8 minutos de lectura 16 set. 2020
Guide to investing in infrastructure projects in Peru 2020/2021

Guide to investing in infrastructure projects in Peru 2020/2021

Autores
Juan José Cárdenas

EY Law Infrastructure Leader

Abogado de profesión, asesor de vocación, emprendedor por diversión. Firme creyente de la diversidad e innovación como los faros a seguir en la vida personal y profesional. Padre de dos hijos.

Manuel Rivera

Tax Services Partner, EY Perú

Motivado por la innovación en el ejercicio de su práctica profesional y absolutamente proactivo en la atención de sus clientes. Disfruta pasar tiempo con su familia, ver buen fútbol y correr.

8 minutos de lectura 16 set. 2020

Publication of EY Peru, ProInversión and the Peruvian Ministry of Foreign Affairs for the promotion of investment in infrastructure in Peru for the year 2020/2021.

We are living challenging times for everyone, not only in Peru but in the entire world. Times that requires, probably more than ever, promoting public and private investment in infrastructure in all countries but even more in emerging ones, such as Peru, to close the infrastructure gap and provide quality and adequate service to our citizens.

This is the main purpose of the Guide to investing in infrastructure projects in Peru 2020/2021 that we have prepared, aimed as being as useful tool for any private investors, banks and other financial institutions, multilateral organizations and governmental entities interested in exploring and assessing Peruvian investment opportunities in infrastructure. It is the result of a joint effort from a diverse team, with different background experiences and perspectives, but mostly with the same passion for promoting Peruvian investment opportunities.

We have chosen a good timing for it. Peru's gap in infrastructure, up to 2025, will be

USD110 billion.

We are committed to impulse its prompt reduction. Moreover, our country is still struggling with COVID-19 and its collateral effects in the economy. In this challenging scenario, it is well known that public investment is a great driving force to stimulate the market, in terms of providing rapidly private companies new options to offer their goods and services, as well as creating new jobs opportunities.

It should be highlighted that the focus is not developing public infrastructure itself. There is an extremely large gap in essential services, deeply emphasized with the pandemic. Thus, each project is a step toward improving quality of life for citizens. With this clear purpose in mind, all the endeavor should be driven to deliver high quality public services. Even though great works are expected, operation and maintenance with the highest standard possible, are also necessary to assure increasing living conditions.

We hope this guide would provide an holistic panorama of Peruvian investment climate and would help as a starting point for canalizing your interest in our country. We invite you to enjoy this guide and contact us should you have questions or need special assistance.

Infrastructure Investment

It is expected that Peru will realize its full economic potential after reducing its infrastructure gap and bottlenecks. In the last decade, Peru has begun to take the necessary measures to improve its infrastructure in transport facilities, electricity, water and communications in order to promote new investments which will contribute to the development of the productive sectors of the country.

Peru is focused on promoting the development of the infrastructure for its positive impact in the GDP through the production of transport services, the supply of water, sanitation and electricity, health, telecommunications, among others. Infrastructure investments generate positive externalities within the country that will accelerate long-term growth. Additionally, the investment in infrastructure indirectly influence the productivity of the companies and all the supply chain in the economy so that all productive factors increase their productivity. In this sense, companies will benefit from the increase of competitiveness by the reduction of costs, increase of economies of scale, efficiency on supply chain, extension of storage and facility of distribution. Not only companies will benefit but also the population will increase their quality of life by covering their basic needs and accessing better public services, necessary to get out of poverty permanently. Further, the developing of infrastructure has a positive impact on human capital and its competitiveness in the medium and long term.

The Project Pipeline (2021 – 2022) under the Public Private Partnerships mechanism includes a total of 22 projects distributed in different sectors with a total estimated investment of USD 5.9 billion. The main sectors by investment amount are Transport (3 project), Water and Sanitation (3 projects), Real Estate (1 project), Education (5 projects) and Energy (6 projects).

mapa investing infrastructure

Guide to investing in infrastructure projects in Peru 2020/2021

The government is working to increase public and private investment in infrastructure and creating the mechanisms to give continuity to its policies. To close the infrastructure gap, different investment mechanisms might be used: traditional Public Works, Public-Private Partnerships (PPPs), Work for Taxes (WT), and Government-to-Government (G2G) agreements.

