Private investment flows into roads, air and sea ports

With economic growth outstripping existing infrastructure, Peru has committed fully to renovating transport links. Government efforts, coupled with the targeted concession of specific transport infrastructure to private operators, have channelled investment into the sector and improved connectivity. However, with economic growth exposing the current limitations of Peru’s transport channels, efficiency and progress are key.

Due to the economy’s heavy reliance on mineral exports, Peru’s links between its hinterland and export gateways on the coast remain essential, and this is encouraging expansion work in major road connections. Private management of port facilities is allowing for fresh investment in new equipment to increase capacity and shorten service times. Growth is also driving development of aviation infrastructure to raise handling potential for domestic and international traffic.

By land, water and air, the revamping of transportation infrastructure seems set to determine the country’s growth prospects over the medium term. Other projects are also being discussed, such as rail, which has not been a dominant mode of transport to date.

Competitive Prices

The challenges are significant. The World Bank’s 2014 “Doing Business” report, which gauges countries’ attractiveness for business, ranked Peru 55 out of 189 countries in terms of its ability to facilitate trade. This is six positions lower than its 2013 ranking of 49. Despite the fall in rank, export and import costs in Peru remain relatively competitive.

Importing a container costs an average of $1010, compared to $1090 for OECD economies, and $1676 for the Latin American and Caribbean countries. Costs are even more competitive for exports generated in Peru. An outbound container will cost $890, compared with a $1070 average for OECD countries and a $1283 average for the Latin America and Caribbean region. Much of the relatively low import and export costs are related to the proximity between Callao, the country’s main port, and the capital city of Lima, in which a large proportion of economic activity is still concentrated.

Although it allows easy access to trade routes, the port’s location represents additional costs in the logistics mix. Rapid urban growth has decreased available space for handling inside the port area, meaning that some transport activities must go through a dispersed network of logistics areas around the port.

“Logistics costs in Peru currently account for 32% of the total cost of products, much higher than the world average,” César Venegas Núñez, executive director at the Business Alliance for Secure Commerce, an international association promoting trade security, told OBG. “This is because of inefficiencies, such as having logistics zones that are relatively separate from the main Port of Callao,” he added. On average it takes 17 days to import a container, a week longer than the average 10 days required for OECD countries.

Gaps To Fill

Improving infrastructure is key if economic growth is to be maintained. A report by the Association for the Promotion of Infrastructure said that Peru’s current infrastructure gap is equivalent to $88bn, although $90bn is the more commonly quoted figure. Of this total, about 23.8%, or $20.9bn, is related to transport infrastructure alone. Authorities are responding by implementing heavy investment plans that combine both public and private investment and make extensive use of public-private partnerships (PPPs). “PPPs are the answer to reducing the $90bn infrastructure gap, and there are enough private players willing to implement them,” Emilio Fantozzi Temple, general manager of logistics firm Ransa, told OBG. “Now it is a question for the government to expedite tender procedures to have a real impact in reducing the deficit.”

Road Extension

The Ministry of Transport and Communications (Ministerio de Transportes y de Comunicaciones, MTC) has already announced investment of $20bn for the sector in 2013-16. Much of this will go towards the road network, which has long been one of the major bottlenecks of Peru’s infrastructure. Several links are under construction, including routes in the more geographically challenging areas, like the Andean and Amazon regions. One of the more ambitious projects is the 3473.4-km Longitudinal de la Sierra road, which will cross the country from north to south along the central Andean region. The project is divided into five sections, three of which will be built though PPP concessions. The MTC will construct the remaining three sections as public works projects.

Section Concessions

To make the deals more attractive, the government is offering co-financing arrangements for certain sections of the concession. The competiveness of co-financing requests by bidders will play an important role in the tender evaluation. In December 2013 Consierra Tramo II, a consortium of Spanish companies Sacyr Concesiones and Constructora Málaga, won the tender to build and operate the 875-km section 2 of the road. This stretch will connect Ciudad de Dios to Cajamarca and Chiple, Cajamarca to Trujillo and Chilete, in the northern regions of Libertad and Cajamarca. The investment is expected to reach $552m, and the concession will last for 25 years.

