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April 11 (Reuters) - (The following statement was released by the rating agency)
Peru’s massive infrastructure improvements schedule show strong momentum for the usage of public-private partnership (PPP) frameworks in the country, even if it is unlikely to be completed, Fitch Ratings says. According to ProInversion (an advocacy organization for private infrastructure investments in Peru), US$12 billion in projects are in the pipeline for 2014-2015.
Fitch expects the largest projects in the pipeline to be completed. The first contract of the year, for Line 2 of the Lima subway, was granted two weeks ago. It is estimated at US$5.7 billion in investments and is almost half of the value of the projects in the pipeline this year.
A small number of the projects will likely not be tendered due to common challenges faced by governments worldwide. Experience shows that governments often consider more programs than are actually executed. Some projects stall during the request for proposal stage when efficiency costs or the interests of the parties involved cannot be agreed upon. Others are abandoned due to changes in government priorities. In general, the most important projects get done. The presence of an adequate framework for their execution, as in Peru, maximizes the chances for a program’s successful execution.
Peru has the strongest track record in the region in executing infrastructure investments in recent years. The country’s legal framework, including a comprehensive PPP law, has allowed projects to be financed by banks and through capital market issuances. The securitization of milestone-based certificates (CRPAOs and RPICAOs), which delinks the projects’ probabilities of default on their debt from their completion and performance risk, has been used in many cases. These certificates are irrevocable and unconditional obligations to pay for executed works, issued directly by Peru (in the case of CRPAOs) or backed by receivables and contingently guaranteed by the sovereign (for RPICAOs).
Gradually, investors have taken on project risks such as volume and completion, as exemplified by Port of Paita and, more recently, ETEN’s (thermo generation plant) successful cross border issuances, rated by Fitch in ‘BB-’ and ‘BBB-', respectively.
Fitch expects this trend to continue, supported by a strong pipeline of projects, Peru’s macroeconomic stability prospect and growing investor interest.