CONTENTS · 2017-12-14 · CharlotteLloyd+34(0)682736571 [email protected] AssociatePublisher...

December 2017/January 2018 www.fDiIntelligence.com 3

CONTENTS

ANEWCHAPTERFORPERU?

04After a troubled first half of 2017, Peru is showing signs of renewed economic activity. Reboundingcommodity prices are shoring up the economy, giving its president space to deliver long-due reforms.

ANIPAOVERHAUL

07Reforms at Peru’s national investment promotion agency, ProInversión, are designed to make projectdevelopment more efficient than in the past. Measures such as appointing high-quality consultants are

already in place, as executive director Alberto Ñecco tells fDi.

LAYINGAPIPELINEOFOPPORTUNITY

08Peru has to close a $160bn infrastructure deficit. National investment promotion agency ProInversión,which is tasked with turning this shortage into an opportunity for investors, has high ambitions for

developing its portfolio of projects in 2018.

AGAPTOOFAR?

11Peru should reduce its overall level of investment in public works, and engage more with private investmentthrough PPPs and self-sustainable projects, Gonzalo Prialé, president of Peruvian infrastructure lobby

association Afin, tells fDi.

COFIDEPUTSFINANCETOWORK

12With low public debt, Peru is well placed to encourage investment into an infrastructure programme.Meanwhile, national development bank Cofide is already increasing its activity to boost the market.

ODEBRECHT’SPERUVIANDIVORCE

14Brazilian construction giant Odebrecht is disposing of its valuable portfolio of infrastructure projects in Peru inthe wake of a corruption scandal that jeopardised the continuity of its interests in the whole of Latin America.

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4

OVERVIEW

AnewchapterforPeru?

P eru is approaching 2018with some confidence thatthe worst of an economic

downturn fraught with internal andexternal challenges is finally over.

First battered by the end of thecommodities supercycle, the coun-try was then hit by the local falloutfrom the regional graft scandalcaused by Brazilian constructioncompany Odebrecht (which reachedthe very highest levels of the coun-try’s political and business elite).Finally, abnormal flooding devas-

tated its northern coast.After less than a year in power, president

Pedro Pablo Kuczynski reacted by instigating awide-reaching cabinet reshuffle. This gave hisreform agenda some newmomentum just asrecovering commodity prices helped the busi-ness and investment cycle rebound.

Early reformspayoffDespite its recent troubles, Peru still enjoysthe favour of the international communityand good access to the international markets,having built a track record of sustained eco-nomic growth and fiscal discipline sincethe deep reforms of the early 1990s.

The country still has plenty of unexploredpotential to lure investors seeking opportuni-

ties in a region that has struggled in the after-math of the commodity boom. In the infra-structure sector alone, Peru faces amonsterinvestment gap of an estimated $160bn. Thistranslates into dozens of projects waiting toleave the drawing board to be developed bydomestic and international companies.

Yet extremely poor governance remainsamajor challenge across the board, as theOdebrecht scandal underlined. Even thestate’s deep pockets cannot help if national,regional and local authorities struggle, as theyoften do, to spend their annual budget for lackof human resources and competences. If theworst, at least economically, is really behindthe country, expectations are high that MrKuczynski will focus on reforms and try tofind some political room to address govern-ance issues once and for all.

On the rebound“The economy is turning around,” says PabloSecada, former chief economist at the PeruvianEconomy Institute (IPE) and CEO of consultancyfirmOpportunity Investments. “Private invest-ment started falling in 2014, when theminingcycle came to an end, but evenwhenmininginvestment stopped falling, investment inother sectors kept retreating because SMEspostponed their investment plans.

“That cycle touched bottom in the second

AFTER A TROUBLED FIRST HALFOF 2017, PERU IS SHOWINGSIGNS OF RENEWED ECONOMICACTIVITY. REBOUNDINGCOMMODITY PRICES ARESHORING UP THE ECONOMY,GIVING ITS PRESIDENTBREATHING SPACE TODELIVER LONG-DUE REFORMS.JACOPO DETTONI REPORTS

BUSINESS CONFIDENCE HASBOUNCED BACK, HINTING ATA DEFINITIVE RECOVERY INPRIVATE INVESTMENT IN 2018

www.fDiIntelligence.com December 2017/January 2018

5

quarter of 2017, when the economy began tobounce back driven by external factors such asthe growing prices ofmining commodities, butalso recovering exports volumes in traditionalsectors such as textiles. Business confidence hasalso bounced back, hinting at a definitive recov-ery in private investment in 2018.”

