Tenders for new transport projects to expand capacity in Peru

Improving transportation networks has become one of Peru’s top priorities. Several years of fast economic growth have laid bare persisting gaps, underscoring the need to reduce logistics costs and revamp the country’s infrastructure. Projects targeting the development of roads, ports, airports and railways are helping to improve logistics conditions for businesses. Likewise, urban mobility and the need to manage the rapid population growth in many cities, especially the capital, Lima, has led authorities to develop mass transit systems, thereby reducing commuting times and enhancing liveability.

Investment Pipeline

Much transport infrastructure development is being done through public-private partnerships (PPPs), which help attract private investment into the sector. As of July 2015, the investment commitments of 31 signed transport PPP concession deals had reached $14bn, according to ProInversión, the government entity in charge of managing private investment in large-scale projects. Of these, 16 concessions are related to roads, followed by seven port developments, four airport and four railroad projects. As of July 2015 total executed investments through these concessions had reached $5.2bn, according to the Supervisory Authority for Investment in Public Transport Infrastructure.

In addition to the government-led projects, the private sector is also taking the initiative, submitting proposals for transport infrastructure projects which are then evaluated by the authorities and, if deemed relevant, opened to the public for bidding.

Investment in infrastructure, along with the positive impact of overall economic growth, has allowed for an expansion of the transport sector’s contribution to GDP, which has grown over the past decade from PEN13bn ($4.1bn) in 2004 to PEN25.5bn ($8.1bn) in 2014, according to figures by the National Institute of Statistics and Informatics. Between 2004 and 2013, there were only three years in which the sector’s GDP increased at a slower rate than the Peruvian economy, according to the Ministry of Transport and Communications (Ministerio de Transportes y Comunicaciones, MTC) 

Low-Cost Logistics

In the World Bank’s “Doing Business 2016” study, Peru ranked 88th out of 189 nations for its ease of trade across borders, the same position it held in the 2015 report. The cost of moving goods is competitive in Peru when compared to other countries in the region. In 2014 shipping an outbound container cost $890, compared to an average of $1299 in Latin American and Caribbean countries, and $1082 in OECD countries. On the other hand, importing that same container into Peru cost $1010, lower than the average $1691 in Latin American and Caribbean countries and slightly less than OECD countries, which average of $1102.

In a way, Peru’s geography has helped enable the relatively low logistics costs: Callao, the main port, is located on the edge of Lima, the country’s capital and its economic centre. The port of Callao handles an estimated 85% of Peru’s total public cargo, according to figures by the National Port Authority (Autoridad Portuaria Nacional, APN).

Space Restrictions

However, both time and money are lost through inefficient port operations. This is caused by rapid urban growth, which has restricted the available space needed for port operations to grow. Callao is dependent on a network of logistics areas outside the port which are difficult to reach because of traffic and other factors. “Truck circulation outside the port remains one of the biggest bottlenecks, with some trucks taking several hours to move containers and general traffic back and forth between the port and nearby logistics areas,” Diego de la Puente, head of legal and labour relations at APM Terminals Callao, told OBG. The government has established a commission to evaluate port operations at Callao and determine how to improve them. Still, Peruvian logistics remain more competitive than some of its immediate neighbours. According to World Bank figures published in 2014, the cost to export a container is $1535 from Ecuador and $2355 from Colombia.

Road Transport

Linking port areas with the country’s hinterland can also be difficult. Proper road expansion has traditionally faced challenges due to the difficult jungle and mountainous terrain. As of July 2015, up to 16 out of 31 signed transport infrastructure concession deals were directed to road development and renovation. These received $3.2bn in investment out of a total committed amount of $4.4bn in both public and private capital.

One of the region’s most strategic road links, the Pan-American Highway, runs along the Pacific coast, linking Peru’s seafront cities to major seaports. The highway is divided between its northern and southern sections, which then connect to the rest of the country through 20 logistics corridors. These corridors comprise over 25,700 km of road links, according to statistics from ProInversión.

