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Cutting Red Tape and Supporting Infrastructure Development in Peru

Peru has over US$45bn in infrastructure projects currently tied up in administrative deadlock. But the government’s private investment promotion agency Proinversión, which oversees the approval process for the country’s public-private partnerships (PPP), is currently embarking on a complete overhaul to relieve the bottleneck and help stimulate further infrastructure development. Bonds & Loans speaks with Álvaro Quijandría, the recently appointed Executive Director of Proinversión, about how he intends to pull it off.

Jan 19, 2017 // 5:05PM

What is the scale of the untapped potential for new infrastructure development in Peru?

The latest information on the infrastructure gap in Peru, and the consensus among a number of local think tanks and infrastructure business groups, suggest that from 2016 to 2020 the gap sits at around US$68bn. If you take a longer horizon, from 2016 until 2025, the gap is much greater – at around US$165bn. That includes everything from water and sanitation to energy and transportation. The current government has set as a target for the next five years to reduce the gap by half, and that is what we are aiming for.

The biggest challenge we will aim to address is the funding gap, which currently sits at around US$35bn. This means we will need to significantly increase the pace of our analysis and approval operations, which has been reducing progressively in recent year. In terms of financial commitment, we need to move from attracting and approving US$2bn per year, which is what we were originally forecast to see in 2017, to something more in the range of US$10bn per year in about two years. That is a massive leap.

What do you see as the biggest challenges facing central stakeholders involved in the development of infrastructure in Peru? How do you see the government playing a role in overcoming these challenges?

The challenges are fairly clear, and we see them on all sides of the PPP and public finance system in Peru, not just in Proinversión. Overcoming them will entail a broad restructuring across a number of areas: having a much more clear and robust regulatory framework for public-private partnerships, something that the government has already set to work on; overhauling downstream operations – in particular, bolstering our capacity as an agency for following up on contracts; and increasing our ability to attract sufficient financing – the sheer volume of which is likely to pose one of the most significant challenges.

The other thing we need to do is shift from a funding structure mostly based on debt to one that progressively includes more equity, and to broaden the number of instruments available to borrowers – which links itself quite nicely with the development of local capital markets. We are working with Ministry of Finance and other capital market stakeholders to increase the kinds of instruments available in the local capital markets, including introducing new guarantees – for instance, hybrid capital instruments with backstop guarantees. These could exploit some of the unique capacity the state has in facilitating more infrastructure funding and, at the same time, help develop more vehicles for equity investment and financial innovation. These are some of the measures investors find appealing, and some of the things that will attract them to Peru.

What are some of the changes being implemented at Proinversión to ensure the existing infrastructure pipeline becomes unclogged?

We do have a significant backlog of projects, both private and public as well as jointly funded initiatives – about 112 projects by my count. The total value of these projects sits at around US$45bn. One of the things we need to do is increase internal capacity. We have 210 employees at the moment, and we are going to review our own internal capacities and processes and try to bring in new talent; that is essential to strengthening the agency.

The driving idea is to develop a PPP unit within Proinversión that top-of-the-line, and model it after what we see in Colombia as well as places like Canada, New Zealand, and Australia. We will also look at restructuring several other areas within the organization.

The central question is how to effectively and efficiently process that backlog. Part of the answer lies in the changes Proinversión is gearing up to make in terms of organizational structure, and the other relates to making approval processes more efficient; this also involves prioritising the existing portfolio.

We are currently engaged in reviewing the portfolio of existing projects. We should have about half of the portfolio of projects segmented and prioritized at the end of the first quarter 2017, which will indicate the projects that will be expedited to the structuring phase; projects that are the main priorities for sectors and the various ministries sponsoring these projects; and new projects. It is critical that Proinversión – including the regions and the ministries – we have some clear and common criteria for prioritization. This might include an injection of additional resources and some amount of public financing as well. We need to make sure that the volume of PPPs is consistent with the fiscal trajectories being set by the government.

There is a special group in charge of unclogging the pipeline of projects that have already been rewarded, which sits with the Ministry of Finance and coordinates with other relevant ministries, and Proinversión. The aftercare element – following up on contract fulfilment, progress monitoring and the like – is going to be moving to Proinversión as a distinct unit within the agency. We will look to finalise the restructuring by the end of 2017.

What is being done to stimulate investment into new projects in Peru?

Peru is an open economy and provides a favourable framework for investments from a wide range of stakeholders. At Proinversión, we are working on increasing our capacity for investment promotion in general, which includes promoting our own operations and projects. This is something we hope to achieve in three ways: by strengthening our organisation and increasing our capacities in Lima; our new mandate in the PPP legal framework; and decentralising our operations – working with regional governments to create branches of Proinversión to stimulate local investment and provide more information to investors based closer to where these projects are actually located. We hope to achieve a much broader and stronger network across Peru in 2017

We are in constant contact with existing and potential investors. My first trip as Executive Director was to China and a range of countries in Asia, where we aimed to strengthen the link between Asia and Peru, because we need to have a broader spectrum of investors; we are already quite active in terms of our engagement with investors in Latin America, North America, and Europe, but Asia offers a host of new opportunities for our country. We need to broaden geographically, but at the same time we want to attract leading players in areas where we are aiming to develop a stronger pipeline of projects, particularly in energy, sanitation, health, telecoms, and education. In each sector, there are specialised funding players abroad, and we want to attract them to Peru and get them involved in the concession process. New capacity at the agency is essential for delivering on this.

Peru’s Executive Branch recently modified the framework law for investment promotion through Public-Private Partnerships (PPP). What kind of new role will this entail for Proinversión?

Aftercare moving to Proinversión is probably the biggest change brought about by the recently modified framework. Previously, once a contract was awarded, the follow up was being done by the Ministries or regional government, whichever ministry was the key party driving the PPP. Now, with the new framework, Proinversión will have the aftercare mandate for up to three years after the contracts were awarded. This will ensure we are kept in the loop for a greater period throughout a project’s lifecycle, and it enables us to apply centralised standards on aftercare and contract fulfilment in general. It also makes more clear the formulations of the investments – they ensure better oversight over the project flow and viability of the projects being delivered by ministries, regional governments, local governments. The agency’s mandate will be much more focused on the project structuring part of the cycle, contract awarding process and the aftercare of these projects.

Part of this involves eliminating investor confusion around who is responsible for what. The new framework provides a higher degree of clarity, and sets out very specific points about the project cycle in terms of how institutions that participate with Proinversión can submit opinions on how projects need to adapt based on the agency’s advice, and what is expected of project stakeholders. We expect to pass a supplementary bylaw that provides more detail on this by the end of January 2017.

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