This chapter examines the state of subnational public investment1 in Peru, a critical lever for addressing regional disparities and promoting inclusive territorial development. It provides an overview of the evolution and composition of public investment across levels of government, and analyses the institutional, financial, and regulatory frameworks shaping subnational investment decisions. Key areas explored include strategic planning and co-ordination mechanisms, funding and financing arrangements, public procurement practices, and the regulatory environment for investment implementation. The chapter also highlights persistent challenges related to capacity gaps and fragmentation. It proposes recommendations to strengthen the effectiveness, transparency, and strategic alignment of subnational public investment, with a view to improving development outcomes across regions.
Regional Development Policy in Peru
Abstract
In 2021, total public investment (national and subnational) in Peru accounted for 4.2% of GDP, above the OECD average of 3.4% of GDP. Over the period from 2000 to 2021, public investment in Peru averaged 3.8% of GDP, with a peak of 5.6% in 2010 and a low of 1.9% in 2002 (IMF, 2024[1]).
A significant portion of public investment occurs at the subnational level, with subnational government investment in Peru representing 2.6% of GDP and 61.8% of total public investment in 2021. This is notably higher than the median for unitary OECD countries, where subnational investment typically accounts for 1.6% of GDP and 39.5% of total public investment (Figure 6.1). Additionally, subnational investment in Peru amounts to 31.5% of total subnational expenditure, a much larger share compared to the 15.7% median for unitary OECD countries.
Subnational investment in Peru is primarily driven by local governments, which accounted for 42.6% of total public investment in 2021, while national government investment represented 37.4% and regional governments accounted for the remaining 20.0%.
Note: The box plot shows the distribution of subnational government investment for unitary OECD countries.
Source: OECD calculations based on (IMF, 2024[1]).
Strategic planning of public investment at subnational level
Public investment in Peru is planned across several years through the National System of Multiannual Programming and Investment Management (also known as Invierte.pe), a system that facilities to carry out the multiannual investment programming. Since its creation in 2016, Invierte.pe has provided the framework for Peru’s National System of Multiannual Programming and Investment Management (Sistema Nacional de Programación Multianual y Gestión de Inversiones, Invierte.pe), replacing the former National Public Investment System (Sistema Nacional de Inversión Pública, SNIP). Its primary objective is to close infrastructure gaps and improve access to public services throughout the country.
To achieve this, Legislative Decree No. 1525 of 2016 emphasises a territorial approach to public investment, requiring that multiannual investment programming aligns with national, regional, and local objectives as set out in strategic planning guidelines, in accordance with the National Strategic Planning System (Official Gazette Legislative Decree No. 1252, 2016[2]). According to the decree, this alignment should also be integrated into multiannual budget allocations, reflecting macroeconomic projections. Crucially, investment programming must allocate resources not only for project execution but also for the operation and maintenance of infrastructure, following the principles of the investment cycle. Lastly, the management of public investment is conducted with a firm commitment to transparency, quality, and promoting competition, ensuring efficient and effective use of public resource (Official Gazette Legislative Decree No. 1252, 2016[2]).
Invierte.pe has five main bodies: the Ministry of Economy and Finance (Ministerio de Economía y Finanzas, MEF), through the General Directorate of Multiannual Investment Programming (Dirección General de Inversión Pública, DGPMI), which acts as the governing body; and each entity at the different levels of government has a resolution body, a multiannual investment programming office, a formulation unit and investment spending agencies. In the SNIP, the MEF was involved in almost all phases of investment decision making; in Invierte.pe, its powers have been decentralised to provide decision-making and action spaces for public entities in the formulation, evaluation, feasibility, and implementation of projects. In Invierte.pe, the sectors and regional and local governments now have their own decision-making bodies. Each has a resolution body, a multiannual investment programming office, a formulation unit and an investment spending unit. The aim of Invierte.pe is to have more detailed projects that reflect the specific reality of the country’s different territories, with the formulation units of the line ministries, regional governments and local governments granting the viability of the investment projects they formulate. Unlike the SNIP, with Invierte.pe it is expected that each prioritised investment project will have a guaranteed budget, at least to launch the work.
The changes introduced by Invierte.pe require greater responsibility, commitment and capacity from sectors and subnational governments. In the framework of the implementation of Invierte.pe, capacity building and technical assistance are available from officials from the DGPMI and public investment specialists in the territories (virtual and face-to-face). However, there are high levels of turnover among the officials in charge of implementing the system, thus the knowledge acquired in the field is lost. The MEF offers capacity-building for subnational governments through key mechanisms. One is the Technical Assistance for Investments (Asistencia Técnica de Inversiones, ATI), a specialised MEF team present in each region that provides direct technical assistance on investment matters (OECD, 2024[3]). Additionally, the CONECTAMEF offices, also regionally based, facilitate co-ordination between local governments and the MEF. They provide services such as processing documentation, responding to inquiries, conducting training, and offering technical assistance related to MEF’s administrative and software systems (MEF, 2024[4]).
