic reality in Peru. “A large reason for this reduction is the slower performance of the mining sector; the price of copper has gone down, and so have Peru’s exports. The construction sector is very much tied to the mining sector’s performance,” Erick Rojas Carlotto, a technical expert at CAPECO, told OBG. Other elements affecting growth are more cyclical, such as the expectation related to the upcoming general election in 2016, which tends to slow activity in the sector. These factors have been leading to slower yearly growth levels. In June 2015 construction activity saw a 3.15% reduction compared to the same period in 2014, classified by the chamber as the worst performance in five years. In June 2014 the sector expanded 4.2%, after growth rates of 13.6% in 2013 and 11.03% in 2012. Home sales have also registered a reduction of 40% in 2014 and 24% over the first half of 2015 .

The slowdown is reducing the impact that the sector is having on overall employment. “Traditionally, each job created in the construction sector resulted in four indirect jobs. But with the current performance, each new job now represents only three indirect jobs,” Rojas told OBG. In 2013 the sector accounted for 5.1% of GDP, according to Peru’s National Statistics Institute.

Despite a weaker performance, the medium-term outlook for the sector’s main drivers – housing demand and urban building construction – remains positive. Housing demand is considerable despite lower sales, and urban building construction has been driven by office and commercial real estate development. More importantly, much remains to be done in order to improve infrastructure across the country.

Infrastructure Revamp

Development of infrastructure has been marred by both conjectural and structural issues in the past. On one hand, an unstable economic and security situation hampered large-scale infrastructure work from advancing. This has left important gaps. The World Economic Forum’s “Global Competitiveness Report 2015-16” ranked Peru 89th out of 140 countries for the quality of its infrastructure, below neighbours Colombia (84th), Mexico (54th) and Chile (45th).

Recently, with macroeconomic growth allowing for a new-found fiscal flexibility, successive Peruvian governments have been channelling private and public funds to infrastructure development across the country. Difficult conditions prevail, however. Peru’s geography continues to pose a challenge to the improvement of transport and energy connectivity, with large-scale projects impeded by difficult terrain, including the Andes mountains and swathes of difficult Amazonian jungle. “Peru has immense economic growth potential, especially with respect to infrastructure. The main challenge ahead is execution, which is vulnerable to delays that many times officials are unable to control or predict,” said Sergio Quiroz Ortiz, general manager of construction firm Tigre Peru.

Mind The Gap

Peru faces a major infrastructure gap. According to a study by the School of Public Management at the Universidad del Pacífico, for the Association for the Promotion of National Infrastructure ( Asociación para el Fomento de la Infraestructura Nacional, AFIN) released in late 2015, current infrastructure needs amount to $68.8bn in investment for the 2016-20 period. To cover its infrastructure needs to 2025, Peru would need to invest close to $160bn. This is a tall order, involving annual investment of 8.3% of GDP for nine consecutive years. However, the benefits would be considerable. The study estimated that the impact of those investments would add the equivalent of 15.5% of GDP annually during the 2016-25 period.

“The prevailing policy in recent years has been to reduce debt. But given that we need to build infrastructure and that anti-cyclical measures could be useful for the country at the moment, a policy of more debt for infrastructure or co-financing of projects would be useful,” Félix Jiménez Cieza, economic affairs coordinator at AFIN, told OBG.

Sector Needs

Not all sectors require the same amount of investment. AFIN’s study points out that 36% of long-term infrastructure needs, or $57.5bn, relates to road infrastructure. The second most critical segment is the energy sector, which requires $30.7bn. Accounting for 17% of the country’s long-term needs, telecoms infrastructure needs some $27bn. Health and education, two sectors that have recently seen increased investor interest through the Public Works for Taxes programme – which encourages private investors to suggest and structure infrastructure projects and present them to the government – will require investment of $18.9bn and $4.5bn, respectively, or a combined 15% of needed capital. “There is a significant infrastructure gap in the health and education sectors, so there are many opportunities for construction companies to help bridge this gap.” Janeth Bouby, general manager at Bouby SAC, a local engineering and construction company, told OBG. “Co-management arrangements also offer a way for private players to enter these sectors.”

The government has also been preparing for the potentially grave effects of El Niño in 2015-16, which could deliver a heavy blow to existing infrastructure, especially in northern Peru.

Moving Parts

An improved budgetary position in the late 1990s and early 2000s gave Peru the means to accelerate infrastructure development, with much being channelled towards the transport sector. According to ProInversión, the government agency tasked with attracting private investment into infrastructure projects, as of June 2015 total investment commitments related to 31 transport concession deals reached $14bn. The funds are being directed to ports, highways, airports and urban and regional railway systems. In mid-2015 up to $5.2bn of that amount had already been fulfilled.

Road Work

Road expansion and maintenance received much government attention, and using the public-private partnership (PPP) model, authorities have been able to attract private capital to revamp Peru’s strategic road network. One of these, the 2635-km Longitudinal de la Costa Highway, or Panamericana, has been divided into seven sections. Five sections have already been tendered and allocated. For the remaining two portions, the link between Ica, Nazca and Quilca in the south, as well as the connection from Sullana to Tumbes, transport authorities have received private sector proposals that are currently being studied. The tenders for both of these sections are expected to be allocated during the first half of 2016.

