The Peruvian transportation infrastructure gap
As is commonly known, infrastructure is an element of critical importance for a country’s economic system.
Infrastructure is vital for commerce, industry and services, and economic growth is not possible without it. However, due to a range of variables that goes from the lack of resources to simple mismanagement, many countries do not have adequate infrastructure. In such cases, it is said that there is an ‘infrastructure gap’ to be bridged.
The infrastructure gap can be defined as the difference between available resources and the amount of investment required to meet a country’s infrastructure needs. Lack of infrastructure has been a constant in most Latin American countries, making investment in such assets vital for the region’s competitiveness.
In Peru, the infrastructure gap is considerable. According to a recent study carried on by the Public Management School of the Peruvian Universidad del Pacífico, the Peruvian infrastructure gap for the years 2016–2025 amounts to approximately US$159.5 billion. This figure includes infrastructure related to various sectors, such as water and sanitation, telecommunications, transportation, energy, health, education and irrigation. According to the same study, for the next 10 years, an average of 8.27 per cent of the country’s GDP must be invested in order to bridge the infrastructure gap. As mentioned below, there are several legal mechanisms by which private entities are able to invest in Peruvian infrastructure projects.
It must be noted that, out of the total amount mentioned above, around US$57.5 billion is linked only to the transportation infrastructure gap. Around US$17 billion of this amount is for investment in railways; US$31.8 billion for investment in highways; US$2.3 billion for airport investment and US$6.3 billion for port infrastructure.
The following paragraphs provide a brief description of the present situation of transport infrastructure in Peru.
Regarding railway infrastructure, Peruvian railways can be classified in three types: massive transport infrastructure; coastal-Andean railways, mostly dating from the 19th century; and touristic railways. The Peruvian government has granted concessions over only six railways, including the concession of Lines 1 and 2 of Lima’s metro system.
On the other hand, regarding road infrastructure, Peruvian highways are classified as national, regional and local roads. Almost 70 per cent of Peruvian roads are classified as local roads, while the other 30 per cent corresponds to national and regional roads, by a rate of 15 per cent each. While more than 75 per cent of national roads are actually paved, regional paved roads are about 10 per cent of the total, and the rate of paved local roads is less than 2 per cent. Out of the total of 160,000km of Peruvian roads, around 65,000km are currently administered by private companies.
Concerning airport investment, most of the main national airports are already being managed by the private sector. The country’s main airport, Lima’s Jorge Chávez International Airport, was granted for concession in 2001. Many other regional airports are now under a concession regime.
Finally, regarding port infrastructure, only seven out of more than 50 ports owned by the Peruvian port administration have been given to private concessionaries. Up to 2014, around US$962.8 million of private investment had been recognised by the state.
After seeing the large investment amounts of infrastructure to develop listed above, one can see how deep the Peruvian infrastructure gap is. In fact, even though during the past few years several million dollars were invested in infrastructure, there is still a long way ahead. However, recent administrations have shown the political will to promote private investment in infrastructure in order to fill the gap. This is reflected in recent and increasing legislation regarding private investment in public-private partnerships, which we will comment on in the following sections.
Peruvian transportation framework
Depending on the type of infrastructure, as well as its classification as of national, regional or local range, different authorities are competent to regulate and develop it.
Authorities are technically independent. In fact, the authorities in charge of conducting the private investment procedure are different from the ones granting the concessions, while a third authority is competent to supervise the concession’s exploitation. The main authorities regarding the matter are described below.
The most important governing body for transportation infrastructure is the Peruvian Ministry of Transportation and Communications (MTC). It is responsible for the development and promotion of highways, railways, airports and ports, as well as providing them with concessions when they are of national range. The MTC represents the Republic of Peru as the grantor in concession contracts awarded to private investors.
The MTC promotes and executes the construction of new roads, and the implementation of massive transport systems. It also controls the adequate functioning of airports, and promotes the development of port infrastructure. Finally, even though it is not related to transportation infrastructure, it must be noted that the MTC is also responsible for developing and controlling telecommunications infrastructure, as well as for planning the use of the radio spectrum.
The MTC is in charge of the administration of the transportation infrastructure of national range, the elaboration of the national development plans for the sector and the issuance of specific regulations on the matter. Within the MTC, the Department of Railways and Roads is competent to regulate on roads, bridges and railways, and to control the compliance with its regulations. The Department of Civil Aviation, on the other hand, regulates air transportation. Among other things, it also approves the master plan for the development of Peruvian airports.
