PERU INVESTMENT CLIMATE PROJECTS
EVALUATION
Enterprise Research Institute
January 2004
TABLE OF CONTENTS
1.
INTRODUCTION .............................................................................................4
2.
METHODOLOGY OF THE PERU INVESTMENT CLIMATE STUDY .....4
3.
INVESTMENT CLIMATE CONTEXT...........................................................5
POLITICS AND THE MACROECONOMY ............................................................................ 5
QUALITY OF INFRASTRUCTURE ...................................................................................... 7
STATE OWNERSHIP OF ENTERPRISE & THE PRESENCE OF MONOPOLIES ....................... 7
TRADE ENVIRONMENT ................................................................................................... 8
THE FINANCIAL SYSTEM ................................................................................................ 8
4.
WORLD BANK INVESTMENT CLIMATE STRATEGY IN PERU –
COUNTRY ASSISTANCE STRATEGIES ...................................................10
COUNTRY ASSISTANCE STRATEGY (CAS): 1994 .......................................................... 10
COUNTRY ASSISTANCE STRATEGY: 1997 ..................................................................... 11
COUNTRY ASSISTANCE STRATEGY: 2002 ..................................................................... 13
5.
WORLD BANK INVESTMENT CLIMATE STRATEGY IN PERU – SECTOR
WORK.............................................................................................................13
ESTABLISHING A COMPETITIVE MARKET ENVIRONMENT IN PERU (1993) ................... 14
PERU PRIVATE SECTOR ASSESSMENT 1994 “TRANSACTIONS WITHOUT TRUST” ............ 14
COUNTRY ECONOMIC MEMORANDUM: 1994 ............................................................... 16
HOW PROBLEMS IN THE FRAMEWORK FOR SECURED TRANSACTIONS LIMIT ACCESS TO
CREDIT: 1997 ............................................................................................................... 16
2003 MICROECONOMIC CONSTRAINTS TO GROWTH.................................................... 17
6.
LENDING ACTIVITIES ................................................................................18
1994 TRANSPORT REHABILITATION PROJECT ............................................................. 18
1995 RURAL ROAD REHABILITATION & MAINTENANCE PROJECT .............................. 19
1997 JUDICIAL REFORM PROJECT ............................................................................... 20
1999 FINANCIAL SECTOR ADJUSTMENT LOAN ............................................................. 20
STILL ACTIVE WORLD BANK LOANS ............................................................................ 21
1998 URBAN PROPERTY RIGHTS PROJECT ...................................................................... 21
7.
EVIDENCE REGARDING PERU’S INVESTMENT CLIMATE................23
OVERALL OUTCOME .................................................................................................... 23
BUSINESS’S PERCEPTION OF PERU’S INVESTMENT CLIMATE ....................................... 25
OED PERU COUNTRY ASSISTANCE EVALUATION: 2002 .............................................. 28
8.
CONCLUSIONS .............................................................................................29
Figures
FIGURE 3.1
INFLATION (GDP DEFLATOR, %) .............................................................. 5
FIGURE 3.2
GDP GROWTH (ANNUAL %)...................................................................... 6
FIGURE 3.3
IMPORTS, EXPORTS, & TRADE BALANCE OF GOODS & SERVICES (% OF
GDP)
8
FIGURE 3.3
COMPARATIVE GROSS CAPITAL FORMATION ............................................. 8
RATIO OF PRIVATE SECTOR CREDIT TO GDP (%).............................................................. 9
FOREIGN DIRECT INVESTMENT (% OF GDP) ................................................................... 10
Tables
TABLE 3:2 REGIONAL INTEREST RATE SPREADS ............................................................... 9
TABLE 7.1 RANKING OF THE MOST SEVERE OBSTACLES TO GROWTH BY FORMAL PRIVATE
SECTOR BUSINESS ................................................................................................... 25
TABLE 7.2 CONTRACT ENFORCEMENT (FORMALITY OF PROCEDURES AND TIME TO
RESOLVE DISPUTES)............................................................................................... 26
TABLE 7.3 HIRING AND FIRING WORKERS (2003)......................................................... 26
TABLE 7.4 CLOSING A BUSINESS (2003)....................................................................... 26
TABLE 7.5 BUSINESS START-UP: NUMBER OF PROCEDURES .......................................... 27
1.
1.1
The purpose of this evaluation is to assess the World Bank’s investment climate
strategy and its implementation in Peru over the past ten years. The paper focuses
on whether the investment climate strategy correctly identified priorities, whether
such identification translated into appropriate projects and sector work, and how
well the strategy was implemented.
2.
2.2
METHODOLOGY OF THE PERU INVESTMENT
CLIMATE STUDY
An evaluation of investment climate policy presents a particularly challenging task,
as attribution of cause and effect can only be done indirectly. Many factors not
directly related to investment climate issues influence how the private sector
behaves. For example, over the 1992 – 2003 period covered by this paper, business
risk was increased by uncertainties arising from macroeconomic instability,
terrorism, political instability, and external shocks. Separating out this “noise”
from investment climate interventions in a manner that allows a direct attribution of
outcomes to World Bank programs is difficult. The paper therefore takes an
indirect approach to evaluation by examining the weight that investment climate
issues were accorded in the various strategy papers, country papers and projects
and how the investment climate evolved over the period being reviewed as
evidenced by investment climate indicators and interviews. More specifically,
evaluating the investment climate interventions in Peru was based on:
•
•
•
•
•
2.3
INTRODUCTION
An analysis of World Bank country strategy and technical assistance
documents dating from 1992 onwards that contained investment climate
recommendations. These included country assistance strategies, a private
sector assessment completed in 1994, country programs, sector work and an
investment climate assessment completed in 2003.
An evaluation of World Bank projects that had investment climate
components over the same period
Reviewing investment climate indicators and the results of a recent investment
climate assessment.
During a mission to Peru, a broad cross section of business people were
interviewed regarding the evolution of issues and problems related to the
business environment. These included members of representative business
bodies, individual business people, and financial sector representatives. In
addition, government officials as well as quasi government bodies were
consulted on the effect of World Bank investment climate interventions.
The scope of the review includes the legal and regulatory environment as well
as financial market development and property rights.
Unavoidably, much of the analysis must be based on judgments rather than “hard”
empirical evidence. The report gives special attention to the importance of the
institutions that are the basis of market economies. Since the mid-1990s there has
been a growing body of research that shows the importance of institutions in
economic growth. However, guidance on actual institutional reform is not so well
developed. “Our understanding of reform strategies remains in its infancy,
especially in light of the growing understanding that different institutions might be
appropriate in different circumstances.”1
3.
INVESTMENT CLIMATE CONTEXT
POLITICS AND THE MACROECONOMY
3.1
When President Fujimori was elected in 1990, the country was verging on total
disintegration. Hyperinflation, multiple exchange rates, the nationalization of the
banking system and a vicious terrorist movement had resulted in economic
collapse. The foreign debt had been repudiated, law enforcement had broken down
and transport communications between different parts of the country had almost
stopped from fear of crime and terrorism. Widespread strikes paralyzed the cities
and state services were in virtual collapse. Per capita incomes fell to the levels of
the 1950s. The impact on the private sector was catastrophic – anti-business
legislation, the breakdown of public goods endemic corruption caused a collapse of
business activity. Sharp increases in poverty pushed many into the informal sector,
which employed over 50 per cent of the economically active population in low
productivity and low wage occupations.
3.2
When Fujimori took
80
office, he declared war
70
on terrorism and his
60
government embarked
50
on
the
most
40
comprehensive
30
economic
reform
20
program
in
the
10
country’s
history.
