Bridging the gap: Public-private partnerships drive highway infrastructure development

Substantial economic growth over the past decade has resulted in greater focus on Peru’s deficient infrastructure. Of the estimated deficit, approximately $13bn is attributed solely to highway construction, an essential component that often encounters difficulties due to the country’s complicated terrain, especially in the Andes Mountains and Amazonian jungle.

According to the latest figures from the Ministry of Transportation and Communications, Peru has about 130,000 km of roads, divided among the national, regional and municipal levels. National highways are the most significant, connecting regions and providing access to neighbouring countries. However, only 17,213 km of roads are currently paved and highways tend to be in substandard conditions, which is often costly or even fatal in emergencies such as landslides. The main task involves renovating highways, although some new thoroughfares will need to be built as well. Currently, only the Panamericana highway spans the length of the country, running along the Pacific coast.

Regional

One central factor that is contributing to highway development is the Initiative for the Integration of the Regional Infrastructure of South America (IIRSA), a motion signed by Mercosur member states in 2000 to improve land trade routes within the region. IIRSA projects in Peru have created three fundamental transport networks that cross the country horizontally and cover the northern, central and southern regions. This last region forms part of the IIRSA Interoceánica, which will be the first paved highway to connect Peru’s Pacific seaports with Brazil’s Atlantic coast, covering approximately 2500 km once completed.

Partnerships

Government concessions to improve roads amount to about 5300 km, currently divided into 15 large projects, many of which fall under the model of public-private partnerships (PPPs), regulated by the Supervisory Authority for Investment in Public Transportation Infrastructure (Organismo Supervisor de la Inversión en Infraestructura de Transporte de Uso Pú blico, OSITRAN). According to OSITRAN, current highway investment for these concessions amounts to roughly $3.93bn. It is believed that around $2.83bn of the work had been completed as of July 2013.

Brazilian giant Odebrecht is leading much of the local highway development with PPP projects. Ronny Loor, director of investment for Odebrecht’s IIRSA projects, sees PPPs as a successful method for improving public infrastructure works. “Concessions place the state and the private sector on the same playing field, utilising the specific advantages each can bring to a project,” he told OBG. “Highways constructed under the PPP model are completely different from those constructed under public management because private operations add value to the final product with more efficient construction and maintenance.”

In 2006, Odebrecht was granted a concession for the IIRSA Norte, covering more than 955 km in northern Peru. The contract consisted of upgrading the existing road and constructing 114 km of new highway. That same year the firm won the tender for the second and third spans of IIRSA Sur, which run from Urcos, located in the Cusco region, to Iñapari, bordering Brazil, together accounting for 649 km and forming part of the Interoceánica. Almost 100% of this highway was constructed by Odebrecht. Benefits of this new stretch were seen in 2012, when parts of the highway received mean daily traffic intensity eight times higher than the previous road, amounting to the equivalent of initial estimates for 2020. All three of these concessions involve maintenance and operation for 25 years following the completion of the road, which is standard procedure for these types of highway concessions in Peru.

Obstacles

However, not all highway construction is so smooth. Government concessions can often take more than five years to complete, from the application process to operations, according to local construction firm Obras de Ingeniería (Obrainsa), another key player contributing to infrastructure development.

Ernesto Tejeda, president of Obrainsa, attributes much of these delays to political reasons. “The issue of financing is the least of our concerns,” he told OBG. “The largest problems rest in a political vision of wanting to improve infrastructure deficits and eliminating obstacles to do so, such as access to land and water.”

Bureaucratic procedures have held up many projects. Before May 2012 maintenance projects on key provincial roads could be undertaken without applying through the National System of Public Investment (Sistema Nacional de Inversión Pública, SNIP). However, revised regulations require that all applications be approved by the SNIP. According to Loor, the SNIP often undervalues projects of social importance, ignoring indirect benefits such as community access to new markets.

Procedures to obtain and expropriate land are also slow, mainly because concessions often involve several ministries. For Tejeda, the problems are to do mainly with poor local government administration, further complicated by issues concerning the protection of the country’s extensive archaeological remains. He also cited requirements for environmental impact studies (EIAs) and the Law of Prior Consent (LPC) with local communities as factors that will add to bureaucracy. According to Obrainsa, EIAs take around two years and the LPC about four years, resulting in more delays, especially as both procedures are becoming increasingly politicised. Regardless of the various challenges involved, Obrainsa also views PPPs as the most efficient way to rectify highway deficiencies.

Nevertheless, the government is taking steps to resolve these issues. In June 2013 the national Congress approved a law that streamlines private investment in the country and encourages productive development and business growth. The initiative includes proposals to amend laws and reduce timelines for issuing permits. It also provides penalties for officials and workers who impose illegal bureaucratic requirements.

Luis Miguel Castilla, minister of economy and finance, said there are municipalities that take more than 700 days to process a building licence, for example. The fundamental goal is to reduce the time to just 50 days.

Private Initiatives

Odebrecht has taken on the role of addressing such challenges with private initiatives, especially with regard to integrating communities. Even so, Loor acknowledges that communication needs to be more transparent, and this includes the government as well as the private sector. “If the entity in charge of constructing a highway builds up false expectations among the affected community – either negative or positive – this will harm future projects because we lose our credibility,” he told OBG.

One successful initiative led by Odebrecht is the internationally recognised iSur project, which has already reached 2500 families along stretches 2 and 3 of the IIRSA Sur in southern Peru. The project, supported by the Inter-American Development Bank and the Development Bank of Latin America, aims to integrate production areas that were formerly marginalised into the larger national market, using the highway as a means of sustainable access. Milk production in Ocongate, for example, is one success story of the iSur initiative.

Future Projects

While the final touches are being put on the Panamericana highway connecting the country from north to south along the coast, similar projects are in the works stretching the length of the Andes and the Amazon, eventually providing three main arteries corresponding to the country’s topographical regions. The national investment promotion agency, ProInversión, has posted a new concession project for section 2 of the Andean thoroughfare, which is divided into five stretches altogether covering around 3500 km. With an estimated investment of $174.5m, section 2 project entails 879 km of highway spanning the northern districts of Cajamarca and La Libertad. The award of the concession will be announced in December 2013. Both sections 4 and 5 of the same highway are currently being prepared for concession as well, consisting of 640 km in the central Andes and 423 km in southern Peru, respectively. Together the projects are estimated to require more than $300m in investment and are set to go up for tender in 2014.

Bridging The Gap

According to Loor, Peru needs to spend the equivalent of 1.4% of its GDP to have a major impact on closing the infrastructure gap. The IIRSA projects have already made key strides in tackling these issues, providing more access to ports, while encouraging improved production by local communities. The projects slated to traverse the Andes are the next step towards improving terrestrial connectivity. However, large gaps still exist and many industry specialists fear that economic growth is exceeding infrastructure development. For example, Gianfranco Boggio, general manager of PMP Holding, told OBG that car sales during 2013 are likely to surpass 200,000: as a result, highway traffic will increase. While Boggio believes large-scale infrastructure projects present potential for foreign investors, he said that the mechanisms for investment need to be modernised and updated.

Although there are plentiful opportunities for investment in the construction of highways and infrastructure, there is room for improvement in land organisation, procedures for issuing permits and access to PPPs.