This content is from: Local Insights

Peru: Evolution of co-financing

José Miguel PuiggrósGabriela Dañino
Although Peru has a strong track record in developing infrastructure projects, it still has one of the largest infrastructure deficits in the region. There are many projects in different sectors of the economy that have been granted more than $12 billion by the Peruvian government between 2013 and 2014, which are expected to obtain financing and begin construction during 2015. Many of these projects will be financed under co-financed schemes, which will require the granting of government credit enhancements.

A stable legal framework aimed at promoting private investment in large scale infrastructure projects, and a steady positive macroeconomic performance, have contributed to the development and bankability of infrastructure projects in Peru. Specifically, credit enhancement schemes granted by the government have played a leading role in attracting both investment and financing sources for this type of project. However, such schemes have evolved since the first projects, where they were incorporated as part of the financing structure.

In previous structures, the government assumed a direct, unconditional and irrevocable obligation to pay for the completion of certain construction milestones (that were represented in freely transferable milestone-based certificates). However, new co-financing mechanisms contemplate contingent obligations for the government to budget any amount necessary to cover any shortfalls that may arise for the completion of certain construction milestones by the corresponding concessionaires. That is, a contractual obligation that, although represented in milestone-based certificates, requires additional formalities for its transfer.

Recent co-financing structures include more complex legal and financing arrangements and have reduced the government's credit exposure. At first sight, this would be expected to have a negative impact on the flow of private investments and financing funds for infrastructure projects. However, the reduction in the credit exposure that the government assumes under contingent credit enhancement schemes allows it to commit public funds for the co-financing of a larger base of projects, positively impacting their bankability. This has been evidenced in the recent enactment of Supreme Decree 376-2014-EF through which the resources for co-financing purposes has been duplicated, representing approximately 12% of current GDP.

José Miguel Puiggrós and Gabriela Dañino

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