Market mechanisms
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
were introduced in
Source: World Development Indicators
every sector of the
economy. Macroeconomic policies were directed at stabilizing prices in the face
of rampant inflation, large scale privatizations were announced, negotiations with
foreign creditors were opened, and the exchange rate was unified. Labor market
rules were changed, foreign investment restrictions were liberalized, intellectual
property rights were strengthened, government spending was cut and attempts were
Inflation (GDP Deflator, %)
Annual %
Figure 3.1
1
Appropriate Institutions, (2002) Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei
Shleifer, mimeo, p23
made to increase the tax yield. The capture of the leader of the Sendero Luminoso,
the largest terrorist group, resulted in the virtual elimination of terrorist activity.
The result was a retreat from hyperinflation as price stability began to be restored.
Foreign capital returned to participate in the privatization program.
Figure 3.2
The
economy
responded to these
initial reforms. Growth
surged over the 1993 –
1997 period, inflation
continued to decline,
foreign
investment
remained buoyant and
poverty levels fell.
GDP Growth (annual %)
14
12
10
8
Annual %
3.3
6
4
2
0
-2
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
-4
3.4
-6
During
Fujimori’s
second term, however, Source: World Development Indicators
conditions deteriorated. External shocks, the El Niño effect, and reversals in the
reform program all served to weaken the economy, increase uncertainty and
damage the investment climate. The government’s privatization program came to a
virtual halt as Fujimori increasingly bowed to public pressure. In addition, in
engineering a third term in office, he severely weakened Peru’s institutions –
including the media, political parties, and, most importantly, the courts, which
increased business uncertainty. During the presidential campaign, Fujimori was
implicated in intimidating political rivals and soon after his election to a third term
there was a severe political crisis that resulted in the government falling and
Fujimori fleeing the country.
3.5
A new government was elected in April 2001 – President Alejandro Toledo came
to power promising to improve the economy and eradicate government corruption.
The moribund state of the economy, however, has made the task especially
difficult and confidence in the government began to erode almost immediately. In
particular, policy reversals have added to uncertainty. The government has
changed its stance on several important issues in response to public opinion. The
country has experienced a number of strikes and Toledo’s support has declined
precipitously – even after recent increases only 17 per cent approved of the way
that he is handling the presidency2. Attitude surveys indicate that the business
community does not have confidence in the government, which it views as unstable
and anxious to appease populist sentiment at the expense of continuing reform.
The result has been a sharp decline in investment.
2
El Comercio. Martes 18 de noviembre del 2003. Tema del día. Lima, Perú.
QUALITY OF INFRASTRUCTURE
3.6
Over the 1990s, Peru’s infrastructure has improved. The reliability and availability
of electricity has increased and telephone services have improved – there was both
these sectors were But, large parts of the country still have unreliable water
supplies, and poor transport infrastructure. Some forms of infrastructure – such as
telecommunications and electricity – have been privatized. But in most cases, the
purchasing company has been provided a private monopoly (complete or regional.)
Costs are therefore high even though service as improved. Electricity supply in the
major cities is now more reliable, although large parts of the rural areas are not
electrified. Peru also has about 73,000 kilometers of roads. But only 13 percent of
them are paved, indicating a marginal increase from 1990 when it was 9.9 percent.
The number of telephones (both land line and mobile) has been on the increase.
Mobile phones have registered particularly rapid growth– but this could indicate
the poor reliability of the “land” telephone system in Peru. Over the last decade, the
number of people waiting for telephones has reduced from 376,396 in 1990 to
29,574 in 1999. But the numbers are still large and as recently as 1999, the average
waiting period for a landline was 1.25 years3.
STATE OWNERSHIP OF ENTERPRISE & THE PRESENCE OF MONOPOLIES
3.7
Peru’s economy was state dominated prior to 1990. From 1966 to 1990, the
number of state owned enterprises increased from 29 to 177 and the state had
shares in 226 enterprises from oil and electricity to telecommunications and
fisheries4. Most were running at a loss and by 1989 aggregate losses had reached
US$531 million5 or 2.6 percent of GDP. All utilities were publicly owned. SOEs
accounted for 9 percent of GDP and 2 percent of employment6.
Table 3-1: Support for privatization in Lima by socioeconomic level
Average Monthly Household Income in Lima
Sept
1991
Feb.
1992
Dec.
1993
Dec.
1994
Dec.
1995
Dec.
1996
Dec.
1997
High Income (US$3,200 – 5,000) 4.5% of
households
87
83
84
80
77
65
67
High
Middle
households
65
81
73
64
66
46
42
Low Middle (US$330 – 470) 33 % of households
55
63
58
45
43
39
25
Low (US$200-240) 43% of households
37
42
49
36
42
40
19
TOTAL
Source: Alcázar, Xu, and Zuluaga
52
59
-
48
49
42
28
3.8
(US$750-1,150)
19.5%
of
Fujimori’s government committed to privatization and moved aggressively on its
agenda by offering all of its state-owned enterprises for sale. By the end of 1993,
the government had privatized 19 companies and garnered US$522 million in
World Development Indicators Database.
The World Bank. 1994. Peru: Public Expenditure Review. Washington, D.C. p. 4
5 Ibid. p. 4
6
Ibid. p. 11
3
4
revenue for the sales. By 1998, 80 percent of Peru’s state-owned enterprises had
been sold, but opposition to the sales was growing – anxious to build support for
reelection, Fujimori reduced the pace of privatization.
3.9
The Toledo government has continued to back down on the sale of state assets, the
privatization process has made little progress recently, and the government is
increasingly using concessions.
TRADE ENVIRONMENT
Figure 3.3
Imports, Exports, & Trade Balance of Goods & Services (% of GDP)
3.10 Peru’s level of 20
trade
as
a
percentage of GDP 15
(29.6 percent) in 10
1990 was lower
than the average 5
for low income 0
countries
(38.5
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
percent) and lower -5
than most in the
-10
Latin
American
Exports of G&S (% of GDP)
Imports of G&S (% of GDP)
region.
While Source: World Development Indicators
External balance on G&S (% of GDP)
Peru’s
exports
were more diversified than most Latin American countries, they were mostly
primary or processed primary products. The principal exports were and remain
gold, petroleum, copper, lead, coffee, silver, fishmeal, zinc, sugar, and iron ore.
3.11 Over the course of the 1990s, Peru has reformed what was a highly complex and
distortionary trade regime. By 2000, import duties averaged 11 percent. The
actions of the government over the 1990s were important in reducing misallocation
of resources, ensuring the import of foreign techniques, and increasing standards.
THE FINANCIAL SYSTEM
Figure 3.3
30
25
20
% of GDP
3.12 In 1992, domestic
credit to the private
sector was 9. 3 percent
– a level much below
the average for low
income
countries
reflecting a severely
underdeveloped
financial
system.
Gross
capital
formation stood at
17.3 percent, well
below that of even low
Comparative Gross Capital Formation
15
10
5
0
1990
1991 1992
1993
* Missing Data
Source: World Development Indicators
1994
1995 1996
1997
Peru
Middle income
1998
1999 2000 2001*
Low income
High income
income countries (23.8 percent).