Beyond the MEF, two entities attached to the PCM also deliver critical technical assistance and training. The Agency for Investment Project Studies and Design (Organismo de Estudios y Diseño de Proyectos de Inversión, OEDI) helps prepare pre-investment studies and build technical capacity within subnational governments. The National Authority of Infrastructure (Autoridad Nacional de Infraestructura, ANIN), on the other hand, oversees the formulation, execution, and maintenance of large-scale infrastructure projects valued at over PER 200 million. ANIN has also managed projects under the Reconstrucción con Cambios programme, co-ordinating with subnational governments to execute major projects. For example, ANIN has partnered with five regional governments to undertake six major projects totalling PER 2.5 billion, including the La Caleta Hospital in Chimbote (PER 600 million) and a highway project in Apurímac. ANIN’s role also addresses the challenge of project delays, as many projects scheduled for two years often surpass their planned timelines.
Invierte.pe operates through four main phases: gap diagnosis, formulation and evaluation, implementation, and operation. First, each multiannual investment programming office must conduct a gap diagnosis every year to identify the most pressing investment needs and apply prioritisation criteria to rank them by importance. During this phase, each office establishes a portfolio of investments aimed at addressing gaps in infrastructure or access to key services. The next phase, formulation and evaluation, involves refining project ideas and making decisions on the suitability of proposed investments. Following this, projects move into the implementation phase, where investments are carried out. The cycle concludes with the operation phase, during which the performance of the investments is monitored both physically and financially through the investment monitoring system, ensuring that the projects meet their intended objectives (OECD, 2023[5]).
As mentioned in Chapter 4, the National Congress in Peru approves the consolidated budget of both the national and all subnational governments, including their public investment projects. In that process, and after the planning phases of the gap diagnosis, formulation and feasibility evaluation, additional funding for other projects, which may not have been identified during the planning phase, can be introduced in the budget phase. Moreover, after the budget is approved by the National Congress, budgetary modifications, which are highly frequent in Peru, can take place to provide additional funding for capital expenditure.
Funding and financing public investment
National government funding
Subnational public investment in Peru is primarily funded through transfers from the national government, with most of these transfers being discretionary and earmarked for specific projects. Other transfers, such as FONCOMUN and FONCOR, are formula-based, while funds such as the FIDT are competitive, requiring subnational governments to apply and compete for funding from the national government. Additional sources for public investment include canon revenues in regions where they exist, and in some cases, local tax revenues generated through initiatives such as the Works for Taxes (Obras por Impuestos) programme.
Discretionary transfers are a significant source of funding for subnational public investment. In general, discretionary transfers have the benefit of allowing the national government greater flexibility to direct funds where they are most needed, allowing for subnational public investment to take place in regions with wider fiscal gaps or with more pressing needs. Correlation analysis shows that, in 2021, regions with lower Human Development Index values, reflecting poorer outcomes in life expectancy, education, and income, receive a larger amount of discretionary transfers per capita. Similarly, regions with a higher proportion of households facing at least one unsatisfied basic need tend to receive higher per capita discretionary transfers. However, this relationship is not always direct, and there remains considerable disparity in the distribution of discretionary funds across regions (COMEX, 2023[6]).
The Fund for Investment in Territorial Development (Fondo Invierte para el Desarrollo Territorial, FIDT), previously Fondo de Promoción a la Inversión Pública Regional y Local (FONIPREL) (Official Gazette Legislative Decree No. 1435, 2018[7]), is a key instrument in Peru designed to support territorial development by financing investment projects and pre-investment studies. As a competitive fund, subnational governments must apply to receive funding. Each funding round has its own set of rules, deadlines, and procedures, requiring applicants to prioritise their projects based on Regional Development Plans or Local Development Plans. The administration of the fund is overseen by a Board of Directors composed of representatives from key institutions, including the PCM, the MEF, and regional and municipal associations such as National Assembly of Regional Governments (Asamblea Nacional de Gobiernos Regionales, ANGR), Association of Municipalities of Peru (Asociación de Municipalidades del Perú, AMPE), and Network of Urban and Rural Municipalities of Peru (Red de Municipalidades Urbanas y Rurales del Perú, REMURPE). Projects funded via the FIDT work towards closing gaps and improving access to essential services, such as basic health and education services, road infrastructure, sanitation, rural electrification, and agricultural infrastructure. In recent years, the fund’s size has fluctuated depending on national fiscal policies, with allocations amounting to several hundred million soles (MEF, 2024[8]; OECD, 2024[3]).