Along the Andes, the 3503-km Longitudinal de la Sierra Highway is being developed to connect Peru’s interior. It has been divided into five sections, three of which are being developed through PPPs. The remaining two will be built as public works. The 422-km section five of the highway is to be tendered during the first quarter of 2016. Additionally, sections one and three of the road, which will extend over 328 km and 1458 km, respectively, will be completed by the government.

Metro Build

The biggest transport project currently under way is the construction of Lima’s metro system. The second line, which will run for 35 km, is expected to cost over $5bn. The tender for the project was awarded in 2014 to the Nuevo Metro de Lima Consortium, made up of two Italian firms, Finmeccanica and Salini Construttori, as well as Spanish contractors Fomento de Construcciones y Contratas and Actividades de Construcciones y Servicios, together with Peruvian engineering company Cosapi. Construction began in May 2015 and is to be finalised by mid-2019. The metro’s third and fourth lines are expected to be 32 km and 30 km, respectively, with the tender for the first of these to be awarded in 2016 .

Due to its size, complexity and cost, the second line of the metro is expected to have a positive impact on the construction sector. In June 2015 the Nuevo Metro de Lima consortium raised $1.16bn with a 19-year bond offering a 5.875% yield, to help support the cost of the project. This was the highest non-governmental bond offer in Peru to date.

Laying Tracks

Peruvian, Brazilian and Chinese authorities have been discussing the construction of a 5300-km rail link between Peru’s pacific coast and the Brazilian Atlantic. The proposed line would run from the port of Ilo in southern Peru to the Brazilian Açu port. The new link would be used to reduce the cost of shipping commodities such as Brazilian iron ore and soybeans to China. The three countries signed a memorandum of understanding in November 2015. Despite the potential to improve logistics between Latin America and China, the construction project, expected to cost up to $10bn, is controversial. Indigenous groups in Brazil and Peru have expressed worries about environmental impacts. More certain is a smaller railway project to rehabilitate the existing 129-km line between Huancayo and Huancavelica. The winner of the $200m project will be announced in the first quarter of 2016, according to local media reports.

Several infrastructure projects are also being directed at airport infrastructure. The capital’s Jorge Chávez International Airport is undergoing an $850m expansion aimed at building a new terminal, aircraft slots and a second runway. Additionally, the project to build a new $658m international airport to service the city of Cusco was awarded in 2014 to the Kuntur Wasi consortium, made up of Andino Investment Holding, a Peruvian group, and Argentinian firm Corporación America. Construction of the new airport is set to begin in 2016 in nearby Chinchero, over a 40,000-sq-metre area. Investment is also reaching smaller airports in Arequipa, Ayacucho and Tacna. All three will see expansion of terminals and runways.

Linking Up

Economic growth has also increased the demand for energy. This has led to higher generation and distribution needs, as urban expansion and industrial capacity are added to existing capacity. To take advantage of Peru’s gas reserves, the country is building a 1000-km gas pipeline linking the Anta gas fields in the Cusco region to the southern part of the country, to bring feedstock to factories and thermo-electrical power plants, as well as to several cities. The new pipeline is also expected to provide new gas export routes.

One of the country’s most ambitious projects, the tender to build the Gasoducto Sur Peruano, was awarded in June 2014 to a consortium of a subsidiary to Brazil’s Odebrecht, Infraestructura de Transporte por Ductos, and Spanish firm Enagás. The concession is valid for 34 years, with the project expected to cost $3.6bn-4bn, although Proinversión has stated that the total cost could reach $7.3bn, taking maintenance into account.

The pipeline will cross the Cusco region southwards, across to the Arequipa and Moquegua provinces, ending at the Pacific port of Ilo. A series of secondary connections will link the main pipeline to the cities of Quillabamba and Cusco, and with the city of Abancay in the neighbouring Apurimac region. Further south, secondary links will bring natural gas into the region of Puno, as well as further south towards the city of Tacna. Although the secondary connections represent added construction costs, they will also allow the benefits of natural gas to reach a larger number of domestic and business users, which in turn will help the concession holders recoup building costs faster. As of July 2015, the consortium in charge of the project reported that one year after signing the concession deal, 20% of the project had been completed.

Refining Capacity


Another large-scale energy project is the revamping of the Talara Refinery in the city of Piura. The project was awarded in May 2014 to Spanish contractor Técnicas Reunidas, by state-owned energy firm Petroperú, and will require a total of $2.7bn. The project is expected to be completed in 2017, and will expand refining capacity at the facility from 60,000 barrels per day (bpd) to 95,000 bpd. Although the project has already begun, Petroperú was still trying to secure necessary investment capital, planning to finance the modernisation programme by issuing a bond. “This project will be an important catalyst for the construction and infrastructure sector if it moves forward,” Jasmine Helme, senior analyst at Credicorp Capital, told OBG.