Figure 3.4
Ratio of Private Sector Credit to GDP (%)
% of GDP
140
3.13 The indicators of
financial
market
120
maturity – the ratio
100
of private sector
80
credit
to
GDP,
60
interest rate spreads,
40
market capitalization
–
all
generally
20
improved over the
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
1990s but overall
Peru
Low income
Peru’s
financial Source: World Development Indicators
Middle income
High income
system
remains
immature
when compared with countries of Table 3:2 Regional Interest Rate Spreads
similar income levels. Private sector
INTEREST RATE SPREAD (LENDING
2001
credit, rose to 28.6 percent of GDP in
RATE MINUS DEPOSIT RATE)
1999. But after 1995, private sector
Argentina
12.4
lending
became
increasingly
Bolivia
11.1
dependent on short-term external
Brazil
43.5
debt. As the contagion of the Russian
Chile
4
debt moratorium in 1998 caused
Colombia
7.4
credit lines to be withdrawn, banks
Ecuador
9.6
began to fail or be consolidated into
Mexico
6.5
larger ones while interest rates
Paraguay
15.8
continued to increase. As bank crises
Peru
10.5
mounted, private sector lending
Venezuela
7.6
decreased from the banking system
Source: World Development Indicators Database 2003
fell by the equivalent of 5 percentage
points of GDP between 1999 and 2001. To minimize default risk, banks generally
lent only to those they know or those with real estate assets; and even then
demanded collateral that was worth several multiples of the value of the loan.
3.14 Gross capital formation was 18.3 percent of GDP by 2001, which is only 1 percent
higher than it was in 1992.
Figure 3.5
Foreign Direct Investment (% of GDP)
3.15 Privatization
and 8
other
structural 7
reforms resulted in 6
an inflow of long- 5
term private capital, 4
most of it in the form
3
of foreign direct
investment, which 2
increased
sharply 1
from 0.4 percent of 0
GDP in 1992 to the -1 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
equivalent of over 6 Source: World Development Indicators
per cent of GDP by the mid 1990s. The political crisis in Peru together with the
external shocks of the late 1990s, however, made investors wary of developing
country risks and FDI dropped off precipitously – in 2001 it was only 2 per cent of
GDP.
4.
WORLD BANK INVESTMENT CLIMATE STRATEGY
IN PERU – COUNTRY ASSISTANCE STRATEGIES
COUNTRY ASSISTANCE STRATEGY (CAS): 1994
4.1
The 1994 Country Assistance Strategy for Peru reviewed the policy reforms of the
new government including financial, trade, labor, privatization, and legal/regulatory
measures7. It also reviewed the changes established by the 1993 Constitution:
abolition of central planning, guaranteed pluralism unless specifically authorized
by law, cooperative promotion, promotion of mining, and requirements for a
consolidated budget, and defense of consumers8. It examined the agricultural,
energy, and industry sectors along with the privatization of state-owned
infrastructure, the poverty situation in Peru, and the environment. Finally, it
examined the macroeconomy and external environment.
4.2
The recommendations of the report for the World Bank’s strategy for Peru for the
1995 - 1997 fiscal years included:
•
7
Poverty Alleviation. All World Bank interventions in Peru would focus on
poverty reduction. They would alleviate poverty through private sector and
environmentally sustainable growth and investments in public goods.
The World Bank. 1994. Memorandum of the President of the International Bank for Reconstruction and
Development to the Executive Directors on a Country Assistance Strategy of the World Bank Group for Peru.
Washington D.C. p. 2
8 Ibid. p. 3
•
•
•
•
4.3
Infrastructure Development. Develop infrastructure to provide a basis for
private sector growth, and provide loans and advise the government to redirect
infrastructure expenditure towards the poor9.
Social Sector Development. The Bank would work with the government to
design and implement education and health programs to build institutions,
increase efficiency, and deliver services to the poor10.
Institution Building. The Bank aimed to assist the government in
decentralizing, increasing its capacity, and reducing its role in the economy.
Improving government efficiency was central to this effort11.
Macroeconomic Stability. The Bank would cooperate with the IMF in
assisting Peru in maintaining macroeconomic stability. The Bank committed
to making loans conditional on maintenance of macroeconomic stability.
With regard to the investment climate, the report stated
..although environment and private sector development issues
will not be areas of Bank concentration in the near-term, we
will be involved selectively, taking into consideration the roles
of partner institutions12.
4.4
The strategy did not take into account investment climate related sector work, in
particular the 1994 PSA that had been completed only a few months before the
CAS.
COUNTRY ASSISTANCE STRATEGY: 1997
4.5
This CAS reviewed World Bank activities in Peru from the previous fiscal years
(1994–97) and established the policy agenda for the FY1998 – 2001 period. The
report summarized the previous CAS’s priorities as macroeconomic management,
infrastructure and social sector development, institution building and support for
the government’s reform efforts. It mentioned the private sector:
Attention was also given to private sector development, as
the primary source of future growth, and to environmental
concerns, but these were not proposed as areas of primary
concentration in the near term13.
4.6
The CAS evaluated earlier Bank interventions and concluded that they had been
successful with the exception of activities related to building institutions. The CAS
pointed out that these efforts had been less successful because strengthening
institutions requires a much longer time horizon and is intertwined with political
Ibid. p. 16
Ibid. p. 17
11 Ibid. p. 17
12 Ibid. p. 18
13 Ibid. p. 14
9
10
issues14.
4.7
The report pointed out that despite positive reform and growth, serious issues
remained. The government’s priorities were threefold: decreasing poverty and
increasing social integration, institutional reform, and communication of the
economic reform program15. These goals would be achieved through:
•
•
•
•
•
•
•
•
•
4.8
The Bank ultimately looked to support the government in its poverty reduction
activities16. Its recommendations for action included supporting the government
in17:
•
•
•
•
•
•
4.9
15
Increasing spending on education and health.
Improving property rights through an urban informal land titling and
registration project.
Developing infrastructure through the transport rehabilitation and Lima water
and sewerage rehabilitation projects.
Improving rural development through increased productivity and improved
water use.
Promoting sustainable development through reduced pollution and promoting
the more efficient use of water.
Reforming institutions through encouraging a stronger regulatory
environment, providing ongoing support for privatization, decentralizing the
national government, and building capacity at the municipal level.
Although this report also states that private sector development is important it does
not have an investment climate focus. Poverty reduction was its main goal,
although there is not a specific analysis of how this could be achieved without
private sector led growth.
Ibid. p. 15
Ibid. p. 5
16 Ibid. p. 17
17 Ibid. p. 20
14
Improving access to health and education services.
Removing administrative barriers to land titling (rural and informal urban).
Improving infrastructure, particularly in the remote and poor areas.
Stimulating rural development through increasing access to health and
education services, improving infrastructure, and increasing land titling, as
well as productivity increases and improved natural resource management.
Improving the status of women and indigenous people.
Improving environmental controls to ensure environmental sustainability in
important sectors such as fishing.
Pursuing further privatization to improve efficiency and services.
Reforming the financial sector to reduce the role of the state and increase the
availability of loan instruments.
Public sector modernization through streamlining procedures, increasing
transparency, decentralizing public service provision, and judiciary reform.
COUNTRY ASSISTANCE STRATEGY: 2002
4.10 The 2002 Country Assistance Strategy outlines proposed Bank activities for the FY
2003-2006 period. The main purpose of the strategy is to support the government’s
program to renew growth and reduce poverty through improving governance, and
institutional reforms. Specific elements include:
•
•
•
Generating employment and increasing competitiveness by addressing
“barriers to private sector growth and increasing exports.”
Increasing access to health, education, culture and basic services.
Developing a transparent and decentralized state.
