Unifying technology: The IT market continues to grow as infrastructure investment and internet use expand

Plans to modernise and expand the IT industry by the government, and generally improve internet connectivity throughout the country, are beginning to take shape. The multi-pronged approach aims to tackle technological issues across the nation by developing e-governance and lowering computer and laptop costs. Ranked 69th out of 142 counties surveyed in World Economic Forum’s “2011-12 Global Competitiveness Report” in terms of technological readiness, Peru trails regional competitors Chile (45), Uruguay (49), Brazil (54) and Argentina (64).

Of the $6.87bn in revenue generated by the ICT market as a whole in 2011, $2.36bn came from the IT market, equivalent to roughly 1.5% of GDP. While the country continues to see steady growth, it has much work to do to achieve its ultimate goal of developing into a knowledge- and information-based society.

INTERNET PENETRATION: Internet teledensity was measured at 4.39% in 2011, with connections across the country totalling 1.3m, according to figures from the Ministry of Transport and Communications (MTC). This represents a significant increase of 225.5% on levels recorded just five years ago. Telefónica dominates the fixed broadband segment with 90.3% of the market share and is followed by América Móvil’s Telmex Perú in distant second with 7.6% of the market.

High pricing remains an obstacle to further penetration, particularly for high-speed broadband. Data published in the “National Plan for Broadband Development” show that in 2011 the monthly cost of a fixed broadband connection running at 4 Mbps with Claro was $135, while 4 Mbps with Movistar was $272.

Fixed broadband internet access accounts for the majority (76%) of connections in Peru, with just 24% of internet connections coming via mobile broadband networks. Peruvians reported using public cabinas, local internet cafes, more than any other location, with 56.1% of the population accessing internet through cabinas. Additionally, 34.9% reported accessing the internet at home, 15.7% at work and 8.3% at school.

ADP & NBP: The government has established a multilateral committee, known as the Multi-sector Committee for the Development of an Information Society (CODESI), which consists of members of the private sector, government and the academic community. CODESI is responsible for the “Peruvian Digital Agenda 2.0” (ADP), a broad plan published in July 2011 to improve the country’s technological readiness and transform it into an information-driven society. The ADP 2.0 consists of eight objectives that chiefly aim to improve productivity, innovation and competitiveness in both the public and private sector, while simultaneously promoting social inclusion by further integrating ICT into education, health and basic civil services.

Indeed, in 2011 not one, but two key strategies were released for strengthening IT capacities. In May 2011 the government published its broad strategy for expanding the IT infrastructure network, with the ultimate goal of achieving universal internet access, fittingly named the “National Plan for Broadband Development” (NBP). Its five-year goals to be met by 2016 include ensuring that 100% of government schools, hospitals and buildings in urban zones have a broadband internet connection of at least 2 Mbps.

The NBP also calls for 4m installed broadband connections nationwide by 2016, which would raise broadband internet teledensity by 289% from its current 4.39% to 12.7% in 2016. Furthermore, of the 4m broadband installations, a minimum of 500,000 are to be high-speed connections of at least 4 Mbps. Much of the increase in installed capacity will occur in rural areas away from the coast, where internet is currently found in less than 1% of all households.

INFRASTRUCTURE DEVELOPMENT: Indeed, IT infrastructure development in the form of a growing fibre-optic network has thus far been limited to coastal areas. According to the MTC, there are currently 8933 km of installed fibre-optic cable, with Telefónica maintaining the longest network (4008 km), followed by América Móvil/Telmex Perú (3225 km), Internexa (1293 km), Global Crossing (252 km), Americatel Perú (92 km) and Optical IP Services (63 km). The geographical boundary preventing inward expansion, the towering Andes mountain range, combined with lower levels of demand in the central and western regions will likely see the expansion of mobile internet services at a faster rate than fixed-line internet services in rural areas.

The government is also trying to drive investment in the sector through its Telecommunications Investment Fund (FITEL). According to the NBP, FITEL’s budget for infrastructure development through 2015 amounted to just $442m, ironically due to legislative restrictions limiting the funds facility to invest in infrastructure development. FITEL funds were recently awarded through state investment agency ProInversión for the construction of an additional 690 km of fixed broadband to América Móvil (470 km) and Winner Systems (220 km). However, according to the technical secretary of FITEL, Luis Montes Bazalar, the government does have much larger plans in place for expanding the country’s fibre-optic network. “The government is currently studying the feasibility of launching a project that will see 5000 km of fibre-optic cable installed, particularly in the rural areas where penetration is lowest. Geography remains the greatest foreseeable problem; however, the government wants to have a national broadband network,” Montes told OBG.

In addition to government investment in the sector, both major telecoms outfits, Telefónica and Amé rica Móvil, have announced investments by 2014 amounting to a combined $2.5bn, much of which will go towards expanding the country’s fibre-optic network. Government investment is not, however, limited to infrastructure development as it continues to develop its e-governance platform.

E-GOVERNANCE: In February 2011 IBM signed a five-year service agreement to provide cloud services to 10 state-owned enterprises with the National Fund for Financing State-Owned Enterprises. Since establishing the state web portal peru.gob.pe in 2001, such expenditures are becoming commonplace as the government continues to modernise its IT systems. The National Office of Electronic Government and Information was created three years later in 2004 to oversee the transformation. Government spending on IT has so far continued under the new administration. Indeed, President Ollanta Humala himself proposed the creation of a dedicated ICT ministry during his election campaign. Currently, the MTC is not only charged with ICT-related issues but with the development of the national transportation network.