Both the public and private sectors are involved in the economic development and social welfare of the country. Peru is recognized in the international community for providing favorable conditions to take advantage of the opportunities in the development of its infrastructure.

Investment Promotion Conditions

a. Foreign Investment legislation and trends in Peru

Peru seeks to attract both domestic and foreign investment in all sectors of the economy. To achieve this, it has taken the necessary steps to establish a consistent investment policy that eliminates any barriers that foreign investors may face. As a result, Peru is considered a country with one of the most open investment systems in the world.

Peru has adopted a legal framework for investments that requires no previous authorization for foreign investment. In this regard, foreign investments are allowed without restrictions in the large majority of economic activities. The activities with restrictions are very specific, such as air transportation, sea transportation, private safety and surveillance and the manufacture of war weaponry. Additionally, Peru has a legal framework to protect the economic stability of investors and to reduce government interference in economic activities.

The Peruvian government guarantees legal stability to national and foreign investors with regard to the legislation governing income tax and specifically, distribution of dividends. Foreign investors with the right to obtain legal and tax stability are those willing to invest in Peru for a period of no less than two years and for a minimum amount of USD10 million in the Mining and/or Oil & Gas sectors, or USD 5 million in any other economic activity.

As a result, Peru's Central Bank reported that the stock of Foreign Direct Investment (FDI) inflow reached USD 8.8 billion in 2019. FDI is concentrated in mining, communications, finance, manufacturing and energy.

Foreign Direct Investment (in US$ millions)

Source: BCRP

b. Recognition of favorable investment climate

According to the World Economic Forum, Peru is among the top countries in Latin America in terms of macroeconomic stability, human capital, market size, financial system, among others. Also, according to Doing Business 2020, Peru ranks 76th out of 190 countries in terms of ease of starting a company and doing business and ranks sixth in Latin America.

Furthermore, the 2020 Index of Economic Freedom prepared by The Heritage Foundation, Peru ranks among the top countries in the region. This index is elaborated by an analysis of the financial, investment, trade, monetary, labor and business freedom. It also evaluates fiscal health, government expending, tax burden, government integrity, judicial effectiveness and property rights.

Foreign Direct Investment by Industry 2019

Source: ProInversión

c. Trade agreements

Peru's development strategy is based on an economy opened to the world and competitive in its export offer. It has been a successful strategy that has permitted the country to consolidate its foreign trade in goods and services as an instrument for economic development and the reduction of poverty.

Peru is a member of the World Trade Organization since 1995 and in 1998 became a member of the Asia Pacific Economic Cooperation (APEC) forum. In 2011 formed the Pacific Alliance with Chile, Colombia and Mexico. It is also a member country of the Latin American Integration Association (ALADI) and a State Member of the Southern Common Market (MERCOSUR). Peru has begun following a Country Program in its process of incorporation to the Organization for Economic Cooperation and Development (OECD). This represents a key tool for Peru for the success of the strategy and the process directed at succeeding with the entry of Peru in said organization.

Infrastructure potential

a. Infrastructure gap

The National Infrastructure Plan for Competitiveness identifies a basic access infrastructure gap of USD 110 billion (S/363 billion) approximately. This estimate does not consider qualitative elements such as water quality, the number of hours of access to electricity, the schools' structures condition, among others. Therefore, this infrastructure gap would be underestimated assuming Peru aims to be a developed country.

Infrastructure Gap – Short Term (in USD millions)
It has been calculated considering a five years horizon, at approximately US$35 billion, distributed among the following sectors: transport (31%), sanitation (25%), healthcare (24%), telecommunications (10%), hydraulic (6%) and water (5%).

Infrastructure Gap – Long Term (in USD millions) 
This gap considered a twenty years horizon and is estimated at approximately US$110 billion, distributed among the following sectors: transport (44%), sanitation (20%), healthcare (16%), water (7%), telecommunications (6%), hydraulic (4%),electricity (2%) and education (2%).

b. Overview by sector

  • Roads

    Peru has a total of 168,474 km of roads, distributed among the local road system (67.6%) with a total of 113,858 km, departmental roads (16.3%) with a total of 27,506 km and national roads (16.1%) with a total of 27,110 km. 79% of the national roads (21,434 km) are paved, while only 13.17% (3,623 km) and 1.63% (1,859 km) of the departmental and local roads, respectively, are paved. In total, 141,557 km of roads are unpaved by 2018, which represents 86% of all existing roads. This situation explains part of the transport infrastructure gap previously shown, which must be solved through public and private investment. Regarding private investment participation, Peru has 16 concessions for 6,693 km, which are being supervised by OSITRAN.