The equalisation transfers for regions and municipalities–FONCOR and FONCOMUN–are two transfer mechanisms in Peru that contribute significantly to subnational public investment. FONCOR is a transfer exclusively designed for regional governments and is strictly earmarked for capital expenditure whereas FONCOMUN, which is allocated to municipalities, is unearmarked, allowing local governments more flexibility in how they allocate their funds between current and capital expenditure. While municipalities can use FONCOMUN for capital expenditure, they can also allocate these funds to current expenditures such as administrative costs, salaries, or operational activities. This flexibility enables municipalities to address their immediate operational needs, but it can also dilute the potential for long-term investment if too much of the fund is diverted to current spending.
Revenue from canon and mining royalties can be used to finance or co-finance public investment only, not current expenditure, within the regions and municipalities where natural resources are extracted (Official Gazette Law No. 28258, 2004[9]). This source of revenue is thus designed to support infrastructure development, helping to close gaps and improve essential public services. Moreover, subnational governments can choose to use up to 20% of the resources they receive from canon and mining royalties for infrastructure maintenance and to cover costs associated with the selection processes for public investment projects. Additionally, up to 5% of this allocation can be used to finance the preparation of project profiles, in line with their concerted regional and local development plans (MEF, 2024[10]). However, operational costs–such as staff salaries and intermediate consumption–needed to run infrastructure, such as schools or healthcare centres, built with canon resources cannot be financed through canon revenue. This limitation often triggers an increasing demand of additional discretionary transfers from the national government to ensure the effective operation of infrastructure developed with these funds.
There are also some innovative solutions to gathering funding and accelerating infrastructure investment. The Works for Taxes scheme is a mechanism in Peru that allows private companies to directly finance public investment projects in exchange for future tax payments. Established in 2008, it was designed to accelerate infrastructure development by enabling private firms to advance their income tax payments and use these resources to cover the costs of specific public works. This approach not only helps the government bridge infrastructure gaps but also allows the private sector to take an active role in delivering critical projects such as roads, schools, and health facilities. Once a project is completed, the private company receives certificates of investment from the MEF, which can be used to offset their income tax obligations over a period of up to 10 years. This mechanism is used across all levels of government, national, regional, and local, and has become an essential tool for reducing the time and costs associated with traditional public investment processes. However, Works for Taxes faces certain limitations, such as delays resulting from a limited understanding among public officials about how the mechanism works, lack of long-term sustainability of completed projects given that the project only covers capital–but not operational–expenditures, and a concentration of investment projects in areas where private firms typically operate rather than prioritising the most underdeveloped regions of the country (IFC, 2018[11]).
Finally, Peru has implemented an annual programme called Reward to Investment Execution (Reconocimiento a la Ejecución de Inversiones, REI) since 2019, a budgetary incentive established under the framework of performance-based budgeting and managed by the MEF. The REI aims to boost the execution of public investments at the subnational level, where projects are often delayed or halted. The programme works by providing additional transfers to subnational governments that meet specific investment execution targets within a set timeframe. These targets are developed by the General Directorate of Public Budget (Dirección General de Presupuesto Público), in co-ordination with the DGPMI (MEF, 2024[12]).
Subnational debt for investment
Fiscal discipline has been a key pillar in the Peruvian decentralisation process. As a result, levels of debt are not a pressing issue for subnational governments in Peru. In 2021, Peruvian subnational government debt represented 1.4% of total general government debt, or 0.5% of GDP, significantly lower than the unweighted average for subnational governments in unitary OECD countries, where it accounts for 10.4% (Figure 6.2). Of this debt, 64.6% is held by regional governments, while the remaining 35.4% corresponds to local governments. This contrasts with the distribution of public investment, mostly implemented by municipalities (42.6% in 2021, compared to 20.0% by regional governments). Subnational debt is concentrated in a small number of regions and municipalities, particularly in Lima, which is the only one with access to financial and foreign markets.
