Peru is discovering that public-private partnerships are a good way of bringing to fruition major infrastructure projects that the state could not afford to finance on its own.

The first concessions to private firms were granted during the presidency of Alberto Fujimori in the 1990s but it is under subsequent presidents that the programme has really gathered steam. Under Mr Fujimori, 16 concessions were awarded with a committed investment value of $3.1bn; under Alejandro Toledo (president between 2001 and 2006) 11 were granted with a commitment to invest of $2.3bn; under Alan Garcia (2006 to 2011) 38 were granted with a value of $7.9bn; and under Ollanta Humala, there have been 26 projects valued at a total of $14.8bn, according to Peru’s inward investment agency, ProInversion.

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Of the 62 concessions granted between 2005 and 2013, $5.2bn was committed to electricity projects, followed by transport (including roads, airports and railways) with $3.8bn, telecommunications with $1.98bn, ports with $1.6bn, and natural gas and oil with $1bn.

“Peru has a very strong PPP mechanism; I would say the pioneers in its application in Latin America have been Chile and Mexico, followed by Peru,” says Eleonora Silva, representative director for Peru at Latin American development bank Corporación Andina de Fomento. “They are a very smart way to involve the private sector in big projects. These [projects] could not have taken place otherwise and one of their biggest advantages is that they lead to a long-term relationship between the state and the private concessionaires, which are often engaged in the projects’ operations and maintenance for many years.”

Written in law

Peru now enjoys a solid legal framework for the application of the PPP model in the country. Decreto Legislativo 1012, passed in May 2008, provides the definition of a PPP contract and sets out the basis upon which concessions are awarded. This legislation unified all previous rules about the awarding of concessions and also enabled the state to outsource many secondary or auxiliary services, such as the operation of data centres or the collection of
utility bills, to the private sector.

Today, ideas for new projects or initiatives can come from the public or private sectors. They take two main forms: self financing (also known as self sustaining) and co-financed. Under self-financed projects, the state does not provide any subsidy or contribution to the construction, maintenance or running costs, and does not underwrite the project. However, private initiatives or unsolicited proposals can request financial support from the government. At the beginning of the ‘private initiative mechanism’, the government only admitted for evaluation self-sustained projects, but now co-financed projects can also be presented. 

Co-financed means that the state backs the project financially to at least some extent: this could take the form of an initial subsidy for some of the construction outlay or a financial contribution every year to cover the original construction costs and maintenance and operational expenses. This acts in a similar manner to a mortgage: the private sector covers much of the initial cost, but is paid back by the state over the years.

Unsolicited bids

During the past few years, the Peruvian government has allowed the private sector to put forward its own ideas for projects as unsolicited proposals. These projects were self financing until the Garcia government introduced rules in 2008 specifying that they should be co-financed, and the Humala administration added a so-called ‘beauty contest’ in which the private sector can propose initiatives during only the first 45 days of the year. This mimics the Chilean ‘windows of opportunity’ model.

Private initiatives that are self financing can be proposed at any time before a competent public entity, including municipal governments and the various federal ministries. Those private initiatives requiring co-financing can only be proposed to ProInversion. Most private initiatives must be put out to tender and ProInversion always manages the tendering process, as it is the public agency with the greatest capacity to do so. If there are any other investors, aside from the private initiative proponents, who are interested in developing the project, ProInversion has to put the project out to tender. 

During 2014’s ‘beauty contest’, 64 private initiatives were received with a total commitment to invest of $14bn. ProInversion selected 22 initiatives with a total commitment to invest of $5.4bn. This year the agency received 147 initiatives and it is investigating 41 in greater depth, although no concessions have so
far been granted.

Board approval

“The private sector has a big incentive to make proposals for projects if the state has not already put them out to tender,” says José Luis Escaffi, a partner at Lima-based economic and financial consultancy Apoyo. “Sometimes the government undertakes work in a piecemeal way; this could be better coordinated by the private sector and take place under a long-term contract.”

ProInversion’s board meets weekly and decides which projects are priorities and should be considered for a request for tender. It is made up of representatives from
the ministries of economy and finance, energy and mining, transportation and communications, housing, construction and sanitation, and finally the ministry of
agriculture and irrigation.

“Peru now has a well established PPP mechanism and ProInversion is a pretty efficient agency in managing the tendering process,” says Richard Cabello, manager in the Latin American infrastructure advisory department at the International Finance Corporation, part of the World Bank. “There is a lot of international interest among investors in the concessions coming out of Peru. It is seen as a country in which transactions can be closed. But it is true that Peru is competing for capital against other Latin American nations such as Chile and Colombia. This is forcing countries to work on better, clearer transactions.”

The trend in Latin American countries is towards unsolicited proposals from the private sector, according to Mr Cabello, but he adds that these could become a danger to the government’s finances and it is important that Peru monitors this kind of proposal carefully.

Peru’s strong legal framework for PPPs has helped many projects to get off the ground, generating interest from overseas companies. Though unsolicited proposals are becoming one of the main ways in which projects are being proposed, the regulatory agencies must supervise the process closely to keep a lid on government spending.