Peru’s Amazon Central Highway Concession

 

Case Study

 

By

 

James W. Fox

 

November 2007

 

            On July 25, 2007, the considerable gathering of people in dark suits in the conference room at the government of Peru’s investment promotion agency, ProInversión, awaited the opening of envelopes containing offers from any of six pre-qualified firms for a major highway concession.  This concession was for the Amazon Central highway, traversing the 854 km. from near Lima, Peru’s main port, through the Andes to the Amazonian basin town of Pucallpa, near the Brazilian border.  This road was the “crown jewel” trans-Andean highway, much more important than the Amazon North road, concessioned two years earlier, and the Amazon South to be concessioned later.  The expectation had been that this concession would be self-financing, with tolls from road users paying the cost of the improvements mandated under the concession offer. 

 

            Chart 1 shows the trajectory of the Amazon Central road, along with two other USAID-promoted concessions, the South container port at Callao, and the Amazon North highway.

Chart 1

 

            The specifics of the concession are shown in Table 1.  It offered a combination of rehabilitation, upgrades, and maintenance over the 867 km. stretch of the road.  However, the MTC sought to reduce risk to the concessionaire by taking responsibility for two particularly difficult sections of the highway.

 

Table 1

 

Highway Number

Section

Length (km)

Type of Investment

05N,16

Pucallpa - Tingo María

254.9

Rehabilitation and  asphalting during the first two years of the concession of the San Alejandro – Neshuya section

16

Tingo María - Huánuco

116.3

Actions to achieve the required level of service by the second year of the concession

03N

Huánuco - La Oroya

235.8

Actions (stabilization of embankments, improvements in road safety, etc.) to reach the required level of service by the second year of operation..

03S

La Oroya - Huancayo

124.6

Actions to achieve the required level of service by the second year of the concession.

20

La Oroya - Ricardo Palma Bridge

135.6

Actions to achieve the required level of service by the second year of the concession

 

 

867.2

 

 

            ProInversión circulated numerous amendments and clarifications for bidders during the several weeks previous to the envelope opening.  The latest – two days before the opening – modified the rules to allow the concession to be awarded if only one qualified bidder made an offer.  This late change added to the muted anticipation evident among many of the participants at the envelope-opening event, as participants speculated about which bidder had reached a “sweetheart” deal with the Peruvian government.

 

            Sadly for conspiracy theorists, and for others who wanted needed improvements on the Central Highway, there were no envelopes to open.  None of the pre-qualified firms chose to present an offer.  This case study outlines the main features of this failed award. 

 

A Digression

 

            Many years ago, Albert Hirschman argued that the scarcest resource in poor countries was government decision-making.  He identified the problem as involving too many interest groups and too many ideas by different executive or legislative branch officials.  Each had a particular investment project to promote.  With this cacophony, the easiest thing for government was to defer decisions.  Hirschman suggested that, in this environment, very evident bottlenecks in the country’s infrastructure were a good guide to action.  Government should not try to lead, but instead respond to the clamor of businesses and consumers for action on problems evident to all. 

 

            Although Hirschman addresses mainly the question of which investment projects to choose, government decision-making can easily become conflictive or hobbled once a specific project is chosen, because of differences of opinion about the specifics of the modality.  In the case of the Amazon Central concession, there were three principal actors:  the Ministry of Transport and Communications (MTC); ProInversión, the government investment promotion arm; and Ositrán, the government institution that would supervise the concession contract once signed.  Each party to the concession debate entered with a unique perspective arising from that particular organization’s mandate.  Ositrán wanted contractual clarity in the concession contract, so that it could carry out its responsibilities with a minimum of conflict with the concessionaire.  ProInversión’s interest was, narrowly, the award of the concession, and more broadly, to demonstrate that Peru was a reliable and safe partner for prospective foreign investors. 

 

            The MTC’s motives were more complex.  While Ministry policy favored concessions as a better vehicle for assuring maintenance of major highways in Peru, concessioning a highway necessarily meant fewer resources for the Ministry.  This had been the case for the Amazon North concession, where a significant part of the MTC budget went directly to pay the concessionaire.  In the case of Amazon Central, the concession was to proceed at no cost to the government of Peru, but at a significant cost to the MTC.  Heretofore, the MTC had benefited from the tolls collected on the Amazon Central highway, so its revenues – and therefore its capacity to carry out road investments – would be reduced.  Compounding these institutional issues was an implication that the MTC bureaucracy would gradually shrink as concessionaires became responsible for more and more of the traditional MTC portfolio.

 

            The Amazon Central highway was expected to be concessioned on July 25, 2007.  But the convocation produced no offers.  This failure of the country’s most economically viable road concession raises the question of the impact of the assistance financed by USAID to promote this concession. 

 

            The problem identified by Hirschman — the inability to make decisions — seems to have been at the root of the failure of the Central Highway concession.  Initial rules of the concession were developed in an extensive process of discussion and decision within the government, and discussed with possible bidders.  Some government officials unsatisfied with the outcome lobbied to change the rules. The result was a series of last-minute changes in the terms of the concession, with continued tinkering as each change introduced some additional problem.

  

            At the micro level (i.e., the assistance provided by the USAID-financed consultants to ProInversión, the investment promotion arm of the Peruvian government), the assistance seems to have been effective.  USAID financed studies of the technical risks inherent in the Amazon Central project, and the Peruvian government further reduced the risk by agreeing to take responsibility for two of the most vulnerable sections of the road.  USAID-also financed a “road show” in late 2006 to encourage construction firms in Brazil, Colombia, Ecuador and Mexico to offer bids for the concession.

 

            In early 2007, however, the Ministry of Transport and Communications (MTC) began to assert a stronger role in the process, arguing that the concession should not be self-financing from toll collections from the highway, but that some of the toll collections should be made available to the MTC for other road projects.  A complex restructuring of the flow of funds from tolls replaced the simple version that had been promoted in the road show.  As potential bidders raised questions about the revision in approach, a stream of revisions to the contract terms ensued.

 

            The “crown jewel” of Peru highway concessions has so far been a failure.  There is hope that a new concession proposal may be more successful.  Personnel changes are likely to improve the prospects.  The senior MTC official who led the revision of the terms of the concession was replaced.  The ProInversión official initially responsible for managing the Amazon Central concession, but who resigned in protest of the MTC’s revisions of the draft concession agreement, has now been hired by the MTC to promote the concession.

 

            Speculatively, one might argue that the cause of the failure of the Amazon Central concession may have been USAID’s unwillingness to protest when the basic concept for the concession, which had been jointly developed by ProInversión and the USAID contractor, was essentially hijacked by the MTC.  High-level representations to the Peruvian government by USAID might have prevented this.  At worst, the failure of such an effort would have allowed USAID later, after the failure of the concession process, to make a strong case for more consistent procedures in future concessions.

 

            But USAID staff were not very involved in the concession process, leaving the contractor to manage it.  No USAID staff members were present at the envelope opening for Amazon Central, and USAID staff was only vaguely aware of the date of the award.  In general, USAID seems to have regarded the concessions as a sideshow not critical to USAID’s primary business of moving larger amounts of money.  But, as the companion case studies of concessioning in Peru make clear, it is achieving impact, not moving money, that makes the difference for development.