The sector is also likely to be spurred by a large-scale urbanisation project. The Ministry of Housing, Construction and Sanitation announced that the project to build a new city in the northern region of Lambayeque will begin to be tendered in 2016. The new Olmos city will be developed to eventually accommodate between 400,000 and 500,000 inhabitants as well as support large-scale agricultural development in the region (see analysis).

Enhancing The Model

The government has been able to improve regulation and attract private investment into the large infrastructure projects. In a national address in July 2015, President Ollanta Humala stated that a total of 28 PPP projects worth $20.4bn had been tendered during the previous four years of his government, between 2011 and 2015. Although this has meant private expertise and fresh capital to revamp existing infrastructure, existing PPP concession practices could be improved. “The institutional level needs to be strengthened, as the current PPP model is difficult to manage for companies that are dependent on the government for aspects such as land access,” Jiménez told OBG. One example of this has been the delayed transfer of government lands necessary to expand the capital’s Jorge Chávez International Airport, which has stalled expansion work at the congested airport for several years. Under the concession contract, the land was supposed to be made available to Lima Airport Partners, the concession-holder, in 2006, but has been delayed repeatedly. On the other end of the spectrum is the project for the new Chinchero Cusco International Airport, being built to serve the city of Cusco. To avoid past problems, the land expropriation issues were dealt with in the initial stages of the project.

“In some aspects, there is a learning curve towards concessions and private management of public infrastructure. The government is learning and improving, which is positive,” Jiménez told OBG. Legislative changes are also helping. In August 2015 the government approved a new expropriation law aimed at accelerating procedures. This will likely help keep large-scale projects like the capital’s second metro line on schedule.


Other issues present different challenges. Investment commitments in large-scale infrastructure are divided and scheduled, with each new wave of investment in a port or airport being triggered when a particular facility reaches specific pre-agreed traffic figures. However, private operators of public infrastructure regularly face difficulties and delays when implementing these plans, due to redundant oversight. “Investment financing needs to be reviewed and approved by several public actors, creating unnecessary bureaucracy,” Diego de la Puente, head of legal and labour relations at APM Terminals Callao, told OBG.

Improved technical training and capacity building would also help secure expenditure plans aimed at infrastructure development in Peru’s provinces. “There is no capacity to properly invest public resources in the regions. Consequently, regional budgets end up having, at best, an expenditure level of about 70% of the resources allocated to them by the central government, and the rest goes back to the national treasury without the regional governments properly investing their resources,” Jiménez told OBG. To counter this, ProInversión will regularly send project development experts into the regions to build capacity and help support investment capabilities. For example, in February 2015, the central government ran a week-long seminar about PPP concession deals and the Public Works for Taxes scheme, to 70 state employees in the Valley of the Apurímac, Ene and Mantaro Rivers region, one of country’s poorest areas where investment in infrastructure is critical for development. These measures can help improve expenditure efficiency. However, a more permanent cooperation programme would do more to bolster knowledge transfer onto regional entities.

Added Competition

In addition to economic development, the rise of private financing in infrastructure has been reshaping the sector. New regulatory instruments for private-public cooperation are being created and improved. Private initiative projects have become increasingly common, with authorities receiving various contractor-originated proposals for revamping of infrastructure such as roads, ports, schools, hospitals and hydro-electric dams. These can be either co-financed proposals, where the state is expected to contribute with some amount of financing, or self-sufficient private sector proposals, in which the private operator establishes a financial agreement that is sustained through expected project revenue. Once received, private sector proposals are evaluated, and if deemed relevant authorities open the project to the market, to verify if there is an alternative proposal for the same infrastructure project.

The Public Works for Taxes scheme has also become a popular way for private firms to contribute to the local communities in which they operate, and for the government to attract more private financing for infrastructure. Through local government project proposals, firms can offset certain tax expenses by building infrastructure such as roads, schools and health care facilities in the areas close to their operations. The scheme has focused mostly on large-scale extraction firms working in the provinces. Between 2009 and August 2015, the Public Works for Taxes scheme channelled PEN1.6bn ($510.7m) into infrastructure.

The new mechanisms and added stakeholders are boosting competition in the infrastructure sector, and pushing it to operate more efficiently. “Peruvian contractors have been quite spoiled over recent years, because they have been able to get a very high level of return on their projects. There used to be a lot of room for widening their margins in general. Now, projects will be tendered at a more competitive price, and this is not positive for local construction companies. They have to accept that this is the new normal for them,” Helme told OBG.


Despite the slowdown in activity, the construction sector is becoming increasingly relevant for Peru’s development. With large-scale infrastructure projects channelling private and public investment across the country, Peruvians will benefit from the current development plans.

As the number of tendered projects increases, the authorities are gradually improving the means for collaboration between private operators and the state. This will help to make the infrastructure construction market easier to manage for Peruvian and foreign firms alike, as well as help keep the country a competitive destination for foreign direct investment in the sector.

Despite the somewhat lacklustre recent performance, the number of projects in the pipeline will ensure activity over the coming years. However, the upcoming elections in 2016 and related government change can be expected to slow the rate of projects being allocated over the short term.