Strengthening the Design and Capacity of the Transportation Sector in Peru
Peru´s economy has been doing modestly well with an average growth rate of 5.9% over the past decade and has consistently outperformed its neighbours.1 Nevertheless, it could have done better had its transportation sector been more resilient as an efficient transportation sector holds an overriding importance in the development of an economy. It helps in the expansion of the national markets and enables integration of economic systems.
According to the Chamber of Commerce of Lima, Peru could have been a potential trading hub on the west coast of South America2, leveraging economic merits. However, it lacks an adequate transportation infrastructure, among other deficiencies, which over the years has made it difficult for Peru to attract foreign companies.
Through this document, you will be informed about the transportation sector in Peru, the underlining problems of the sector, the necessary course of action to improve the design and capacity of the sector, and the EU-Peru bilateral relations and projects related to the sector.
Who is this document for?
This document is structured to provide relevant information to the following:
Policymakers working in restructuring the transportation sector;
Market players operating in the transportation industry; and
Potential EU investors who are considering Peru as their investment destination.
Since the early 2000s, the transportation sector in Peru has had a myriad of problems. The cities have become highly populated and unsustainable and require major restructuring. This has resulted in higher congestion, average travel times, traffic accidents and transportation costs. In addition, the roads are full of obsolete vehicles that have a detrimental impact to the environment. As per data from the Municipality of Lima, 40% of the transport vehicles in Lima are at least 21 years old3. In the outskirts, there is still a problem of road connectivity, thus, restricting the participation of economic players. However, by bettering the institutional framework, improving the governance, and increasing the capacity in sustainable transport, Peru can overcome these issues.
Many funding agencies understand that Peru’s transportation issues give way to development opportunities. For instance, the EU, Inter-American Development Bank and the World Bank have been heavily involved in transportation projects to further the transportation sector. If there is a consistent flow of investments catered towards the transportation sector, it can entice foreign market players to participate.
In the upcoming levels, you will learn more about Peru´s transportation sector and the EU-Peru regional cooperation.
Peru´s transportation at a glance
Peru´s transportation sector is growing and fostering economic activities. According to the National Institute of Statistics, in 2016, the transportation industry increased by 2.30%. This expansion is factored by a 3.05% increase in air transport, 4.26% in railway transport, 2.11% in passenger transport, and 0.74% in port transport.4 The government has supplemented this growth with policies in the hope of bettering the economy. The information presented below provides a general understanding of the popular means of transportation and government intervention.
Peru has an extensive road network system of 72,887 km. The main transportation routes include Pan-American Highway, the Central Highway and the Marginal Highway, which runs the length of the country down the cost; connects the capital, Lima, to the Andean highlands; and goes through the north-eastern jungle region. Even though the roads have limited capacity, the number of automobiles has been increasing at an alarming rate since the 1990s. In the 2000s, the number doubled, making transportation difficult. Nonetheless, the government has had a liberal policy towards the import of vehicles. Over the long run, this could create more road transportation woes. Having import tariffs on vehicles and investing in road-expansion projects could be a suitable approach to discourage congestion and minimise current problems.
Peru has 234 airports. The main airport, situated at the heart of the capital is Jorge Chavez International Airport, which has been privatised along with 5 other airports to maximise transportation efficiency. The move behind privatisation is that the airport infrastructure development would improve and help to boost tourism and foreign trade. Of course, improving the air transportation is necessary as the aviation industry plays an important role in contributing to the GDP. In 2017, the aviation industry contributed €3.1 billion to the economy (2.1% of the GDP), employing over 280,000 jobs; thus, becoming one of the important pillars of the economy.
The market is characterised by high levels of competition due to the growing presence of low-cost carriers, which continue to expand their services within Peru and internationally, contributing to accessibility and an overall higher transit rate. The government intends to keep it this way to ensure affordability and accessibility to many.