Subnational government debt in Peru consists primarily of other accounts payable (90.4%) and loans (9.6%), as bond issuance is de facto forbidden for most subnational governments. A large portion of outstanding debt tied to “other accounts payable,” or commercial debt, can be problematic for local development. Unlike loans, which typically have structured repayment schedules and lower interest rates, commercial debt may involve higher interest payments and less favourable terms, putting a heavier burden on subnational governments’ finances. This can reduce fiscal flexibility and limit their ability to allocate resources effectively toward long-term investment projects, infrastructure development, or public service provision, rather focusing on meeting short-term financial obligations. Additionally, shorter repayment deadlines may not be feasible for certain subnational governments, causing SMEs a lack of cash flow as they rely on timely payments to maintain their operations. Despite the low level of subnational debt overall, diversifying sources of subnational debt should be taken into consideration.
Subnational governments in Peru can borrow only under state guarantees and exclusively for capital investment projects, a rule typically known as the golden rule and applied in most OECD countries. This marks a notable shift from the previous fiscal framework, where subnational governments required direct authorisation from the MEF for any borrowing activities. Moreover, subnational governments are now required to submit multiannual fiscal management reports to ensure compliance with debt regulations. The MRTF-SN, which replaced the 2013 Fiscal Responsibility Law, introduced several measures for restructuring subnational government debt. It mandates that the debt balance of subnational governments must not exceed the average current income of the last four years, and it must comply with limits on the issuance of Regional and Local Public Investment Certificates (Certificado Inversión Pública Regional y Local – Tesoro Público, CIPRL) established by law.
Note: The box plot shows the distribution of subnational government debt for unitary OECD countries, excluding Chile and Colombia due to missing data.
Source: OECD calculations based on (OECD, 2023[13]) for OECD countries and (IMF, 2024[1]) for Peru.
Public procurement
The National Supply System (Sistema Nacional de Abastecimiento) is managed by the MEF, which establishes the guidelines for the planning, contracting, storage, and distribution of goods, services, and works, retaining exclusive jurisdiction over these matters. The Public Procurement Law applies uniformly across all levels of government, national, regional, and local, prohibiting subnational governments from developing their own procurement regulations (Official Gazette Law No. 30225, 2019[14]). However, within the regulatory framework established by this law, subnational governments conduct procurement procedures based on the specific needs they identify for goods, services, or works. Although they lack full procurement authority, subnational governments have limited discretion in contracts involving amounts below 8 UIT.
Despite some modifications to the law, Peru ranked 121st out of 180 countries in 2023 in the Corruption Perception Index, a composite measure developed by Transparency International that combines data from 13 surveys and assessments of corruption (Transparency International, 2024[15]). Peru scored 33 out of 100, three points lower than in 2022, with 0 representing high corruption and 100 indicating a very clean public sector. Policymakers in Peru acknowledge that public procurement faces several challenges, including a lack of skilled personnel that results in poor scheduling of contracts and delays in project selection and execution due to incomplete or deficient technical files. Furthermore, disputes frequently halt public works, and corruption in contracting processes often leads to the manipulation of technical documents and favouritism toward specific bidders (PCM, 2024[16]).
In November 2023, the MEF approved the Strategic Reform Framework (Marco Estratégico de Reforma, MER) for Public Sector Financial Administration for the period 2023–2027 (MEF, 2023[17]). As part of this framework, the Action Plan for Reforms (Plan de Acción de Reformas, PAR) was introduced specifically for the National Supply System, aimed at overhauling public procurement and financial management practices across government agencies. The MER and PAR initiatives have set clear objectives: to strengthen Multiannual Programming for Goods, Services, and Works; to enhance the management of supply chains for public sector goods and services; and to streamline associated processes, thereby improving efficiency, transparency, and cost-effectiveness.
The MEF has already acted upon some of these objectives. For example, three Supreme Decrees have already been issued to mandate corporate purchases and one to implement mandatory standardisation in order to promote demand aggregation and efficiency. These mechanisms aim to consolidate procurement operations, yielding time savings, reduced administrative costs, and financial savings through economies of scale. Importantly, a primary focus of the PAR is to address the lack of co-ordination among the various actors involved in public procurement. To do so, the MEF plans to integrate the State Financial Administration’s digital platforms, enabling centralised procurement data management and real-time communication among stakeholders. This should also enhance transparency in public procurement by fostering citizen access, monitoring, and active participation, and allow for the definition of performance indicators specific to certain categories of contractual objects, enabling evaluation, comparison, and benchmarking across different areas of procurement (OECD, 2024[3]).