After the global financial crisis, Peru ledLatin America’s ‘Southern Cone’ in growth asbooming commodity prices boosted invest-ment in its mining sector. Peru is the world’ssecond largest producer of copper, the world’sthird largest producer of zinc and silver, andthe sixth largest of gold, withmining productsmaking up 60% of total exports. The govern-ment tried to capitalise on that unprecedentedpush by setting inmotion infrastructure devel-opments across the board to raisemillions ofPeruvians out of poverty and unleash thecountry’s economic potential.

As the commodity cycle cooled off, eco-nomic growth sharply fell in 2014 and anyattempted recovery was frustrated by weakexternal conditions, but also by the Odebrechtscandal, which sent shockwaves throughoutthe local political and business communities.Most notably, it saw former president OllantaHumala and his wife taken into custody(pending a final verdict onmoney-launderingcharges related to their dealings with theBrazilian company and Venezuela); implicatedanother former president, Alejandro Toledo,

who is now living as a fugitive in the US; anddid not spare Mr Kuczynski, who has deniedany wrongdoing and is protected by politicalimmunity as long as he is president.

Brighter horizonThe devastation left behind by the floodingthat hit Peru’s northern coastal areas putadditional pressure to the authorities andeconomy. Overall, public and private invest-ment combined fell to less than 21% of GDPin the first three quarters of 2017, the lowestlevel since 2009, according to figures fromthe central bank.

“There have been challenges, particularlyat the beginning of the year, but things areimproving and we expect growth to gainmomentum towards the end of 2017, reachingits potential in 2018, primarily on the back ofhigher public and private spending, as well asaccommodating financial conditions,” saysFernando Bravo, a Peru-bornmanaging direc-tor at Goldman Sachs’s investment bankingdivision. Goldman Sachs expects annualgrowth in Peru to stand at 2.8% in 2017, thenaccelerate to 4% in 2018, from 4% in 2016.

With an emerging consensus that theworst might be behind the economy, the busi-ness environment – which appeared particu-larly depressed once the Odebrecht scandalhit – is also improving.

“With the new cabinet andmore construc-

December 2017/January 2018 www.fDiIntelligence.com

On the rise: Peru and its capital Lima (pictured) are experiencing renewed economic activity

6

PERUOVERVIEW

tive policy environment, we are starting to seeincreased [economic] activity, and despite allthe uncertainties, we do see very strong inter-est from investors across asset classes and sec-tors to invest in Peru,” says Mr Bravo. “They stillsee the country as one of the strongest amongthemain Latin American economies, bothfrom amacroeconomic and structural reformsperspective, but also in terms of investmentopportunities.”

Peru’s overall FDI amounted to $6.9bn in2016, down from $8.3bn the previous year, butconsiderably higher than the $4.4bn recordedin 2014, according to figures fromUnctad.Central bank figures show FDI flows remainedweak in the first half of 2017, when they didnot exceed $2.6bn.

Despite the recent headaches, the coun-try’s economic fundamentals are solid and itspublic finances relatively sound, although thefiscal deficit is growing and estimated at 3%and 3.5% in 2017 and 2018, respectively, from2.6% in 2016, which already represented thehighest level in 15 years, according to figuresfrom the IMF. On the other hand, public debtis expected to be 30% of GDP at the end of 2017,according to the IMF.

Major bondofferingYield-thirsty financial investors still holdPeru in high esteem. State-owned oil companyPetreperu pulled off the largest corporateoffering in the country’s history in June 2017,when it placed two bonds worth a total $2bnfetching a 4.75% yields on a 15-year tranche,and 5.625% on another 30-year tranche. These

are competitive yields for an issuer such asPetroperu and underline themarket’s propen-sity for Peruvian commodities.

At the same time, national investment pro-motion agency ProInversión signed three pub-lic-private partnerships (PPPs) in 2017, includ-ing a $95m project for the development of awaterway network in the Amazonian region ofthe country with a consortium led by Chinese-owned Sinohydro, as well as a $278.4m trans-mission line running betweenMantaro,Marcona, Socayaba andMontalvo, which wasawarded to Colombian utility company ISA.

