Come one, come all: Foreign direct investment surges ahead

The combination of a stable and expansionary macroeconomic environment, vast natural resources and an investor-friendly legal framework has created an attractive setting for international investors looking for emerging market opportunities. While the majority of foreign direct investment (FDI) has been channelled to Peru’s extractive industries in part due to high commodity prices, opportunities in sectors like retail and communications have also seen an influx of foreign investment. Furthermore, the government is keenly promoting private sector involvement in infrastructure development through concessionary agreements. In total, FDI stock amounted to $20.8bn at end-2010, according to figures from investment promotion agency ProInversión.

RISING NUMBERS: Since 2003 FDI inflows have increased each year, with the exception of 2009 when the global financial crisis caused a reduction, according to figures from the Central Reserve Bank of Peru (Banco Central de Reserva del Perú, BCRP). Since 2003 when net FDI totalled $1.3bn, foreign investment has increased by an average of 29% annually, reaching $7.3bn in 2010 and $7.6bn in 2011.

The growth of FDI stock has coincided with the expansion of the external sector, which has seen the trade surplus widen as a result of increased revenues derived from exports. A growing number of free trade agreements has ensured this trend should continue in the short to mid-term. Along with the increasing prominence of investments in the extraction and export of natural resources, other major industries that are highly attractive to foreign investors include communications, infrastructure, retail and agriculture.

DESTINATIONS: Peru’s vast mineral and hydrocarbons wealth has thus far been the predominant force in attracting FDI, with 23.3% ($4.8bn) of the total stock, according to figures through 2010 from ProInversión. It is followed by communications with 18.2% ($3.8bn), finance 14.9% ($3.1bn), industry 14.7% ($3.1bn) and energy 13.4% ($2.9bn). While the government continues to encourage investment in extractive industries, especially at a time of record commodity prices, it is simultaneously also persuading foreign investors to become involved in value-added manufacturing and the downstream processing of raw materials. This is best evidenced by the proposed creation of a petrochemicals industry to maximise value coming from the Camisea natural gas field. Brazil’s Braskem, South America’s largest petrochemicals producer by capacity, is investigating the possibility of opening a $3bn petrochemicals plant in Peru. Meanwhile, Chile’s Sigdo Koppers is still trying to source ammonia to get its $800m petrochemicals complex up and running by 2015.

Investors in Peru’s communications industry include Telefónica del Perú, a subsidiary of the Spanish telecom giant Telefónica, which announced in 2010 that it would invest $1.5bn to upgrade its communications networks between 2011 and 2013. Meanwhile, Amé rica Móvil, the Mexican telecom owned by billionaire Carlos Slim, announced in June 2011 that it would invest $1bn in Peru during the same time period. Vietnamese telecoms operator Viettel Group has also said it will enter Peru in early 2013, having won a licence in 2011, and is planning to offer highly discounted rates.

Retail investors from Chile have had tremendous success in capitalising on rising domestic consumption due to Peru’s growing middle class. Chilean firm Falabella entered Peru in 1995 through the purchase of local department store Saga, which had just two locations at the time. Saga Falabella has become Peru’s largest department store chain, with 17 locations, while Chile’s Ripley has also since entered the market and has 15 stores. Chile’s Cencosud grocery chain and Falabella’s Tottus supermarket brand also dominate the mass grocery retail sector with more than 60% of supermarket sales in 2010, according to figures from Cencosud.

ORIGINS: As of the end of 2010 Spain held the largest share of FDI stock in Peru, with $4.41bn (21.2%) in active investments coming from the Iberian nation, according to data from ProInversión. The UK was a close second with $4.38bn (21%), followed by the US ($3.17bn, 15.2%), the Netherlands ($1.35bn, 6.5%) and Chile ($1.32bn, 6.4%). Brazil, Panama, Colombia, Mexico, Canada and Switzerland also had significant contributions as of the end of 2010.