Following the MER, Peru recently passed a new General Law on Public Procurement, which seeks to redress many of the issues previously mentioned (Official Gazette General Law No. 32069, 2024[18]). Although its impact remains to be evaluated, the new Law introduces several changes aimed at improving transparency, efficiency, and the alignment of procurement practices with national development priorities. Compared to the Public Procurement Law of 2019 (Official Gazette Law No. 30225, 2019[14]), the new law implements stricter guidelines for monitoring and oversight, ensuring that contracts are subject to more rigorous compliance checks. It also introduces more streamlined processes for selecting and managing suppliers, particularly in the context of large-scale infrastructure projects, and includes mechanisms to prevent undue delays by holding public institutions accountable for meeting established timelines. Additionally, Law No. 32069 places a stronger emphasis on fostering competitive bidding, aiming to limit sole-source contracts unless justified by specific strategic needs. It also addresses fiscal constraints by limiting budgetary modifications mid-project, a step not as explicitly mandated in the previous Law No. 30225, which aims to help to minimise the risk of delays and cost overruns due to shifting financial resources.
Regulation, accountability and transparency
Strict fiscal rules are in place for subnational governments in Peru. The 2013 Fiscal Responsibility and Transparency Law (Official Gazette Law No. 30099, 2013[19]) clarified the previous regulations and set two main rules, aligned with the national macro-fiscal framework. The first rule limits the annual growth in total non-financial public expenditure to the average of revenue growth of the last four years in order to smooth the volatility of subnational governments’ revenue. The second rule restrains the overall fiscal framework by capping the stock of debt that a given subnational government can take to less than their own revenue (measured as an average over the last four years). Law No. 30099 also empowers the executive to regulate the full management and reporting framework associated with these two rules. In 2015, a Supreme Decree established a Fiscal Council to provide technical, independent and non-binding opinions on the fulfilment of fiscal rules by the national but also by subnational governments (Official Gazette Supreme Decree No. 287-2015-EF, 2015[20]).
Peru’s framework for public-private partnerships (PPPs) allows all subnational governments to use the PPP modality for infrastructure and development projects, guided by the PPP law, its regulations, and national policy and technical guidelines. The process consists of five phases (planning and programming, formulation, structuring, transaction, and contract execution) each with milestones that must be met by public entities. During the formulation phase, an eligibility assessment is conducted to determine if a project is better suited for a PPP compared to traditional public procurement. One of the key criteria considered is the capacity of the public entity to manage the project.
The Advisory Commission for the Development of National Infrastructure (Comisión Consultiva para el Desarrollo de la Infraestructura Nacional), established in August 2023, provides recommendations and issues proposals to enhance the development and execution of infrastructure projects within the National System of Private Investment Promotion (Sistema Nacional de Promoción de la Inversión Privada), with a view to improve the use of the PPP modality. However, despite these efforts, subnational governments face significant challenges in implementing PPPs. A lack of up-to-date technical and managerial skills, particularly at the local level, hinders their ability to execute these projects. While many governments have established Committees for the Promotion of Private Investment, few have successfully implemented PPP projects. Additionally, although public entities are required to prepare the Multiannual PPP Investment Report (Informes Multianuales de Inversiones en Asociaciones Público-Privadas, IMIAPP) to propose projects, the number of projects developed remains limited. The National Infrastructure Plan, which offers a top-down perspective, is still working towards incorporating a more territorial approach to better align with regional needs, but progress has been slow in truly reflecting local preferences (PCM, 2024[16]).
Peru has made progress in enhancing its subnational public investment system. In 2016, the country replaced its National Public Investment System with the Invierte.pe system, which offers greater flexibility, streamlines investment planning across all levels of government and decentralises to subnational governments the ability to formulate, evaluate and implement their projects through their own resolution bodies and multiannual investment programming offices. The new system incorporates a gap diagnosis, where each authority identifies and prioritises its needs, enabling subnational governments to create a well-structured portfolio of investments for which they can seek funding. Although funding sources are primarily limited to transfers, several options within this type of source are available, including discretionary transfers, formula-based funds such as FIDT, FONCOMUN, and FONCOR, as well as resources from the canon in regions that receive them. Additionally, the Reward to Investment Execution programme offers extra funds to subnational governments that meet specific budget execution thresholds, and the Works for Taxes is an innovative scheme that seeks to collaborate further with the private sector in infrastructure investment.
Peru’s significant progress in recent years in strengthening its subnational public investment system places the country in a unique position to address remaining barriers, close critical investment gaps, and secure the foundations for regional development.