Beyond an apparently recovering invest-ment sentiment, the Odebrecht scandal, aswell as the hiccups in the reconstructionprogramme caused by flooding, highlightedPeru’s long-standing governance challenges.Its governability is currently at stake at anational level, with Congress dominated by apugnacious opposition led by Keiko Fujimori,the daughter of former president AlbertoFujimori, who is in jail serving amaximum25-year sentence for human rights violations.

“In the context of this administration,Congress is controlled by the opposition, andthat poses some challenges to getting thingsdone,” says Mr Bravo. “However, particularlysince the cabinet reshuffle inmid-year, there isa bit more dialogue, and it’s going to be impor-tant for the government to gain somemoreconsensus with concrete achievements.Historically, Peru has done very well from amacroeconomic perspective, but there is roomfor growth in terms of strengthening differentinstitutions. That’s why, in addition to launch-ing projects, it is important to launch struc-tural reforms such as the formalisation of theeconomy and labour reforms.”

Peru’s institutional strength ranked 106thout of the 137 countries surveyed in the latestGlobal Competitiveness Report by theWorldEconomic Forum.

Joining the clubOne of themain objectives of Peru on itsway to upgrading its institutions, is becomingamember of the OECD, amatter that MrKuczynski has defined as a state issue. The gov-ernment is signing up to a series of interna-tional conventions on its way to OECDmem-bership, such as the ‘Multilateral ConventiononMutual Administration Assistance in TaxMatters’, which it endorsed in October.

At the same time, local regulatory frame-works and institutions are being strengthened.With regard to infrastructure investment alone,the government upgraded the legislation onPPPs (see page 8) and restructured investmentpromotion agency ProInversión (see page 7).

But the challenge ahead goes way beyondthesemeasures. Peru needsmajor reforms inany sector, from the labourmarket to the judi-ciary, health and education. Only when itbecomes amodern, functioning state will itsinvestment potential finally be unleashed.■


New broom: hopes are high that president Pedro Pablo Kuczynski will continue his reform agenda

PERUPROINVERSIÓN

REFORMS AT PERU’S NATIONAL INVESTMENT PROMOTION AGENCY, PROINVERSIÓN, ARE DESIGNEDTO MAKE PROJECT DEVELOPMENT MORE EFFICIENT THAN IN THE PAST. MEASURES SUCH AS APPOINTINGHIGH-QUALITY CONSULTANTS ARE ALREADY IN PLACE, AS EXECUTIVE DIRECTOR ALBERTO ÑECCO TELLS fDi

An IPA overhaul

QHow are you strengtheningProInversión?

A TTQ

he decree 1251 [approved inNovember 2016] establishes a

new legal framework for public-private partnerships [PPPs] andfor the functioning of ProInversión,opening a window for us to restruc-ture the way we work internally.

Tomake processes nimbler, theexecutive director has got many ofthe decisional powers that used tobelong to special committees madeup by external members. The com-mittees will still be engaging in thedevelopment of a project and taskedwith issuing opinions and guaran-teeing the quality of the processes.

For what concerns the develop-ment of our project pipeline, we havefocused on the problemswe had toimprove the quality, efficiency andpredictability of our processes.

QWhat have been themajor prob-lems you have addressed here?

AWWQ

e realised that we have toimprove the capacity to contract

good external consultants. We havelost the capacity to attract world-class consultants over the years.We haven’t updated our policies tocontract consultants, and nowweare working on a new set of rules forthis with the support of theWorldBank and we aim to have it readyby the end of 2017.

In themeantime, we havealready started contracting qualityconsulting for urgent projects, aswas the case with the Michiquillaycopper project, where we launched a

process to select a consultant, whichGoldman Sachs won. [For] more than15 years ProInversión didn’t workwith a consultant of this level and itis helping us a lot with the project,with 10majormining companies,including some of the global leadersin the sector, participating in thepre-qualification phase of the tender.

QHow are you speeding up thetendering process of a project?