Chinese investment in Peru is expected to increase by 30-40% in 2012 and 2013, when the country is projected to invest $1bn-1.2bn. Its current portfolio, which includes large investments in fisheries and mining, will likely remain unchanged, although Peruvian officials have repeatedly encouraged investment in value-added manufacturing, not only commodities. China’s importance to Peru has grown in stature recently as it became the country’s largest trading partner in 2011, surpassing the US. The Peruvian-Chinese Chamber of Commerce has estimated Chinese investments in Peru could potentially total nearly $10bn over the next five years, as South America is forecast to receive around 60% of Chinese overseas investment by 2020.

LEGAL FRAMEWORK: The Foreign Investment Promotion Law (Legislative Decree 662) of August 1991 has been fundamental in Peru’s transformation as an attractive investment destination. The legal investment framework also includes the Law for Private Investment Growth (Legislative Decree 757) and Regulations of the Private Sector Investment Guarantee System (Supreme Decree 162-92-EF).

Under the legal framework, foreign investors are afforded the same rights as domestic investors, including the right to non-discriminatory treatment, freedom to conduct import-export operations, and the right to remit profits and dividends. There are, however, some restrictions as foreigners may not acquire mining, land, water or energy projects within 50 km of international borders unless expressly approved by a decree that also must meet the cabinet’s approval.

Peru also grants investors the possibility to sign legal stability agreements – investor-state contract law – through which any changes in legislation regarding non-discrimination, free remittance of capital, income tax regime, exports promotion regime and labour ( hiring) regulation take 10 years to impact established investors with government contracts, while government-issued concessions come with guarantees throughout the life of agreed contracts.

In order to sign a legal stability agreement investors must invest a minimum of $5m within two years ($10m in the case of mining and hydrocarbons-related investments), acquire the majority stake (more than 50% of shares) of a state-owned enterprise through the privatisation process, or fulfil capital investment requirements agreed upon in a concessionary contract.

INCENTIVES: While there are several areas in which investors may take advantage of state-sponsored incentives, the agriculture sector has been given priority by the government. Investors in the agriculture sector enjoy a 15% income tax rate (half the usual 30% corporate rate), while corporate bodies may depreciate 20% per year the amount invested in hydraulic infrastructure/irrigation projects and flexible labour requirements allow for the hiring of seasonal labour.

Additionally, Centres of Export, Transformation, Industry, Commercialisation and Services (Centros de Exportación, Transformación, Industria, Comercialización y Servicios, CETICOS) have been set up as economic zones with special status in and around the coastal cities of Paita, Ilo and Matarani, primarily to promote agro-farming and agro-industrial export activities.

Companies set up in CETICOS are exempt from income, value-added tax (VAT), excise and municipal promotion taxes, as well as Customs duties on exported products and imported products destined for reshipment.

More generalised incentives apply to all foreign investors, such as refunds on VAT on the acquisition of machinery and goods during pre-production stages (up to a maximum of five years). The Tacna Industrial Free Zone (Zona Franca de Tacna, ZOFRATACNA), located near Arequipa along the southern Chilean border, also provides tax benefits similar to those found in CETICOS. ZOFRATACNA was created in 2002 to spur industrial development, while it also affords tourists the opportunity to make duty-free purchases.

CHALLENGES: Social conflicts – often a consequence of regionally limited water supplies – have put mining, energy and agricultural projects at risk, with the suspension of Newmont’s $4.8bn Minas Conga mine being considered due to rows with local communities (see Mining chapter). There are an estimated 200 social conflicts, and the government’s ability to resolve these clashes could drastically affect FDI inflows in the future.

Another investor concern is a lack of adequate infrastructure. However, with the government budgeting $20.5bn for infrastructure development over the next five years, some of these concerns will be allayed.

The current administration has thus far displayed a continuation of the moderate, investor-friendly economic policies that have contributed to recent economic success. Despite mining and energy projects attracting more than $50bn in investment over the next decade (much of it from foreign sources), opportunities will continue to abound in a range of other sectors, including retail, infrastructure, communication and agriculture.