Region: Latin America and Caribbean
Country: Peru
Sector: Subnational and Municipal
Keywords: Knowledge Lab, Funding and Financing, Sub-national
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Document Summary:
PPIAF’s Sub-National Technical Assistance (SNTA) program is helping sub-national government entities in Peru raise market-based financing for much needed infrastructure investment. Since 2008, SNTA has assisted eight regional and municipal entities by facilitating credit ratings, implementing financial assessments and coaching, supporting transaction preparation, and helping the central government monitor and evaluate the financial health of local authorities.
As a result of SNTA support, the Municipality of Lima has signed two significant financings for investment: a $70 million commercial bank loan with BBVA Banco Continental in April 2010—and a subsequent $120 million (local currency PEN$360 million) loan with BBVA and Scotiabank, signed in November 2013. The SNTA technical assistance also helped the Regional Government of Arequipa obtain a $10 million commercial bank loan in January 2011 to finance a regional road rehabilitation project.
Document Details:
Until 2002, Peru was one of the more centralized countries in Latin America. The government’s approach to fiscal decentralization was a cautious and gradual one. However, a policy shift in 2002 led to the passage of the Decentralization Framework Law, which established the guiding principles of a political and fiscal decentralization process.
Because of the limited authority of sub-national governments to raise tax revenues and the absence of a sub- national debt market, local governments in Peru rely heavily on government transfers for both operating and capital expenditures. Regional governments, in particular, have no authority to levy taxes and hence rely almost fully on central government transfers for both operating expenditures and investments. Municipalities finance a higher percentage of their expenditures from their own sources (e.g., property tax, real estate transaction tax, various fees, sale of goods and services, etc.), but have no authority to set local tax rates and rely heavily on government transfers for capital expenditures.
Local governments are exploring options to better leverage their resources in order to meet large infrastructure investment needs. Currently, borrowing accounts for only 1% of such investment funding, with virtually all of that in Lima. Commercial banks restrict their activities to financing working capital for a small number of local governments. To date, the only sub-national bonds issued securitized Lima’s toll road revenues, allowing for greater investment in roads.
Updated: March 7, 2022