First, while the National System of Multiannual Programming and Investment Management has required a gap diagnosis since 2016 to identify regional and local needs, the resulting portfolio of investment projects is not linked to the budget. This disconnect means that subnational governments’ lists of needs are not aligned with their fiscal capacity, making these investments almost entirely dependent on national government transfers. Moreover, the planning and funding phases of the investment cycle are not clearly delineated. When the budget, covering national and subnational governments, reaches the National Congress for approval, new projects which were not included in the original planning process may be added and funded through discretionary, earmarked transfers for that year. This can result in projects that were not identified as regional or local priorities being prioritised, while those deemed critical in the gap diagnosis may receive insufficient or no funding. Finally, while the Invierte.pe system allows for multiannual planning, the budget is allocated on an annual basis, implying that all projects under implementation must be rediscussed every year and creating a risk that investments initiated in their first year may not receive sufficient funding in subsequent years. This reliance on annual budgets and discretionary transfers exposes investments to potential delays or halts due to political changes or funding shortfalls, often resulting in stalled projects and wasted resources without benefiting the local population.
To fully capitalise on the identification of regional and local needs and the prioritisation system, Peru should better link the multiannual investment planning process with the budget and develop instruments to commit expenditures over multiple years.
This could be achieved through a multiannual budgeting framework with multi-year earmarked funds or legally binding investment contracts with pre-approved financial commitments extending across several fiscal years. Investments already in progress should thus be fully funded upfront, ensuring they are not subject to ongoing discussions about project prioritisation after being funded for the first time. Therefore, projects should only begin when the necessary funding is secured to guarantee their completion from start to finish. Additionally, projects that are not prioritised during the gap diagnosis phase should undergo stricter assessments, with their approval limited to exceptional cases. This would prevent resources from being diverted away from priority investments identified in the planning phase and ensure a more disciplined and strategic allocation of funds. These principles should be integrated into the National Public Investment Policy Guidelines, currently in development as mandated by law and expected to be delivered by end of 2024 (Official Gazette Legislative Decree No. 1252, 2016[2]).
Second, Peru faces a significant challenge with the atomisation of public investment at the subnational level. Most subnational public investment projects are short-term and small-scale, largely due to low budget predictability. Although there are some limits to the budgetary modifications that can be made depending on the specific source of revenue, the opening institutional budgets for subnational governments often differ substantially from their modified institutional budgets over the course of the fiscal year, with wide variations through frequent budgetary modifications that exceed previously set expenditure ceilings, particularly at the local level, negatively affecting strategic planning as well as budget execution. In 2023, regional and local government opening budgets increased by an average of 25% and 67% throughout the year, respectively (Figure 6.3). These discrepancies are primarily driven by frequent budget modifications that incorporate additional discretionary transfers throughout the fiscal year.
Additionally, canon resources, which are disbursed to recipient regions and municipalities in July, further disrupt fiscal planning by arriving midway through the budget cycle. For local governments, the fact that their budgets nearly double compared to the initial allocation, with most increases coming in the second half of the fiscal year, makes it difficult to plan and execute funds effectively and within the required timeframe. This unpredictability severely affects subnational public investment: authorities struggle to plan and prioritise projects effectively because they are unsure of how much funding they will ultimately receive. As a result, they often focus on short-term, small-scale investments that provide immediate but low-impact results. Initially, with fewer resources, local governments commit to smaller projects, and when additional funds arrive, the initial funds are already locked into these smaller initiatives, forcing them to continue funding minor investments with the newly allocated funds under the modified institutional budget.
This results in a fragmentation of investment, further exacerbated by the lack of joint investment strategies that systematically analyse shared infrastructure needs across regions or municipalities and provide a way to jointly fund infrastructure investments that may benefit several regions or municipalities. Therefore, although data shows that subnational governments account for a significant share of total public investment (61.8% in 2021), the quality and long-term impact of these investments is often suboptimal due to the fragmented approach encouraged by unpredictable budgets.
Note: PIA refers to the opening institutional budget and PIM to the modified institutional budget.
Source: OECD calculations based on (MEF, 2024[21]).
To address the atomisation of public investment, Peru should first improve budget predictability. One approach could be to limit the number of budgetary modifications allowed within a fiscal year and set a cut-off date, likely mid-year, after which no further amendments can be made. Major revenue sources that significantly impact the budget, such as canon revenues, should either be more accurately estimated in advance or treated as carry-over funds for the next fiscal year. If this is implemented, governments could better assess their capacity to finance larger investments rather than many small-scale, small-impact ones.
Furthermore, the gap diagnosis conducted by regions and municipalities should be more effectively used to identify common needs and facilitate joint infrastructure investments. By pooling funds from multiple authorities benefiting from the same project, Peru could move from an ad hoc approach to a systematic, collective investment strategy. This process, potentially led by the ARDs, could enable larger-scale investments, maximise shared benefits for multiple entities, and reduce the atomisation of public investment, leading to greater impact.