Sections 4 and 5 of the Longitudinal de la Sierra are to be awarded by the end of 2014. Section 4 will entail renovation and maintenance work on 428 km, and maintenance and operation of a total of 965 km for 25 years. The estimated investment needed for this section is $400m. This part of the project, aimed at connecting Huancayo to Ayacucho, Abancay and Pisco, is expected to be awarded by the third trimester of 2015. The last part of the road to be awarded is section 5, which will run for 422 km, linking several cities in the southern regions of Cusco and Puno. The project should be awarded during the fourth quarter of 2015.

Another project authorities want to begin construction on in the short to medium term is the Longitudinal de la Selva road, which will connect Peru’s Amazonian regions. However, the MTC and ProInversión, the national investment promotion agency, have yet to announce details for the project’s tendering.

Interoceanic Highway

Over the past several years the road network has also seen expansion via a regional project that aims to connect transport, energy and water infrastructure networks in South American nations to promote economic growth. Under the Initiative for the Integration of Regional Infrastructure of South America, partly financed by the Inter-American Development Bank, Peru and Brazil are building a road link that is to allow transportation of goods between the Atlantic and the Pacific Oceans via a continental road, the Interoceanic Highway.

On the Peruvian side, the project entails three highways running from west to east. Two of these routes, the Interoceanica Sur and the Interoceanica Norte, were tendered and awarded to Brazilian constructor Odebrecht in 2006, which won the concession to build and operate the 955-km road linking the Pacific ports of Paita and Bayobar with the central city of Yurimaguas – which allows access to Brazilian ports via the Amazon River. The Interoceanica Sur has also been built and is operated by Odebrecht, which oversees the 656 km that links Urcos, in the Cusco region, to Iñapari close to the Brazilian border, with further connections to Brazil’s highway network. In total the Interoceanica Sur extends over 2594 km, connecting the Pacific Peruvian ports of San Juan de Marcona and Matarani with the Atlantic Brazilian ports of Santos and Paranaguá.

Peru is also strengthening links with southern neighbour Bolivia. The government has announced plans to build a road connection to link the southern Peruvian city of Tacna to the Bolivian capital of La Paz in 2015, a project expected to cost $185m.

Inner City Pressure

Traffic build-up has also affected urban centres. Rapid growth in Lima and other major cities has put pressure on urban roads and encouraged the development of new mass transit systems to reduce congestion. According to the Latin American Association of Integrated Transport Systems, traffic problems in Peru represent an annual loss of $20bn to the country’s economy. In Lima, much improvement has come with the opening of the first phase of the city’s inaugural metro system, which started operating in mid-2012. The line connects Villa El Salvador in the city’s south to the centre over a 22-km elevated link. The second phase of the metro came on-line in mid-2014 and links Grau station to San Juan de Lugarincho. The completed line now extends for 34 km.

Expansion of the metro network is set to continue at full speed, with the government awarding the concession to build and operate a second line in March 2014 to a consortium of Spanish builders ACS and Fomento de Construcciones y Contratas, as well as Italy-based Salini Construttori and Finmeccanica, which will start work before the end of 2014. Also under study is the design for the third metro line. Overall, a total of four metro lines are expected to be built over the coming years. Authorities have already announced that lines 3 and 4 of the Lima metro system, currently under study, will cost up to $5bn each (see analysis).

Expansion is also happening at Metropolitano, the capital’s bus rapid transit system, which is fast becoming a long-term option to develop a comprehensive urban transport network to counter the city’s large number of privately operated small buses. To achieve this, Protransporte, which manages the system, has tendered a contract to set up five new bus lines, scheduled to inject some $850m into the network.

