Peru hopes new anti-corruption law will jump-start infra pipeline

Peru hopes new anti-corruption law will jump-start infra pipeline

Project & Infrastructure Finance Politics Regulation Peru

Market makers in Peru’s infrastructure sector are banking on an anti-corruption law to kickstart the country’s long-stalled project pipeline.

The High Commission of Anti-Corruption within Peru’s Congress is reviewing the Plan Nacional Integrado de Lucha Anticorrupción, and expects to submit a follow-on draft to President Pedro Pablo Kuczynski (PPK) by the end of this week.

Three weeks ago, President Pablo Pedro Kuczynski had requested for amendments to the initial draft versions of the new law that will replace the Supreme Decree, signed last year by the President and due to expire on February 12.

The decree enabled the blocking of the accounts of various Brazilian construction firms linked to the Lava Jato corruption case. It also prevented all companies found guilty of bidding on new contracts.

Replacing the decree with a new law will help prevent these companies of repatriating funds overseas. It is also expected to provide clarity regarding the punishment for companies found guilty, as well as the necessary due diligence processes for the future.

The timing comes as Peru’s infrastructure sector finds itself mired in limbo, with  udicial authorities stepping up their investigation of various executives and companies linked to Odebrecht.

Over the past two months, the police has arrested government officials and executives from Brazil’s OAS, Andrade Gutierrez and Queiroz Galvao, Portugal’s Mota Engil, Spain’s Grupo Plaza, Chile’s HyH, and a host of  Peruvian firms including Graña y Montero, ICCGSA, JyJ Camet, Cosapi, Obrainsa, Malaga, Johe y San Martin.

Need for clarity

“At this moment, we will be very cautious with any name under suspicion, it’s not that we want to end our relationships with construction companies, but we don’t want to embark into a new operation only to see a month later news come out related to the investigation”, a local Peruvian project finance banker said.

Developers are struggling to find EPC and service companies clear from trouble. Banks hesitate to lend to any company mentioned part of the investigation. The troubles and uncertainty have paralyzed Peru’s construction industry as a whole, affecting ongoing projects and the launching of new auctions by ProInversion alike.

As industry participants await the final ruling on the new anti-corruption law, all expect a certain degree of clarity for Peru’s infrastructure pipeline to get back up and running.

“The most important thing is for it not to be too drastic and that it enables local firms to continue operating. Hopefully, they can issue reasonable fines to enable the companies to get back on track, because so far, the fines and punishments mentioned have been unreasonable”, said another local project finance banker.

For the new law to get lenders comfortable again and accomplish its purpose of re-activating the country’s construction industry and infrastructure pipeline, there needs to have been an analysis done on each potential project and concession to see if all possible doubts coming from bankers would be met, according to the first source.

Hoping to get a wider consensus on the approach it should take, the Peruvian government has also seemingly opened a new channel of dialogue.

In his company’s earnings conference call, Graña y Montero CEO Luis Diaz Oliveros acknowledged that over the past week, there had been negotiations between the Peruvian minister of Economy and some banks to discuss how to best deal with the construction industry crisis: “we expect something good must have emerged to preserve the companies that are operating in the construction sector, otherwise it would be hard for me to understand their objective”.

Pipeline stall and economic impact

Speaking to local television program Radioprogramas, finance minister Claudia Cooper said that the ongoing scandal may impede the progress of PEN30bn ($9.5bn) worth of projects, both state projects and PPPs, that were meant to be awarded last year.

"Not to mention the new projects that we should award this year", she added.

After initially planning on awarding a new concession to replace the cancelled Gasoducto Sur Peruano project in January this year, the company recently announced it was moving the plan to auction the newly named “Sistema Integrado de Transporte de Gas Zona Sur” to the end of this year.

A $2bn mining project in the Cupriferos reserves of Michiquillay was also postponed from December last year to later this month.

Another concession, the $520m construction of a new airport in Cusco awarded in 2014, was canceled last month by the government. Since the start, the Kuntur Wasi consortium developing the project had faced financial difficulties and suspicions of various irregularities regarding the auction process handled by Ollanta Humala’s administration.

In February 2017, current President Kuczynski amended the concession contract, whereby the Peruvian government would assume a larger part of the financing. However, this only caused further public scrutiny the government was in no shape to handle, ultimately leading to the project’s cancellation.

This week, the companies comprising the consortium, which includes Argentina’s Corporacion America and Peruvian holding company Andino Investment Holding, initiated an international arbitration process for the contract annulment.

Moving forward

Despite the setbacks, in November, ProInversion successfully awarded two 30-year transmission project contracts to ISA, which will entail $272m in initial construction investment and $6.83m in operation and maintenance costs.

In December, ProInversion also received nine bids for two broadband telecommunications PPPs which are expected to bring in $300m in investments.

However, ISA is expected to finance its transmission lines through its own balance sheets, according to one New York banker, while the winner of the telecom projects auctions will receive non-reimbursable financing from the Peruvian government's telecommunications fund Fitel.

The two projects were also deemed more strategic than others for the Peruvian government, according to the sources.

Another project which is expected to remain on track is the brownfield expansion and renovation of the Lima international airport. Lima Airport Partners, which won a 30-year operation concession for the airport in 2001, will invest $1.8bn to build a second take-off track for airlines, another terminal and other civil works. The project, which hired SMBC as financial advisor, is expected to develop more concrete financing plans in the next couple of months, sources say.

As President Kuczynski emerges weaker despite having survived the impeachment trial, sources say the government is not necessarily in a rush to get all its infrastructure projects back on track.

“A few more important projects will be launched, I have a lot of faith for the Lima airport renovation, but I don’t expect a wave of projects to be unleashed. I think this year will be a year to test out and see how to best design auction rules for projects in 2019 and 2020”, one of the Peruvian bankers said.

Despite setbacks, ProInversion will be hoping to stick to its goal of generating $10bn in annual infrastructure investments for the next three years.

Whatever happens to the construction companies currently being investigated, the country is not expected to have any dearth of willing new players.

 “I don’t think there will be a scarcity of able construction companies. We are hearing about American companies beginning to position themselves to enter the Peruvian market. There are also various companies involved in the region that are currently unscathed from the investigations, such as France’s Vinci, and various Spanish companies, Cobra, Bragados, Tecnicas Reunidas, OHL, Sacyr”, according to another New York project finance banker.

Hoping for a quick and positive turnaround, the project finance market continues to have a lot of appetite for Peru, the source said, adding that “Peru has incredible potential, but just needs the right political support”.