Throughout the past four years of halting growth punctuated by recession in Peru, the state was still able to point to occasional successes in attracting foreign investment, often in quite substantial quantities.
In spite of the entry of companies like TIM and Frankfurt Airport, there is general agreement that the overall pace of privatizations and concessions slowed dramatically in recent years. As one economic analyst views it, former president Alberto Fujimori was a pragmatic supporter of privatization when the government needed resources – but was not a ‘true believer’ and was quite happy to ease up on the program later in his term. Average annual privatization receipts in Peru from 1991 to 1996 were almost $850 million. Yet, between 1997 and 2000 this average had slumped to a little over $200 million.
Now the Toledo administration has pledged to revive and accelerate the privatizations and concessions program. It told the International Monetary Fund in its recent letter of intent, privatizations and concessions are, “An essential element to generate confidence among investors and to help finance fiscal deficits in 2002 and 2003.” The government’s aim, as agreed with the IMF as part of a two-year program, is to generate income of at least $700 million this year and the same next year through the sale of concessions and of state assets.
Prime Minister Roberto Dañino says the administration has “jump started” the privatization process. “[We have put] 65 projects on the table, with a schedule for each one, identifying the bottlenecks and putting draft legislation before Congress to unblock those bottlenecks.” Pedro-Pablo Kuczynski, minister of economy and finance, believes the government can do better than it has promised the IMF and bring in $1 billion a year. Under the IMF agreement, any extra receipts above the $700 million target will allow the government to ease its fiscal deficit target, allowing additional infrastructure spending.
However Hugo Santa María, principal economist at the Apoyo consultancy in Lima, is less optimistic than the government about the likelihood of substantial income from sales and concessions. He says the Commission for the Promotion of Private Investment (COPRI) has failed to meet its goals, and cites concerns over the political sensitivity of some privatizations. “I think if we can get to $500 million [this year] we can say that is a good result. I think the probability of getting more than that is very low,” says Santa María, adding that the first half of 2002 presents the best window of opportunity.
Carlos Montoya, president of Latin Pacific Capital, a Peruvian investment bank, says, “There is clearly the will and the sense of urgency within the government to advance with asset sales.” But he notes that Congress may be another matter. Montoya headed COPRI himself in the heyday of Peruvian privatizations, presiding over such landmark transactions as the sale of the state telephone company to Telefónica of Spain.
“The biggest risk is interference by Parliament,” Montoya says. “There is no reason [the program of privatizations] should not be completed, unless there is political interference that creates so many obstacles that the government stops the process, or that the companies that might come decide to abstain.”
One unsettling experience was the sale in 2001 of the 183-megawatt ElectroAndes generating company to PSEG. The US company already operates in electricity distribution in Peru through its joint venture in Luz del Sur, which has 700,000 customers in southern Lima. PSEG’s bid of $227 million for ElectroAndes was successful in July. Yet the sale was not closed until December, amid what industry insiders say was a “nightmare” for PSEG. Political protests led by vocal members of Congress nearly derailed the sale. Eventually the deal was closed but that frustrating episode has given rise to concerns over future sales.
Still, PSEG could be ready to consider fresh bids for electricity assets this year, believing past problems can be resolved and that Peru’s fundamentals are strong enough to make it an attractive growth prospect. The government has already said that electricity generation, transmission and distribution companies will be the main focus of the privatization program for 2002. Energy consumption per head in Peru is among the lowest in Latin America, so there ought to be plenty of scope for private investment.
Slow Power Restructuring
Private companies in the sector have expressed concern for some time that restructuring of the power industry was left incomplete. They have to compete with state-owned companies in a way they feel can be opaque and unfair. The government is still the country’s largest power producer, says Mickey Peters of the US company DukeEnergy. State-owned companies generate 40% of Peru’s power, he says, Spain’s Endesa about 37% and Duke, 12%. Peters says finishing the stalled restructuring of the industry is “issue number one” for his company – and he is satisfied that the government agrees. A string of smaller assets and government-held shares is set to go on the auction block.
Some privatizations are explicitly promised in the government’s IMF agreement. These are the sales of the Etecen transmission network and the Jorbsa distribution companies – to be completed by the end of June 2002 – and the disposal by the end of September in a single bidding process of the Arequipa generating company (Egasa), which has 324MW of installed capacity, and Egesur, another small (62MW) generator. Together these two generators have 7% of the market.
In fact, the government wants to move faster than that, with COPRI planning to conclude those privatizations in March and April. Such speed may not be to all the companies’ liking, since many feel the government needs to deal with certain regulatory issues first. Peters, for example, says Duke would like a short delay in the privatizations. It is interested in participating in the sales of Egasa and Egesur “in the right circumstances”, he says, as part of its strategy to increase its market share to around 20% and diversify risk. Nevertheless, Duke has been critical of some of the policies of Osinerg, the electricity sector regulatory authority. Peters says: “There is a lack of transparency in the regulatory environment. It is unpredictable, uncertain and badly notified.” The company feels the regulator has tried to drive down prices artificially by calculating tariffs based on uncertain and unrealistic long-range forecasts of the spot market.
The appointment of a new head of Osinerg was due last month and Peters says overall he has confidence in the government team. But potential bidders for power sector assets would probably feel more comfortable if they had a few months’ experience first under the new regulatory chief.
Transport and Water
The government says it will also speed up the concession of ports, regional airports and roads, planned for some time. Only 12% of Peru’s 74,000 kilometer road network is paved. The country has a public infrastructure deficit estimated at $7 billion.
One road concession is for a highway from Huacho to Pativilca, requiring a $61 million investment for a 25-year construction and maintenance contract. Another, highway, running 149 kilometers to the southern town of Ica, may require a $202 million investment.
Authorities are awaiting a study for a new international airport for Cuzco, one of Peru’s main tourist hubs, and are also planning to offer concessions for a string of other regional airports. A new port law, permitting build-operate-own-transfer, or BOOT, concessions for five regional seaports, is still awaited. There is also a need to define how to attract more private investment to Callao, the country’s main port.
Carlos Montoya of Latin Pacific adds that restructuring the water sector is an urgent necessity, pointing out that the dozens of small municipally-owned companies in the sector are lagging behind and in need of extensive modernization.