4.11 This CAS includes different lending scenarios depending on the actions of the
government and whether performance “triggers” are met. The triggers are:
maintenance of macroeconomic stability, increasing tax revenue collection,
portfolio performance, and public sector and competitiveness reforms as well as
decentralization. The low lending scenario provides for only social sector lending
whereas the higher lending scenario has a broader lending agenda.
4.12 A positive feature of this CAS related to the investment climate, is the stress on
including institutional projects during the CAS period including continued property
rights efforts as well as actions to modernize the judicial system.
4.13 An annex to the report includes a private sector strategy for Peru with the following
recommendations for policies to improve private sector growth:
•
•
•
•
More evenly distributing access to investment financing by providing for outof-court debt work out processes and allowing for the merging of Banks.
Supporting corporate restructuring through improvements to the bankruptcy
process and investment to increase exports and expand competitiveness
through improving quality standards and increasing productivity.
Improvements in infrastructure to decrease transport costs
Ensuring that resource-based industries are on a sustainable growth path.
4.14 While relevant to the investment climate in Peru, these recommendations do not
focus on issues that various surveys and sector work identified as priorities.
5.
5.1
WORLD BANK INVESTMENT CLIMATE STRATEGY
IN PERU – SECTOR WORK
The Bank engaged in a substantial amount sector work on investment climate
issues over the period under review. In 1993 a report on measures needed to
establish a competitive market economy was published. In 1994 a private sector
assessment was completed, outlining issues pertaining to the investment climate
and containing policy recommendations designed to deal with some of the
problems faced by the private sector. In 1997 a secured transactions analysis in
1997 made recommendations on ways to improve the functioning of Peru’s
underdeveloped financial markets. In 2003, an investment climate review was
published which analyzes problems faced by the private sector. These reports
provide benchmark data that allows evaluation of progress made to date. In
addition, a 1994 country economic memorandum focused on the immediate
problems facing the economy as a whole.
ESTABLISHING A COMPETITIVE MARKET ENVIRONMENT IN PERU (1993)
5.2
The purpose of this report was to assess the competitive environment in Peru. It
aimed to examine some obstacles to investment assuming that firms would be
unable to respond to the government’s reforms without their removal. The main
report recommendations included:
•
•
•
•
•
5.3
Increasing labor flexibility by rationalizing and changing labor regulations18.
Streamlining business creation requirements to make the process less
cumbersome and costly and strengthening the system of recording titles to
property to reduce barriers to credit19.
Removing preferential treatment for some sectors in tax policy20.
Repealing the Unfair Competition Law due to its redundancy, irrelevance, and
potential damage to the competitive environment along with the restructuring
of INDECOPI – the National Institute for the Defense of Competition and
Protection of Intellectual Property21.
Liberalizing petroleum prices and accelerating privatization in the sector.
This report outline the elements of a program necessary for Peru to become a
market-oriented economy, the government’s aggressive reform activities in the first
years of the Fujimori government.
PERU PRIVATE SECTOR ASSESSMENT 1994 “TRANSACTIONS WITHOUT
TRUST”
5.4
In 1994, the Bank completed a private sector assessment (PSA) for Peru. The report
used transactions costs and institutional analysis to identify constraints to private
sector growth in the early 1990s. The report recognized the progress Peru had
made in undertaking extensive privatization and reducing macroeconomic
instability. But it pointed out that Peru was still a “poor and divided country”. It
concluded that Peru lacked the institutions to facilitate “arms-length” contracting.
This resulted in the business community dealing primarily with those that they
knew22, which restricted new entrant into the formal sector and led to low
productivity and informality, one of the main causes of the high levels of poverty
that existed in Peru23. The report identified haphazard regulation, costly
infrastructure, lengthy customs procedures, a weak legal system and poorly
The World Bank. 1993. Peru: Establishing a Competitive Market Environment. Washington DC p. v
Ibid. p. vi
20 Ibid. p. vii
21 Ibid. p. viii
22 Hence the title Transactions without Trust.
23 The World Bank. 1994. Peru: A Private Sector Assessment. Washington, D.C. p. 2
18
19
protected property rights as severe barriers to the development of the private sector.
5.5
Specifically, the report examined:
•
•
•
5.6
The negative impact of labor regulation on employment and the high costs
that it imposed on businesses in Peru24.
The poor legal system and its impact on the business environment. It
concluded that the business laws were generally sound but weak enforcement
meant a legal system where justice was “uncertain, delayed, and costly25.”
It discussed the issues associated with land registries and the uncertainty that
this created. (See the Urban Property Rights Project for a description of the
issues.)
Given the government’s critical need to reinforce its credibility and improve the
investment climate, the report recommended that Peru needed to:
•
•
•
•
•
•
•
•
•
•
Privatize. Complete the privatization process, particularly given
infrastructure’s negative impact on business.
Simplify the Tax System. Simplify the tax system so reduce tax evasion and
broaden the tax base through increased compliance.
Improve Infrastructure. Improve infrastructure given its negative impact on
business and its persistent poor quality.
Increase Security. Improve the security situation by reducing crime and
terrorism given its impact on risk perceptions.
Maintain Macroeconomic Stability. Continue to keep inflation in check so
extreme instability did not return.
Reduce the Size of the Informal Sector. Direct policies at reducing the
incentives for informality so the informal sector could be absorbed and
enhance economic growth.
Extend Land Titles and Increase Credit. Speed up titling and registration of
property to extend the benefits of reform to the poor and allow collateral to be
leveraged for credit.
Strengthen the Legal System. Strengthen the legal system to make contracting
more robust and extend its use by business.
Simplify Regulations. Simplify existing regulations, publicize information on
legislation and rules, and renew its commitment to market-based reforms
given the high transactions costs that result from uncertainty and regulatory
burden.
Build Capacity and Decentralize. Encourage government institutions to
continue the reform process and redefine the role of the national government –
through privatizing or decentralizing activities.
For example, labor stability laws excluded contract workers but only allowed for 3 renewals of a contract
after which the person became a permanent employee. Many businesses employed contract workers but to
avoid the labor stability law, they would dismiss them all after 3 renewals because the costs of the labor stability
law exceeded the benefits associated with a trained and productive worker.
25 Ibid. p. 19
24
COUNTRY ECONOMIC MEMORANDUM: 1994
5.7
The CEM analyzed in some depth a number of issues facing the Peruvian economy:
Its recommendations included:
•
•
•
•
•
Reducing crime and terrorism through increased spending on law enforcement
and establishing property rights so people had something to defend. It did not
provide more than general suggestions of how to strengthen property rights,
however.
Maintaining economic stability through tight monetary policy, reintegration
with world markets, reducing uncertainty surrounding the tax regime, and
reducing the fiscal deficit.
Securing property rights through land titling, establishing an effective
judiciary, creating a market for water, and not intervening in private
contracting. These improvements would hopefully increase productivity.
Efficient poverty reduction through targeted health and education programs
and emergency programs for the very poor.
Maintaining or establishing a regulatory role in cases where monopolies
existed, primarily in telecommunications, electricity, fisheries, hydrocarbons,
and infrastructure26.
HOW PROBLEMS IN THE FRAMEWORK FOR SECURED TRANSACTIONS
LIMIT ACCESS TO CREDIT: 1997
5.8
This report analyzed the reasons for financial underdevelopment in Peru. It pointed
out that even large companies had limited access to credit. Small companies had no
access to credit at all. Farmers were also adversely affected – the inability to obtain
credit limited investment and reduced farm productivity and income. Access to
credit was limited to the value of real estate a borrower could offer as collateral
using a mortgage. In a small number of cases, borrowers could use warehouse
merchandise warrants and equipment pledges as collateral but use of these
instruments was restricted. The report attributed the problems to the inadequate
legal, regulatory, and institutional features of the Peruvian economy.
