In any economy, the state must uphold its fiscal discipline and respect tax and debt boundaries when it comes to financing public investment. Meeting that challenge is easier said than done, but public private partnerships (PPPs) have emerged as a mechanism that allows government to avoid or defer spending on infrastructure, without reneging on commitments and while maintaining public services.
The World Bank’s defines PPPs as agreements between the public and the private sectors within which a portion of public sector responsibilities are instead provided by the private sector, under an agreement with aligned objectives and incentives.
For more than two decades, Peru has pushed forward with these PPPs, as the need for them has become more evident. Still, according to the World Bank, Peru’s shortfall in infrastructure spending is US$80 billion, half of which comes from transportation and communication.
Peru’s own Legislative Decree No. 1012, of the Framework Law for PPPs, includes in its third article a particular definition that defines PPPs. It justifies them as modes of private investment participation that draw on experience, knowledge, equipment, technology, risks, and resources with the purpose to create, develop, improve, operate, or maintain public infrastructure or provide public services.
Further, Peruvian law specifies that the modes of the PPPs include all contracts that encourage the active participation of the private sector. Such contracts, depending on the level of state participation, can be for licensing, consortium, management agreements, shared-risk, joint ventures, and any other kind of contract that the law permits.
The latest modification of this law, which was recently published, prohibits public agencies, at any government level, to perform actions or emit rulings that can create bureaucratic obstacles to the granting of the necessary permits, licenses, or authorizations for the execution of PPP projects. In addition, this amendment grants the Commission for the Suppression of Bureaucratic Barriers — an agency of the National Institute for the Defense of Competition and Protection of Intellectual Property (INDECOPI) — the duty to enforce this law.
However, the initiative from the executive branch to promote investments wasn’t free of complaints, particularly from the heads of regulatory bodies. When first submitted, they stated that the bill would affect the autonomy of their agencies, by limiting their power in the provision of technical opinion, a prior phase to the PPP contracts, and this way, give more power to the Promoting Agency of Private Investment (OPIP).
Among many other advantages, PPPs allow public spending to focus on the most critical problems, such as in a subsidiary role, where the private sector is not otherwise present. PPPs also provide a gain with higher levels of technical efficiency, since private companies have to compete in all the stages of the project, from the design to the completion of the operation. It also creates a sense of legal stability for private companies because the state is also supporting the ventures, and this leads to a better risk management.
According to Minister of the Economy and Finances Luis Miguel Castilla, in the coming two years, investment through PPPs will reach a minimum of $13 billion. Of these projects, 80 percent will be licensed in 2014, and the remaining 20 percent during the first trimester of 2015. These projects, that are designed to foster private investment, will be focused on ground transportation, electricity, and hydrocarbons.
This dynamism and allure of PPPs can also cross over to other sectors, traditionally reserved for public investment, such as health care. By the end of last year, for example, the Ministry of Health initiated seven PPP projects to provide better services, mainly in the health care associated with highly complex diseases.
Nonetheless, as the minister of economy acknowledged, the sum of $13 billion is relatively small compared to the infrastructure gap, which mounts up to$80 billion. This is why the state should create even more favorable conditions, so that PPP projects can not only continue to rise, but can venture into less traditional PPP realms such as health care and education — key factors for a country’s growth.
The Peruvian experience with PPPs has been notably positive, and every day it grows more sophisticated and more decentralized, with more communities involved. Peru need not mess with a good thing and ought to target more collaboration with the private sector, so that together can achieve to close the infrastructure gap.
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