How would you assess the past year? What were your – and the Department’s – greatest achievements?
We have launched over PEN20bn worth of projects in the past three years, and the government has been fairly successfully at finding the right private sector stakeholders to take them on. More recently, project sponsors and developers have said they would look to reassess or negotiate the terms associated with commercial loans that underpin their projects. Around 15 projects are currently in that stage, with 40 more in the pipeline, so it is important to concluded negotiations quickly – something we have prioritised, and are achieving quite successfully.
How is the government looking to tweak regulations in ways that make it easier for the private sector to participate?
We have just overhauled our PPP framework. Two years ago, the Economic Ministry laid the basis for that process with the previous framework, but we found that it did not work as well as we expected. That is why the new government decided to tweak it by adding some new articles relating to the timeframe, role of different public offices, and the risk management. In the coming weeks, we will rework some of the terms and amendments incorporated in the PPP legislation, and it appears that the market is reacting positively to that. We also maintain a close dialogue with the private sector, and it is very important that we heed to their concerns and demands.
If you look at the list of possible challenges these deals encounter, where do you see the main bottlenecks?
We have seen a number of very successful projects hit the market over the past five years – the Metro Lima Lines I and II, the southern gas pipeline (GSP), and Chavimochic project to name a few. But when you take a closer look, it would be fair to say some challenges have emerged. One of them relates to Gasoducto Sur Peruano Pipeline project. The government cancelled it due to the participation of Odebrecht and the knock-on effect that had on the project’s ability to secure the necessary funds on time and under the terms defined in the deal contract. The Chinchero Airport project, ostensibly a successful deal and approved in 2014, will service one of the largest tourist destinations in the country. But, as we discovered, there were problems with the contract’s terms, so we had to sign an addendum with the private side – causing unnecessary headaches and delays. This is a recurring theme; many of the challenges are clustered on contractual side, where the terms were often unclear or undefined, and any fallout is often heavily shouldered by the government. If you look at developed markets, PPP projects tend to transfer the bulk of the risk onto private sector stakeholders, but that is not the case with Peru’s programme. That said, we want to execute a deal review, reassess the risk allocation between public and private sectors, and decide on which financial instruments we need to develop in order to cover those risks. The World Bank is working with us on this, providing guidelines and also helping kick-start the development of these tools.
We are also looking to redevelop the tools we already use for infrastructure funding in a way that would allow this kind of risk reallocation to occur. RPI CAOs, the payment certificates backed by the government, is a good example of this. These certificates have for years been structured in a way that forces government to assume most of the risk; that situation is unsustainable.
Reforming the certificate programme is not an easy task, as it has so far has been very successful, and because the private sector is naturally sceptical about changing something that already works well. But our position is that we need to get to the next stage of building a real, sustainable PPP programme, where more of the risk is assumed by borrowers.
Are there plans to introduce new incentives that would make that kind of change easier for the private sector to swallow?
Yes. That is why we don’t plan to roll-out the new terms on a national level immediately, but rather address three or four projects individually to begin with. We are trying to put them on the market, but with the new set of conditions in place. But this shift in risk needs to be complemented with financial incentives – like, for instance, land risk; you could address that by introducing securities on the ownership of the land. The idea, then, would be for the local banks to provide assurance to the owners of that land and create a market in those securities. So essentially, we want to help the private sector further redistribute those risks throughout the market.
And what is the outlook for the next year? Where will we see the biggest challenges?
We expect to sign off at least 8 projects this year, worth around US$4bn, which is not a huge amount – but it is twice what we spent in 2016. In 2018, we want to push forward with those projects, including the Metro de Lima Line III. Total project investment for 2018 is likely to reach US$10bn, so this year we will focus on promoting these new projects, and structuring them in the best way possible.
The main challenge for us will be to find a way to kick-start these remaining 15 to 18 high-priority projects that are assigned but that we are not executing on because of lack of investment. I believe that if we amend the contractual terms in the right way, we can appeal to new investors. We want to show the market we are open to resolving the differences the past administration had with the private sector.