Third, despite the existence of a multiannual investment framework, Peru currently lacks a comprehensive mid- or long-term infrastructure investment plan. Beyond the National Sustainable Infrastructure Plan for Competitiveness (2022-2025) published in 2019–focused on the private sector and leaves out important sectors such as health–, there is no strategic document that articulates investment priorities at the national level across sectors and levels of government for the long term. The National Public Investment Policy Guidelines provide some guidance as to develop sectoral investment plans and those of regional and local governments, with a territorial approach, but they can be modified every five years (MEF, 2016[22]; Official Gazette Legislative Decree No. 1252, 2016[2]; OECD, 2024[3]). While the identification of needs and prioritisation of gaps is a valuable exercise, the fact that it must be tied the annual budget (instead of multiannual), the focus remains on short-term investments. As a result, Peru is missing a national investment strategy that co-ordinates priorities across sectors and subnational governments, a situation that can lead to investment duplication, missed economies of scale, and overall inefficiencies in public investment.
Peru needs to adopt a more forward-looking approach to public investment, one that extends beyond multi-year programming.
This would require developing a long-term investment vision at the cross-sectoral level with a prospective and territorial approach. Such a strategy should establish clear national priorities across key sectors–such as transport, health, education, and energy–while aligning investment efforts among national, regional, and local governments, given their vital role in public investment in Peru. This would enable to obtain better estimations of available resources and a thorough assessment of both current and future infrastructure needs, thereby guiding infrastructure investment decisions towards specific long-term goals. Moreover, having a comprehensive strategy in place would also facilitate co-ordinated joint investments through regions, municipalities, mancomunidades, or other similar collaborative bodies, as discussed above.
Finally, despite several legal modifications to Peru’s public procurement system and regulations in the past five years, the perception of corruption within the system has not improved over the last five years. Public procurement is highly regulated at the national level, governed by a complex and extensive set of legal clauses that are difficult to navigate for subnational governments that may be understaffed. Among the limited number of personnel who remain in their posts long enough to develop expertise, few possess the necessary skills to manage the entire procurement process efficiently, resulting in delays in project selection and execution, as well as challenges in ensuring transparency and legality. In fact, 60.9% of municipalities have requested additional capacity-building in administrative processes, while 58.2% have requested further training on internal controls and auditing (INEI, 2024[23]).
Additionally, monitoring and evaluation of public procurement processes are not systematically conducted. Under these circumstances, it is difficult to create an environment where public-private partnerships can be established with the necessary legal safeguards. While the MER has already started producing some effects, such as three Supreme Decrees on mandatory corporate purchases or the recently approved General Law on Public Procurement seeks to tackle many issues on transparency, efficiency, and alignment with strategic priorities (Official Gazette General Law No. 32069, 2024[18]), its implementation remains to be seen and evaluated.
Peru should continue strengthening its public procurement framework by ensuring the full implementation of the MER Action Plan for Reforms and bolstering the skillset of officials at all government levels. This process should start with a thorough knowledge assessment of procurement officials to identify gaps, followed by a comprehensive training programme tailored to address these needs. Simplifying processes by establishing standardised qualifications, contractual terms, and technical specifications would also benefit subnational governments, which often operate with limited time and resources, by making procurement procedures more accessible and ensuring transparency standards are met. An integrated procurement platform could further enhance efficiency, transparency, and enable systematic monitoring and evaluation. Additionally, clear legal guidelines for PPPs, along with targeted training for officials on this topic, could facilitate greater private sector participation in critical infrastructure projects.
Link the multiannual investment planning process to a budget that enables the commitment of expenditures over multiple years to ensure a better alignment between planned and funded investments. This could be accomplished through a multiannual budgeting framework with earmarked funds or legally binding investment contracts that secure financial commitments across several fiscal years. Additionally, infrastructure projects should only begin once all necessary funding is secured to ensure completion from start to finish. Lastly, projects added later in the budget approval process, without undergoing the gap diagnosis phase, should be strictly limited to prevent the diversion of resources from strategically prioritised investments.
Limit the number of budgetary modifications permitted within a fiscal year and encourage joint investment strategies to reduce the fragmentation of subnational investments. This could be achieved by setting a cut-off date after which no further budget amendments are allowed, and by treating canon revenues as carry-over funds for the next fiscal year to avoid large discrepancies between the opening institutional budget and the modified institutional budget. A clearer view of total revenues would enable subnational governments to plan and invest in larger-scale projects. Additionally, joint investment strategies could foster collaboration between regions and municipalities, pooling funds to support more impactful, larger-scale investments that maximise shared benefits and reduce the atomisation of public investment.
