The Peruvian government is stepping up infrastructure development, announcing plans to award $4.5bn in public-private partnership (PPP) contracts in 2018 – up from $3.4bn in 2017 – to boost growth and trade potential. In January 2018 Alberto Ñecco, executive director of ProInversión, announced the agency would survey 18 PPP finalisations by end-2018. This represents 50% growth in the number of PPPs and a four-fold funding rise on 2017, indicating higher public commitment to developing big-ticket infrastructure.
Bridging the Gap
The infrastructure gap is considerable – Peru’s Universidad del Pacífico (UP) estimates this to be worth nearly $160bn for the 2016-25 period – and public investment is keeping pace with the country’s strong economic growth. The transport gap, at $57.5bn, accounts for the largest portion, followed by energy, ICT and health, with $30.8bn, $27bn and $18.9bn, respectively. While the government has allocated 3-4% of GDP to this, UP estimates that 8.3% of GDP is needed to bridge the gap.
Inadequate infrastructure is known to exacerbate socio-economic inequality, as education and health care facilities – particularly in rural areas – have been struggling. As such, government moves to increase infrastructure investment through PPPs are a welcome sign of progress towards mitigating this disparity.
Regulatory Changes
Increased investor interest in PPPs has been partly attributed to the implementation of reforms to increase clarity in contracting and operating processes. Enacted in March 2017, the measures set higher standards for project evaluation, requiring that studies be undertaken to determine whether state funding is needed for certain developments, and that full environmental and technical reports be prepared ahead of a project launch.
These processes should help avoid costly delays or appeals against developments. Tighter tendering procedures and oversight provisions were also included in the regulations, with clauses to prevent underbidding in the contract process. This should block attempts to upgrade concessions after they have been awarded.
The 2017 reforms follow major legislative changes regarding PPPs that were enacted in 2008 and modified in 2015 to facilitate the promotion of private investment. The 2008 regulations established the National Public Investment System (Sistema Nacional de Inversión Pública, SNIP), an overarching body that incorporates the Ministry of Economy and Finance, regional and local government representatives, and ProInversión. Before this, ProInversión alone was tasked with all private investment promotion and PPP facilitation activities, but SNIP now distributes these responsibilities between its various associated bodies.
Crucially, these changes have allowed private investors to engage directly with regional and local governments. The 2015 updates also allowed private companies to finance and implement public projects and deduct these investments from their income tax.
Progress so Far
Since the enactment of regulatory changes the state has successfully leveraged PPPs. Between 2008 and 2015, 64 PPP contracts were awarded, collectively worth $29bn. According to the World Bank, there were 114 active domestic PPP projects in July 2018, together worth $29.8bn. Transport, electricity, roads, water, gas and sewerage make up the largest projects by value. The biggest active initiative by far was the Lima Metro – Line 2 railway, worth $6.45bn.
The increasing number of PPP initiatives should help businesses and state actors synthesise their strengths. “One of the main advantages of PPPs is the distribution of risks between the public and private sectors,” Alejandro Zegarra, adviser at ProInversión, told OBG. “In addition, the private sector can provide the experience and technology to carry out a high-quality project.”
Investor Roadshows
To attract investors and showcase its portfolio of PPPs, the government has participated in several international roadshows since 2017. Led by Ñecco, these have mainly engaged European and Asian investors to support PPPs in transport, ICT, energy, mining, water and sanitation. Public representatives held several meetings in Europe, hosting bilateral meetings with major international companies and offering stakes in PPPs worth over $10bn.
Upcoming Projects
Over the 2018-21 period ProInversión expects to award contracts for 50 additional PPP projects in transport, irrigation, health, education and energy, with a combined budget of $7.6bn.
Initiatives to be tendered in 2018 include port developments at Salaverry and San Juan de Marcona, an upgrade to the Huancayo-Huancavelica railway, a water treatment plant at Lake Titicaca, a gas distribution concession in the south, and new power lines in Niña-Piura, Pariñas-Nueva Tumbes and Tingo María-Aguaytía. Furthermore, broadband works are planned for Ancash, Arequipa, Huanuco, La Libertad, Pasco and San Martin. The Michiquillay, Colca and Jalaoca mining projects, as well as modernisation of the North-west Electric Public Service Regional Company, are also in the pipeline.
Looking further ahead, at the January 2018 announcement Ñecco said that studies were being performed on a proposed $5bn coastal rail link and expanded gas pipeline network in the south of the country to determine whether they should encourage private sector participation. The faster rollout of PPPs is expected to significantly augment investment volumes in 2018, according to a report released by the Lima Chamber of Commerce in January 2018. The report projects a 4.6% rise in private sector investment over 2018. Meanwhile, state investment outlays are set to see a 10.2% spike to $7.9bn, with infrastructure being one of the main beneficiaries.
Activity Driving GDP
The planned rises in investment in transport, communications and utilities are expected to boost both the domestic economy and external trade. In July 2018 the IMF updated its economic growth forecast for Peru to 3.7% for the year, one of the highest projected rates in Latin America. While export volumes are expected to remain robust, the IMF report said their relative contribution to GDP growth would be lower than in previous years, as major mining developments had reached maximum capacity. Instead, the fund forecast that domestic demand would drive expansion, fuelled by the government’s investment and stimulus programmes (see overview).
Local stakeholders agree, saying the smooth rollout of infrastructure developments – along with stability of inflation, exchange rates and the financial sector – will be critical to achieving the 4% forecast. “If these elements are in line, together with the implementation of the pipeline of infrastructure projects, the country should be able to meet its growth goals,” Mario Farren, former general manager of Citibank Peru, told OBG.
The initiative should also help clear trade bottlenecks. In a December 2017 OBG-hosted panel discussion in Lima, leaders from export-oriented industries said high logistics costs resulting from shortfalls in infrastructure are an obstacle to export trade and disincentivises investment. Bridging the infrastructure gap is key to reducing logistics costs and improving export capacity through greater connectivity, delegates told OBG.
Increasing Investment
The PPP programme is expected to provide broader economic advantages beyond construction and development. One expected beneficiary is the finance sector, as new construction projects will increase private and public demand for capital. “Infrastructure projects contribute significantly to the development of the economy,” Eduardo Torres-Llosa, general manager of local lender BBVA Continental, told OBG. “The banking system has the financial capacity, human capital and disposition to participate in the development of such projects. Furthermore, the global context is favourable to raise capital.”
In addition, the infrastructure development plan is likely to boost the stock exchange as companies seek to attract institutional investors, and pension and insurance funds look to invest in longer-term projects.
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