PERU: An Introduction to Projects

Peru: Projects  

Peru is one of the most important economic venues in Latin America. It was considered one of the best countries in the region to successfully overcome the negative effects of the 2008 financial crisis. Its GDP is projected to grow more than 4 points between 2023 and 2025. It is also a country of opportunities due to the need for public and private infrastructure.

The infrastructure investment gap in Peru is estimated at USD58 billion, therefore there are major projects needed to be developed to fill this gap. Public infrastructure projects are developed and promoted by different levels of government entities, but the main ones are organized - at least at a domestic level - by PROINVERSION, which is the public agency committed to obtaining private investment in public projects.

PROINVERSION has a project portfolio of PPP projects and Obras por Impuestos (OxI) Projects. PROINVERSION is developing more than 555 PPP projects in sectors such as electricity, sanitation, roads, water treatment plants, irrigation systems for agriculture, educational infrastructure, ports, health care, rail, telecommunications and tourism; this will represent more than USD6.3 billion of investment. In OxI, there are more than 500 projects representing more than USD2 billion in investment. All of these projects will be released into the market between 2021 and 2023.

There is also a portfolio of projects managed by the Reconstruction with Changes Authority, which includes projects to recover roads, sanitation, education, and irrigation infrastructure in the northern provinces. This was created based on the need to rebuild the infrastructure lost by the last El Niño phenomenon. These projects represent an investment of more than USD2 billion.

These days, there are good expectations on FIDIC and NEC Contracts, as well as on Government to Government Agreements. It is now more common to see these kind of contracts. Peru has a great experience with them and has taken advantage of their benefits. The Pan American Games in Lima in 2019 is an example of one of these successful projects, which took a year and a half to execute.

When it comes to private projects, there are major projects related to the expansion of ports and airports in the country. For example, the expansion of the Jorge Chávez International Airport, the remodelling of the airports of the northern provinces, and the expansion of the port of Callao, among others. The value of these projects is over USD1 billion. In Lima, there are also a number of real estate projects, such as the construction and remodelling of shopping centres, the construction of social housing projects, and the rehabilitation of the main roads in the city, among others.

As stated, there are many investment opportunities in Peru. However, current economic conditions are also being affected by political circumstances. The newly elected government for the period 2021-2026 has a stronger social policy than the last one and the President has communicated on multiple occasions that both public and private investment will be respected and promoted. As of July 2021, there has been a sustained increase in prices, especially in the construction field, which has affected the final cost of infrastructure projects, making new projects less likely to come about in 2021. Likewise, the exchange rate between Peruvian soles and US dollars has increased, which has led to many suppliers and vendors in the sector only selling their products and services in dollars, which also makes projects more expensive.

Inflation and the increase in the exchange rate have generated the need to manage this risk in new and existing construction projects. Clients require advice to overcome these problems and recently, more and more contractors have been preparing claims against owners for time extensions and cost increase-related claims. This will only serve to increase the occurrence of claims and conflicts in projects, which will generate a greater demand for mediation, dispute boards and arbitrations, as alternative dispute resolution mechanisms.

On the other hand, owners of construction projects require advice on how to manage cost-efficiently, especially regarding inflation and exchange rate. For this purpose, we have began to design, alongside a team of project engineers, a readjustment formula that allows for stability in terms of the prices of the contracts. It is also our recommendation that project owners acquire the main materials and work equipment directly, avoiding the overcharging of an intermediary: the contractor. Payments in advance for materials and important parts of the work are also some ways to mitigate the increasing prices. However, all these ways to mitigate the risks of inflation and exchange rate are provisional and for a short term until the market regains its equilibrium.

We have also recommended the use of dispute resolution clauses that include claims resolution in stages, starting with direct negotiation between on-site representatives and then escalating to manager positions. If direct negotiation fails, there is a dispute board resolution mechanism, and, only if the parties do not accept the decision, they can use arbitration to settle the dispute. Recently we have successfully used emergency arbitration to mitigate financial impacts on construction projects.

Finally, we see the possibility that the market dynamism will decrease in 2021 and 2022, but we also see the possibility of new investments and projects.

For those new projects, it is important to be prepared with good legal advice and detailed contracts that include clauses to mitigate the risks previously exposed and efficient mechanisms to resolve disputes.