Interview with Peru's Minister of Economy and Finance, Alfredo Thorne

We sit down with Peru’s Minister of Economy and Finance, Alfredo Thorne...

How do you hope to improve Peru’s economic performance?

Alfredo Thorne: In the short term, we have set out to reverse the decline in investment over the last three years. This is important because we seek to reactivate the virtuous cycle of investment-employment-consumption. This mechanism speeds up the labour market, in particular the formal sector where you find good quality jobs with social benefits.

For this purpose we are promoting a public and private infrastructure boom through different kinds of mechanisms. The first one is related to the reform of Proinversion, our private investment promotion agency, which will be in charge of multi-year investment plans and will count with a technical board that prioritises high social impact investment. Besides that, projects will have managers who will be in charge of monitoring investments until the contract execution phase. These changes will strengthen the technical role that Proinversion should have, an entity that is now being chaired by Mr. Álvaro Quijandría, a former World Bank executive. These institutional changes will allow the deployment of infrastructure projects like Lima’s Metro Line 2, Chavimochic irrigation project, Majes Siguas irrigation project, Jorge Chávez International Airport and the Southern Gas Pipeline, for an approximate amount of $13billion. It is important to highlight that the expected infrastructure investment commitments respond for about 80% of private investment growth in 2017, with a higher impact in the second half of the year.

"we have set out to reverse the decline in investment over the last three years…"

Another key mechanism to boost infrastructure is the creation of a new public investment system, which will streamline the approval process within the public sector. We have made profound changes to this system and now it includes a digital platform by which local authorities will be able to prioritise investment projects according to different sets of criteria such as poverty, connectivity or agricultural productivity. Other measures adopted include the standardisation of procedures, in order to give greater predictability to the planning and execution of investments of local and regional governments.

We also have refocused the 2017 national budget, which includes 40 large projects for S/100million, of which over half are already tendered and could start construction soon. Those projects include Puerto Bermudez-San Alejandro highway (S/379 million), Olmos new city (S/243 million) and Dv. Negromayo – Dv. Yauri highway (S/113 million). Likewise, budgetary measures have been adopted to shorten the deadlines and procedures for making transfers to regional and local governments during the first quarter of 2017, in order to break the seasonality of public investment.

Bureaucracy, corruption and political decentralisation are major problems; how will your government overcome these challenges?

AT: In October 2016, the Peruvian Congress granted the Executive Branch extraordinary powers to legislate for a period of 90 days. So far, the Ministry of Economy and Finance has managed to enact a series of legislative decrees with the aim of simplifying the regulatory framework for the implementation of public investment projects, to streamline the process for public private partnerships and to restructure Proinversion. The target of these changes is to eliminate red tape in the approval process of public investment projects and, thus, accelerate their execution. Besides, the intention of the government is that Proinversion becomes a specialised PPP unit, in line with more developed units from Canada, Australia and New Zealand.

In order to strengthen the efficiency of the public sector, the Executive Branch has been promoting the coordination between different levels of governments, through joint work with regional governments in periodic forums called "Executive GORE". Two of these forums have been held so far and their outcomes have been positive as they have allowed ministers to plan work with the governors of each region on issues that are crucial to their development, such as deployment of infrastructure and the execution of social projects.

As for fighting corruption – an illness that our region struggling to overcome now more than ever – as part of the legislative powers, the government is set to strengthen our judicial system and ban any company from contracting with the State which has been proven guilty of corruption charges or has directly admitted to wrongdoing. The current administration has made the fight against corruption one of its main pillars and is fully committed in reassuring investors that we will not tolerate it.

How will you attract international investors?

AT: Aside from having a solid macroeconomic environment, Peru has a favourable investment and business climate. Our legislation offers equal treatment to both foreign and domestic investors, and provides legal stability to each company that decides to do business in our country. Peru has also a friendly tax framework for long-term and large-scale investments which increases the project’s financial and social returns. However, it does not mean that Peru is a fiscal or business paradise where any enterprise could achieve their investment goals without observing the law.

With that being said, we still have plenty of room to implement changes to improve the way business is done in Peru. Recently, the government has adopted two key measures to reduce red tape, which include the modification of the operating license framework law and the general administrative procedure law. Regarding the former, it is no longer required to request a modification, extension or new operating license when the owner of the premises develops another related business. Also, correspondent cashier activities and other activities that promote financial activity are no longer required to modify the operating license. Finally, businesses can now choose to have a license in either a corporate or individual form. With regards to the latter, the main objective is to simplify, optimise and eliminate administrative procedures within government through the modification of the regulatory framework. For example, the new law establishes a period of 9 months for sanctioning administrative processes and adds electronic administrative procedures.

Peru’s large informal economy has negative impacts from house building to tax collection; how will you formalise it?

AT: Greater formalisation is the most effective policy tool for the Peruvian economy to increase productivity and overall growth. At present, two out of every three workers are employed in the informal sector and are consequently without access to social services. The World Bank estimates that informal workers who transit towards formal jobs in the economy experience an average increase of 54% in their productivity. By extension, it is apparent that the most effective way to induce higher productivity levels is by promoting formalisation of the economy.

Unfortunately, informality has been under-researched and few economies have made a successfully rapid progress towards formalisation. The Kuczynski administration intends to promote formalisation by reducing the recurrent costs of being formal, boosting credit, and removing the salaries tax from formal employment. The government’s target is to increase the formal workforce participation to 45% of the national workforce, from 25% at present, by the end of its term of office.

To complement this push towards greater formalisation, the government is instilling a credit revolution, making credit accessible to SMEs in a way which it has not been seen before. The extraordinary powers that were granted by Congress have allowed the current administration to pass a reform on factoring, allowing firms to sell their invoices in a centralised market managed by the Lima Stock Exchange. Capital gains on these invoices are taxed at the lower rate of 5% that is applicable to all other financial instruments and highly liquid capital could even be regarded as tax-exempt. In addition, the government is working with COFIDE, Peru’s development bank, to make credit accessible to SMEs: COFIDE is taking the first loss on commercial-bank loans granted to SMEs. The government is also implementing a number of important tax changes that should create a situation where workers feel incentivised to migrate from the informal sector to the sector.