  • Railways

    Peru has a total of 1,939.7 km of railways, grouped by ownership regime in Railway Concessions (78%) with a total of 1,512.4 km, followed by Private Railways (12.3%) with a total of 238.6 km and State Operated Railways (9.73%) with a total of 188.7 km. From total railway concessions, only 33.1 km are for urban transport (Line 1 of the Lima and Callao Metro System). The rest are freight and tourist transport railways. It is worth mentioning that Peru has two experiences in railway infrastructure concessions supervised by OSITRAN. However, Line 2 –first fully underground metro project– is not counted yet, because it is currently under construction. Line 2 includes an extension of 35 km and 35 stations.

    Railways by Property Regime (in Kilometers)

    Source: Ministry of Transport and Communications (2018)

    Railway Concessions (in Kilometers)

    Source: Ministry of Transport and Communications (2018)

  • Airports

    Peru has a total of 35 airports. Our main airport the "Jorge Chávez International Airport" in Lima, has been granted in concession to Lima Airport Partners (LAP), currently owned by Fraport AG (80%) and International Finance Corporation (IFC) of the World Bank (20%). There are two more concessions, 12 regional airports as part of the "First Group of Regional Airports" that were awarded to Aeropuertos del Perú (ADP), and 5 regional airports as part of the "Second Group of Regional Airports" that were awarded to Aeropuertos Andinos del Perú (AAP). At last, there are 17 airports operated by CORPAC, the government entity in charge of airport operations in Peru. In 2019, passengers traffic amounts 38.1 million people, of which LAP represents 61.1%, followed by ADP with 17%, AAP with 9.4% and CORPAC with 12.5%. 

    Peru has eighteen (18) airports granted in concession and seventeen (17) airports that are currently operated by CORPAC (government entity). From these government operated airports, eight (8) airports will be granted in concession as part of the “Third Group of Regional Airports”. In addition, Cusco city airport operated by CORPAC, will be replaced by the Chinchero International Airport, currently under construction through the Government-to-Government mechanism.

  • Ports

    Peru has a total of 18 ports and a total movement of 50.7 million tons for 2019. The main port terminals in Peru are in Callao. On the other hand, the government port operator ENAPU, manages 10 ports in the country. Peru has experience in the development of port projects, with a total of 8 port concessions that are supervised by OSITRAN. The development of new port projects is being evaluated and included in the PPP project pipeline.

  • Water and Sanitation

    Urban areas

    There are 50 water and sanitation service provider companies that are grouped according to their management in National Government (2) and Regional or Local Government (48). The company that has the most connections is SEDAPAL (National Government), which operates in the capital city of Lima. Companies providing water and sanitation services can also be grouped by connections size. In addition to SEDAPAL there are 17 Big companies that have between 40,000 and 250,000 connections, 12 Medium companies that have between 15,000 and 40,000 connections and 20 Small companies with less than 15,000 connections. The company with the highest coverage of drinking water by area of influence is SEDAPAL with 92.5% in Lima in 2018. On the other hand, medium-sized companies have an average coverage of 79.2%.

    Rural areas

    There are 450 Community Organizations that provide water service and are grouped according to ownership into Community Organizations (319), Municipal Providers (107) and Specialized Operators (9). It should be noted that 94% of the population in urban areas have access to the Public Water Network, while in rural areas only 72%. Peru has experience in Public Private Partnerships (PPP) in the development of Wastewater Treatment Plants (WWTP) such as the La Chira WWTP and Taboada WWTP projects that help to almost completely decontaminate the wastewater generated in Lima Metropolitan Area (Lima and Callao). In addition, the Titicaca WWTP has been awarded, which will have 10 treatment plants for the Titicaca Lake in Puno (southern Peru). 

  • Healthcare

    The Health infrastructure is made up of Hospitals (3%), Health Centers (12%), Health Posts (42%), Specialized Institutes (0.1%) and Medical and dental offices (42%).  

