The new government of President Pedro Pablo Kuczynski had ambitious plans for private infrastructure investment in Peru. Six months on, Tiziana Barghini assesses its progress.
When Peruvian President Pedro Pablo Kuczynski (PPK) took power in July, expectations ran high for rapid change. But while the government of Peru moved to address excessive red tape and a lack of new projects in its first six months, industry insiders say it is too early to declare victory.
Among the PPK administration’s first steps, a new PPP law overhauling the country’s procurement process takes effect early this year. The government’s economic ministry is working on a three-year infrastructure plan for approval around May. And Alvaro Quijandria, 50, an economist tapped to run Proinversion, the government’s procurement agency, plans to launch new PPPs.
So far, Proinversion intends to allot at least four PPPs over the first six months of 2017.
All told, the PPK administration plans to launch about USD 35bn of infrastructure projects by 2021. The activity would roughly double the USD 18bn allocated by Proinversion for 19 projects under President Ollanta Humala (2011-2016).
To carry this out, the government moved to strengthen Proinversion’s hand via new rules on its operations that take effect this year. Along with three government ministers, Proinversion’s new six-member board will include three independent members to provide input from the private sector. To avoid time-consuming changes in contracts on infrastructure projects, Proinversion will weigh opinions and requests from ministries and bankers to speed up the financial close of projects.
New offices will open to advise and supervise local administrative bodies on the authorizations and land expropriations that caused delays in the past.
Enrique Oliveros, a partner at EY Peru who worked on the new legal framework for Proinversion, said he is confident the new PPP law will produce long-term results starting in the second half of 2017.
“All these changes are favorable and we hope that they bring a stronger Proinversion and a more dynamic infra market,” Oliveros said. “Of course there will still be people who are not happy but the changes are the result of serious work that has been discussed by developers, bankers and investors. Before the approval, they were given the opportunity to include comments and changes. The result is important and positive.”
Questions remain about the pace of implementation and a lack of deals as the new government faces the complexity of carrying out its plans
Bankers and investors would like to see more concessions on the table in the short run as well as new projects for the long-term pipeline. The handful of smaller projects that Proinversion lined up for the coming months do not measure up to the mega pipeline that international investors would like to see.
Project limbo lingers
“The private sector has welcomed the changes in the PPP law and at Proinversion, but what we are waiting for now — not only on the banking side but also from corporations and the developers — is to see results,” said Jorge Yataco, executive director at BBVA Continental in Lima. “It is important for our country to have infrastructure investments and this is not only to give the economy a boost.”
A number of projects allotted under the former government remain in limbo. Reasons for this include a lack of specific authorizations, a need to review contractual aspects, and questions around financing.
The casualties include the massive USD 7.3bn Southern Peruvian Gas Pipeline (GSP), the USD 600mn Chinchero airport in Cusco, and a USD 1.7bn ring road around Lima. Many expected the new government to unblock them or “destrabe” — a Spanish verb that means to remove everything stopping them.
“There have been some issues with old projects, like the GSP or the Chinchero airport and the expectation was that they were going to be restarted very quickly after the election,” said Oscar Trelles de Belaunde, a partner at Estudio Echecopar. “Up to now these projects did not restart and that is a major area of concern for everyone.”
Ongoing investigations into alleged bribes paid by Brazilian developer Odebrecht now cloud the outlook for the GSP, the largest single project allotted under the past administration.
The company told U.S. authorities it paid USD 29m in bribes and it realized benefits of USD 142m in Peru, according to a government report. Odebrecht recently paid a voluntary deposit of USD 8.9m to Peru as it cooperates with prosecutors.
The pipeline concession could be cancelled if the consortium does not reach financial close by January. That close may not take place unless Odebrecht’s 55% stake in the SPV is sold first. Uncertainties remain about the sale given the current investigations.
Canada’s Brookfield Asset Management and China National Petroleum Corporation (CNPC) may be lining up to buy Odebrecht’s stake, after Sempra and Italo-Argentine Techint withdrew from the deal, according to media reports. A spokeswoman from Brookfield declined to comment. CNPC did not return an email.
With the deadline for a final close looming in coming weeks and no apparent buyer for Odebrecht’s stake, the concession may be reopened.
Work on the Chinchero Airport is expected to start as early as this month after the consortium that holds the concession agreed to transfer some financing obligations to the government.
In another move, Peru’s transportation minister has cleared the way for the ring road around Lima to restart, a source said.
Work on a second line for the Metro in Lima is likely to restart soon since land expropriation is now moving forward, sources said.
Despite these efforts, industry players see challenges ahead.
“People who have come into the government have a lot of energy but I think that they found things are harder to get done than they believed,” said de Belaunde , the partner at Estudio Echecopar. “It is alarming to them.”
Government officials may be reluctant to sign off on contracts to avoid getting pulled into any potential investigation of wrongdoing.
“You can have great laws but if the comptroller initiates an investigation on the officials who signed, next time it will be harder to get the paperwork,” Trelles said.
Addressing this concern, Proinversion’s Quijandria said decisions taken by officials “are not subject to criminal liability except in case of fraud and negligence.” Also, the government now allows the use of insurance policies to cover civil, administrative and penal liabilities, he said.
Any movement by the government on just a few projects may fuel more optimism.
BBVA’s Yataco said he would like to see the government re-start the USD 248mln Huancayo-Huancavelica Train and others.
“We are not asking for the moon,” Yataco said. “We are realistic and we know that they have to start somewhere.”
Jose Manuel Abastos, partner at Hernandez & Cia Abogados, said the new government “did a bit of wishful thinking” on its infrastructure plans.
“They thought that putting things back in motion was easy,” he said. “The issues were more complex than expected.”