Regarding port infrastructure, the National Port Authority (APN) is in charge of elaborating and proposing the national plans on port infrastructure to the MTC. The APN promotes the development of port activities, and issues the technical-operative regulations necessary for port services to take place. It is the APN’s policy to promote private investment in the national port system.
Another important government body is the Private Investment Promotion Agency (Proinversión), an independent body attached to the Peruvian Ministry of Economy and Public Finances. Its scope is the promotion of private investment in public services and infrastructure of national range. Proinversión is in charge of conducting the process that results in an infrastructure concession to be granted by the MTC.
Proinversión also has competence to conduct such processes regarding infrastructure of regional and local range, whenever they require the investment of public funds (co-financed concessions).
Local and regional governments are competent to conduct the private investment promotion process, and grant the corresponding concession or authorisation, whenever the infrastructure is not of national range and it does not require the investment of public funds. Municipalities and regional authorities must make their determination with a private investment promotion office, an internal office in charge of these duties.
Regarding control and compliance with legal, technical and contractual obligations, the competent authority is the Public Office for Control and Supervision of Private Investment in Infrastructure (Ositran). As the regulatory agency of the sector, Ositran also regulates, fixes and adjusts tolls and tariffs for the exploitation of infrastructure, and serves as a platform for users’ complaints.
Finally, when it comes to control and supervision of the celebration of construction agreements between private companies and the state, the competent authority is the Supervision Office for Public Contracting. This government body is also competent to issue directives applicable to public contracting, and to administer the different registries and electronic mechanisms used in public contracting.
Being a heavily regulated sector, the legal framework for transportation infrastructure is vast and complex. However, it is still possible to identify certain regulations that serve as a basis for the system. Such norms are described briefly below.
One important norm to be considered is Law 30225, the Law on Public Procurement. It provides the principles that rule state contracts in general, and must be applied by almost every government body. This includes ministries, as well as regional and local governments. This regulation is important because it is the general framework for infrastructure construction agreements between private companies and the government.
Another relevant norm is Legislative Decree 1224, which provides the legal framework for private investment and public-private partnerships. The decree establishes a series of principles that rule the whole private investment process, as well as its requirements, procedure and development. It is also the source of Proinversión’s competence for conducting such proceedings.
Regarding specific-sector regulations, the National Regulations on Railways were approved by Supreme Decree 032-2005-MTC. The norm gives the general classifications applicable to the national railway system, the technical requirements for its operation and the security measures that must be taken by the operators. Also, it states that the MTC must adopt a National Plan of Railway Development, the most recent of which was approved by Ministerial Resolution 514-2015-MTC/01.02. The Plan analyses the present situation of railway infrastructure in the country, as well as the social and economic indicators to be taken into account for future developments.
General road regulations are provided by Supreme Decree 034-2008-MTC: National Regulations on the Management of Road Infrastructure. These establish the general conditions for the management and use of road infrastructure, as well as the applicable fines in case of breaching. Another important regulation is Supreme Decree 017-2007-MTC, which approves the General Road Classification. The decree sets the criteria to follow in order to qualify a road as of national, regional or local range. Finally, the MTC is also competent to approve a National Plan for the development of the road infrastructure sector. In this respect, it has recently approved the National Plan of Road Infrastructure of Bridges, by Ministerial Resolution 103-2015-MTC/02.
Concerning regulations for airport operations, these are provided by Supreme Decree No. 050-2001-MTC, General Regulations on Civil Aviation. The norm authorises the Direction of Civil Aviation to enact the relevant regulations to ensure security in airport operations.
The legal framework for port infrastructure is provided by Law No. 27943, Law on the National Port System, and its regulations, approved by Supreme Decree 003-2004-MTC. The law regulates the provision of services and development of activities on maritime ports, river and other ports. Also, Article 4 of the Law authorises the APN to elaborate a National Plan on Port Development, the latest of which was approved by Supreme Decree 009-2012-MTC. The Law on the National Port System also has certain provisions related to the administration and investment on port infrastructure, as well as regulations regarding the contractual arrangements
Finally, Supreme Decree 044-2006-PCM provides Ositran’s general regulations. The norm regulates the exercise of Ositran’s normative, regulatory, control and sanctioning functions. It also details the dispute settlement procedure to be carried before Ositran between operators and users, among other operative provisions.
