Cuzco airport row: addendums, Public Private Partnerships and construction delays
5 February 2017
After a week of uncertainties over the future construction of Chincheros airport in Cuzco, President Pedro Pablo Kuczynski, dressed in poncho and chullo and kissing coca leaves, laid the first stone on 3 February. Earlier in the week, following a fierce row over the funding arrangements, the future of Chincheros was placed in doubt. In response, local officials and politicians mobilised local opinion, threatening an indefinite region-wide protest strike if the government delayed any further.
The row over Chincheros centres on an ‘addendum’ to the contract between the government and the consortium in charge of constructing the airport, known as Kuntur Wasi. The addendum would have reduced the amount that Kuntur Wasi would have had to invest in the project while not altering the benefits it would receive from the revenues generated from the airport concession over a period of 40 years.
The decision of the government to accept the addendum led to the resignation in protest last month of Patricia Benavente, the president of Ositrán, the regulator for transport infrastructure.
Verónika Mendoza, the left-wing Frente Amplio’s candidate in last year’s presidential elections argued that the best thing would be for the project to be entirely one of public investment, not a Public Private Partnership (PPP) as currently arranged.
The mechanisms by which major investment projects are funded have come under scrutiny because of the way in which the Odebrecht scandals have revealed massive bribes paid in return for favourable government decisions on contracts. They have revealed in particular the practice by which the government is obliged to succumb to pressures from contractors to amend agreements previously made and agree to added costs borne by the public treasury.
The introduction of addendums to contracts appears to have been common practice in the management of construction projects involving Brazilian companies, according to figures produced by the Organismo Supervisor de Contrataciones del Estado (OSCE) and published in La República.
According to José Luis Guasch, a former head of the World Bank team dealing with PPPs, Chincheros was a prime example of the leverage used by private companies to improve the terms of contracts once signed through subsequent ‘addendums’. He calls this “political opportunism” while noting that addendums, unless accompanied by bribes, were not in themselves illegal.
The addendum in this case substantially changes the assignation of risk to the benefit of the private company and to the detriment of the state says La Republica. In the case of Chincheros, the winning bid was priced at a substantially lower figure than the other rival bids. The subsequent addendum, justified by supposed changes in the schemes used to fund the project, thus changed the costs to the state.
According to Guasch, companies know that once launched it is difficult to annul a project – and in this case there are powerful economic interests in Cuzco demanding swift completion – and that governments find themselves with little alternative but to accept the terms demanded. He argues that, political pressure notwithstanding, the government should have held its ground and reopened the bidding procedures. “The investors take advantage that the government is committed to reducing obstacles (destrabar) to completing the project” he says.
Guasch goes on to say that, in his experience, it is very difficult to undo a PPP. “In the world there are only 3% of PPP contracts that have been dissolved over the last 30 years.” He argues that what governments should do is to impose penalties for non-completion that really bite, “so if you don’t fulfil the terms, you accept the risk”.
Kuntur Wasi was awarded the contract to part-fund and run the airport at Chincheros in 2014. It is a consortium made up of two corporations, the Corporación América from Argentina and the Andino Investment Holding (AIH) in Peru. The latter is a holding company of 14 firms mostly involved in ports and airports. One of the executives at AIH is the sister of Fernando Zavala, the prime minister.