AWWQ

e are working to improve thereadiness of the projects we are

bringing to themarket. It is key forus to have a plan ready with all thesteps necessary tomake a projecthappen.With the new rules we haveto come upwith a detailed agenda ofthe project and foresee any possibleinterference (expropriation, reloca-tion, etc) so that when the project isexecuted it’s going to be clear howlong it will take to fix these interfer-ences. The new legal frameworkobliges us to bemuchmore ready toimprove the quality of what we do.

QAre there any specific improve-ments with regard to invest-

ment promotion?

AWe are working to combine ourexecution and promotion capac-

ities. We are now in a position to goout to themarket and bring to Perumore sophisticated investors than inthe past and develop a pipeline thatkeeps them in the country.We haveto put in place quality projects andgoodmechanisms to lure the bestinvestors, which are also those whocan get the best terms of financing.■

WITH THENEWRULESWEHAVE TOCOMEUPWITHADETAILED AGENDAOF THE PROJECTAND FORESEE ANY POSSIBLE INTERFERENCE

Q&A: ALBERTOÑECCO

7December 2017/January 2018 www.fDiIntelligence.com

2017ProInversiónActing executive directorPreviouslyBanco de Crédito BCP, head ofspecial projects; Credicorp Capital,managing director, corporatedevelopment

CURRICULUMVITAEALBERTO ÑECCO

8

PERU HAS TO CLOSE A $160BNINFRASTRUCTURE DEFICIT. NATIONALINVESTMENT PROMOTION AGENCYPROINVERSIÓN, WHICH IS TASKED WITHTURNING THIS SHORTAGE INTO ANOPPORTUNITY FOR INVESTORS, HASHIGH AMBITIONS FOR DEVELOPING ITSPORTFOLIO OF PROJECTS IN 2018,REPORTS JACOPO DETTONI

Layingapipelineofopportunity

P eru’s infrastructure gap hasbeen widening as sustainedeconomic growth hasmulti-

plied the needs of its economy. Theauthorities have been scrambling foryears to address the chronic lack oftransport, energy and industrialinfrastructure, partly through anambitious public-private partner-ship (PPP) programme that featuredamong the first experiments of itskind in South America.

However, economic growth hasgreatly outpaced infrastructure devel-opment, increasing the overall infra-structure gap that has now reachedamassive $160bn, according to esti-

mates by Peruvian infrastructurelobby association Afin. Additionally,infrastructure projects were at thecore of the corruption scandals thathit the country’s business and politi-cal elite in recentmonths, causingadditional delays and uncertaintiesacross thewhole sector.

There have been signs of arenewed appetite for projects inPeru in the second half of 2017 asrecoveringmining commodity pricesbreathed new life into the country’seconomy. The government is attempt-ing to address governance issues,while promoting best practicesacross the board andworking on afirst ever national infrastructureplan expected to provide a strategicperspective to future developments.Themonths aheadwill thus be key todefining the progress of the pipelineof projects that investment promo-tion agency ProInversión is develop-ing on behalf of the government.

Anoticeable gap“Despite the achievements of thepast decades [Peru’s economy grewby an average of 5.1% between 2000

and 2016, UN figures show], thereare still major hurdles that investorshave to face when doing business inPeru and that do not allow that thebenefits of economic developmentlead to a greater reduction of pov-erty,” Afin said in its latest report,published in 2016. “Among them,the gap of physical infrastructure,as well as the quality deficit of theexisting infrastructure, standout,” it added.

Peru ranks 89th globally for thequality of its infrastructure, behindits Pacific Alliance partners Chile(44th), Mexico (57th) and Colombia(84th), as well other major LatinAmerican economies such as Brazil(72nd), according to figures from thelatest Global Competitiveness Reportby theWorld Economic Forum.

Afin puts the gap at $160bn,based on benchmarking Peru’s exist-ing stock of infrastructure againstthe stock in other 214 countriesacross the globe. The sector requir-ing the highest investment is trans-port, which needs about $57.5bn,followed by energy ($30.8bn), tele-communications ($27bn), health

Men at work: the installation of natural gas pipelines in capital Lima is evidence of Peru’s attempts to fill the infrastructure gap


9

PERUINFRASTRUCTURE

($18.9bn), water and sanitation($12.2bn), irrigation ($8.5bn), andeducation ($4.6bn).

