As Latin America’s sixth-largest economy, Peru has managed to largely discredit the fallacy that inflationary pressures accompany high growth trends. The country has exhibited one of the highest economic growth rates – and lowest inflation rates – of any Latin American economy over the past two decades, averaging impressive annual GDP growth of more than five percent.
At the heart of the country’s current success is ProInversión, Peru’s private investment promotion agency, which specialises in the implementation of public-private partnerships (PPPs) across a variety of sectors, including water and sanitation, energy and transport. In fact, through PPPs and state concessions, Peru has been able to promote investments totalling $30bn since the 1990s.
PPPs grant public projects access to private sector technology, R&D and operational efficiency, while also transferring some of the risk
If this positive trend is to continue in the coming years, however, Peru will need to bridge its $160bn infrastructure gap. ProInversión has already made efforts to this end, simplifying the legal and regulatory processes that have often acted as hurdles to foreign direct investment.
And by obtaining investment grade ratings from three of the world’s most reputable agencies – Moody’s (A3), Standard & Poor’s (BBB+) and Fitch (BBB+) – the infrastructure shortfall that has long burdened domestic companies is starting to present lucrative investment opportunities to foreign parties.
ProInversión receives mandates from government ministries working across a variety of sectors. The board of directors – which comprises the Ministry of Finance, the Ministry of Energy, Mining and Hydrocarbons, and the Ministry of Transport and Communications – then approves projects by selecting and prioritising those that will help reduce the national infrastructure gap most effectively.
Peru’s investment graded ratings
Standard & Poor’s
Projects are also judged on their compatibility with the PPP model. ProInversión is currently prioritising projects in the transport sector, as well as in water and sanitation.
Here at ProInversión, we are extremely proud of all the projects that have been completed successfully to date, especially as they have benefitted a variety of sectors.
In particular, I want to highlight the $280m wastewater treatment system in the Lake Titicaca basin, which recently won an award for its efforts to clean such a symbolic natural asset in one of the poorest regions of Peru.
Further, the Michiquillay mining project – a $2.5bn asset-based landmark awarded at the beginning of the year – has been highlighted as an example of how projects should be integrated within local communities.
The use of the PPP method to fund infrastructure projects has received support from public and private organisations around the world, and is used by ProInversión for a number of reasons. Importantly, it allows the public sector to benefit from advantages usually associated with privately funded projects.
For example, PPPs grant public projects access to private sector technology, R&D and operational efficiency, while also transferring some of the risk. The private sector, meanwhile, benefits from the support of large international firms, further developing its capabilities.
A working model
At ProInversión, we have identified four strategic pillars to guide both our short and long-term plans. First, we must strive to become a hub of excellence, so we can advise the government in the formulation and structuring of PPP projects. To achieve this, it is critical we have top-tier consultants, as well as standardised contracts that provide the market with a degree of predictability.
Our second major focus is the promotion of private investment where social and environmental management is a priority. In the work we do, we have identified the importance of efficient social and environmental management to guarantee sustainable, bankable projects that are beneficial to society in general.
The third pillar is our commercial strategy. Here, we have been applying an orderly methodology to identify, segment and attract potential investors. Our commercial intelligence is highly specialised to retain the right investors for each project.
As such, we will continue to participate in local and international road shows, as well as utilise digital tools to keep attracting first-rate investors who are highly committed to our economy. Finally, we will continue our focus on organisational efficiency, so we can offer the best possible working conditions and attract the best human capital to our organisation.
International investors looking for opportunities in Peru will also find very favourable conditions. Peru offers a robust legal framework that protects foreign investors, ensuring non-discriminatory treatment and providing unrestricted access to most economic sectors.
Investors will also find a very open environment with free competition, free transfer of capital and the freedom to purchase local stocks. What’s more, Peru’s potential OECD membership ensures the implementation of the organisation’s Guidelines for Multinational Enterprises, providing further assurances. Altogether, investors will find Peru boasts a perfect mix of transparency, openness and regulation.
Infrastructure projects take a long time to plan and even longer to complete. But they also provide long-term benefits – they are the hallmarks of a country that cares about its future, as well as its present.
One way the Peruvian Government has demonstrated its commitment to infrastructure development is through its Work for Taxes scheme, which enables a private company to recover its investment in a public project from its future income tax bills.
Since its introduction in 2008, the Works for Taxes scheme has successfully attracted over $1.2bn in project investments from more than 90 companies. As well as reducing tax payments, the programme provides companies with environmental, social and governance acknowledgement.
The great success of the scheme has been tracking the money generated by local taxes, making reinvestment more direct, transparent and efficient. Put simply, Works for Taxes has improved the channelling of foreign direct investment in Peru, while minimising direct state involvement. As a result of the programme’s success, we have started to export our knowledge of this tool to neighbouring countries, such as Columbia.
Even considering the many projects we have already supported, we believe our work is far from complete. As such, we have many exciting projects planned in the coming years, with an infrastructure pipeline totalling approximately $11bn between 2018 and 2020. This is without mentioning the significant mandates ProInversión expects to be awarded in the months after, which could push the pipeline above $20bn.
One of the most interesting upcoming projects is a natural gas distribution system that will stretch across the regions of Apurímac, Ayacucho, Huancavelica, Junín, Cusco, Puno and Ucayali. This $400m downstream gas project will be awarded in the last quarter of 2018.
Further, in the transportation sector, the Huancayo-Huancavelica railway is an exciting project with an estimated investment value of $235m. By supporting these projects, and the many more still in the planning stages, ProInversión will continue to play a leading role in Peru’s economic success story.