5.9
The problems in the secured transactions framework arose from the difficulties in
creating security interests in assets, in establishing priority over the pledging of the
assets, in publicizing that priority, and enforcing the security interest27. By
undertaking reforms of the secured transactions framework, the availability of
credit could be expanded and interest rates lowered. The report estimates that
appropriate reforms had the potential to impact one third of the capital stock and
significantly raise economic growth28.
Ibid. p. v and vi
The World Bank. 1997. Peru: How Problems in the Framework for Secured Transactions Limit Access to
Credit. Washington, D.C. p. iv
28 Ibid. p. 21-22
26
27
2003 MICROECONOMIC CONSTRAINTS TO GROWTH
5.10 In 2003, the Bank produced an investment climate assessment for Peru using the
manufacturing sector as a case study. This report identifies many of the issues that
had been flagged as obstacles to private sector development in the 1993
competitiveness, the 1994 private sector assessment, and the 1997 secured
transactions analysis. Those issues include29:
•
•
•
•
•
•
The high level of uncertainty associated with the regulatory and legal
framework and government policies. The level of uncertainty is driven by the
amount of interaction they have with the government – the more interaction
(e.g. inspections) the higher the level of uncertainty due to corruption and lack
of transparency. This uncertainty has the impact of reducing investment.
Those firms who compete directly with the informal sector, report lower
productivity and more tax evasion.
Significant corruption still exists particularly in public procurement and the
judiciary. The report notes, however, that the government has made efforts to
improve the stability of regulation by increasing the powers of INDECOPI
and to deal with corruption in tax collection and customs. But
The economy is still relatively closed – foreign trade is low, which is
impacting productivity through the lack of competition.
Logistical costs are high because infrastructure is in a poor state.
Credit is difficult and costly to obtain, particularly for SMEs, because
financial markets have low penetration and it is difficult to repossess collateral
in the event of default – due to poorly functioning asset registries and the
judiciary.
5.11 The report makes a number of recommendations, including:
Reducing policy uncertainty
Ensuring that the regulatory agency INDECOPI has sufficient resources
Making regulations more transparent
Increasing tax collections among informals
Improving judicial enforcement mechanisms
Reducing labor regulations
Reduce logistical costs
Improve access to credit through reforming the movable collateral
framework.
5.12 The analysis is of high quality, although some of the recommendations, such as
“increase foreign direct investment” are too general to have much operational
content. The report also does not incorporate earlier relevant sector work.
5.13 Many of the recommendations in the investment climate assessment are strikingly
similar to earlier sector work. One of the Peruvian reviewers for the investment
climate report, who was interviewed as part of this assessment said “we have
The World Bank. 2003. Peru: Microeconomic Constraints to Growth the Evidence from the Manufacturing
Sector. Washington D.C.
29
known these things for 10 years – why do we need another report to say the same
thing? The World Bank has ignored earlier reports on what needs to be done for
the private sector. Why were the issues that had been identified not incorporated
into policies?”
6.
6.1
LENDING ACTIVITIES
The World Bank lent US$2.9 billion to Peru over the 1992 – 2002 period. Of that
total US$900 million was for investment climate-related projects. The table below
summarizes the World Bank’s private sector-related lending and compares those
activities against the recommendations of the 1994 PSA. The lending activities of
the World Bank are summarized in the table below.
Table 6-1: World Bank Investment Climate Lending in Peru
LOAN AMT.
ICR RATING OED RATING
(US$ MIL.)
LOANS
YR.
Financial Sector Adjustment Loan
’92
400
HS
HS
Trade Policy Reform Loan
’92
300
HS
HS
Transport Rehabilitation Loan
‘94
150
S
S
Lima Water Rehabilitation and Management Project
‘94
150
NR
NR
Rural Road Rehabilitation and Maintenance Project
‘95
90
HS
HS
Judicial Reform Project
‘97
22.5
NR
NR
Urban Property Rights Project
‘98
38
Open
Open
Financial Sector Adjustment Loan II
‘99
300
HS
MS
Second Transport Rehabilitation Project
‘00
50
NR
NR
Second Rural Roads Project
‘01
50
Open
Open
National Rural Water Project
02
50
Open
Open
HS = Highly Satisfactory, MS = Moderately Satisfactory, S = Satisfactory, U = Unsatisfactory, NR = Not Rated
1994 TRANSPORT REHABILITATION PROJECT
6.2
30
The US$150 million Transport Rehabilitation Project supported the goal of the
1994 CAS to rehabilitate infrastructure by improving Peru’s transport infrastructure
including, roads, railways, and airports. The project was designed to support the
government’s reform agenda, which sought to restore the transportation
infrastructure, provide services that were efficient and economic, establish a
competitive transportation sector, reduce the role of the state by transferring
appropriate roles to the private sector, and build capacity in the transportation
agencies30. According to the OED review, the goals of the project were either
satisfactorily or partially achieved. Rehabilitation of the transport infrastructure
was accomplished (e.g. 81 percent of the targeted roads were rehabilitated or
paved) and the groundwork for future road building was laid, along with the
The World Bank. 1994. Staff Appraisal Report. Peru: Transport Rehabilitation Project. Washington D.C. p. 2
strengthening of road maintenance, private participation in the sector, and
improved mobility of the poor31.
1995 RURAL ROAD REHABILITATION & MAINTENANCE PROJECT
6.3
The isolation of most rural areas in the sierra32 and the dilapidated state of the road
infrastructure in general but particularly in the interior promoted the Rural Road
Rehabilitation and Maintenance Project. This project was a US$90 million loan (an
additional US$160 million was to be made available by other donors) aimed at
improving the condition of Peru’s rural roads. The Bank considered the benefits of
the project to include increased access to urban areas, formation and strengthening
of building and maintenance SMEs and microenterprises (an estimated 250 firms
would be formed as a result), and increased local government institutional capacity
from the investment and technical assistance33.
6.4
The OED review found that the quality of rural road infrastructure had improved
greatly by reducing travel time, increasing vehicle volume, and reducing transport
costs of both people and freight34. The reduced costs were attributed to decreased
operating costs and more competition35. Access of the rural population to urban
areas and services also improved, particularly in the area of health services36. In the
end, the road rehabilitation goals were exceeded - 8,900 kilometers of road were
renewed along with 2,370 of secondary roads37. The project improved village
transport infrastructure by 190 more villages than planned and villagers noted
improved security and reliability of trips along with their decreased length38. Four
hundred and ten microenterprises were formed (exceeding the goal of 250)
generating 4,700 permanent jobs. Thirty two thousand and three hundred seasonal
unskilled jobs were created through the program. Despite the national government
not making much progress in decentralization, the project did manage to achieve in
building institutional capacity at the municipal level through training and involving
the municipalities in the rehabilitation project39. Overall the project had a positive
impact on Peru’s rural infrastructure and served to improve not only the general
investment climate but the rural business environment in particular.
The World Bank. 2000b. Implementation Completion Report (CPL-37170; SCL-3717A; SCPD-3717S; TF23012; COFN-04180) on a Loan in the Amount of US$150 million to the Republic of Peru for a Transport
Rehabilitation Project. Washington D.C.