Airport Revamp

Fresh investment is also revamping air transport. Enhanced competition between airlines has promoted flying as a central option to cover the country’s vast distances. Coupled with its attractiveness as a tourist destination, which has been driving regular growth in international passenger numbers over the past decade, Peru’s economic performance and rising living standards allow a growing number of Peruvians to join the ranks of domestic air travellers. These factors have led to an exponential rise in the number of passengers over the past decade, from 5.2m in 2004 to 15.7m in 2013, according to MTC figures.

Domestic passengers are becoming ever more important for the sector, making up 49% of all passengers in 2004 and 53% in 2013, rising at an annual average rate of 13% over the past decade. Still the increase in domestic traffic remains concentrated on a small number of traditional routes. This has left many smaller airports in need of an infrastructure overhaul. “Due to the low use of internal flights – just 7% of the population 10 years ago – provincial airports have become obsolete. The government should promote tenders to privatise them and increase their capacity, taking some pressure off other infrastructure, like roads,” Carlos Cueva, general manager of Aero Transporte, a Peruvian airline operating charter flights, told OBG.

Despite insufficient infrastructure at some airports, airlines have been responding to the rise in demand with capacity increases. Market leader Lan Perú is acquiring eight new A320 aircraft to substitute part of its A319 fleet, representing an added 40-passenger capacity per flight. Pressure on existing infrastructure has risen, stressing the need for expansion and upgrades of airport capacity across the country.

Adding Capacity

There are high expectations for the new Chinchero International Airport in the southern Andean city of Cusco. The $658m project will replace the existing Alejandro Velasco Astete air terminal, which is located in an urban area close to a mountain range that limits its ability to receive large aircraft. The project was awarded to the Kuntur Wasi consortium, made up of Peru’s Andino Investment Holding and Argentina’s Corporación America, and will be co-financed by the Peruvian state, expected to pay 47% of the total investment needed.

The deal involves a 40-year concession, and construction, expected to take five years, will begin in 2016 and be spread over an area of 40,000 sq metres. The new airport will be able to handle 3.3m passengers, with the capability of expanding up to 4.5m passengers by 2030, up on the 2.2m passengers Cusco received in 2013. Authorities expect to connect the new international airport to the South American and Central American passenger markets, and eventually establish a link to the US through Miami. A direct route to Europe, although desirable for the airport’s global connectivity, may be complicated by the facility’s high altitude.

The capital’s Jorge Chavez airport, managed by Lima Airport Partners since 2000, remains the country’s main air hub. But a consistent rise in passenger figures, which jumped from 4m in 2001 to 15m in 2013, has created congestion issues and is preventing airlines serving the airport from increasing flight frequency.

Air Expansion

An $850m expansion project now under way will involve the construction of a second runway, aeroplane parking slots and a new passenger terminal, allowing the airport to handle 30m passengers annually by 2031. Expansion has been planned for years, but repeatedly delayed due to difficulties in securing land. The additional 7m sq metres needed belong to the state. However, since it is occupied by residential areas, expropriation has taken longer than expected; the initial deadline for delivery was 2005. The revised deadline to deliver the land is December 2015, with construction to begin in January 2016.

Increasing the capacity of Lima’s airport is critical. Air traffic in South America continues to climb quickly, and being able to respond to rising demand will determine whether Lima can compete as a regional hub. Excessive traffic in Jorge Chavez airport might also be relieved by Pisco airport, south of the capital. The site is still being built, but due to start operations in May 2015. The $50m project has been under construction since 2012, and involves building new passenger and cargo terminals. When completed, the airport will be able to handle 400,000 passengers a year, and concession holders Aeropuertos del Perú (ADP) hope to position Pisco as the gateway to southern Peru’s tourist attractions and as a transition point to Cusco. The new Pisco airport will also aim to serve the region’s exporters. “Pisco is an agricultural area, and so the airport can be used to develop a cargo market,” Evans Avendaño, executive director at ADP, told OBG.

Despite growth, the aviation sector remains limited by excessive dependence on Lima. “One way to reduce centralism would be to improve the existing province airports, which would significantly reduce logistic costs. The government needs to promote PPPs as there are many international companies looking to invest in Peruvian airports,” Arturo Cassinelli, general manager of airport services provider Talma, told OBG.

