Peru politics undermines Kuczynski's infra plans

Wednesday, January 11, 2017

Shortly after Pedro Pablo Kuczynski won the Peruvian presidential elections last June, the former investment banker and ex-cabinet chief vowed to turn Peru into a construction camp.

Six months later, the company that built many of the country's biggest construction projects threatens to envelop President Kuczynski's government in the biggest corruption scandal the region has seen in decades, and his political rivals are sharpening their knives, undermining his plans to push ahead with tens of billions of dollars in infrastructure investment.

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Kuczynski, who took office July 28, set out to accelerate US$25bn in public-private partnership infrastructure projects, including highways, line No. 2 of the Lima metro, the southern Peruvian natural gas pipeline, the port of Pisco, and the Jorge Chávez and Chinchero airports.

The perception in the local industry was that Brazilian construction giant Odebrecht – already in charge of the Inter-Oceanic highway (IIRSA), line No. 1 of the Lima metro, the Chavimochic and Olmos irrigation ventures and the southern gas pipeline – would lead the charge.

But those plans ran into a roadblock when Odebrecht admitted to paying hundreds of millions of dollars in bribes – including US$29mn in Peru alone – to secure contracts across Latin America. The case known as Lava Jato is believed to be part of the most widespread corruption network in Latin America since Bank of Credit and Commerce International (BCCI) was intervened for money laundering in the late 1980s.

While Odebrecht is shedding assets, including its stake in the gas pipeline and highway concessionaire Rutas de Lima, investigations into their dealings in Peru are only just getting underway, as congress last week established an opposition-led panel to conduct an inquiry.

Kuczynski's role as finance minister and later cabinet chief during the Alejandro Toledo government (2001-2006), which awarded several contracts to Odebrecht, may expose him to the real danger of impeachment, as has occurred in recent decades in countries such as Brazil, Venezuela, Ecuador and Paraguay, according to political analyst Fernando Rospigliosi.

"There is a very real possibility of an impeachment of the president. A crisis may occur over the next 6-12 months and pressure will mount in favor and against it," Rospigliosi, a former interior minister who was forced out of Toledo's cabinet by congress in 2004, told the local press. "The removal of Kuczynski wouldn't necessarily signify a break from democracy, but it would create an undesirable period of instability that wouldn't help the economic recovery."


Possibly Kuczynski's biggest weakness is his lack of support in the 130-member congress, where his Peruanos por el Kambio movement won just 18 seats.

His election rival Keiko Fujimori, whom Kuczynski beat last year in the closest presidential race in half a century, controls congress through her Fuerza Popular party, which earned 73 seats. Her party will now head the Lava Jato investigation, a harbinger of more political strife for Kuczynski.

Fuerza Popular had already begun flexing its muscles last month, forcing Kuczynski's education minister Jaime Saavedra to resign amidst accusations of corruption and for the lack of progress made on the 4.5bn-soles (US$1.3bn) infrastructure plan for the 2019 Pan American Games.

The unexpected departure of Kuczynski's most popular minister – the only member of the cabinet asked to stay on from predecessor Ollanta Humala's administration – has thrown the organization of the games, already years behind schedule, further into disarray, prompting calls for Peru to withdraw as host.

"The slow pace they've been working at until now leads us to predict that will continue," said vice president of congress Rosa Bartra. "We can't risk 4.5bn soles that could be used to close the infrastructure deficit in education."


At the same time, economic growth slowed in the fourth quarter, as investors awaited legislation designed to overcome bureaucratic obstacles to mining and infrastructure projects.

The economy – driven last year by the start-up of new mines and expansions built by Freeport-McMoRanChina MinmetalsTahoe Resources and Buenaventura – can no longer count on the mining industry, as companies have completed their projects, according to investment bank Credicorp Capital.

"The mining sector will make a smaller contribution compared to the start of the year. Public spending also fell 25% y-o-y through November, which will affect consumer demand," Credicorp analyst Joao Ribeiro wrote in a report. "There won't be major changes in the performance of the economy at the start of 2017 and there will be a gradual recovery in demand starting in the second quarter."

The government, meanwhile, took advantage of special legislative powers awarded by congress in October to issue 112 decrees in recent weeks. The legislation is aimed at reactivating and formalizing the economy; investing more in potable water and sewerage; combatting corruption and street crime; and reorganizing state oil company Petroperú, according to cabinet chief Fernando Zavala.

Zavala is now expected to appear in congress to explain the decrees, while a congressional committee has until March to study the new legislation to determine their legality.

Industry leaders are concerned the ongoing political and judicial investigations may overshadow the government's efforts to get the economy moving, according to industry groups such as infrastructure association AFIN.

"The investigations, actions and decision taken about awarded projects where there is evidence of corruption must be clearly separated from the continuity of other projects that are moving forward and the awarding of new PPP projects and private initiatives," said AFIN president Gonzalo Prialé.