32 Sixty-six percent of the population lived in poverty. The World Bank. 1995. Memorandum and
Recommendation of the President of the International Bank for Reconstruction and Development to the
Executive Directors on a Proposed Loan in an Amount Equivalent to US$90 million to the Republic of Peru
for a Rural Road Rehabilitation and Maintenance Project. Washington D.C. p. 2
33 Ibid. p. 9
34
The World Bank. 2001c. Implementation Completion Report (SCL-44970; TF-25903; COFN-04280) on a
Loan in the Amount of US$300 million to the Republic of Peru for a Second Financial Adjustment Loan
(FSALII). Washington D.C. p. 4-5
35 Ibid. p. 5
36 Ibid. p. 5
37 Ibid p. 7
38 Ibid p. 5
39 Ibid p. 6
31
1997 JUDICIAL REFORM PROJECT
6.5
While Peru had reformed portions of its legal and regulatory framework,
particularly for economic transactions and the protection of intellectual property,
there had been little effort to build institutional capacity within the judiciary. As a
result, the interpretation and application of laws was not occurring appropriately.
Surveys of the judiciary revealed:
…the reality of a judiciary with unpredictable and low
quality outcomes, unreasonable times to disposition, low
levels of accessibility and extensive politicization and
corruption40.
6.6
In 1997, the Bank initiated a $22.5 million project to reform the judiciary. The
project’s overall aim was to improve the execution of justice and create an
environment for conflict resolution. More specifically, the project aimed to41:
•
•
•
•
•
•
•
6.7
Modernize the operation and administration of the judiciary.
Improve the performance of courts (labor and civil) in select districts.
Strengthen the Consejo Nacional de la Magistratura (CNM), the National
Judicial Council, so Peru could improve its system of appointment,
advancement, and removal of judges. The government initially created the
CNM through the 1993 Constitution to increase the judiciary’s
independence42.
Increase the accountability and integrity of judges by strengthening the
Academia de la Magistratura (AM), the Judicial Academy and improving the
disciplinary system of the Oficina de Control de los Magistrados (OCMA),
the Office of Judicial Control.
Improve and strengthen alternative dispute resolution mechanisms.
Improve the Defensoria del Pueblo (DP), the Ombudsman.
Increase the ability of civil society to monitor, assess, and thereby demand
improved judicial performance.
The project sought to strengthen the judiciary, improve and enable private sector
development, and increase access to justice. But, due to political maneuvering
surrounding the efforts by Fujimori to secure the right to run for a third term in
office, the project did not proceed. The weak performance of the legal system in
Peru remains a persistent problem with the investment climate in Peru.
1999 FINANCIAL SECTOR ADJUSTMENT LOAN
6.8
The purpose of this US$300 million loan was to strengthen:
…the government’s capacity to manage the impact of future
economic shocks on the financial system, promote the
The World Bank. 1997. Staff Appraisal Report. Peru: Judicial Reform Project. Washington D.C.p. 2
Ibid. p. 5
42 Ibid. p. 3
40
41
longer-term development and resiliency of the system, and
enhance its contribution to the overall growth and stability of
the economy43.
6.9
To achieve these ends the World Bank sought to assist the government in:
•
•
•
Instituting banking sector reforms to allow pre-emptive supervision of the
sector through a modernized bank resolution framework.
Reforming the capital markets to foster development and establishing
institutional arrangements to allow for the restructuring of the public debt
management unit.
Reforming the pension system to improve its administration, removing
employer arrears, encouraging transfer of people from the public to the private
system, and increasing the allowable percentage of overseas investments.
6.10 While these issues were important, they were not the central ones limiting the
access to credit that had been identified in sector work. The loan did not take into
account the recommendations contained in the secured transaction report and did
not focus on the reform the framework for mortgage finance, thereby reducing the
impact of the 1998 Urban Property Rights Project.
6.11 An OED44 evaluation judged the loan to have severe shortcomings and rated the
Bank’s performance as “Unsatisfactory”. Among the problems noted in the rating
were the deteriorating political environment that had not been recognized in the
loan design, the fact that there were no specific conditions attached to disbursement
and in spite of evidence of corruption, that the second tranche had been released.
STILL ACTIVE WORLD BANK LOANS
1998 Urban Property Rights Project
6.12 Peru’s urban areas are surrounded by land owned by the government on which the
urban poor have built dwellings. The government requested World Bank assistance
to formalize transfer of the land to those residing on it. The Urban Property Rights
Project was a $38 million loan that aimed to reduce poverty by establishing a
national property rights formalization program45 through the strengthening of the
capacity of the institutions responsible for the program.
6.13 The Peruvian government instituted a “Law to Promote Access to Formal
Property”, which supported the land transfer from the government to the urban
43
The World Bank. 1999. Report and Recommendation of the President of the International Bank for
Reconstruction and Development to the Executive Directors on a Proposed Loan in the Amount of US$30
million to the Republic of Peru for a Second Financial Sector Adjustment Loan. Washington D.C. p. 27
44 The World Bank. 2001c. Implementation Completion Report (SCL-44970; TF-25903; COFN-04280) on a
Loan in the Amount of US$300 million to the Republic of Peru for a Second Financial Adjustment Loan
(FSALII). Washington D.C. and OED Financial Sector Adjustment Loan Evaluation.
45 The World Bank. 1998. Project Appraisal Document on a Proposed Loan in the Amount of US$38 million
equivalent to the Republic of Peru for an Urban Property Rights Project. Washington D.C. p. 1
poor. In addition, they created a new agency, Comisión de Formalización de la
Propiedad Informal (COFOPRI) to implement the new law and created a separate
registry for urban areas only – the Registro Predial Urbano (RPU) – an offshoot of
the Registro Predial. COFOPRI was responsible for issuing titles and RPU for
registering them. The main project objectives were to:
•
•
•
•
Establish an effective market for urban property rights through legal,
institutional, and regulatory reforms. This project component was designed to
decrease transactions costs by improving property formalization and reducing
the time and costs of property registration46.
Launch “effective and sustainable” agencies (RPU and COFOPRI) for
implementation and maintenance of the registration and adjudication system.
The project would achieve this goal through training and human resource
management to build the involved agencies’ institutional and administrative
capacity47.
Ensure formal secure property rights for informal urban property. The project
would accomplish this by documenting the conversion process, recruiting the
necessary staff, and executing the process in the field. Ultimately, the project
looked to register 960,000 properties and issue 805,500 titles in eight of
Peru’s urban areas48.
The methodology developed was revolutionary in that it eschewed the normal
high technology methods of defining boundaries through satellite imagery.
Rather it used a community based approach and, in addition, allowed
registration of the property at the same time as the issuing of the title.
6.14 The project is now nearing completion. The urban poor can now more easily (both
in terms of time and cost) obtain title to the land they occupy. By August 2000, the
project had titled and registered about one million dwellings, in which 7 million
people lived. The cost of registering a title was reduced from over $2,000 to $50
and the length of the process has been reduced from 15 years to 6 weeks or less49.
A recent evaluation by APOYO, a Peruvian economic research company, estimated
that the average value of a titled property rose by $925 and has increased overall
assets values of the properties registered by at least $500 million50. At the same
time, the COFOPRI title held no more value than any other title, which indicated
that there was little recognition of the value of the registry51. This result is probably
because of the limited impact the titling program has had on the ability of owners
of the new titles to borrow against their property.
6.15 An unexpected benefit of the titling program has been a substantial increase in the
number of hours worked by owners of the newly titled property. With the
Ibid. p. 21-22
Ibid. p. 23
48 Ibid. p. 25
49 The World Bank. Tools and Practices 14.
http://www.worldbank.org/poverty/empowerment/toolsprac/tool14.pdf
50 APOYO study on the economic impact of the urban property rights project.
51 Ibid.
46
47
strengthening of property rights they are more confident that they can leave their
property unattended without fear of occupation52.
