Money for nothing: the failure of public investment in Peru

By Ronin 360

One of the main challenges of the Peruvian economy on its path to development is to raise the level and quality of its public infrastructure. In this context, public investment plays an important role in closing the infrastructure gap by financing projects that under normal conditions the private sector would not take on.

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Public investment spending in Peru stood at 5.2% of GDP in 2024, the highest figure in the last 10 years and above our regional peers, such as Chile, Colombia, Mexico, and even OECD countries (see graph 1). Furthermore, 60% of this investment was executed by subnational governments, equivalent to just over 3% of GDP.

Despite the greater resources allocated to public investment, this spending has been executed inefficiently. This is reflected in works that are delayed for years and generate cost overruns, that are never completed and that, even if they are completed, generate almost no impact.

To all of the above, it is added that public investment projects are too small to generate a significant impact on the population.

The evidence generated shows the great magnitude of the problem. According to a recent study by the World Bank, the number of paralyzed and abandoned projects represents almost 50% of all projects that began execution from 2012 onwards.

These paralyzed and abandoned projects have a value of S/179,000 million or 17.3% of GDP. This is equivalent to more than three years of public investment.

Causes

The causes behind the low efficiency of public investment are deep, complex and multidimensional. One of them is the lack of link between the multi-year investment programming and the public budget beyond the current year, which means that the projects do not have the guaranteed resources to be completed.

In addition, the investment system allows the introduction of new projects, even if those in progress have not yet been completed and after the budget law is approved.

In this regard, according to the World Bank, only half of public investment corresponds to projects planned in the original budget approved by Congress. This high improvisation is also observed when comparing the initial budget with the modified one (see graph 2), the latter being, on average, almost 40% greater than the former, a percentage that rises to almost 100% in the case of subnational governments. Other no less important factors are the low quality of the technical files.

The design of decentralization is another element that encourages the atomization of spending into increasingly smaller amounts.

The number of districts in Peru is relatively high compared to other countries: 1 for every 17,000, compared to Chile (54,000), Colombia (46,000) or Mexico (52,000).

In addition, there are incentives to create more districts, such as the possibility of receiving minimum transfers from the Municipal Compensation Fund (Foncomun). Atomization reduces the quality of public works, since it is a complex function that many municipalities are not prepared to fulfill and, rather, creates spaces for corruption and political clientelism.

Investment reform

Raising the efficiency of public investment requires redesigning administrative systems, the budget process and decentralization, said Isaac Foinquinos, chief economist at Ronin. As he explained, behind the current state of investment there are particular interests and clientelism practices, as a result of a dysfunctional political system without parties, in which the government in power uses investment resources as a mechanism to ensure political support.

Foinquinos warned that promoting these reforms will require a significant effort that must begin in the Ministry of Economy. In that sense, he indicated that the entity must change the focus from a logic of “spending more” to one of “spending well”, especially in a context in which fiscal accounts are under pressure due to measures approved by Congress.

Likewise, he maintained that the MEF must generate indicators for monitoring the quality of public investment that are easy to communicate and that complement traditional execution indicators.