Andean Group - October 2011 (ISSN 1741-4466)

The government of President Ollanta Humala is eager to present itself as a safe bolt hole in a risky world and investors are responding. The first three months of President Humala’s term in office have brought a record US$3.6bn worth of investment pledges, according to the Inter American Development Bank (BID). But much of this is dependent on China’s continued growth – something which Economy Minister Luis Castilla says he prays for every night. However, China is not the only country eyeing up Peru. Brazil has been preparing the ground for an extensive investment package, as has Argentina. The top growth sectors are infrastructure and extractive industries.

Forbes Magazine ranks Peru second, behind Chile, as the region’s most business-friendly investment location. Furthermore, Peru is still among 50 countries which expect to record substantial economic growth this year and next.  These plusses are offset by poor infrastructure in the interior of the country.

Long-standing partnerships, such as that between a major Brazilian construction company, Odebrecht, and the Peruvian government, will not only survive but thrive under the new Humala administration, it seems. Odebrecht’s leadership of the Interoceanic Highway, linking Brazil with Peru’s gateway to the Pacific, was the brainchild of former Brazilian President Lula da Silva (2003-2010) and his then-counterpart in Peru, Alejandro Toledo (2001-2006).

Other well established investment partners like Repsol are looking to extend their portfolio in Peru. On 6 October Prime Minister Salomón Lerner announced a tender for an upgrade of the state-owned Talara refinery, operated by the state firm Petroperu. Respol is already due to modernize its refinery, La Pampilla, in order to boost productivity and reduce waste and harmful emissions. The company is also in talks with the government over the building of the long-talked of gas pipeline to supply gas to southern Peru from the main Camisea gas field.

The government is trying to encourage more foreign investment. On 5 October it announced that it would reduce the time taken to issue new hydrocarbon concessions from two years to eight months. The next step, according to Lerner, is to reduce the timeframe within which informed consultation and environmental impact assessments must be completed. He says this acceleration in the reduction of red tape is essential to ensure Peru’s hydrocarbon sector remains competitive.

The approval, in the first month of President Humala’s time in office, of the consultation law was a fillip to indigenous groups who are now legally assured of prior informed consultation [RA-11-09]. However, reducing the time needed for consultations leaves the government open to accusations of double standards. Indigenous groups and environmentalists will have to get sharper in reacting to project proposals.

The first concessions, negotiated after the new tax and consultation law frameworks were approved, were unveiled on 3 October. Argentina’s Tecpetro leased another block off the north coast. In July, just before Humala took office, exploration blocks in Peru’s Eastern Amazon were also awarded to Colombia’s Ecopetrol, and to two British firms, Pitkin Petroleum and Hydrocarbon Exploration. These projects are dependent on a new contractual clause to make them compliant with the law of prior consultation.

Tecpetro is expected to invest between US$5m and US$10m. Pitkin, Hydrocarbon Expo and Ecopetrol’s anticipated investments are put at around US$50m per block.

• Follow Peru’s lead

The World Bank announced that it had recommended Zambia and Zimbabwe to take note of Peru’s national public investment model, known as the Sistema Nacional de Inversión Pública (Snip). This system is meant to ensure that public investment projects meet quality and transparency criteria. That said, a recent report by the investigative journalist group IDL-Reporteros uncovered consistently over-extended budgets to meet escalating costs and unexpected delays associated with the Private Public Partnerships (PPPs) favoured by the previous Alan García (2006-2011) administration. PPPs, nevertheless, look to be a core part of future public investment plans. Brazil’s Odebrecht is the main construction partner in most of them.