Peru: a bright future for FDI.
Recently we had the chance to interview Juan Luis Reus, Director of Peru Trade, Tourism, and Investment Office in Washington, DC about the success that Peru has found in instituting reform measures and attracting foreign direct investment.
While the Latin American region is experiencing a slowdown, one bright spot seems to be Peru. What do you attribute this success to?
Peru is the fastest growing economy in the region. From 2006 to 2016, the economy grew at an average annual rate of 7.6%, primarily due to a consistent and diligent application of sound macroeconomic policies over a long period of time. The Peruvian government has been very disciplined to seek macroeconomic stability which is critical to ensure the best investment climate which, in turn, is vital to encourage a constant flow of new investments and propel economic growth. Clear indicators of this strong macroeconomic performance are: one of the lowest inflation rates in the region, a very stable exchange rate over time, a very healthy external debt ratio (25.8% of GDP, one of the lowest in Latin America), and net international reserves at 31% of GDP. Peru has also been granted the investment grade, indicating a low risk for investors.
In booming times, when commodity prices were high, Peru’s Ministry of Finance created the Fiscal Stabilization Fund to save fiscal resources for difficult economic times. The Fund was fed by the balance of the national budget, 10% of net income from selling assets through privatization, 10% of net income from the initial payment of government concessions, and interests from term deposits of the Fund in the Central Reserve Bank of Peru. By the end of 2016, the Fund was over US$ 8 billion, equivalent to 4% of GDP. The government has wisely refrained from propelling expenditures in booming times and has avoided the risk of increasing indebtedness in case the economic growth pace slows. To preserve soundness, the government has applied counter-cyclical policies to offset any slow-down of the economy.
In terms of monetary policy, the Central Reserve Bank of Peru, which is an autonomous organization, cumulated US$ 61 billion in net international reserves to intervene in the exchange market and avoid abrupt exchange rate fluctuations, unlike other economies which left their exchange rates to float freely. The Bank plays a critical role in keeping inflation quite low, which has been between the target range (1%-3%).
Multilateral organizations, such as the World Bank, the International Monetary Fund, and the Inter-American Development Bank have often praised the soundness and discipline of the policies applied by Peruvian authorities.
Another reason Peru has had a significantly positive performance in the region has been its policies to attract private investments. It has allowed the development of big mining projects which started production last year, such as Cerro Verde and Las Bambas’ expansion. Copper production rapidly expanded, allowing Peru to become the second largest global copper producer ahead of China. This investment attraction policy has resulted in large, global companies setting up in Peru and subsequently more job creation and rise in national income.
For years, corruption has stifled growth into South America and made foreign investors cautious, how has Peru taken measures to fight corruption?
The government of Peru has been implementing a comprehensive strategy to effectively fight corruption and promote public transparency. This is precisely one of the topics for which Congress delegated on the Executive Branch the faculty of issuing legislative decrees, that is, regulations with the same rank as laws. The legislative decrees issued to fight corruption have two focus areas: prevention of corruption acts, and legal mechanisms for the investigation, punishment, and registration of individuals involved in corruption cases.
In terms of preventing corruption acts, the government has set up the National Accord for Justice, a cooperation and coordination body among the Judiciary, the Attorney General’s office, the National Judiciary Council, the Judiciary Academy, and the Ministry of Justice and Human Rights. This organization focuses on much needed institutional reform to provide citizens with a quality service and to strengthen the training of judges and attorneys so they can do justice in a transparent, predictable, and credible way. The National Accord for Justice has submitted to the Congress a law draft to set up the Permanent Interinstitutional Council for the Cooperation, Coordination, and Follow-up of Justice Public Policies. The Accord has also produced a Justice Map which provides information on how much, how, where, and why to allocate human and financial resources to organizations which are part of the system. The government has also set up the National Registry of Lawyers Punished for Bad Professional Practice and the Registry of Punishments to Civil Servants, and has ruled the dismissal of civil servants who have committed acts of corruption.
As part of this effort, the government is effectively granting citizen access to the contents of judiciary decisions at all levels and has set up a technical authority for transparency and public information access. Punishments have been designed for civil servants who do not comply with regulations regarding access to public information.