The Peruvian legal system provides many tools or mechanisms that allow privates to invest in the infrastructure sector. During recent years, the trend has been to facilitate such private participation, due to the increasing need of infrastructure to maintain the country’s competitiveness, and the friendly attitude toward business of the recent Peruvian governments. In the following paragraphs, the most important investment tools will be described.
Construction agreements executed under the Law on Public Procurement must be the result of a public tender, as is established in the Law’s regulations, approved by Supreme Decree 350-2015-EF.
Article 49 of the regulations contains the successive stages that every public tender must comply with. First of all, the tender must be called by the authority that is competent to celebrate the construction agreement. The calling must include the publication of the tender’s rules, regarding which the participants of the tender are able to present queries or observations. After that, the participants must publicly present their offers, all of which must be evaluated and punctuated. Only after that can the tender’s award be rendered.
A second investment channel to be considered is the one regulated in Legislative Decree 1224, which provides the possibility of entering into public-private partnerships. Article 11 of the decree defines public-private partnerships as a channel of private investment in which private companies provide experience, knowledge, equipment and technology in order to build, develop, operate or maintain public infrastructure. The main aspect of public-private partnerships is that risks and resources are divided between the public and the private sector.
Public-private partnerships are classified in two types: self-financed and co-financed. Self-financed projects are those that are capable of generating their own income. Therefore, the state is not required to contract any financial guarantee to ensure the project’s feasibility. On the other hand, co-financed projects are those that require the use of public funds, or that require the state to contract any kind of guarantee that is likely to be executed.
It is also important to notice that the Legislative Decree 1224 admits the possibility for privates to have the initiative to propose the development of a project. Private initiatives must be presented to the corresponding competent authority, and their final execution is subject to the authority’s discretionary approval. After the approval, the authorities publish the project in order to give third parties a chance to manifest interest in developing it. If no third parties are interested in developing the project, there is a direct award to the proponent. If there are interested parties, private initiatives must go through the general process of public tender, so the proponent does not always end up executing the proposed project. However, the proponent of a private initiative does have certain rights. For example, if it loses the tender there is a chance to compete with the winning bidder in a second round. In the worst case scenario, it can claim the reimbursement of the expenses that it incurred to design the project.
It must be said that, in order for a public-private partnership to be executed, it must obtain the approval of several government bodies, the most important of which is the Peruvian Ministry of Economy and Public Finances. In fact, the Ministry must approve the final version of the public-private partnership’s agreement, as well as of any addendum to such agreement. If not, such agreement is automatically null and void.
A third mechanism to invest in infrastructure is the one provided in Law 29230, the Law on Public Works’ Tax Deductions. The Law provides the possibility for private companies to build public infrastructure in exchange for fiscal credit before the Peruvian Tax Administration. Such credit is embodied in certificates issued by the National Management of the Public Treasury, an office attached to the Peruvian Ministry of Economy and Public Finances.
The projects executed by the application of this mechanism can be proposed to the competent government body by the same private companies that would benefit from the fiscal credit after such project is done. The proposal must then go through a public tender, after which an agreement must be celebrated between the authority and the company that will execute the project. A private supervisor must also be hired to control the advances in the works; only after they are accepted will the private supervisor receive the corresponding certificates.
Finally, we must mention Legislative Decree 1192, which approves the Legal Framework for the Acquisition and Expropriation of Properties, the Transfer of State-Owned Properties, the Realising of Interferences and Other Measures for the Execution of Infrastructure Works. Even though it does not regulate any specific type of investment, it does provide a special regime to facilitate infrastructure investments. This is particularly important because difficulties in the expropriation of properties have proved to be one of the most challenging problems that investors have faced in recent years.
In the last few paragraphs, we have given a clear and fast look on the Peruvian regime for infrastructure investment. As we have already mentioned, our legal framework is business and investment friendly, and the recently elected government will likely follow the same path. The road ahead is still long, yet promising.
Will the gap be bridged?
As stated above, the Peruvian infrastructure gap amounts to several million dollars. However, our country is working on promoting public and private investment to reduce the gap and increase its competitiveness. In the following section, we will describe recent experiences in infrastructure investment, as well as future projects in critical sectors that will help to reduce the deficit.