6.16 In common with many other World Bank other property reforms, this project was
not classified as having an investment climate component in the project database.
7.
7.1
EVIDENCE REGARDING PERU’S INVESTMENT
CLIMATE
This section draws on investment climate indicators and interviews with the
business community to draw conclusions regarding the current state of the
investment climate in Peru.
OVERALL OUTCOME
7.2
The areas of improvement included:
•
•
•
•
7.3
52
Macroeconomic stability. The government was able to restore macroeconomic
stability, with the assistance of the World Bank and other IFIs. Most
macroeconomic variables improved over the 1992 – 2003 period. GDP growth
increased, inflation was drastically reduced, and interest rates declined. Many
Bank loans attached conditionality to the maintenance of macroeconomic
stability.
Infrastructure. Whilst Peru’s infrastructure remains weak, improvements were
seen over the course of the decade. A number of the World Bank’s projects
were either dedicated to infrastructure construction or rehabilitation (e.g.
roads) or the privatization of those sectors that provided infrastructure.
State dominance in the economy. Peru had a very highly state dominated
economy in the early 1990s. But the government, with the assistance of the
World Bank, made impressive progress in privatizing its state-owned
enterprises. Over the last couple of years, this process has slowed but Peru’s
achievements in this area are substantial and World Bank projects related to
privatization were an important component of this effort.
Trade Environment. In the early 1990s, the government drastically improved
Peru’s trade environment. The World Bank assisted the government in that
process. In so doing, Peru’s average tariff rate went from 80 percent in 1990
to 10 percent in 2001 and many non-tariff barriers and distortions were
removed..
As a result, many of the contextual investment climate variables improved in Peru
over the course of the period under review. Among the core investment climate
variables, there has been progress in some areas and little or none in others.
Kagawa, Ayako. 2000. Policy Effects and Tenure Security Perceptions of Peruvian Urban Land Tenure
Regularisation Policy in the 1990s. Workshop Paper, ESF/N-AERUS International Workshop. Brussels,
Belgium and Field, Erica. 2002. Entitled to Work: Urban Property Rights and Labor Supply in Peru. mimeo.
Princeton University.
•
•
•
•
7.4
Legal System, Governance, and Property Rights. The two core investment
climate projects in Peru were aimed at improving the legal system and
providing property titles to the urban poor. The attempt, to improve Peru’s
legal system through the Judicial Reform project failed, at least partly because
of the judicial instability associated with President Fujimori’s attempt to
secure a third term in office. The Urban Property Rights project appears to
have been successful and has made an important contribution to poverty
alleviation through the wealth and labor market effects that it engendered.
Financial market reform to allow mortgages of the newly titled property has
yet to occur, however. Extension of property rights in the rural areas will also
be important if the World Bank is determined in its poverty alleviation
agenda. This will also require coordination with the IDB, who has sponsored
a rural titling project. Although evaluation of that project was not part of this
report, it was described as experiencing substantial problems that will need to
be resolved if Peru is to have a coherent unitary property registry.
The Financial System. The financial system remains underdeveloped for
reasons that have been identified in Bank sector work. Access to credit for
many businesses is still limited. The ratio of private sector credit to GDP in
Peru lags behind that of many other countries and is lower than that of many
poorer countries in other parts of the world. Experience in Peru contrasts
markedly with Bank efforts in Romania, where a successful secured
transactions reform has resulted in a large increase in access to credit for the
private sector.
Foreign investment in Peru also remains at chronically low levels. Peru
initially saw an encouraging increase in FDI levels in the mid-1990s but the
external shocks of El Niño, and the Asian and Russian crises scared off
investors initially and then the protracted political issues have foreign
investors away.
Regulation. Regulation is an area where Peru has made only limited progress.
Labor regulations reduce flexibility and encourage informality. The activities
of the current government – to strengthen workers rights at the expense of
labor flexibility - has also served to increase instability and uncertainty and
degrade the investment climate. Business registration has improved but it still
takes a long time to register– 83 days (down from 289.) Bankruptcy still takes
too long at 2 to 3 years to resolve cases.
Bank Investment Climate Consultations with the Government: The government
officials interviewed as part of this evaluation indicated that in the area of
investment climate projects, they were not adequately consulted. They also
indicated that they would like more sector work and technical assistance on
investment climate and financial market issues53. The officials felt that the
investment climate technical expertise and knowledge embodied in the Bank is not
being applied in Peru. Official complained that in the investment climate area
A senior government official complained that “The International Financial Institutions are becoming more and more
like commercial banks. We ask for advice and they give us money”.
53
project preparation documents are presented to the government as final documents
rather than as part of a process of consultation. They complained that CAS
consultations are driven by Bank deadlines rather than being outcome oriented.
There is the perception of informal and haphazard contact and as a result, the Bank
is perceived as unresponsive.
BUSINESS’S PERCEPTION OF PERU’S INVESTMENT CLIMATE
7.5
Historically, the private sector has often been operating in an environment in which
government attitudes were openly hostile towards private enterprise. Businesses in
Peru have been burdened by excessive bureaucratic regulation and faced with
policies that have oscillated from populist to interventionist to liberal.
Entrepreneurs in the formal sector in Peru, therefore, have responded by putting a
great deal of creative energy into arranging their business activities to minimize
risk and take advantage of the rents to be gained from the state rather than into
competing vigorously, in either the domestic or international markets.
7.6
Insights into the way that the business community in Peru perceives the constraints
to doing business are contained in the results of a series of World Bank surveys
conducted in 1990, 1993, and 1999 on the garment and construction industries. (An
Table 7.1
Ranking of the most severe obstacles to growth by formal private sector
business
1990 SURVEY
1993 SURVEY
1999 SURVEY
2002
INFORMAL SURVEY
Political/Policy
Uncertainty
High Taxes
Tax Regulation
Tax Regulation
Inflation
Cost of Bank Financing
Political/Policy Uncertainty
Political/Policy Uncertainty
Security
Political/Policy Uncertainty
Cost of Bank Financing
Cost of Bank Financing
Trade Restrictions
Unfair Competition from
the Informal Sector
Inflation
Labour Issues
Labour and Other
Regulations
Security
Street Crime and
Corruption
Corruption
Source: Various sources
at the World Bank
informal survey of eight small businesses was also conducted in May 200254.
Interviews with private sector representatives were also conducted in November
2003.) The data over this extended period catalogues the evolution of firm’s
concerns regarding Peru’s investment climate. It is clear that the reforms of the
early 1990 began to improve the business environment in Peru, primarily because
of the decline in inflation and the defeat of the terrorist movement.
7.7
54
A striking aspect of the surveys is that since the restoration of macroeconomic
stability in the early 1990s, the business community has expressed remarkably
consistent concerns. Tax issues dominated followed closely by political
Holden, Paul. 2002. Notes from interview with Peruvian business people.
uncertainty. Financing costs and corruption feature prominently.
regarding labor issues also featured heavily in the interviews.
