MAXIMIZING FINANCE FOR DEVELOPMENT PERU Building Infrastructure with Local Financing Highlights of World In 2015, Peru embarked on reforms to attract more commercial Bank Group Support financing for its PPPs while reducing the need for government guarantees to cover projects’ commercial risk. With assistance The World Bank and IFC jointly sup- from the World Bank Group, these reforms are helping the ported two new public-private part- nership (PPP) laws and related regula- government prepare better project contracts and create a new tions, which passed in 2015 and 2016. pipeline of PPPs that are fiscally sustainable and shift commer- The World Bank provided a $1.25 cial risk to the private sector. billion loan with a deferred drawdown option for related reforms. Development Challenge In 2015, the World Bank initiated a Peru rapidly expanded its use of PPPs to develop public infrastructure and capital markets strengthening program services in the past decade, but the government took on most project risks. It to increase financing options in local paid firms on construction milestones rather than pre-agreed quality standards, currency for infrastructure. reflecting a weak PPP framework. The government’s PPP unit, Proinversion, also lacked staff with the right experience. This policy and institutional framework The World Bank is supporting the contributed to misaligned incentives for the private sector and undermined the development of financial instruments quality of projects. It also increased the fiscal burden, limiting the government’s to enhance credit and transition to a ability to support PPPs and other key investments. sustainable risk allocation system for PPPs. The MFD Approach A follow-on IFC advisory mandate is The government led efforts to improve its entire PPP project cycle so that future being jointly implemented with the projects would be fiscally sustainable and maximize financing from the private World Bank in the water sector as a sector. Its guiding principle was to set up a framework that clearly defined roles pilot. across key government institutions and used a fiscally sustainable risk allocation model. The World Bank Group worked closely with the government to plan and Photo © Presidencia Perú/Flickr (CC-by-NC-SA 2.0) implement these changes, as well as coordinate and integrate expertise. Setting up the regulatory and institutional Viable state-owned enterprises (SOEs) are being considered framework as sources of new issuances and infrastructure finance. For example, the government and the Bank Group are exploring In 2015, the Peruvian government implemented its reform whether SOEs in water and sewerage could be candidates, agenda and passed a new PPP law with by-laws supporting as part of efforts to improve access to these services in urban the new risk allocation model. The law paved the way for a areas, set better governance standards, and deepen the use of new framework that has allowed the government to phase capital markets. out government guarantees as well as transfer construction and financial risks to the private sector. Based on previous These uses of capital markets financing build on IFC’s work capital markets support initiated in 2012, the Bank Group since 2003, which has paved the way for issuers to raise is providing technical assistance on preparing standard con- funds in local currency. From 2004 to 2017, IFC pioneered tracts, and new procedures for preparing bankable projects the issuance of domestic bonds, offshore bonds, and green have been added to the framework. bonds in Peruvian soles. It also helped local companies access the capital market through partial credit guarantees. These institutional and regulatory reforms were partly fund- These initiatives reduced exposure to foreign currency risks ed by the Swiss government through a $1.5 million techni- and created financing products with longer maturities, diver- cal assistance program and supported in 2016 by the World sified structures, and better investment ratings Bank through a $1.25 billion IBRD loan with a deferred drawdown option. These milestone achievements helped Making a difference Peru subscribe to the principles for PPPs established by the Organisation for Economic Co-operation and Development In 2018, the Peruvian government prioritized transactions in 2016. under the new PPP framework, with IFC advising Proin- version on Headworks for Drinkable Water, a $600 million By early 2018, the regulatory and institutional framework bulk water supply PPP in Lima. The government and the was mostly complete. Ongoing implementation support World Bank are studying the use of credit enhancement continues at the Ministry of Economy and Finance (for products for PPPs, which will replace implicit guarantees example, on setting up a contingency liability framework) with partial, well-targeted, and explicit guarantees for this and at Proinversion. and future transactions. As the private sector becomes familiar with the new risk allocation model, PPPs will no Supporting PPP projects and local financing longer rely on credit enhancements. The World Bank’s water The Peruvian administration that took over in July 2016 and financial markets teams as well as IFC continue to help asked the World Bank Group to help structure a robust implement sector reform and create enabling capital mar- pipeline of PPP projects. Enhancing sustainable private kets, further improving access to commercial financing. In sector investment in infrastructure became a full-fledged addition to water, the two-year planning horizon of the PPP objective of the World Bank Group’s Country Partnership portfolio includes investments of $14.6 billion, mainly in Framework with Peru for 2017–21. transport ($9.6 billion) and energy ($1.1 billion). The World Bank Group helped design and prioritize a The Bank Group is exploring more ways to attract institu- PPP project pipeline to implement the new risk-sharing tional investors and capital markets financing for new proj- model and assisted in developing local-currency financial ects, for instance by establishing debt funds specialized in instruments to access private financing for infrastructure. infrastructure. Another example is the Joint Capital Markets The engagement on capital markets has already supported Program (J-CAP) initiative that aims to expand access to implementation of a hybrid issuance regime, reducing cost domestic financing in six countries, including Peru. Through and time-to-market for issuers. It has also supported more J-CAP, the Bank Group will spearhead the 2018 Pacific Al- efficient clearing and settlement of securities, as well as over- liance Capital Markets Conference, which will contribute to sight of secondary markets. the development and integration of capital markets in Chile, Colombia, Mexico, and Peru. MFD BRIEFS 06/2018 WHAT IS MFD? Achieving the Sustainable Development Goals to end extreme poverty by 2030 will require about $4.5 trillion annually, far more than multilat- eral development banks or donors can provide by themselves. To face this challenge, the World Bank Group adopted the MFD approach, which entails working with governments to crowd in the private sector while optimizing the use of scarce public resources. This approach is guided by the Hamburg Principles adopted by the G20 in 2017 and builds on the substantial experience across the institution. www.ifc.org www.worldbank.org www.miga.org