Closing the gap wouldmeaninvesting an average of 8.27% (or$15.6bn) of national GDP into infra-structure between 2016 and 2025,Afin estimates. This huge investmentwould pay fat dividends straightaway – as it calculates an extragrowth boost of an average of 15.5%of GDP through 2025 – and wouldhelp reduce poverty levels by about6% annually.

Ripe for returns“The infrastructure gap that exists inPeru is a big opportunity,” says PedroArizmendi, infrastructure leader atEY. “From the perspective of foreigninvestors, the opportunity lies in thechance to get interesting returns ontheir investments – likely higherthan what they can get inmorematuremarkets such as Europe.”

Investment promotion agencyProInversión has long been taskedwith finding ways to turn the lackof infrastructure into an openingfor private investors, mostly through

mechanisms such as self-sustainableor co-financed PPPs, as well as ‘worksfor taxes’, where private companiesexchange a fiscal liability with thecommitment to develop a particularinfrastructure project.

As many as 102 PPP projects havebeen awarded in Peru between 2004and 2017, according to ProInversión,including a $5bn contract for thedevelopment of the LimaMetro Line2, and a $2.5bn contract for thedevelopment of hydro power inthe Huánuco region.

PPPoverhaulFrom a legal framework standpoint,Peru’s PPP programme ranked fifthamong PPP programmes in SouthAmerica, Central America and theCaribbean behind Chile, Colombia,Brazil and Jamaica, according to a2017 analysis by the EconomistIntelligence Unit.

Despite its track record in termsof numbers of projects awarded andcompanies attracted, as well as itstested legal framework, Peru’s PPPprogramme has often struggled tolive up to original expectations in

terms of development pace and qual-ity of project development, prompt-ing the government led by new presi-dent Pedro Pablo Kuczynski to pass adeep reform of the sector.

“[These changes] are aimed atreducing bureaucracy tomake the sys-temnimbler, empower ProInversiónand put it in a better position to leadits projects and thus avoid its pipelineto be too exposed to political criteria,”says EY’sMr Arizmendi.

The strengthening ofProInversión (see interview on page7) accompanies an overhaul of PPPregulations, particularly with respectto several key issues that have oftenbeen a cause of recurring delays.

“As opposed to the past, thefinance and economyministry hasto review a draft of the PPP contractfrom the very beginning of the pro-cess in order to reduce changes tothe final terms of the contract to theminimum, and thus givemore pre-dictability to the process,” sayCamilo Carrillo, head of the directo-rate for private investment withinthe finance and economyministry.

“On a different note, we realised

PERU’S PPP PROGRAMMEHASOFTENSTRUGGLED TO LIVEUP TOORIGINALEXPECTATIONS, PROMPTING THEGOVERNMENTTOPASS ADEEP REFORMOF THE SECTOR


PERUINFRASTRUCTURE

that 70%of the changes of contract terms dur-ing the life of a projectwas due to delays in theavailability of the land for the project. The newrulesmake it compulsory to have a predefineddate for the final availability of the contracts.Wealso fit in a strong anti-corruption clause, sayingthat if any corruption emerges, the contract isautomatically void, and this holds also for pro-jects under publicworks schemes.”

What’s next?ProInversión is hoping to change opinions ofits track record by focusing on amore reasona-ble and efficient portfolio. “We have sharplyreduced the number of projects in our portfo-lio to about 95 from 130 in the past year, andwe want to keep reducing them, and put

emphasis on keeping project structuring timeswithin 18 and 24months, in line with interna-tional standards,” says Mr Peñaranda.

After awarding one project in 2016 andthree projects in the first 11months of 2017,ProInversión has set ambitious targets untilthe end of 2018. The agency plans to awardnine PPP projects, worth about $3bn, inDecember 2017 alone, including theMichiquillay coppermine, a $2bn projectthat has stirred the interest of 10 internationaland domestic companies and sees the involve-ment of Goldman Sachs as transaction adviser.Another 22 projects worth $5.36bn areexpected to be awarded in 2018, accordingto Cesar Peñaranda, the head of the agency’sinvestor services division.