Overall, Peru’s coastal highway extends for 2635 km from north to south, and its operation has been divided into five different private concession contracts. Additionally, two remaining sections of the Pan-American Highway will be tendered soon. As of October 2015, a private initiative proposal to revamp and manage the section of road between Ica, Nazca and Quilca had been presented to the transport authority. The government is also considering a proposed private initiative for the northern section of the Pan-American Highway to revamp and operate the section from Sullana to Tumbes and the border with Ecuador. Both of these proposals are self-sufficient, which means that the projects do not require any amount of state co-financing.

Transport authorities are evaluating these proposals. They are expected to give their consent to a declaration of interest. According to the private initiative procedure, the declarations of interest will be published with the purpose of allowing interested third parties to submit their proposals related to the project. In the event that other third parties submit their proposal, a closed bidding process will be carried out. If there are no interested third parties, the contract will be directly awarded to the proponent.

Regional Scope

Partly financed by the Inter-American Development Bank (IDB), the Initiative for the Integration of Regional Infrastructure of South America (IIRSA) has channelled funds and expertise into the development of continental road projects to link Peru and neighbouring Brazil. Under the scheme, which started in 2000, Peru has been building three inter-oceanic roads named IIRSA Norte, IIRSA Centro and IIRSA Sur. These roads will link the country’s Pacific Ocean ports to Brazil and, eventually, the Atlantic Ocean.

The contract to construct and operate both the north and south highway links was awarded to the Brazilian firm Odebrecht. IIRSA Norte is a 955-km highway, linking the port of Paita and Bayobar to the river port city of Yurimaguas in the region of Loreto, which has access to Brazil via the Amazon River. The IIRSA Sur highway, meanwhile, links the Peruvian coastal areas of San Juan de Marcona, Matarani and Puerto Ilo all the way to Iñapari, on the Brazilian border. The route then continues to the Atlantic ports of Santos and Paranguá, on the Brazilian coast.

Disagreements between the concession holder and transport authorities in one of these three corridors, the IIRSA Centro, led to delays in much needed revamp work along one of the country’s most strategic road axis, the Carretera Central.

Being a central link between the capital, Lima, and the Peruvian hinterland, the Carretera Central is the country’s most crowded thoroughfare. The contract to improve and operate this section of road, included within section two of IIRSA Centro, was attributed to the Columbia-based Deviandes consortium in 2010. However, disagreements over the financing and design of the initial contract led to a four-year stoppage of rehabilitation work, expected to cost over $100m. In August 2015 transport authorities announced that the project had been unblocked after amendments to the initial contract, which led to a re-start of renovation work.

One strategic projects in terms of road development is the rehabilitation of the Longitudinal de la Sierra highway, which connects the interior to the north and south of the country. Work on the 3503-km development has been divided into five sections. Two sections will be undertaken as public works projects managed by the MTC, and the remaining three sections are to be constructed as PPP concession deals (see analysis). Additionally, the 1809-km Longitudinal de La Selva highway, is expected to provide a better link to the Amazonian regions in North-east Peru. A timeframe for the start of the tendering process had not been announced as of early 2016.

Ports Capacity

Better roads will help smooth the flow of goods through the country’s ports. According to October 2015 figures published by the APN, Peruvian public ports have attracted approximately $1.2bn in investments over the past 15 years, while an additional $650m has been injected into private ports in the past seven years.

August 2015 figures by APN show a 4.6% decrease in the total moved cargo through the country’s public ports, in comparison with August 2014 figures. Containerised cargo, on the other hand, saw a 4.2% increase over the same period. The mid-2015 figures, however, came after a series of strong annual performances. In 2014 the public ports’ network moved a total of 42.1m metric tonnes of cargo, a 7.4% increase on 2013 figures.

The biggest port in the country, the port of Callao, is divided between three private concession holders. APM Terminals manages the port’s northern area, while the southern area is managed by Dubai Ports World. The third concession holder is Mineral Concentrate Terminal, managed by Consorcio Transportadora Callao. Overall, the country’s most important facility handled 1.9m twenty-foot equivalent units (TEUs) in 2014. August 2015 figures showed a 5.8% year-on-year increase in TEU handling in Callao.