During the past few years, investment in infrastructure has been constantly increasing. In fact, it went up from representing around 2.2 per cent of the total private investment in Peru, in 2011, to representing around 6.6 per cent of such amount in 2015, according to the past government’s data. Relevant projects include railway, road, airport and port infrastructure, as we will now describe.
Regarding road infrastructure, one of the biggest projects that explain the increase in infrastructure investment is the Peruvian section of the Inter-Oceanic Highway, which is meant to link the Atlantic and the Pacific Oceans. The road will facilitate commercial exchange between Brazil and China, some of the world’s biggest economies today, and allow Peru to take advantage of its situation between these giants. The Inter-Oceanic highway has been divided in three branches, north, central, and south, which are being developed separately.
Other relevant road projects are those located in the Peruvian coast, which link major coastal cities with the capital, Lima. In fact, these roads are heavily used and bear intense traffic, so they are projected to become two-lane highways in the following years. So far, the project portfolio for road infrastructure investment equals more than US$10 billion; however, most of it is still waiting in line, while the gap in this sector is about three times such amount.
Some of the problems highway concessionaires have been facing in recent years are related to state difficulties in giving them the released area they require to build the infrastructure. Such problem is particularly serious in the coastal highway’s concessions, which require an extra area to be completed. However, we believe that the recent legislation regarding the topic, mentioned above, will help to solve the issue.
Concerning railway infrastructure, the project portfolio equals more than US$25 billion, which largely exceeds the estimated infrastructure gap of US$16 billion. However, of this amount, only about US$5 billion, which corresponds to Line 2 of Lima’s Metro system, has actually been compromised for investment. The construction of this Metro line is suffering the same problem as road construction: the state is delaying the provision of the released area.
Regarding airport infrastructure, the project portfolio equals US$2.8 billion, which slightly exceeds the infrastructure gap in the sector. All of this investment has already been compromised via the self-financed concession contract of Lima’s Jorge Chavez International Airport (worth more than US$800 million), and the co-financed concession of most of Peruvian regional airports (including the airport of major cities, such as Arequipa’s, Trujillo’s, Chiclayo’s and Iquitos’ airports). Another important project is the construction of the new International Chinchero airport, which is bound to serve the city of Cusco, Peru’s main touristic destination. The project is worth US$658 million, and will also be partially financed by the state.
Airport construction has also faced the problem of obtaining the released areas needed to finish the infrastructure. This has been a serious problem for the completion of the second runway of Lima’s airport, a project considered vital for the development of our country’s touristic and business potential.
Finally, regarding port infrastructure, the project portfolio amounts US$1.4 billion, far below the approximate gap of almost US$6.3 million. Recent experiences include the concession of the ports of Paita, Pisco, Yurimaguas and Matarani, which are part of the Peru-Brazil corridor, complemented by the Inter-Oceanic highway. The North and South Pier of Callao have also been opened to private investment.
What is coming up?
With respect to future projects, we have already mentioned the projected portfolio amount for the following years. This section describes the main infrastructure projects that are soon to be executed.
Regarding road infrastructure, the process for the concession of the 965km of Section 4 of the Longitudinal de la Sierra highway has already been started by Proinversión. The road will link the Andean cities of Huancayo and Abancay with the port of Pisco, and will require an investment of approximately US$466 million. Section 5 of the same highway, which links Cusco with the Bolivian border, will also be required soon. Both projects will be co-financed by the state.
Another relevant project about to commence is the Amazon Waterway, which includes works and actions to improve navigability on the Amazonas, Marañon, Huallaga and Ucayali rivers. These works will make navigation possible through these rivers all year long, thus complementing the Peru-Brazil corridor. The estimated investment amounts to US$70 million, co-financed by the state.
Concerning railway infrastructure, the most important projects to be called are Lima’s metro lines 3 and 4. The lines will be 32km and 30km long, respectively, and will serve more than 3.5 million people. The estimated amount of investment is still unknown, though it is certain that the project will be co-financed.
Finally, regarding port infrastructure, Proinversión has received two self-sustainable unsolicited proposals. These refer to the upgrading and development of the multipurpose terminals of Salaverry, in the north, and Ilo, in the southern coast of Peru. The foreseen dates for the declarations of interest for these projects are in the fourth semester of 2016.