Concern
7.8
Contract enforcement remains Table 7.2 Contract Enforcement
(Formality of Procedures and Time to
length and costly. Businesses still
Resolve Disputes)
seem to view the legal structure as
2003
almost irrelevant - they usually INDICATOR
35
confine transactions to those with Number of procedures
whom they know well. There is a Duration (days)
441.0
lack of trust by firms of participants Cost (% of GNI per capita)
29.7
in the business process: workers, Procedural Complexity Index
81.9
suppliers, customers, lenders, and,
Source: The World Bank Doing Business Database 2003.
above all, government agencies and
the commercial legal system. In surveys of Peruvian businesses, the overwhelming
majority claimed that the court system would not adjudicate disputes impartially,
delays were long, and judges were untrained in commercial law and open to
influence. The complexity in contract enforcement was calculated in a World Bank
survey. The high cost combined with the number of days and steps required makes
it unsurprising that Peruvian businesses avoid courts. The collapse of Fujimori’s
regime and the level of corruption that was endemic in the government reinforced
the lack of trust in the system. Courts and the legal system are not a positive
feature of the investment climate in Peru.
7.9
Labor
Regulation.
Labor Table 7.3 Hiring and Firing Workers (2003)
REGIONAL OECD
regulation is an area where little INDICATOR
PERU AVERAGE AVERAGE
progress was made during the Flexibility of Hiring Index
71
56
49
1990s. The first Fujimori period Conditions of Employment 81
79
58
was a period during which labor Index
69
48
28
regulation was eased. It is, Flexibility of Firing Index
Employment Laws Index
73
61
45
however, once again becoming of Source: World Bank Doing Business Database
greater concern to Peruvian
businesses. It is estimated that the regulation imposes a tax on employers of 50
percent of wages55. The new government has sharply stepped up enforcement of
labor regulations and in some areas has reintroduced stricter labor laws. The more
vigorous enforcement, however, was reported by those interviewed as a factor
discouraging them from new hiring and adding to incentives for informality
7.10 Bankruptcy Regulation. In Peru, bankruptcy proceedings used to take up to ten
years to resolve. In the early 1990s, the government established an agency –
INDECOPI – that was responsible, among other things, for the bankruptcy process.
Although the institution has substantially improved the process by reducing the
amount of time to two to three years. It is still far too lengthy to give creditors a
reasonable prospect of liquidating company assets and recovering money owed.
Table 7.4
Closing a Business (2003)
The World Bank. 2003. Peru: Microeconomic Constraints to Growth the Evidence from the Manufacturing
Sector. Washington D.C.
55
7.11 The INDECOPI process is viewed as
providing dishonest owners with the
possibility of retaining the assets of
their bankrupt businesses through
delays and theft. This situation is one
of the factors that have led Banks to
reject movable property as security.
INDICATOR
Actual time (in years)
REGIONAL OECD
PERU AVERAGE AVERAGE
2.1
3.7
1.8
Actual cost (% of estate)
8
15
7
Goals of Insolvency Index
67
46
77
Court Powers Index
33
63
36
Source: World Bank Doing Business Database
7.12 Business Registration. In 1989,
Hernando de Soto documented the costs imposed by registering a business in Peru:
it took 289 days and over US $1000 to comply fully with the formal requirements
to set up a small firm56. Since that time, the Peruvian government has made
progress in reducing the cost of business registration for tax purposes at the
national level – it now takes 114 days and costs US$ 465. SUNAT, the tax
authority, has made tax registration for new business very easy - it is inexpensive
and can be over the Internet. Furthermore, penalties for not registering for tax
purposes are high, widely
enforced, and impartially Table 7.5 Business Start-up: Number of Procedures
PERU
REGIONAL
OECD
imposed. It is important to
(2003)
AVERAGE AVERAGE
note,
however,
that INDICATOR
Number of procedures
9
12
7
registration with SUNAT
100
74
30
is
only
a
partial Duration (days)
24.9
70.2
10.2
registration. It does not Cost (% of GNI per capita)
provide the entity being Min. Capital (% of GNI per capita)
0
85.6
61.2
registered with any of the Source: World Bank Doing Business Database
normal protections of
limited liability companies, nor does it supply a legal vehicle for obtaining bank
credit. SUNAT registration is primarily a means for the tax authority to collect
VAT.
7.13 While the cost and time associated with business registration is important to
consider, it also important to look at the underlying reasons why businesses choose
not to be formal. In Peru, the benefits of formality, including access to credit,
providing a legal entity for contracting, and limited liability are not very attractive,
particularly for smaller businesses.
7.14 Evidence from interviews in Peru suggests that the Bank is not communicating
sufficiently with either the public or the private sector. The private sector does not
see the Bank as considering their view important in terms of project efforts and
complained of rarely being consulted - few members of the business community
that were interviewed had had recent interactions with the Bank and they perceived
it as a bureaucratic organization that was only concerned with talking with the
government. Those that had, had contact were contacted for information gathering
but there was no interaction or exchanges of views.
56
De Soto, H. 1989. The Other Path: The Economic Answer to Terrorism. New York: Harper & Row.
OED PERU COUNTRY ASSISTANCE EVALUATION: 2002
7.15 The OED department conducted an overall evaluation of the World Bank’s
activities during the course of the 1990s. The report assessed the World Bank
activities in the first half of the decade and concluded that:
…the Bank played a constructive and important role, based on an
accurate and timely diagnosis of the economic situation. While the Bank’s
role is small vis-à-vis that of the Government, the Bank did help stabilize
the economy, reintegrate Peru in the world financial community, and
support a very effective structural reform process57.
7.16 Lending became less effective in the latter half of the decade, however, which was
attributed to the government’s lessening commitment to reform. While it blamed
the situation mostly on the government, the OED evaluation rated Bank policy over
this period in the following way:
Starting in 1997, the Government was no longer committed to the Bank’s
assistance program. The Bank was misguided in yielding to pressure to
redirect loans from investment projects to fast-disbursing structural
adjustment lending, in the midst of allegations and then evidence of
corruption, and in contradiction to its own strategy at a time when
progress in macroeconomic and structural fronts was being reversed 58.
7.17 OED judged the Bank’s country assistance strategy for Peru during this period as
unsatisfactory. Among OED’s recommendations was the need to undertake
institutional reform if the Bank’s assistance program was to be successful in the
future59.
The World Bank. 2002. Peru: Country Assistance Evaluation. Operations Evaluation Department.
Washington D.C. p, i
58 Ibid. p. ii
59 Ibid. p. 28
57
8.
CONCLUSIONS
8.1
There was extensive economic and sector work that examined investment climate
issues over the 1992 – 2003 period. It is hard to avoid the conclusion that the
investment climate component of Peru Country Assistance Strategies over a major
part of the period under review failed to incorporate investment climate priorities
that had been identified in World Bank sector work. Although there were two
investment climate related projects in this period, one of them failed and the other
was not classified as having an investment climate dimension.
8.2
Poverty alleviation became the aim of policy, without spelling out how the growth
necessary to reduce the number of poor in Peru could be achieved without a well
functioning private sector. The factors that were identified in early sector work,
were essentially ignored. Over the 1993 – 2003 period successive documents
identify similar issues – regulation, policy uncertainty, infrastructure, a weak
judiciary, financial market underdevelopment and poorly protected property rights.
The earlier reports made the same recommendations in the first half of the 1990s as
did the investment climate assessment in 2003. Despite the Country Assistance
Strategies indicating that the private sector was a priority, promoting private sector
development through a coherent strategy did not occur. The various CAS
documents contained recommendations relevant for the investment climate –
privatization and infrastructure initially, then more a recognition of the importance
of institutions such as property rights. But these activities could hardly be called a
strategy in the sense of incorporating the issues that had been identified into a set of
priorities, which then resulted in a cohesive investment climate action plan that was
reviewed and updated on a regular basis. In addition, the private sector strategy
component of the most recent CAS focused on issues that were not among the most
important ones identified in sector work. As a result, much of the impact of good
quality sector work was wasted.