The importance of Peru as a shipping hub has been noticed globally. It has one of the largest port facilities in the world in Callao. Peru also has three large river ports: Iquitos, Pucallpa, and Yurimaguas. Iquitos is located on the Amazon River, while the other two ports are located on major tributaries. The Peru government has plans on improving the container supply chain, automation, digitalisation and innovation in this port transportation.
Improving efficiency and closing the infrastructure gap
It is evident that Peru has an infrastructure gap. The government effort is under way to address the gaps and the institutional inefficiencies. They have been committed to meeting the logistics and transport needs to improve the sector by increasing its budget, which set aside almost €91 million for road, air and port infrastructure development in 2019. The government also expects to land additional funds from the private sectors and foreign players. By closing the gap, the idea is to improve the country´s image as a business destination.
Furthermore, the government has also mobilised its plans for road expansion. With the intention of facilitating local road access, it has pledged to invest €505 million to upscale rural roads in 24 regions and 100 provinces in its Subnational Transport Support Programme Project. This means that over 2200 km of roadways will be maintained.5
In regard to air transportation, one of the government’s plans is to restore the non-commercial Marcona and Chimbote airports and rebuild airports in Ilo, Jauja, Jaén, Tingo María, Huancayo, Rioja and Yurimaguas for cargo shipment. If this plan is fully operational, it can reduce the costs by 30%. This would provide maximum leverage to boost the exports, which is expected to reach €50 billion, a significant increase from €34 billion in 2017.
Aligned with the government plans, the actions identified by state investment promotion agencies incorporate projects related to port, maritime, road and railway infrastructure. An estimated €3.6 billion will be invested in these areas. The implementation of these projects will result in extensive road networks, improved maintenance, bridge building, and new road development.
Peru: EU´s business destination
The EU and Peru have a good history of economic activities. In 2011, the two economic entities concluded trade negotiations6, with the aim of opening up the markets on both sides and increasing economic activities. In addition to trade and investment, the agreement also focuses on sustainable development and regional cooperation. The agreement’s benefits will reach far beyond the scope of the parties’ €16 billion trade relationship.7 The benefits of having close cooperation and trade are mutual:
Makes a good destination for EU-private destination;
Opens the markets for goods, services, government procurement and investment;
Betters the conditions for trade through new rules on non-tariff barriers, competition, transparency and intellectual property rights;
Enables a stalwart and predictable environment for businesses with a bilateral dispute settlement mechanism and a mediation system for non-tariff barriers;
Helps in the competitiveness, innovation, production modernisation, trade facilitation and technology transfer;
Ensures high levels of labour and environmental protection, which includes a transparent arbitration system and procedures to engage with civil society; and
Provides technical assistance and capacity-building initiatives, which looks at competitiveness and innovation in Peru.
EU- Peru collaboration in the transportation sector
The EU has also been effective in Peru and other Latin American countries. In 2019, it started the project EUROCLIMA+, under the framework of its Forests, Biodiversity and Ecosystems component, which implemented three binational projects in Peru, together with Costa Rica, Honduras and Bolivia. As far as transportation projects are concerned, a project on Preparation of the Sustainable Urban Transport and Mobility Plan for the Provincial Municipality of Arequipa was mobilised.8 The main objective of this project was to develop a city model which promotes sustainable modes of transportation. It aimed at improving urban mobility systems, reducing travel times and articulating an Integrated Transportation System, reducing the consumption of non-renewable energy and improving alternative use of the road system to foster healthier modes of use.
EU, as a co-financing partner, is investing in a project Urban mobility project in Peru (2019 - 2023). The goal of this project is to help in the reduction of carbon and other polluting emissions, travel time, transport costs and traffic casualties. The project enhances competition and the quality of life in Peru's urban areas by improving the urban mobility systems, reducing the effects of climate change and developing institutional capacities of the different stakeholders involved in bettering the transportation sector.9
The goal now should be to attract more investments in the transportation sector. The Peru government, with more sense of urgency, should try to prioritise investment in this sector so that it creates a favourable climate for the private players to operate. The hope is, with the improving transportation sector, the investment will help derive more business activities and create jobs in the process. This should be exciting news for European firms.