Further down the line, the agency is com-mitted to awarding othermajor projects, suchas LimaMetro Line 3 and LimaMetro Line 4,and aims to create a pipeline of more than$20bn between 2017 and 2020, with transportinfrastructuremaking up about two-thirds ofthe total estimated investment; water and irri-gation about 11%; mining another 10%; healthabout 6%; and the remaining amount goinginto energy, property development, telecom-munications and education.

The release of a national infrastructureplan by the government should give theagency new impetus and investors additionalinsights into the country’s mid-term strategyand priorities regarding infrastructure devel-opment. The finance and economyministryhas been working on the document in the pastmonths, and aims to publish it in 2018. ■

A new Peru? the national infrastructure plan being released by the government will give investors additional insights into the country’s mid-term strategy


PROINVERSIÓNAIMS TOCREATE A PIPELINEOFMORE THAN$20BNBETWEEN2017 AND2020

10

PERUAFIN

Agap too far?

QAfin estimated an overallinfrastructure gap for Peru

of $11Q

60bn.What does this meanfor the country? Does it have theresources to close that gap?

A In order to close the gap, thestate should invest about 6%

to 7% of national GDP every year.Currently, it has been investingabout 4% to 5% of GDP. In 2016alone, the country invested 84% ofthe expenditure allocated to infra-structure into public works projects,and another 16% into public-privatepartnership [PPPs] schemes. We sug-gest the state should aim at aninvestment matrix made up byabout 60% in public works, 25%in PPPs and another 15% in self-sustainable unsolicited proposals.

Overall, the Peruvian state hasgot fiscal solvency and a good macro-economic management led by itscentral bank. Besides, it has savedresources for more than 15% of GDP.

QThe infrastructure sectorcame to an abrupt halt as

the llQ

ocal chapter of the Odebrechtscandal came to light. What isthe current situation? Is the privatesector showing renewed interestfor projects in Peru?

AWe have got to an inflectionpoint. On the one hand, the

global prices of the commodity thatPeru exports have been improving,something that will shore up growthin 2018. On the other hand, facingup to and addressing corruption isnot an alternative to infrastructureinvestment: we have to keep invest-ing and growing while the fightagainst corruption unfolds. Theprivate sector needs a clear timehorizon to keep investing.

QPeru has been addressing itsinfrastructure gap for years,

withhQ

little result. What does it stillneed to be successful?

AAn infrastructure gap hasalways been there. What’s new

is that the gap has been estimated,and there is awareness in the coun-try about the need to close this gap.Now the government should launchthe national infrastructure plan ithas been working on – a three-yearplan to start with. The plan is impor-tant to attract high-profile investorsto the country. At the same time,ProInversión needs to continue thegradual upgrade of its processes,adjusting to international standardsaccording to the institutional capaci-ties of the country.

QHow can youminimise thoserisks that have caused delays

in thhQ

e past, such as the risk ofchanges to the terms of contract,or the risk of delays in the deliveryof land needed for the project?

A It is impossible to avoid changesto PPP contracts with a long

time horizon. These changes willalways be needed, but can be mini-mised with deeper studies, standardcontracts, competition factors ableto unveil bold offers in public ten-ders, as well as having expropria-tions and permits ready in order tomake it possible for the work to startafter the signing of the contract andthe financial closing, and then con-tinue without major hiccups. It isbetter to spend earlier to prepare theprojects than spend later to make upfor delays and changes to the execu-tion budgets. ■

PROINVERSIÓNNEEDS TOCONTINUE THEGRADUALUPGRADEOF ITS PROCESSES, ADJUSTING TOINTERNATIONAL STANDARDSACCORDING TOTHE INSTITUTIONAL CAPACITIESOF THE COUNTRY

Q&A: GONZALO PRIALÉ

11December 2017/January 2018 www.fDiIntelligence.com

2017AfinPresidentPreviouslyPeruvian business associationConfiep, vice-president, directorfor public services

CURRICULUMVITAEGONZALO PRIALÉ

PERU SHOULD REDUCE ITS OVERALL LEVEL OF INVESTMENT IN PUBLIC WORKS, AND ENGAGEMORE WITH PRIVATE INVESTMENT THROUGH PPPs AND SELF-SUSTAINABLE PROJECTS, GONZALOPRIALÉ, PRESIDENT OF PERUVIAN INFRASTRUCTURE LOBBY ASSOCIATION AFIN, TELLS fDiMAGAZINE