Tenders

Investment is flowing into regional port facilities as well. In the southern city of Pisco a renovation project is revamping the infrastructure and expanding the capacity of the General San Martin port. The tender was won by the Paracas consortium in April 2014 and will entail the construction of a new port terminal. Total investment is expected to reach $215m, with a concession period of 30 years. “The project is divided into 4 phases. The first one is mandatory and the other 3 are depending on increases in traffic. The concessionaire will invest the total of phase 1 and the infrastructure component of the next phases.” Ricardo Guimaray Hernández, director of planning and economic studies at APN, told OBG.

Other private sector initiatives are set to greatly impact port infrastructure. The project to renovate and expand the port of Salaverry has attracted attention, since the Consorcio Transportadora Salaverry first launched a private sector proposal in 2012 to renovate and manage the facility for 30 years. A competing proposal was launched by Andino Investment Holding. Transport authorities are expected to announce which of the proposals will win the concession in the second half of 2016.

An additional private sector proposal to construct a container terminal in Chimbote, the largest city in the Ancash region, was also received by transport authorities in December 2014. The plan envisions building a 250-metre quay and the rehabilitation of 10.5 ha of handling space. The project is expected to be awarded in second half of 2016. Another private proposal, published in March 2015, aims to establish a multipurpose terminal in the southern port of Ilo, with the 30-year concession deal involving revamping work as well as the operation of the port.

Enhancing Activities

In addition to regional port expansions, authorities are aware of the improvements that could come from enhancing integration of port activities around Callao. The new Callao Port Logistics Activity Area project aims to solve some of these difficulties. To be built on 39 ha of government land, the new facility will include a logistics area, a pre-docking space for trucks, an inspection zone and an administrative building for private and public bodies.

The tender was launched in October 2014 and aims to attract a private investor to develop and manage the logistics area, which will be located about 2 km from the Port of Callao and 1 km from the Jorge Chávez Airport. ProInversión has estimated a necessary investment of $186m, with a 30-year concession deal. Since the land belongs to the Peruvian Navy, the winner of the contract will also be required to relocate some navy buildings and pay a fee for use of the land. The winner of the tender is expected to be announced during the first half of 2016.

Traffic congestion is not the only hurdle affecting transport costs. “One of the biggest challenges for the international logistics sector in Peru are the heavy bureaucratic procedures involved with passing through the Callao port, especially for exports,” Renatto Castro, general manager at Andina Freight, a logistics operator, told OBG. “This is mostly caused by the inspection of goods, which should normally take one day but currently takes up to seven days. Some goods can miss the ship they were supposed to depart in, and this greatly increases logistics costs.”

Air Transport

Strong overall economic growth in recent years has also led to an increase in domestic and international air travellers. Air transport is progressively opening up throughout the region, with the number of internal flights and routes also increasing. Even traditional tourism destinations are seeing an increase in domestic non-tourist passengers. “Before, up to 90% of passengers on any flight to Cusco would be tourists; now, it must be closer to 60%, with the rest being Peruvian businessmen,” Luis Villa Prado, general manager at the National Chamber of Tourism, told OBG. Between 2009 and 2014, the number of domestic passengers increased from 4.3m to 8.9m, according to figures by the MTC. First quarter figures for 2015 indicate a 12% increase versus the same period in 2014.

To support this growth, a number of infrastructure projects currently in progress are helping to improve capacity at the country’s airports. The capital’s Jorge Chávez International Airport is undergoing an $850m revamp, which includes a new terminal and runway. Expansion work for the runways and terminals at airports in the cities of Pisco, Tacna, Arequipa and Ayacucho are also under way, while the construction of a new $658m airport in the city of Cusco will allow for another international air transport link into Peru (see analysis).

