Living in Peru : your everyday companion

by
Alexander Müller Jiskra, Economist, AmCham Peru

The lack of investment in public service infrastructure in Peru has led to the growth of the infrastructure gap to US$ 30 billion – an amount equivalent to the public debt – which raises the question of whether or not the Peruvian government has a vision of how to reverse this deficit that limits the growth potential of the economy.

Today, to say that more investment in infrastructure is needed for a sustainable long-term growth may sound like a trite recommendation, but the limited amount of resources that Peru allocates to the provision of public service infrastructure (transportation, sanitation education, health, electricity, telecommunications, etc.), equivalent to 2.5% of its GDP, less than what Latin American countries invest (4%) and far below what the World Bank considers to be optimal (7%-9%), makes clear the need to continue insisting.

It seems incredible that, despite a presidential speech urging investment and the empirical evidence that reveals the historical infrastructure deficits afflicting the country, progress towards the solution of this problem is minimal. According to preliminary estimates of the Association for the Promotion of National Infrastructure (AFIN), Peru’s gap in public service infrastructure (excluding education, health and housing), expressed in terms of investment required to have levels of coverage similar to those in Chile, increased from US$ 23 billion in 2005 to US$ 30 billion in 2008. A US$ 7 billion additional deficit, which is reflected in Peru’s fall to position number 110 out of 134 countries in the world ranking of the quality of infrastructure by the WEF. Does this represent a failure? Without a doubt, since all success or failure is relative and Peru finds itself at the bottom of the barrel in Latin America and in the world.

It seems that the economic boom of the past seven years, a period when Peru had the highest average annual growth in the region (6.7%), has given the impression that it is possible to grow steadily at high rates without increasing the capital stock of public services, which is what increases the potential GDP. A utopia, because the infrastructure needs increase exponentially with respect to GDP growth, and our country is a proof of that.

The positive output gap of the Peruvian economy - explained by GDP growth rates higher than the potential growth rate (currently 7%) - has shown clearly how the infrastructure bottlenecks, exacerbated by economic growth, affect the competitiveness of business activity and opportunities for economic development, especially in the provinces.

One of the most alarming cases is the transport sector, where problems of connectivity affect not only the logistical costs of businesses, but also have a direct impact on the welfare of the inhabitants in the interior of the country. It is pointless to encourage partnership and training of farmers if they are unable to transport their products competitively to the capital or to local collection centers, given that only 50% of the national road network and 8% of the departmental roads are paved.

It is also regrettable that the 3,000 kilometers of Peruvian coastline has only two port terminals (Matarani and Callao) with gantry cranes, which are essential to compete internationally, and one capable of moving large volumes (Callao), which forces the provincial business clusters to incur higher costs for not having a closer outlet. The concession of the port of Paita represents progress and will positively influence the development of the northern regions, given that the megaport that is being built will charge rates almost 50% lower than Enapu. But what about the rest of the country? In other concessions of potential megaports, such as Salaverry, Bayóvar, San Martín, San Juan de Marcona and Ilo, there is still nothing concrete. Even the multinational Chinalco is in danger of not having a port for minerals when its Toromocho project enters into production, putting at risk an investment of over US$ 2 billion.

Another worrisome case is the energy sector, where growth of electricity demand in combination with the delay of investment in generation and transmission has led to the system operating with a practically non-existent margin of reserve (between 2% and 4% versus a 30% which is considered appropriate), risking a rationing of the service that could hinder the country's growth.

Even Lima is suffering from to the infrastructure deficit. The recent widening of major thoroughfares (Grau, Abancay, Manco Cápac, Raúl Ferrero, Javier Prado, Panamericana Sur, etc.) and the metropolitan bus system that is being built will not diminish the crippling congestion in the long term. Lima is a city that is overcrowded and expanding and so, it should have a transportation system based on electric trains, a subway, more pedestrian and highway overpasses, etc.

But beyond the problems of transportation, the Peruvian capital does not seem to have any city planning that looks to its future. Which zones will grow the most and, given that, what is planned in terms of basic service infrastructure? Where will the improvised San Isidro financial center move when it becomes saturated? When will there be an adequate maintenance of the Rímac River that makes the development of nearby activities sustainable? Certainly, the lack of public service infrastructure poses great challenges if the capital and the country as a whole are to continue to grow.

The government is aware of the problem. It is not in vain that it has scheduled a 52% increase in public investment in 2009 and allocated nearly 80% of the resources of the Economic Stimulus Plan for infrastructure. ProInversión has also given a good signal by re-launching the outsourcing of infrastructure concessions processes through the Special Committees for Privatization (Cepri), a scheme that proved to be agile and efficient for attracting investments during the decade of the nineties.

Nonetheless, this huge increase in public investment in infrastructure will last only a few years, and cannot compare with what private investment could do, were it not blocked by specific factors, such as restrictions on co-financed private initiatives in the framework of the PPPs; the legal obstacles to pension funds financing infrastructure projects; the exclusion of the jurisdictions where there are no royalty payments in the law which allows the payment of taxes with infrastructure projects; bureaucratic obstacles in the local districts; among others.

In the end, the issue is whether or not there is a vision, whether or not there is a development plan, or whether the State policy to reverse the infrastructure deficit will consist only in packages of projects whose coordination will be seen along the way. Thus if the government hopes that, once the crisis has ended, Peru will continue to grow at rates above 7% with a gap in public service infrastructure that increases US$ 7 billion (nearly 6% of the 2008 GDP) in 3 years, I ask myself, where is the vision?