An investment promotion expert for the South American country highlights why a free trade agreement with India will prove beneficial to both economies.
Peru has an investment grade rating, the second highest in Latin America, from the three main agencies (S&P, Moodys and Fitch) and has managed to break the common false dichotomy that high growth tends to accompany inflationary pressures by presenting the highest economic growth and lowest inflation rates in the region over the last two decades.
In particular, growth has been impressive with a constant annual growth rate of over 6 per cent in the last 15 years. Furthermore, Peru offers a favourable legal framework for foreign investment, which includes:
- Non-discriminatory treatment: Foreign investors receive the same treatment as local investors
- Unrestrictive access to most economic sectors
- Free transfer of capital
- Free competition
- Guarantee for Private Property
- Freedom to purchase stocks from locals.
- Freedom to access internal and external credit.
- Access to international disputes settlement mechanism
- Peru participates in the Investment Committee of the Organisation for Economic Cooperation and Development (OECD). It promotes the implementation of the Guidelines for Multinational Enterprises.
The public-private-partnership (PPP) method for investment projects has been largely studied and approved by both the public and the private sector worldwide. Among other, some of the reasons ProInversion chooses the PPP method are:
- Using private sector technology and innovation as well as operational efficiency for the public sector.
- private sector more often delivers projects on time and within budget
- Transfer of risks to the private sector
- Utilising PPPs as a way of developing local private sector capabilities through joint ventures with large international firms
Furthermore, studies find that the P3 approach can reduce life cycle cost up to 20 per cent compared with the traditional approach. Moreover, according to a study by the UK Audit Office, a reduction of 70 per cent of project budget overrun counts and 65 per cent reduction in project schedule overruns deploying a P3 model.
Countries such as Canada, Australia and the US have been using the PPP model for various years now with great success. The Canadian model of PPP is considered one of the most successful in the world. For Canada, it takes an average of 16 months from the release of tenders to financial closure of a project, compared to 17 months for Australia and 34 months in the UK.
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. 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. I want to highlight the $263-million wastewater treatment system in the Lake Titicaca basin, which recently won a prestigious international 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 $2.5-billion 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 several 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.
At ProInversión, we believe that having the best possible advisors in place is vital. The involvement of a highly skilled transaction advisor for each project can be directly linked to the quality of a project's structuring, profitability and overall success. We strive to bring projects of the highest quality to market. As formulation is key to achieving this, we are in the process of consolidating this phase of every project. In addition, we are currently carrying out international public auctions with high technical requirements - this way, we can ensure advisors have the experience needed for the sector in question.
All our efforts are directed towards becoming a centre of excellence. At Proinversión, we promote private investment, which goes hand-in-hand with a strong commercial strategy. By doing so, we can bring key infrastructure players to each sector, as well as strengthen policies to eliminate barriers that investors may otherwise face. While we currently only have a mandate to carry out the structuring and transaction of a project, we are keen to begin supporting grantor entities during the formulation phase of their projects, too
There is a particularly interesting pipeline for what´s missing of 2018 and 2019 -2020. Set to be around $8.4 billion, there are projects in many sectors such as: Transportation (railways, ports, airports, highways), Hydrocarbons, Health, Water and Sanitation and Mining.
One of the projects is the new natural-gas grid system, stretching across the Apurímac, Ayacucho, Huancavelica, Junín, Cusco, Puno and Ucayali regions. Set to cost $400 million, the project is due to be awarded in the first quarter of 2019. During the first quarter of 2019, another significant project will be awarded: the Huancayo-Huancavelica railway, an exciting new development with an estimated investment value of $235 milion. For the second semester of 2019 the Headworks and Conduction for the Drinking Water Supply in Lima, a $700 million water and sanitation project in the Peruvian capital, will be one of the most attractive projects.
The pipeline could very well surpass a total amount of $20 billion, as we will be opening a co-financed unsolicited proposal window in the transportation sector in the next few months, as well as will be receiving new mandates for new projects.
Peru and India are in rounds of negotiations for a free trade agreement (FTA). As ProInversión, we are part of the investment section of the treaty. This will generate a great benefit to both the Peruvian and the Indian economy.
Although several Indian companies have investments in Peru′s mining sector, we look forward for the big Indian companies to establish relations with ProInversión, as we believe their expertise in many sectors, such as transportation and water and sanitation, may benefit the projects overall.
César Martín Peñaranda Luna is the Director for Investor Services at ProInversión, an investment promotion agency for Peru.