Draft

11/13/07

JFox

 

The Peru Northern Highway Concession

 

Case Study

 

 

            In July 2005, the government of Peru signed a concession agreement with a Brazilian-Peruvian consortium for the operation and maintenance of 960 km. of highway from the Pacific port of Paita to the Amazon basin port of Yurimaguas.  This highway qualifies as an inter-oceanic route, as there is regular river service (a 36-hour trip) from Yurimaguas to Iquitos, Peru’s main city on the Amazon.  It is one of the highways designated by an inter-governmental group from the governments of South American countries as priority inter-oceanic routes.  These routes are part of the IIRSA (Inter-oceanic and Inter-Regional Routes of South America) system, intended to bind the hinterlands of the South American countries together, and to compliment the region’s dominant means for transportation of goods within the continent (oceanic transport) by a system of roads, railroads, and rivers that would knit together the countries of South America.  This knitting together would be from the inside – on land or rivers – instead of via the peripheral movement of goods via ocean steamers. 

 

 

 

            Once goods are boarded on an ocean-going ship, the cost of moving cargo over long distances becomes low relative to the cost of loading and unloading it in ports – at least for containerized shipments, which today constitute the bulk of international trade in manufactured goods, as well as for most non-bulk primary products.  It remains to be seen whether the integration of South America is best achieved by hauling products long distances over highways, or by transporting them via ship to peripheral destinations in other countries.

 

Why Concession?

 

            The first question to be answered about such a concession is why it was done at all.  Why did the Peruvian government, which originally built this road and has maintained it ever since, choose to turn it over to a private company?

 

            There are three main reasons typically put forward for concessioning a project like Amazon North:

 

  1. Independence from Budgetary Uncertainty: The concessionaire will be required to maintain the road for the next 25 years, regardless of how the budgets of the Ministry of Transport for road maintenance wax or wane.

 

  1. Immediate Action Unencumbered by Bureaucratic Process: The capital improvements in the highway will occur now, funded by foreign investors, while improvements from Peruvian government budgetary allocations would have been much slower.

 

  1. Faster Customer Response: A private company that collects tolls from users is more likely to respond to their needs than a government ministry.

 

            In particular, the requirements that the concessionaire maintain the road to a certain standard may lead to better road maintenance than under government management.[1]

 

The Concession Process for IIRSA-North

 

            Table 1 offers a timeline for the concessioning of IIRSA-North, or Amazon North.  As indicated by the timeline, the actual award came about one year later than originally scheduled. 

 

Table 1

 

            The delays in awarding the concession resulted from various factors: production of relevant background documents, responses to inquiries by potential bidders and disagreements within the Peruvian government about what exact form the concession should take.

 

            Nine firms expressed interest in the concession, and four firms were pre-qualified for the final stages of the concessioning.  They included three Brazilian firms and one Peruvian firm.  However, in the late stages of the process, three of the firms – two Brazilian and one Peruvian – agreed to submit a joint proposal.  This left only this consortium and one other Brazilian firm as the two bidders for the final award.  The presence of the second bidder was critical to the award, as the presence of only one bidder would have required re-bidding of the concession. 

 

            The review of the two final proposals led at least one of the official reviewers to conclude that only the consortium’s bid was responsive, while the submission by the other bidder was technically deficient and was unacceptable as unresponsive to the conditions of the competition. 

 

            In sum, there was an absence of genuine competition for the IIRSA-North concession.  This lack of competition appears to have led to two consequences.  First, the cost of the contract to the Peruvian government of the concession was probably significantly higher than it would have been in the presence of stiff competition.  Second, it appears that the concessionaire was able to convince the MTC that further investment beyond that contemplated in the concession were warranted, with resulting further payments to the concessionaire.

 

            Two different interpretations can be given to this outcome of the IIRSA-North concession.  In the more optimistic interpretation, a relatively “fat” contract for that concession would encourage more firms to participate in later highway concessions – most notably Amazon Central.  In any event, in this interpretation, the condition of the Amazon North highway is secure for the 25-year period of the concession.  If still maintained by the Peruvian government, this level of maintenance – based on past history – would be unlikely.

 

            The pessimistic interpretation is that the lack of competition and personal links between senior Ministry of Transport officials and concessionaires makes likely excessive costs and profits for the concessionaire.  Moreover, as the concession consortium is a group of construction companies, they may well neglect maintenance of the highway, despite the contractual commitment. 

 

            As discussed in the Amazon Central case study, the “fat” contract for Amazon North did not attract additional bidders for that concession.  Thus, the ultimate impact of the Amazon North concession can only be determined over time, as firms and individuals change their behavior in response to improvements in infrastructure.  On this, only time will tell.



[1] It is a common claim in developing countries that highway maintenance is generally shortchanged, at least in part because of incentives created by donor agencies.  Donors have typically financed road construction or major rehabilitation, but have been unwilling to pay for maintenance.  An astute ministry of finance might thus conserve scarce resources by skimping on highway maintenance, as donors would pay for the rebuilding of the road, but not for its maintenance.