The UN’s “Public Administration Programme 2012 E-Governance Survey” indicates Peru has much work to do to improve this area. Although it was placed 82nd out of 190 countries surveyed, this represented a significant drop of 19 places on the previous survey’s rankings. Peru was also rated behind neighbours Venezuela (71), Brazil (59), Argentina (56), Uruguay (50), Colombia (43) and Chile (39).

While all major governmental ministries, agencies, regional governments maintain a presence on the web, the vast majority of local district offices do not. Just 490 out of 1834, or 26.7%, district offices have a web page, according to the MTC. In 2009 the “Master Plan for E-Government” was published, mapping out priorities for developing e-governance and integrating citizen services online. The plan runs through 2013, and in addition to broadening the web presence of local and federal governments, it aims to develop IT systems for national identification, judicial information and public accountancy among a host of other citizen services.

HARDWARE: Peru’s hardware market will continue to be driven by computer sales, though retail sales account for just a fraction of the total. PC ownership remains relatively low, with 30.1% of Lima residents reporting they own a household PC, a stark contrast to the 2.5% of rural households with a PC. Total hardware sales brought in $1.7bn in 2011, representing 72% of the IT market and a year-on-year increase of 17%, according to figures from local consulting firm Dominio Consultores. Moreover, computer sales reached $1.16bn and are expected to generate $1.71bn in 2012.

In 2011 the Congress began considering drafting a bill that, if passed, would exempt local computer manufacturers from sales tax in a bid to stimulate the local hardware industry. This would cost the government around $122m a year. At the time of writing, the bill remained under consideration, though there are concerns stemming from the potential violation of established free-trade agreements, particularly those with major computer manufacturers China and the US. In addition, objections from Peru’s Association of Computer Manufacturers, which includes international manufacturers such as Dell and HP, could potentially see the bill reformed to apply to all manufacturers or dropped entirely. Either way the industry will continue its upward trajectory. According to Oscar Zevallos, the general manager of local manufacturer Deltron, “The hardware market is continuing to attract new investment, and growth in the segment is estimated to be between 20% and 30% in the next few years. This will naturally affect the software market, which is expected to sustain robust growth.”

SOFTWARE & IT SERVICES: Indeed, the software market is predicted to experience double-digit growth rates over the next five years, although admittedly off a small base estimated at just under $200m. According to the Peruvian Association of Software Producers, the country exported $25m worth of software and IT services in 2011, an increase of 25% on 2010 figures.

The software market is dominated by micro and small enterprises, accounting for more than 90% of software development, according to Peru’s Commission for the Promotion of Export and Tourism (PromPerú). Data from a PromPerú 2011 study show that of the over 300 companies working in the industry, 63% are micro, while 27% are considered small, 6% medium and 4% large. The industry generates 20,000 direct and indirect jobs. Most programming, meanwhile, is completed for the US market, which accounts for 53%, followed by 27% for the Andean Community and 14% for Europe.

Currently accounting for roughly one-third of revenue generated in the broader IT market, demand for IT services in Peru is also expected to continue expanding at double-digit rates over the next five years. Demand for more sophisticated IT services, such as security, cloud and data management services from both government and private sector companies, is seen as a central factor in driving growth.

R&D: Aside from the obvious challenge of physically establishing IT infrastructure in the form of a fibre-optic network running over and though the Andes Mountains and the Amazonian jungles, Peru faces a host of obstacles in furthering its IT development, such as a lack of funding for research and development (R&D). In 2010 the Chamber of Commerce of Lima reported R&D spending far beneath regional competitors, such as Chile (0.7% of GDP) and Brazil (1.1% of GDP), at just 0.1% of GDP. R&D spend in Peru remains unquestionably low, and though the level did increase in 2011 to 0.15% of GDP, the government would like to ultimately increase R&D spending to 1.5% of GDP.

The National Council of Science, Technology and Innovation (CONCYTEC) is the primary government agency responsible for coordinating and supervising state policy in R&D. Its primary vehicle for putting strategy into action comes in the form of FONDECYT, its state fund. FONDECYT has sponsored a variety of projects, including the subsidising of annual research projects across numerous sectors such as IT, agriculture, biotechnology and medicine. Other funds, such as the Ministry of Production’s $75m R&D fund for competitiveness, known as FIDECOM, provides 75% co-financing options on private sector projects designed to increase industry competitiveness.

However, nominal increases in funding for R&D, while necessary, are simply one part of the puzzle as Peru also faces a shortage of human capital, which is necessary to carry out research. Roger Guerra-García, the president of the National Academy of Science, spoke of the lack of scientific professionals in Peru to local press when he estimated the number of scientific doctorates awarded annually to be 10, compared to the hundreds produced by neighbouring Chile.

EDUCATION: Indeed, furthering IT education is conceivably the most significant obstacle to the industry’s long-term development. A dedicated ICT ministry within the government would likely not only help streamline plans for developing e-governance, but more importantly would also provide additional clout when it comes to budgeting for IT training, education and R&D funding. In the private sector, further integrating universities and technical institutes to companies’ needs and demands could help spark innovation. Establishing dedicated IT parks housing both universities and private sector tech firms to act as research incubators is a proven model that works.

OUTLOOK: Though facing significant challenges in infrastructure establishment, training and R&D funding, the pace of IT development across the country will continue to gather momentum – particularly if forecast economic growth targets are met. The passing of inclusive legislation eliminating taxes on hardware manufacturers will not only stimulate investment, but also reduce retail computer and laptop prices. While internet penetration remains low, especially in rural areas, the current administration’s platform based on social inclusion, combined with the continued investment in expanding the country’s fibre-optic network, will steadily remedy the problem. While still in early days, there is a mood of cautious optimism as Peru continues to tackle the issues surrounding its IT development.