    It is estimated that there is one (1) doctor for every 390 habitants and one (1) nurse for every 368 habitants nationwide.  56% of beds are found in hospitals of the Ministry of Health and Regional Governments, 19% in EsSalud and the remaining 26% as part of Other institutions such as private clinics. Peru has 16 beds for every 10,000 habitants. 

    Peru has experience in Public Private Partnerships (PPP) in the Healthcare sector such as the Alberto Barton Hospital in Callao and Guillermo Kaelin Hospital in Villa María del Triunfo district, both projects that improve the health network of Lima Metropolitan Area (Lima and Callao). On the other hand, under the Works for Taxes (WT) mechanism, Peru has developed healthcare projects such as hospitals construction, ranking as one of the most important sectors for this mechanism by investment amount. It is worth mentioning that some development of health infrastructures is intended to be carried out under the government-to government (G2G) mechanism.

    Number of Health Establishments

    Source: National Superintendence of Health (2018)

  • Telecommunications

    On average, 90.9% of households nationwide have at least one member who owns a telephone, while within Lima Metropolitan Area 95.1% and in the rest of the country 89%. Regarding internet access, on average 29.8% of households nationwide have access to internet service, while within Lima Metropolitan Area 54.2% and in the rest of the country 18.7%. Peru has experience with private participation in the telecommunications sector. Many of the awarded projects are now in operational phase, which includes the concession of high-speed Internet broadbands, among others.

  • Irrigation

    Peru has 7.1 million hectares of agricultural land, of which 36.2% are under irrigation and 63.8% are rainfed crops. Only 0.5% of agricultural land with irrigation is done with agricultural technification, 12,542 hectares. Regarding private participation, Peru has experience in the development of irrigation system projects such as the Chavimochic project and promoted the development of Olmos and Majes – Siguas projects which include the water transfer for hydroelectric and irrigation purposes (new agricultural land). Additionally, Peru has also developed irrigation projects under the Works for Taxes mechanism.

  • Power

    Total electric energy production is estimated at 54,883 GWh. Energy production in Peru is mainly made up of Hydraulic Production (56%) and Thermal Production (40%), followed by Wind Production (3%) and Solar (1%).

    Peru has experience in Public Private Partnerships (PPPs) in the power sector such as transmission lines, substations, power generation, hydroelectric power plants, and others. Furthermore, energy projects are being promoted in the PPP pipeline.

    Production of Electrical Energy (GWh

    Source: National Institute of Statistics and Informatics – INEI (2018)

  • Education

    In the education sector, the rate of nonenrolled students of regular basic education for 2018 was 8% for initial education, 6.4% for primary education and 14.8% for secondary education. 

    In Peru there are 101,229 Regular Basic Education Centers, 49,637 for Initial Education, 37,888 for Primary Education and 13,704 for Secondary Education. Among them, the percentage of inadequate installed capacity levels is 89.7%, 94.9% and 89.9%, respectively. 

    In recent years, Peru has been structuring Public-Private Partnerships (PPP) projects, seeking to improve infrastructure in the sector and educational quality. Currently, the Ministry of Education is developing projects such as High-Performance Schools (COAR) for students in the 3rd, 4th and 5th year of secondary education. This COAR schools are currently administered by the National Government. In addition, there are projects regarding Schools at Risk (CER), which are being proposed to be developed under the same mechanism. Both COAR and CER projects are included in the PPP pipeline. 

Guide to investing in infrastructure projects in Peru 2020/2021

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Resumen

The Guide to investing in infrastructure projects in Peru 2020/2021 was aimed as being as useful tool for any private investors, banks and other financial institutions, multilateral organizations and governmental entities interested in exploring and assessing Peruvian investment opportunities in infrastructure. It is the result of a joint effort from a diverse team, with different background experiences and perspectives, but mostly with the same passion for promoting Peruvian investment opportunities.

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Autores
Juan José Cárdenas

EY Law Infrastructure Leader

Abogado de profesión, asesor de vocación, emprendedor por diversión. Firme creyente de la diversidad e innovación como los faros a seguir en la vida personal y profesional. Padre de dos hijos.

Manuel Rivera

Tax Services Partner, EY Perú

Motivado por la innovación en el ejercicio de su práctica profesional y absolutamente proactivo en la atención de sus clientes. Disfruta pasar tiempo con su familia, ver buen fútbol y correr.