PPPs are driving up FDI and improving efficiency

As with several countries in the region, Peru has been channelling the proceeds of its economic performance into the development of infrastructure. Through its public-private partnership (PPP) model, strategic infrastructure such as airports, port and roads has been on the receiving end of private financing and programmes aimed at enhancing managerial skills to improve the country’s overall competitiveness. Now, authorities are hoping to apply the PPP model to public services and installations such as schools, hospitals and penitentiaries. Alongside the inclusion of other smaller-scale projects within the PPP concession framework, the government has been working to make regulations more versatile.

PPPS On The Rise

The annual amount of investment directed towards infrastructure through PPPs has risen considerably over the past decade. In 2004 a total of $220m was committed to Peruvian infrastructure through this option. This amount has risen considerably, reaching $1.86bn by 2009. An even greater hike was registered over the past two years, with amounts rising from just over $5bn in 2013 to a record $12bn up to the first quarter of 2014, according to figures from ProInversión, the government body responsible for attracting private investment and promoting the PPP deals coming out of the different ministries. As of April 2014, ProInversión’s $12bn portfolio in concessions for the 2014-15 period included projects such as the construction and operation of the second line of the Lima metro, worth $5.7bn, and the new international airport at Cusco, which will be built in the nearby town of Chinchero for $658m. Project allocation under PPP agreements is set to continue to represent billions of dollars over the coming years. Peru’s Association for the Promotion of National Infrastructure (Asociación para el Fomento de la Infraestructura Nacional, AFIN) has listed several large plans that are expected to be tendered and awarded between 2014 and 2018. These include: four additional subway lines for Lima, amounting to 86 km in length; the five sections of the Longitudinal de La Sierra highway, three of which will be tendered under PPP agreements; the northern Peru gas pipeline; and a total of 6000 MW of electricity generation capacity expected to come out of several new dams. AFIN has estimated that these projects will represent between $15bn and $16.7bn of PPP contracts to be awarded per year over the coming four years under the state concession programme.

Evolving Regulation

The country’s current PPP framework is the result of an evolving process that began in 1996, with the public works concession law. Some changes began to be implemented in 2007, allowing for projects to be financed by investment funds, which opened the spectrum for additional sources of funding. The changes also created the concept of co-financed PPPs, which established the framework necessary for the state to contribute a slice of the investment needed to make initiatives succeed.

This has injected some dynamism into the PPP environment by making a wider variety of projects more appetising for private investors. When concession deals were first introduced to Peru, they were basically about privatisation and selling assets. However, since the end of the previous government and throughout the current one, there has been a greater push to use a PPP model that includes co-financing. This is largely due to the fact that there are very few large projects remaining that are sustainable on their own.

Several projects are now broken up into different sections, making them more profitable over the concession period, and in some cases include a slice of co-financing by the state. This can add some managerial challenges, for example, in projects involving road construction, as they require having different builders and concession holders involved in the same project. But it has so far proven to be an efficient way to award concessions for large-scale infrastructure projects by distributing risk among different parties. Co-financing of some infrastructure development has allowed for the viability of some challenging projects, and it has impacted competition between firms looking to win deals, as the amount of co-financing included in the proposals is considered one of the decisive elements when the state compares private offers.

Another change in June 2011 allowed the private sector to take the initiative by proposing infrastructure projects. Recent legal changes are attempting to focus private initiative bids and improve annual planning. In June 2014 the Ministry of Economy and Finance (Ministerio de Economía y Finanzas, MEF) announced that the timeframe for private contractors to present private initiative concession projects would be limited to the initial 45 days at the beginning of each calendar year. This will allow a limited period of time for private operators to present their proposals to ProInversión, which will then evaluate the information, as well as coordinate with the relevant ministries to understand how the suggested projects might be included in their respective strategic plans.

Although the new private initiative rules restrict the timeframe for presenting project proposals, this might help to better organise resources and plan for the year. Private initiative projects might also be a good way for the government to gain technical expertise in tendering and preparing projects related to health care, education and the legal sector, areas where the state lacks the experience it has accumulated in fields such as transport or energy.

Another important legislative change is the establishment of a third-party body to resolve disputes between the state and concession holders. The amigable componedor, or a friendly mediator, will be able to address both technical and non-technical disputes regarding concession deals. Connected to this, the MEF has announced measures to allow for construction work to continue when disputes arise.

Post-Concession Service

Although Peru has seen considerable increases in the amount of private financing it attracts through its infrastructure concessions, some issues show that the relationship between the state and concession holders can be further improved. Examples of this are the multiple situations where planned expansions of infrastructure have been delayed due to the state’s inability to provide land. Although the timeframe for state expropriation and handing over of land was included in concession deals as a responsibility of Peruvian authorities, expansion plans for infrastructure such as roads and airports have been delayed for several years because of this.

After such delays and the concomitant financial costs, the responsibility for expropriating land for expansion has in some cases been returned to the concession holder, who is then faced with going through the judicial system to solve an issue that was expected to be handled by government authorities at the time of the deal was signed. This has caused some issues, as often times the concession holders does not have the same capacity to pursue land expropriation as the government does.

Enhancing Support

Through capacity increases and more training for staff, authorities are trying to become better at dealing with concessions. The Ministry of Transportation and Communications has announced it will seek to double the number of staff at its concessions office to better handle requests. The government is also aiming to increase the level of knowledge among its personnel, so as to improve the way the authorities deal with PPP concession deals. In July 2014 ProInversión signed a memorandum of understanding with the UK government to establish the Programme for Capacity Strengthening in PPPs, which covers training for 70 staff from different segments of the Peruvian government, as well as a variety of regions, to deal with PPP deals. The training will take place over 2014 and 2015, and focus on specific sectors, such as health care, education and legal.

Peru has much to gain from continuing to develop its PPP model. Private management of certain infrastructure has the potential to improve efficiencies. This has been shown in recent years in the way private management of the country’s ports has improved their performance. After the initial $400m investment in the Port of Callao’s southern concession, for example, managed by DP World, average service times were reduced from four days to 12 hours, according to local media reports. Another example is the Port of Matarani, in the Arequipa region, which was able to increase traffic from 1m tonnes a year to just under 4m tonnes after it was taken over by private hands.

Other public infrastructure has similarly been proved to benefit significantly from private management. But authorities now need to focus on the way in which government commitments are guaranteed and fulfilled. As Latin American economies increasingly compete to attract financing and management skills for the purpose of improving public infrastructure, investors will be looking at the way potential expansion plans can be implemented and their investments recouped. Establishing effective processes and a proven track record will be critical for ensuring sustained interest.

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