Peru’s infrastructure deficit, together with available financing options, provides solid foundations on which to revive the investment cycle in the infrastructure sector. In the current market, international investors are thirsty for quality projects offering decent yields, with many watching the pipeline of projects being developed by international promotion agency ProInversión.
These include Canadian Brookfield Asset Management, which owns majority stakes in infrastructure concessions all over the globe, and Chinese state-owned China Three Gorge, which swiftly filled the void left by scandal-hit Brazilian construction group Odebrecht in several major projects.
At the same time, the country’s public debt remains relatively low, giving the government room to allocate fresh resources for the development of projects under public-private partnerships (PPPs) or public works schemes. Within this context, restructured national development bank Cofide will play a key role in whetting the private sector’s appetite by facilitating the bankability of future projects and setting them in motion. However, to be successful, it will have to avoid the excesses of the past.
Scope for spending
“The finance and economy ministry committed up to $9.8bn to PPP projects until 2042,” the Peruvian association for infrastructure development, Afin, wrote in September 2016.
“As the PPP framework stabilises and the development of the portfolio of projects intensifies, it’s clear that [the government] needs to make space for big infrastructure developments in the coming years. Given that, the state (at central, regional and local level) could finance the execution of projects through the public debt. In fact, countries with low public debt are making the most of this to address economic slowdown and stimulate private and public investment.”
Total external debt is expected to be 30% of GDP at the end of 2017, and then to gradually decrease to 22.4% of GDP in 2022, according to IMF estimates. In the whole of Latin America, only Chile and Paraguay have lower levels of external debt than Peru.
Low debt, combined with the prudent fiscal policies of the past, give the government ample fiscal space to address contingent challenges, such as the reconstruction of the communities affected by heavy flooding in March 2017, as well as structural challenges such the country’s infrastructure gap. And Peru’s access to the bond market is still good – it sold sovereign bonds worth 10bn soles ($3.1bn) in July to pay in advance loans in foreign currency as part of an ongoing 'solarisation' of the public debt. The 15-year notes fetched a yield of 6.15%.
“From talking to international investors, we don’t see them being concerned [about the] debt and fiscal situation, but when it comes to Peru they are more concerned with the political scenario and the ability of the government to implement its plans,” says Fernando Bravo, a Peru-born managing director at Goldman Sachs’ investment banking division.
National development bank Cofide, which acts as a second-tier lender, has played a key role in capturing the resources available on the market and funnelling them towards the development of all kinds of projects. “In a context with so much liquidity, we want to incentivise private banks to invest in the country’s projects,” says Pedro Grado Smith, chairman of Cofide.
Cofide has increased its focus on infrastructure projects in recent years, with loans to the sector growing to 53% of its overall portfolio in June 2017, from 22% at the end of 2011. Despite a historically solid balance sheet and profitable operations, its exposure to the infrastructure sector did not spare the bank from the consequences of the economic slowdown and the troubles in the same infrastructure sector.
The bank’s volume of non-performing loans spiked up to an estimated 17% of its total outstanding loans at the end of 2017, from less than 1% a year earlier. This mounting financial strain prompted international credit rating agencies to downgrade the bank, and eventually forced a deep financial and operational restructuring.
“The new regulation allows Cofide to take on up to 50% of a project finance risk, whereas in the past it could reach even 100%,” says Mr Grado Smith. “In this way, we introduce a diversification principle where there are at least two banks.”
Putting resources to work
In this new regulatory framework, having regained financial stability, the bank is looking forward with renewed confidence regarding its key role in the development challenges awaiting the country.
“Infrastructure remains our key focus, and we don’t want to leave the energy sector, and with the slowdown of mining we are looking at some corporate sectors such as agribusiness, and credit lines tailored for SMEs,” says Mr Grado Smith.
Cofide has rapidly increased its lending volumes to reignite the investment cycle across the board. It invested as much as $2.68bn in the first six months of the year, which almost equals the $2.72bn invested in the whole 2016, and already exceeds the annual sums disbursed in 2015, 2014, and 2013, according to company figures.
If Peru does not lack the resources to invest into development projects, the time has come for the country to put these resources at work in an efficient, and sustainable, way.