Aside from revamping smaller airport facilities, government support for more isolated communities is also promoting the use of air transport. In July 2015 the MTC started subsidising plane tickets from the Amazonian city of Iquitos to the more isolated communities of Caballococha, Guepi and Colonia Angamos, in the Loreto region. The subsidised tickets cost 30%-50% of the normal market price for the routes, according to the local press.

International Market

Growth in arrivals from overseas is also healthy, having risen from 4.8m in 2009 to 7.7m in 2014, according to the MTC. During the first quarter of 2015, international passengers registered a 6.7% increase over 2014. These increases have been supported by robust growth in the tourism sector over the past decade, which saw international arrivals increase from 1.3m in 2004 to 3.2m in 2014, according to figures published by the Ministry of Foreign Trade and Tourism.

Expansion of air transport to and from Peru is linked to the dynamism in regional travel trends. During the first half of 2015 the most important source cities for international passenger arrivals were Santiago, which accounted for 13.64% of total arrivals to Peru, at 373,006 passengers; Miami, which accounted for 7.98% of arrivals or 218,263 passengers; and Buenos Aires, which represented 7.92% with 216,718 passengers, according to MTC figures. The most relevant European source city and the fifth most important overall was Madrid, which accounted for 183,745 passengers or 6.72% of arrivals over the first half of 2015.

Rising Competition

International airlines have been paying close attention to Peru’s market potential. In March 2015 the French carrier Air France announced that it would increase the number of flights connecting Paris with Lima from three to five weekly flights during the high season, which runs from mid-July to mid-October.

Spain-based Iberia also followed the same strategy, announcing a 40% increase in capacity between Madrid and Lima for the 2015 high season. British Airways, meanwhile, announced that it will start running direct flights between London and Lima in May 2016. Demand for direct flights linking Peru and Europe will also be boosted by the anticipated Schengen visa waiver for Peruvian citizens.

The North America-Peru market is an equally interesting target for airlines. LAN Perú, which already runs direct flights between Lima and Orlando, Miami, Los Angeles and New York, announced a fifth route to open between Peru and the US, through the launch of a Washington DC to Lima connection expected to be operational by April 2016.

There are currently 20 international airlines linking Peru to South America, Europe, the US and Canada via direct flights. According to June 2015 figures published by the MTC, LAN Perú was the market leader in international flights over that period, accounting for 31.7% of all passengers during the first semester of the year, followed by Taca Perú at 12.8% and LAN Airlines with 10.1%. Panama-based Copa was fourth in the international market with a 5% market share, followed by American Airlines , which accounted for approximately 4.3% of all international passengers flying through Peru during that period.

Urban Mobility

In-country links are also critical. With an estimated 10m inhabitants in the greater Lima area, the country’s capital has long suffered from traffic congestion and associated high levels of pollution. A survey published in April 2015 by Datum International found that 62% of the city’s population considered public transportation to be bad or very bad. Besides private cars and motorcycles, the city’s transport authorities have been trying to reign in informal taxis, which became a viable work option for people laid off from city factories during the economic instability of the 1980s and 1990s. In early 2014 a regulation by the MTC established new licence plates for taxis, making it easier for traffic authorities to detect informal taxi-service providers. A programme to retire older taxis has also been under way since 2013. According to local press reports, roughly 180,000 formal and informal taxis were circulating in Lima as of March 2015.

Traffic is also being relieved by the continued development of public transport options. One example is the Metropolitano bus system, which authorities hope can eventually act as a substitute for the large number of privately operated bus routes.

City Links

In operation since 2012, the capital’s first metro line, which links Villa El Salvador to San Juan del Lurigancho over a 34-km connection, is starting to improve mobility. Although it was built using an elevated structure, a second and third line to cross high-urban-density areas is currently being developed to run underground.

