Peru’s infra sector reawakening as runoff candidates debate reactivation

Peru’s infrastructure sector is showing signs of recovery as the country prepares for a presidential runoff in June, but many investment projects are behind schedule and the political factions vying for power are presenting proposals to reactivate them. 

During the first quarter of 2021, activity in Peru’s construction sector rose 41.9% year-on-year, according to national statistics bureau INEI.

During March alone, activity in the sector jumped 133% year-on-year, mainly because of increased cement consumption and physical advances in investment projects, mostly in those handled by the national government.

However, activity in the 12 months between April 2020 and March 2021 was 3.7% lower than the previous 12 months, showing that the infrastructure sector still remains below pre-pandemic levels.

This is shown by what the economics and business development institute (Iedep) of the Lima chamber of commerce calls “dormant projects”, meaning infrastructure investments of more than US$10mn that have not reached 100% financial or physical completion during the construction period originally planned.

Under those criteria, there are 122 projects involving total investments of US$9bn that can be classed as “dormant”. These show an average 1.3-year execution delay and that means US$6bn in investments have yet to be made.

Over half of these “dormant” investments (64 projects) are in the transport sector, where the construction period was outlined at an average 2.4 years but the deadlines have been exceeded by 1.5 years, with around US$3.5bn in investments yet to be made. Of these, 45 of them are highway developments.

The most dramatic example of this is the Huarmey-Aija-Recuay highway rehabilitation project (US$42mn), which has been delayed 12.6 years and only 42% of the planned investments have been made.

Iedep also found 20 dormant projects in health infrastructure, with an average 2.1-year delay and US$896mn in pending investments.

In the case of water, there were 20 such projects with an average delay of 11 months, with some US$592mn in investments yet to be executed.

POLITICAL PROPOSALS 

The delays in completion of infrastructure projects have been called out across the country’s political spectrum, especially during the debate surrounding the upcoming runoff election, which pits Keiko Fujimori of the right-wing Fuerza Popular party against Pedro Castillo of the left-wing Perú Libre coalition.

On Sunday, the technical advisors for both candidates had a debate hosted by elections regulator JNE, where infrastructure was one of the main topics.

On the subject of reactivating infrastructure projects, former housing minister Carlos Bruce, who is part of the Fuerza Popular team, argued in favor of government-to-government agreements (G2G) to speed up execution, saying that the model “allows project managers, designated as the PMO [project management office] to arrive in Peru and get these large projects moving efficiently, transparently and without corruption.”

The current administration is carrying out US$2bn in G2G projects alongside the UK in regions that were hit by the 2017 floods, while France was chosen as a G2G partner for the US$3bn Central Highway. Lines No. 3 and No. 4 of the Lima’s metro system are also expected to be carried out under this model.

However, this format has also been criticized for its high cost to the public sector.

On the side of Perú Libre, economist Andrés Alencastre argued in favor of a decentralized approach, saying that the current policy “does infrastructure by projects, not using a social process created around multimodality.”

He pointed out that municipalities suffer from “institutional weakness,” which contributes to projects failing to advance, and he called for the creation of a “social management system” to unblock investments between the government, the private sector and local organizations.

Alencastre did not mention his coalition’s manifesto, which calls for reviews of all existing infrastructure concessions and refers to private investment promotion agency ProInversión as a “perverse organism”.

The proposals of Castillo and Perú Libre have generated some uncertainty in the markets, given the candidate’s lead in polls for the June 6 vote.

However, current authorities have stated that, regardless of who becomes president, Peru’s current infrastructure model is unlikely to change significantly in the medium term