12

WITH LOW PUBLIC DEBT, PERU IS WELL PLACED TO ENCOURAGE INVESTMENT INTO A WIDE-RANGINGINFRASTRUCTURE PROGRAMME. MEANWHILE, RESTRUCTURED NATIONAL DEVELOPMENT BANK COFIDEIS ALREADY INCREASING ITS ACTIVITY TO BOOST THE MARKET, AS JACOPO DETTONI REPORTS

Peru’s infrastructure deficit,together with availablefinancing options, provides

solid foundations on which torevive the investment cycle in theinfrastructure sector. In the currentmarket, international investors arethirsty for quality projects offeringdecent yields, withmany watchingthe pipeline of projects being devel-oped by international promotionagency ProInversión.

These include CanadianBrookfield Asset Management,which ownsmajority stakes ininfrastructure concessions all overthe globe, and Chinese state-ownedChina Three Gorge, which swiftlyfilled the void left by scandal-hit

Brazilian construction groupOdebrecht in several major projects.

Scope for spendingAt the same time, the country’spublic debt remains relatively low,giving the government room to allo-cate fresh resources for the develop-ment of projects under public-privatepartnerships (PPPs) or public worksschemes.Within this context, restruc-tured national development bankCofidewill play a key role inwhettingthe private sector’s appetite by facili-tating the bankability of future pro-jects and setting them inmotion.However, to be successful, it will haveto avoid the excesses of the past.

“The finance and economy

ministry committed up to $9.8bnto PPP projects until 2042,” thePeruvian association for infrastruc-ture development, Afin, wrote inSeptember 2016.

“As the PPP framework stabilisesand the development of the portfo-lio of projects intensifies, it’s clearthat [the government] needs tomake space for big infrastructuredevelopments in the coming years.Given that, the state (at central,regional and local level) couldfinance the execution of projectsthrough the public debt. In fact,countries with low public debt aremaking the most of this to addresseconomic slowdown and stimulateprivate and public investment.”

Paying upfront: Peruvian national development bank Cofide invested as much as $2.68bn in the first six months of 2017


Cofideputsfinancetowork

13

PERUCOFIDE

Total external debt is expectedto be 30% of GDP at the end of 2017,and then to gradually decrease to22.4% of GDP in 2022, according toIMF estimates. In the whole of LatinAmerica, only Chile and Paraguayhave lower levels of external debtthan Peru.

Low debt, combined with theprudent fiscal policies of the past,give the government ample fiscalspace to address contingent chal-lenges, such as the reconstructionof the communities affected byheavy flooding inMarch 2017, aswell as structural challenges suchthe country’s infrastructure gap.And Peru’s access to the bondmar-ket is still good – it sold sovereignbonds worth 10bn soles ($3.1bn) inJuly to pay in advance loans in for-eign currency as part of an ongoing‘solarisation’ of the public debt. The15-year notes fetched a yield of 6.15%.

“From talking to internationalinvestors, we don’t see them beingconcerned [about the] debt and fis-cal situation, but when it comes toPeru they are more concerned withthe political scenario and the abil-ity of the government to implementits plans,” says Fernando Bravo, aPeru-born managing director atGoldman Sachs’ investment bank-ing division.

Cofide’s comebackNational development bankCofide,which acts as a second-tier lender,has played a key role in capturing theresources available on themarket andfunnelling them towards the develop-ment of all kinds of projects. “In a con-textwith somuch liquidity, wewantto incentivise private banks to investin the country’s projects,” says PedroGrado Smith, chairman of Cofide.

Cofide has increased its focuson infrastructure projects in recentyears, with loans to the sector grow-ing to 53% of its overall portfolio inJune 2017, from 22% at the end of2011. Despite a historically solidbalance sheet and profitable opera-tions, its exposure to the infrastruc-ture sector did not spare the bankfrom the consequences of the eco-nomic slowdown and the troublesin the same infrastructure sector.

The bank’s volume of non-performing loans spiked up to anestimated 17% of its total outstand-ing loans at the end of 2017, fromless than 1% a year earlier. Thismounting financial strain promptedinternational credit rating agenciesto downgrade the bank, and eventu-ally forced a deep financial and oper-ational restructuring.