Regional Routes

Growth in the regions is spurring demand for new domestic routes. Organisations like ADP, alongside other airport concession holders, are talking to the MTC to establish a fund to finance subsidies for new routes and encourage demand for additional regional connections. A subsidy would be used to reduce the risk to carriers by meeting demand until routes become economically viable. For the state, an advantage of subsidising new routes would be to accelerate the reduction of government co-financing that goes into some smaller airport concessions annually.

Increasing airline traffic to unused infrastructure would help recoup investments faster. The runway at Talara airport in the north was recently renovated and will re-open at the end of 2014. The airports of Piura and Chiclayo are set to see upgrades on their runways in 2015, which will allow them to receive more aircraft.

Port Revamp

Rising numbers of vessels are putting pressure on port capacity, and with some 92%of Peru’s global trade passing through the country’s ports, maritime transport infrastructure has been a main recipient of investment. Chief among Peru’s international sea freight gateways is the Port of Callao, which moves 85% of the country’s total cargo. Exponential growth has led cargo handling to rise from 400,000 containers in 2000 to 1.8m containers in 2012, according to the MTC. Authorities expect the number of containers going through Callao to reach 2m a year by 2015.

Although private operators like DP World and APM Terminals are investing in modernising equipment and improving handling capability in their concession areas, capacity is limited by the port’s surroundings. Continued urban development has brought residential and commercial neighbourhoods in close range of the Port of Callao, bringing traffic problems and slowing trucks.

“There are 39 logistics warehousing zones around the port, but to get merchandise there, a lot of efficiencies are lost,” Núñez told OBG. To fix this, a new logistics area will be set up and privately managed, using land belonging to the nearby Peruvian Navy base.

As in the aviation sector, some players advocate investment across a number of ports. “Port decentralisation would help exporters by providing greater access to transit routes and thus strengthen provincial development,” Henrik Kristensen, CEO of private port operator APM Terminals, told OBG.

Regulation

Government efforts to improve infrastructure are changing the way strategic transport infrastructure is used. Commerce would also be greatly aided by better Customs procedures. One challenge is the full establishment of the Single Platform for External Commerce (Ventanilla Única de Comércio Exterior, VUCE), to allow importers and exporters to handle all documentation at once and avoid procedural duplications. But this requires coordination from several state bodies with differing resources. “VUCE is a concept authorities have been considering. But not all government authorities have the financing needed to improve procedures or technology,” Núñez said.

In July 2014 the Ministry of Foreign Trade and Tourism announced that 15 government entities were already active through the government platform, and that the use of the system had led to savings of PEN70m ($26.36m), by reducing wait times as well as the need for business representatives to physically go to state administration offices. More efficiency is expected as the system attracts more users and public institutions.

Another bottleneck is the relationship between concession holders and the government. Private management of infrastructure like ports and airports requires investment commitment from operators, but governmental delays can block these. In transport as well as several other sectors of the economy, accessing necessary land for expansion can be a challenge. Expansion of infrastructure in some concessions has been slowed by the long timeframes needed for additional government land to become available to operators, which are then forced to delay investment plans. At times, it is the procedures of public approval of investment that delay plans. “Because expansion uses public resources, it needs to go through the National System for Public Investment, which is a problem for us, because it takes too much time,” Avendaño told OBG. “This creates a gap between the existing physical needs, and the current infrastructure.”

Outlook

Rapid expansion of the transport sector is a sign of the growing economy, representing both an opportunity and a threat to the sector. The main challenge is to carry out existing infrastructure plans at a pace that sustains growth. Road expansion and the modernisation of Peru’s port network will be essential.

However, bureaucracy can block infrastructure development, both in the case of co-financed concessions, which can require long processing periods, and concessions that depend on accessing state land. For infrastructure to grow consistently, more agile investment procedures that combine the requirements of the National System for Public Investment with the flexibility demanded by private airport operators would do much for the sector’s expansion in coming years.