Leadership and Democracy LabWestern Social Science

Overview of Climate in Peru for Foreign Investment in the Energy Sector

October 17, 2016

Bethany Hernandez Mayorga - Article Contributor and Analyst following Peru

Sharvil Medhekar - Article Contributor and Analyst following Peru

Roann Enriquez - Article Contributor and Analyst following Peru

Mehek Noorani - Article Contributor and Analyst following Peru

Sydney Scott - Article Contributor and Analyst following Peru

Rebecca Yang - Article Contributor and Analyst following Peru

Marko Gombac - Article Contributor and Analyst following Peru

Jacob White - Article Contributor and Analyst following Peru

Alexa Bran - Article Contributor, Editor and Team Leader following Peru 

Key words: energy sector, peru, Pablo Kuczynski, natural gas, oil, hydropower, solar power, Proinversión, risks, foreign investment  

Peru is in the midst of economic growth, and its social and economic climate indicate a concerted effort to modernize and reform itself. It is a complex country seeking an increase in private sector investment, for which the country must first be fully contextualized.

POLITICS

Peru has a presidential representative democratic republic. As of 2000, presidents are not eligible for re-election on 5 year terms. The current president of Peru is Pedro Pablo Kuczynski who leads the centre-right party “Peruvians for Change” and was elected in April 2016. The Peruvians for Change party’s objectives are to provide trusted, efficient, safe and sustainable energy while also promoting the use of all energy resources available in the country. It looks to solidify current trade relations, and establish trade agreements with other states, namely Turkey and India. Additionally, it plans to double domestic and international investment in Peru and increase the number of Peruvian companies trading internationally by investing in creating high quality exports.

The majority in congress is held by a right-wing party called Popular Force. Popular Force’s focus is on promoting natural gas and safe energy, given the frequent occurrence of oil spills and overall damage caused by pollution. The second largest bloc in congress is the left-wing party Broad Front. Broad Front looks to increase and support international trade, support the internationalization of Peruvian companies, and move towards clean and renewable energy.

MILITARY

The military of Peru is currently composed of the Independent Army, Navy and Air Force constituents.

The military, historically allied with the oligarchical governments of Peru, has been a prominent force throughout the nation’s history. Military coups have always played a role in impeding attempts to form civilian constitutional governments. Previous alliances between the government and military caused widespread national corruption. Economic challenges worsened the quality of life for Peruvian citizens, resulting in political and social discontent. Human rights activists have accused the Peruvian armed forces of committing widespread human rights violations through anti-terrorism crackdowns in the past, most recently during president Alberto Fujimori’s reign from 1990 to 2000. These severe measures included massacres where entire villages were destroyed and thousands of innocent Peruvians were jailed, whereupon some were known to be subjected to torture and rape.

The military of Peru has proven to be loyal to its government. Supporters of the current Peruvian government, led by Pablo Kuczynski, emphasize Kuczynski’s reputation as an “honest professional” in a nation where numerous politicians are viewed as corrupt. It is hoped that he will utilize Peru’s armed forces to protect the people against both internal and external threats.

SOCIAL SITUATION

At the moment, the social situation in Peru is quite tense as indigenous groups are  holding referendums against mining projects proposed by the government. The propositions concerning the construction of mining, energy and lodging industries conflict with the desires of the Peruvian Amerindians. That is to say, construction of these industries directly affect the living and social situations of the indigenous peoples within Peru. The Law on the Right of Consultation of Indigenous Peoples, passed in 2011, requires that certain companies wishing to develop land first consult the ancestral population of that land. However, negotiations have been anything but fruitful. Further, three oil spills from the same pipeline occurred in 2016 in the Peruvian Amazon. This has had the impact of restricting fishing and travel for the indigenous populations surrounding the affected areas.

Peru is now tied with Colombia as the world’s leading cocaine producer and exporter, which has only made security matters worse for the country. Drug use and trafficking, through terrorist groups such as Sendero Luminoso, or “Shining Path,” have become a major source of concern for both the Peruvian people and the government. The situation is such that Peru recently reinstated a highly controversial policy which allows their military to shoot down planes suspected of carrying illegal drugs. Despite economic expansion and a dramatic drop in poverty rates, a quarter of the population continues to live in poverty. Lastly, child sex tourism and forced labour industries are flourishing in the small country, adding to the already tense social climate.

ECONOMY

Classified as an upper middle income country by the World Bank, Peru is one of the strongest economies in Latin America. With a low inflation rate averaging at 2.9% and an expected economic growth rate of 3.7% by the end of this year, it is apparent that Peru is amongst the leading economies in its region. Peru’s economic vigor has been a result from its success in exporting copper, gold and zinc through its strong mining industry.

China is a leading recipient of Peru’s exports. Peru was impacted by China’s economic slowdown in 2015, as it contributed to lower copper demand and prices. Peru has also borne negative consequences of foreign investments from China, such as the Las Bambas project led by China’s Minmetals.

In order to combat these recent adversities, Peru has focused on investing in its economy by means of large mining projects and public infrastructure initiatives. Policy makers hope that these new developments will result in increases in domestic demand to counter the effects of the slowdown in exports.

ENERGY SECTOR 

The World Bank Group / International Finance Corporation’s Doing Business Report 2013 ranked Peru second in Latin America and 42nd worldwide out of 189 economies. This indicates that Peru has a highly favorable environment for foreign investment in its industries, including the energy sector. Relative market openness for energy can be traced back to former president Fujimori’s decision to reduce the state role in energy in 1990. Fossil fuels (oil, natural gas and coal) dominate the total primary energy supply for Peru, generating about 75% of its energy. Bioenergy and large hydro account for about 9 and 15 % respectively, while other types of renewable energy account for 0.03 %.

Interestingly, there is declining interest in oil exploration, which indicates that other energy sources are experiencing increased investment. There is an opportunity to invest in natural gas as an alternative, as Peru has the sixth largest reserve in Latin America.

Some barriers to private sector participation in energy generation do exist. However, both the supply and generation market are not yet monopolized by one or a set of actors, which is a strong incentive to invest. 

ProInversión, associated with the Peruvian Ministry of Economy and in charge of promoting private investment, is working to incentivize investment through a two-step privatization and concessions program. In Peru 69% of electricity is owned by the private sector. 

There are three main trends in new technology in the Peruvian energy sector, all aimed at the extension of the power and energy grid in Peru. Currently, 9 % of Peru does not have access to energy. Green microfinancing and green loans, micro hydro, picoPV systems and micro solar are the primary vehicles of change in Peru. Green microfinancing and green loans work to provide energy to the impoverished segments of Peruvian society, and work similarly to other microfinance models. Micro hydro is hugely important, as hydropower provides 52.3% of the electricity mix to Peru. Micro hydro plants are inexpensive and supply large amounts of energy with even small flowing streams. 

One market in the Peruvian energy sector that has high potential is solar power. Peru currently has minimal investment in solar power, but this sector is positioned for growth as the mountain ranges in the south have some of the largest potential yield for solar power technology globally. This is where picoPv and micro solar comes into play. These technologies are a cheap way to harness solar energy and improve the rural electrification rate.

In conclusion, Peru is a country with various opportunities for private investment in the energy sector. The government remains open to investment, and is actively pursuing investors to expand its energy sector. In this mood, Canada and Peru have signed a free trade agreement, which allows Canadian investors easier access to the energy sources.  However, the country is not without its problems, but still remains one of the more stable and stronger economies in Latin America.