Work on Lima’s $5.2bn Line 2 – a flagship project – began in May 2015. The line will comprise some 35 stations, and will include a branch linking to Gambetta. It will run from the Ate district, in Lima’s east, to the Callao Municipality on the seafront, passing through approximately 13 districts. The 34-km route will serve approximately 660,000 daily commuters, and initial operations will employ 42 trains with a capacity for 1200 passengers each, according to the press. Initially expected to open in 2019, authorities recently announced a delay until 2020 due to expropriation issues. The sheer size of the project led to an MTC announcement that underground work will be undertaken on a 24-hour daily schedule.

So far, the Lima Metro project is the largest to be developed under the country’s PPP scheme and has attracted the attention of international financial institutions. The IDB has pledged $750m in loans to help pay for the expansion of the new system, specifically for the second line. The funds will be disbursed through a $300m loan to the MTC, and an additional $400m of non-sovereign guaranteed loans directly to the Metro Line 2 consortium, the group in charge of the project. The consortium will also receive an additional $50m loan, managed by the IDB but partly financed by the China Co-financing Fund for Latin America and the Caribbean.

Benefits

Much is hinging on the new system. Feasibility studies by the MTC have suggested that the economic impact resulting from the new metro line in terms of time saved, reduced pollution, a decrease in the number of accidents and rising land values around the new line, will reach $3.4bn by 2040.

Transport authorities expect the number of metro users in Lima to increase exponentially. The number of daily users commuting through the system reached 300,000 since the completion of the system’s first line. This is expected to climb to 1m with the completion of Line 2, and to 2m once Line 3 – the route expected to transport the most passengers – becomes operational. Lines 3 and 4 of the Lima metro system are to be tendered soon. According to ProInversión, the winner of the contract for Line 3 is expected to be announced in the third quarter of 2016, while the consortium that will construct Line 4 of the system should be determined in 2017.

Railways

Traditionally, cargo logistics in Peru have been highly dependent on the country’s crowded road network. Now, however, many private sector operators and public bodies are increasingly looking at railroad development as a way to reduce transport costs. Peru currently has 1906 km of railway lines, the majority of which – 1668 km – are public, with some managed by the MTC and others operating under concession agreements.

The Ferrocarril Transandino concession, under a 30-year contract, runs a 980-km network divided into two separate sections in the south of the country, while the Ferrocarril Central Andino concession, awarded in 1999 for a 30-year period, operates the Ferrovías Central railway, linking Callao in Lima to Pasco and Junín. An extra 239 km is privately owned and is mostly used for cement and mining cargo. Underinvestment has led to decay along some sections of the national railway line, but authorities are launching a series of projects to upgrade these.

The biggest project in the works is the revamp of the 128-km railway linking Huancayo to Huancavelica, which runs along the Andes mountains and was tendered in July 2015. The railway has seen a reduction in traffic since its peak in 1998, when it transported around 700,000 passengers and 47,000 tonnes of cargo, according to ProInversión. The co-financed concession will last for 30 years and is expected to cost $220m. The winning consortium is expected to modernise the line to allow for speeds up to 64 km per hour, establish new stations, rehabilitate tunnels and bridges, and bring in new carriages. By 2044 authorities expect a refurbished line able to transport 1.2m passengers per year. The winning bid is to be announced in the first half of 2016.

Authorities are also aiming to improve railway links with neighbouring Bolivia and Chile, as well as implement an inter-oceanic railway line to link the Peruvian Pacific coast with Brazil’s Atlantic Ocean coastline. A number of high-profile meetings regarding this project have already taken place between the Peruvian, Brazilian and Chinese authorities, expressing interest in financing the project.

Outlook

The transport sector will remain a pillar of Peru’s economic future, as reducing the infrastructure deficit is key to sustaining the growth trends Peru has experienced in recent years. Although the slowdown in China is sure to impact demand for the country’s mineral exports and affect state spending, investment in upgrading and expanding infrastructure should be maintained. The MTC expects investment in transport to continue to grow, with another $10.2bn to be committed through new concessions set to be signed in 2016. These investments may take time to materialise, but will have the long-term benefit of improving conditions for the private sector to operate. To better compete internationally and accelerate the economic growth of its regions, Peru will have to prioritise reducing its logistics costs.