As for the main legal mechanisms for the investigation, punishment, and registration of individuals involved in corruption cases, all government organizations are now required to keep absolute reserve of the identity of complainants as well as undertake actions of labor protection. Preventive detention of defendants accused of corruption is increased when the acts committed involve a crime organization. Regulations have been issued to make family relationships of registered individuals transparent through the National Identification Register. Convicted individuals for corruption cases are prohibited to be hired by the government for a period between 5 and 20 years. Convicted individuals for serious corruption cases are subject to disqualification for life. The government has made the process easier for defendants to collaborate by providing information, in exchange for a lesser punishment. New regulations have been enacted to strengthen the prevention, detection, and conviction of acts of money laundering and terrorism.
Why is Peru an attractive destination for foreign companies and investors?
First, as I mentioned before, Peru has been the star performing economy in the region, exhibiting a long-standing macroeconomic soundness with a record of sustainable growth and low inflation.
Second, Peru welcomes foreign investment and keeps a highly favorable legal framework which include the following features:
Non-discriminatory treatment: the foreign investor gets the same treatment as the domestic investor
Unrestrictive access to most economic sectors
Free transfer of capital and free competition
Guarantee for private property
Freedom to purchase stocks from local firms and citizens.
A network of investment agreements. Peru is a member of ICSID (International Centre for Settlement of Investment Disputes) and MIGA (Multilateral Investment Guarantee Agency)
Availability of legal stability agreements with the Peruvian government
Peru participates at the OECD Investment Committee and promotes implementation of guidelines referred to OECD multinational enterprises.
Third, Peru is a very open economy and has actively pursued the best market access to the rest of the world. While our average nominal import tariff is 2.2%, the effective tariff is only 1%. Peru has signed 21 trade agreements with the world largest economies and trading blocs, providing it with preferential access to an overall market of over 4 billion people with a joint GDP of over US$ 56 trillion. In fact, 96% of Peruvian exports enjoy that preferential access.
And fourth, Peru is a very diversified economy with industries which offer distinct advantages and a great landscape of business opportunities.
What types of vehicles do foreign companies and investors have for investment in Peru? Essentially, what type of investment model makes sense?
Peru offers an assortment of vehicles that make foreign direct investment very attractive, such as:
Legal stability agreements by which the Peruvian government grants legal stability guarantee to domestic and foreign investors, as well as to investment recipient companies, both for the implementation of new companies as well as capital increases for established companies. Agreements are valid for 10 years. In the case of concessions, the agreements are valid throughout the concession’s period.
Advanced recovery of VAT paid on imports and domestic purchases of new capital goods, intermediate goods, services, and construction contracts during the pre-operation period.
As for big infrastructure projects, Peru has successfully promoted and implemented Public Private Partnerships (PPPs or P3s). The PPP model seeks to attract private investors willing to share resources, expertise, and risk with Peruvian government organizations in order to create, develop, improve, operate and maintain public infrastructure and provide public services. P3s can be originated by government or private initiatives in a variety of industries or sectors: transport infrastructure, energy, telecommunications, sanitation, health, education, tourism, etc. Examples of the successful concessions granted through P3 scheme are the Lima International Airport (operated by Lima Airport Partners), the Callao and Paita seaports, the Lima Metro Line 2, and the Mountain Range Longitudinal Highway.
PROINVERSION, the agency specialized in P3s, currently offers a project portfolio of more than US$13 billion for the 2017-2018 period, mainly in energy, telecommunications, transportation, and water and sanitation.
Where should U.S. and, in particular, Midwest companies and investors be looking for opportunity in Peru? Which industry sectors?
In spite of the long period of economic growth, Peru still needs to build a great deal of infrastructure, with an infrastructure gap estimated at approximately US$160 billion. The government is implementing the National Infrastructure Plan which provides great opportunities for investors to share their knowledge and expertise and invest in big infrastructure and public services projects.
I have already mentioned the project portfolio that PROINVERSION offers under the P3 model.
And as for green field investment and private projects, the main industries where big advantages are present, and therefore most attractive for investments, are the following:
- Peru’s dry tropics with vertical sunlight generate a type of giant greenhouse with adequate lighting and temperature control which allow for several harvests in a year.
- Agricultural yields are very high: sugarcane (2nd world highest), asparagus and olives (3rd), artichokes (4th), grapes (6th) and avocado (11th).
