PERU: UPGRADING ROADS POST DISASTERS

Following recent floods, the national government of Peru is pushing forward with increased spending to rebuild damaged roads across Peru. These funds — if well spent — should help restore the country’s economic connectivity, though the total public investment picture will still fall short of bridging many of the most pressing infrastructure gaps.

In his annual address to the nation on July 28, President Pedro Pablo Kuczynski Godard outlined his plans to revamp the transport network and other infrastructure damaged by flooding in the first half of the year.

Flooding and landslides caused by the El Niño climate cycle between December of last year and this past June destroyed some 6090 km of rural roads and 4803 km of highways, according to the National Emergency Operations Centre. This amounts to well over one-third of Peru’s 26,700-km road network, and creates large demand for new construction and financing of infrastructure. To

rebuild the lost tarmac, the government has allocated PEN20 billion (USD $6.1 billion) for immediate restoration and reconstruction of critical infrastructure, President Kuczynski said in his address. Alongside rebuilding 47,000 houses, almost 2,000 schools and 150 health centres, the government will prioritise reconstruction of 8700 km of road and hundreds of bridges.

While much of this investment will be directed towards repair, the government also plans to replace infrastructure in areas vulnerable to adverse weather conditions. According to President Kuczynski, this will involve enhancing risk management and prevention in light of fluctuating weather conditions, mainly by relocating transport routes.

“Climate change is a major global challenge which is hitting us hard,” he said. “We must be ready.”

The government had already allocated extra funds to support relief and rebuilding efforts in the wake of the flooding. In mid-March the then-minister of economy and finance, Alfredo Thorne, announced a 3% increase in budgetary spending, representing another PEN4.4 billion (USD$1.3 billion).

While necessary, higher spending will push the budget into deficit: Prime Minister Fernando Zavala forecasted the fiscal shortfall would reach 3.5% in 2018, above the 2.6% projected for this year. However, the government has said the budget will return to surplus within four years.

In the meantime, the cash injection should be good for growth: in response to the increase in infrastructure spending, the IMF revised its GDP growth forecast for Peru in 2018. The economy is now projected to expand by 3.8%, slightly higher than the 3.7% estimated in June. In a statement issued on July 27, the fund said that while natural disasters and political instability had affected the economy, it expected higher public investment to produce more dynamism in the coming months and accelerate GDP growth.

A bit of context: Beyond the floods: is it time for Peru to rethink its infrastructure?

In fast-tracking efforts to restore transport connectivity, government officials stress that these investments are replacing and upgrading what has been lost, rather than eliminating Peru’s infrastructure deficit. Bridging this gap is seen as vital to the country’s social and economic development. According to research undertaken by Universidad del Pacífico in 2015, Peru needs to

invest USD$159.5 billion in infrastructure by 2025 to meet its development targets. Of this, $59.5 billion, or 36% of the total, would need to go towards the transport sector, almost double the needs of the energy sector. Though there is currently up to $10 billion worth of road infrastructure works in the pipeline, according to a study by law firm Rodrigo, Elias & Medrano, this is well short of the total amount needed.

A step towards fulfilling this came in late July, when the government confirmed that two major projects, Line 2 of the $5.66 billion Lima Metro expansion project and a $1.5 billion renovation of the capital’s main airport, had both cleared final planning and approval hurdles.

Read Also: UN accents link between Poverty, Disaster Vulnerability in Americas

One route to narrowing Peru’s deficit of transport infrastructure is through greater use of public-private partnerships (PPPs, aka P3’s). In its most recent review of Peru’s economy, released at the end of June this year, the International Monetary Fund said that government reforms to broaden frameworks for public investment and P3’s would help address the infrastructure gap. Among the reforms enacted earlier this year are measures to increase transparency and accountability, and require private partners in state-backed developments to accept greater responsibility for accessing finance and taking on project risk.

While moves to boost discipline are welcome, it is worth keeping in mind the urgent warnings from Bonds & Loans, a research firm covering emerging market credit issues. Their analysts have recently warned that certain measures – such as requiring contractors to secure funding before breaking ground on a project, and reducing guarantees from the state – could discourage lenders and developers from participating in P3 projects