“The new regulation allowsCofide to take on up to 50% of a pro-

ject finance risk, whereas in the pastit could reach even 100%,” says MrGrado Smith. “In this way, we intro-duce a diversification principlewhere there are at least two banks.”

Putting resources toworkIn this new regulatory framework,having regained financial stability,the bank is looking forward withrenewed confidence regarding itskey role in the development chal-lenges awaiting the country.

“Infrastructure remains ourkey focus, and we don’t want to leavethe energy sector, and with the slow-down ofmining we are looking atsome corporate sectors such as agri-business, and credit lines tailored forSMEs,” says Mr Grado Smith.

Cofide has increased lending vol-umes to reignite the investment cycleacross the board. It invested asmuchas $2.68bn in the first sixmonths ofthe year, which almost equals the$2.72bn invested in the whole 2016,and already exceeds the annual sumsdisbursed in 2015, 2014, and 2013,according to company figures.

If Peru does not lack theresources to invest into develop-ment projects, the time has comefor the country to put theseresources at work in an efficient,and sustainable, way. ■

WHEN IT COMES TOPERU INTERNATIONALINVESTORS ARE CONCERNEDWITH THEPOLITICAL SCENARIO AND THE ABILITYOFTHEGOVERNMENT TO IMPLEMENT ITS PLANS


PERUODEBRECHT

BRAZILIAN CONSTRUCTION GIANT ODEBRECHT IS DISPOSING OF ITS VALUABLE PORTFOLIO OFINFRASTRUCTURE PROJECTS IN PERU IN THE WAKE OF A CORRUPTION SCANDAL THAT JEOPARDISEDTHE CONTINUITY OF ITS INTERESTS IN THE WHOLE OF LATIN AMERICA. JACOPO DETTONI REPORTS

Odebrecht’sPeruviandivorce

Brazilian construction com-pany Odebrecht’s decade ofactivity in Peru is coming to a

bitter end as the group sells itsPeruvian assets to provide for anyfine related to the so-called ‘CarWash’ scandal.

However, the process has notbeen without its obstacles becauseOdebrecht’s interests in the countryare worth billions of dollars, and thePeruvian government wants tomakesure that any sale complies withtransparency standards and guaran-tees the best possible outcome forthe Peruvian state.

Odebrecht won projects worthabout $12bn in Peru over the pastdecade, but the company’s Peruviandealings have been the subject ofintense scrutiny since it acknowl-edged paying $29m in bribes tosecure public works contracts in thecountry between 2005 and 2014.

Funding shortfallThe future of some of the company’slandmark projects in Peru nowhangsin the balance. The government hasalready scrappedOdebrecht’s con-tract for the development of theSouthern Peru Pipeline, amassive$7bn project to transport natural gasfrom the Anta province to the southcoast, because the company’s consor-tium failed to secure the necessaryfunding to continue theworks.

At first, it seemed as ifOdebrecht had reached an agree-ment with Canadian pension fundBrookfield Asset Management tosell its 55% stake in the project. Butthe deal did not materialise andPeru’s private investment promo-tion agency, ProInversión, is now incharge of restructuring the project.Work is 30% complete, and a newtender was initially expected in2018, although that target now

seems unlikely to be met.On the other hand, Brookfield

did team upwith France’s Suezgroup to acquire the Olmos irriga-tion concession in the northernLambayeque region, a project thatOdebrecht wrapped up in 2014.Odebrecht also sold the 456-mega-watt Chaglla hydropower plant toa Chinese consortium led by state-owned China Three Gorge for about$1.4bn, according to local pressreports, and is negotiating a way outof its remaining Peruvian concerns.

Yet Odebrechtmust tread care-fully. An emergency decree approvedin February set stringent rules toensure companies involved in cor-ruption cases sell their interestslocally, lest the capital needed toensure the continuity of theattached contracts and pay futurefines and indemnification chargesleave the country.■


Power cut: the Chaglla hydroelectric plant over the Huallaga river in Huánuco region is just one of the projects from which Odebrecht has had to withdraw

CONTENTS · 2017-12-14 · CharlotteLloyd+34(0)682736571 [email protected] AssociatePublisher...

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Transcript of CONTENTS · 2017-12-14 · CharlotteLloyd+34(0)682736571 [email protected] AssociatePublisher...