- Seasonal windows in major markets provide plenty of opportunities.
- The 100,000 ha of land currently devoted to agricultural exports are expected to double as a result of large agricultural irrigation and expansion of existing projects.
- Agribusiness is a star industry sector: more than US$ 5.5 billion in exports of fresh and processed products to more than 150 countries.
- Peru is the leading world exporter of asparagus, organic coffee and organic bananas.
- And there are many products with high export potential: Andean grains (amaranth, quinoa, and tarwi), exotic fruits (cherimoya, aguaje, and camu camu), berries, avocado, among others.
- Peru is a polymetallic country, third in reserves of gold, silver, copper and zinc worldwide.
- 37% of the land has no restriction for mining activities and only 1.3% of the land is taken for mining exploration and exploitation.
- Peru is one of the few countries in the world with non-metallic mineral deposits, including diatomite, bentonite, limestone, and phosphate.
- Peru is a global producer of copper and zinc (2nd largest worldwide), silver and molybdenum (3rd), mercury (4th), diatomite (5th), and gold (6th). In Latin America, Peru is the largest producer of gold, zinc, and lead, and second in copper, silver, mercury, diatomite, phosphoric rock, and molybdenum.
- In 2016, investment in the mining sector reached a value of US$ 4.3 billion.
- Peru has a great energy potential. The wide availability of water resources and natural gas has enabled Peru to meet the growing electricity demand domestically.
- In 2015, while 93% of total population had access to electricity, the percentage in rural areas was 78%.
- There are other renewable energy sources yet to be explored such as solar, wind, biomass, and geothermal sources.
- Energy production has grown 206% since 1995. In 2016, energy generated through the National Interconnected System was 48% hydro-energy, 47% generated from thermal sources, 3% from non-conventional renewable sources, and 3% from coal and diesel.
- The main economic groups of power generation are: Enersur, Edegel, ElectroPerú, Transmantaro, REP, Luz del Sur, Edelnor, Hidrandina and Electro Dunas.
- The hydrocarbons sector growth began between 2004 -2005, when the major natural gas reserve located near the Camisea river started production activities (Camisea project).
- Peru is the most important sustainable source of natural gas in the South American Pacific.
- As of December 2015, the proven reserves of natural gas reached to 14,09 TCF, and the prospective resources of natural gas to 60,24 TCF.
- For 2025 the estimated demand of natural gas is between 1,900 MCF and 2,400 MCF, covering household consumption, demand from petrochemical activities, and electricity generation.
- Peru has oil fields that have not been explored (29.97 million ha), making it a potential petrochemical hub.
- Tourism has been booming even in times of global downturn. Peru’s tourism has been one of the fastest growing industries. In the 2002-2016 period, the number of international visitors more than tripled to 3.7 million and foreign exchange receipts grew by 12% p.a. to US$4.3 billion in 2016.
- The government aims at doubling the number of international visitors by 2021.
- Peru has unique and invaluable treasures that lay the foundation for its tourism’s sources of competitive advantage:
- Machu Picchu, one of the New 7 Wonders of the World, and the Amazon, one of the 7 Wonders of Nature.
- The Sacred City of Caral-Supe, the oldest civilization of the Americas, and multiple cultures that left amazing and mysterious artistic and architectural works and expressions.
- Natural wonders such as the deepest canyons and the largest river in the world.
- One of the best gastronomies in the world: Peru has been voted the World’s Leading Culinary Destination (World Travel Awards) for five years in a row (2012-2016).
- Due to its strategic location, Lima serves as a regional hub in South America. Over 30 international destinations are connected to Lima’s award-winning Jorge Chávez Airport, with over 1,000 flights per week. As the main gateway to Peru, from Lima it is possible to catch domestic connecting flights to the country’s main tourist destinations.
- Lima has become one of the most important cities for conventions and meetings in Latin America.
- Seventeen international hotel chains, including the most important US chains, operate in Peru. More than 100 hotel investment projects from 2015 to 2018, involving US$1.2 billion, will further expand the Peruvian hotel infrastructure supply in the luxury, upper upscale, upscale, upper middle, and midscale hotel market segments.
- Hotel occupancy in Lima and Cusco are among the highest in Latin America.