Infrastructure gap: Some comments from the real estate sector to help reduce it

In Peru, the ongoing Pandemic has made more evident the great deficit in infrastructure in the various public services: transportation, energy, telecommunications, health, water and sanitation, water infrastructure and education. Our infrastructure development is lagging behind regional peers and even more so with OECD countries. We rank 85th out of 137 countries on the Infrastructure Quality Indicator of the Global Competitiveness Index 2017-2018.

By Franco Soria, Partner of the Real Estate Area

In January 2018, according to calculations by the Association for the Promotion of National Infrastructure (AFIN), the infrastructure gap would exceed US$165 billion, not counting the US$6.4 billion that represented the damage that occurred after El Niño in 2017. With this, by January 2018 the total amount we must invest to obtain adequate public services, amounts to just over US$ 171,000,000.00 (One hundred and seventy-one thousand and 00/100 million dollars). The level of investment that needs to be executed cannot be assumed by the Government alone and therefore requires the active participation of the private sector so that, through private initiatives, concessions, tax works or other mechanisms, they participate in the improvement of public services.

The serious damage generated throughout the country by the phenomenon of the El Niño Costero that occurred in early 2017 and the serious delay that the Government has had to implement the reconstruction work is a clear example of the complications that the public sector has to respond promptly and effectively in the construction of public works.

In this line we have that, the advance of the Integral Plan for the Reconstruction with Changes is extremely delayed. According to figures from the Authority for Reconstruction with Changes (ARCC)[1], to date some S/. 6,210 million have been invested, among its different components. This represents an advance of 24.2% of the entire comprehensive plan, whose total budget is estimated at S/. 25,655 million.  However, there are small signs of acceleration in the works: in 2019 S/. 3,392 million were executed, a figure 89% higher than that recorded in 2018.

Given this scenario, the Executive has considered adopting Government to Government (G2G) contracting schemes, with the United Kingdom, to promote the execution of more than 118 reconstruction and construction works in the north of the country that are contemplated in the Integral Plan for Reconstruction with Changes. It will be implemented in 74 school premises, 15 health establishments and the construction of integral solutions for 17 rivers, 5 streams and 7 drainage systems. Under the agreement with the United Kingdom, it is estimated to invest around S/ 7 billion (about two billion dollars) in the next two years in nine regions of the country. This first investment announcement represents about 27.3% of the total budget for reconstruction with changes.

Then, the first issue that we must continue to solve is: How, from the Government , do we achieve that the execution of projects is effective and transparent? This is necessary to accelerate the closing of the infrastructure gap. We will leave this point raised and seek to identify some problems that delay the implementation of the projects and propose some options for solutions.

The multiple diagnostics carried out agree that the main issues to be resolved to accelerate the closing of the infrastructure gap are:

• Problems with the sanitation of the property. In Peru it is not always easy to identify the owner of a property, nor the exact boundaries of the property. The possible existence of duplicate registrations further complicates the situation. In this sense, it is essential to take into account the status of the property’s sanitation before starting the project. Among other measures, we must develop adequate cadastre and property information management policies at the national level.
• Informality in property, construction, city growth, among others. We have a country with high levels of informality in all economic sectors. This is also evident in property rights. Unfortunately, the land is occupied and houses are built without permits or authorizations. The occupation of land in many cases is not consistent with formally existing property rights. 7 out of 10 buildings are built informally (without permits and/or technical assistance). All this complicates and generates extra costs for the provision of multiple services.
• Delay in taking possession and use of the property. Along these lines, the Single Ordered Text of Legislative Decree 1192 (Expropriation Law) establishes norms that facilitate the Government ‘s taking possession of lands involved in the execution of projects.    As a transversal issue and without prejudice to the provisions of the Law, we must adopt measures so that an eviction process in Peru does not continue to take 4 to 5 years. And sometimes more.
• Delay in the handing over of land and in the execution and completion of the project. In the cases of projects given in concession to individuals, this often generates the payment of fines and penalties by the Government.  Therefore, it is essential to verify and define reasonable deadlines for the delivery of land. Another possibility, perhaps more practical for the Government, is to transfer to the concessionaire the responsibility for the entire process of land clearing and release.
• Release of interference. Interferences are existing installations in charge of companies or entities providing public services and other installations or goods that are within the area of the right of way or the execution of infrastructure works. For example, movable and immovable property used for the direct and indirect provision of public service, panels, channels, bus stops, signaling, traffic lights, among others. Proceeding with their transfer for the execution of the project and even determining their existence or not, sometimes becomes complicated. This is somehow related to the disorderly growth of cities and to problems of lack of cadastral information.
• Multiple entities execute expropriation procedures and this is in accordance with their competence to provide public service. In view of this, it is worth asking: Wouldn’t it be better to create an organism that centralizes expropriations? It is important to take into account Legislative Decree 1333 that created the Special Project for Access to Land for Priority Investment Projects (APIP by its Spanish acronym), as a special project in PROINVERSION. This norm was repealed and could not be implemented.
• Need to generate efficient and fast interconnection processes between public entities to accelerate the exchange of cadastral information. Continue implementing digital procedures. Many entities, for example, the National Superintendency of National Assets and Public Registries are already in this line. However, there is always room for improvement and systematization of procedures (especially at regional and municipal levels of government).

In a scenario of economic crisis generated by the pandemic, it is essential that the Government (at all its levels) generates an environment of stability, legal security and shows policies that facilitate and promote the implementation of projects and mechanisms to promote private investment. Much more for projects linked to the provision of public services (especially in health, telecommunications, transport, which are sectors that have shown huge shortages in the pandemic).

It is clear that there is much to be done and improved especially in various procedures to accelerate the implementation of infrastructure projects and the provision of public services. However, it is a great opportunity for the Government and the private sector to generate synergies and efficient processes.

The country in general and the real estate market in specific have solid economic foundations that make the possibility of executing projects attractive for private actors. Let’s not lose a new opportunity to start building a country where all citizens can count on quality public services.

[1] Law No. 30556 approves extraordinary provisions for the interventions of the National Government in the face of disasters and provides for the creation of the Authority for Reconstruction with Changes”