Develop a mid- or long-term national infrastructure investment plan to strategically articulate investment priorities across sectors and levels of government. This would require developing a long-term investment vision at the cross-sectoral level with a prospective and territorial approach. By establishing clear national priorities across key sectors while aligning investment efforts among government levels, this strategy could provide better estimations of available resources and a thorough assessment of both current and future infrastructure needs, thereby guiding infrastructure investment decisions towards specific long-term goals. This strategy could also facilitate co-ordinated joint investment among subnational governments.
Continue strengthening the framework for public procurement by fully implementing the Strategic Reform Framework Action Plan and ensuring that officials at all levels of government have the necessary skills. A thorough assessment of procurement officials’ knowledge should be undertaken to identify capacity gaps and followed by a tailored training programme to address these needs. Moreover, simplifying public procurement processes by establishing standardised qualifications, contractual terms, and technical specifications would make procedures more accessible, particularly for subnational governments, while also upholding transparency standards. An integrated procurement platform would enhance efficiency, transparency, and enable systematic monitoring and evaluation. Additionally, clearer guidelines for PPPs, along with targeted training for public officials, could also support greater private sector involvement in essential infrastructure projects.
.
References
[6] COMEX (2023), State of subnational public finances in Peru - Special edition, https://www.comexperu.org.pe/upload/articles/reportes/reporte-finanzas-publicas-001.pdf (accessed on 5 May 2024).
[11] IFC (2018), Peru’s Works for Taxes Scheme: An Innovative Solution to Accelerate Private Provision of Infrastructure Investment, https://openknowledge.worldbank.org/server/api/core/bitstreams/55282690-f795-50e2-87a2-0204d430d88b/content (accessed on 15 October 2024).
[1] IMF (2024), Government Finance Statistics, https://data.imf.org/?sk=a0867067-d23c-4ebc-ad23-d3b015045405 (accessed on 14 October 2024).
[23] INEI (2024), Indicators of Municipal Management 2023, https://cdn.www.gob.pe/uploads/document/file/6491283/5665613-peru-indicadores-de-gestion-municipal-2023.pdf?v=1720729228 (accessed on 5 May 2024).
[21] MEF (2024), Budgetary Expenditure (Daily Update), https://apps5.mineco.gob.pe/transparencia/Navegador/default.aspx (accessed on 14 October 2024).
[10] MEF (2024), Canon, https://www.mef.gob.pe/es/?option=com_content&language=es-ES&Itemid=100959&lang=es-ES&view=article&id=454 (accessed on 5 May 2024).
[4] MEF (2024), CONECTAMEF, https://www.mef.gob.pe/contenidos/servicios_web/conectamef/quienes_somos.php#quienes (accessed on 5 May 2024).
[8] MEF (2024), FIDT, https://www.mef.gob.pe/es/?option=com_content&language=es-ES&Itemid=102593&lang=es-ES&view=article&id=5896 (accessed on 15 October 2024).
[12] MEF (2024), Reward to Investment Execution, https://www.mef.gob.pe/es/?option=com_content&language=es-ES&Itemid=102664&lang=es-ES&view=article&id=6379 (accessed on 15 October 2024).
[17] MEF (2023), Ministerial Resolution No. 402-2023-EF/11, https://cdn.www.gob.pe/uploads/document/file/5475553/4884207-rm402_2023ef11.pdf (accessed on 14 November 2024).
[22] MEF (2016), National Public Investment Policy Guidelines - Documentation, https://www.mef.gob.pe/es/?option=com_content&language=es-ES&Itemid=101128&lang=es-ES&view=article&id=945 (accessed on 14 November 2024).
[3] OECD (2024), OECD interviews conducted with local stakeholders as part of the Peru accession mission (RDPC).
[5] OECD (2023), Public Financial Management in Peru: An OECD Peer Review, OECD Publishing, https://doi.org/10.1787/d51d43b1-en.
[13] OECD (2023), Subnational governments in OECD countries: Key data (Brochure), OECD Publishing.
[18] Official Gazette General Law No. 32069 (2024), General Law on Public Procurement, https://www2.congreso.gob.pe/Sicr/TraDocEstProc/Expvirt_2021.nsf/Repexpvirt?OpenForm&Db=202105362&View (accessed on 14 November 2024).
[9] Official Gazette Law No. 28258 (2004), Law on Mining Royalties, https://www2.congreso.gob.pe/sicr/cendocbib/con4_uibd.nsf/1002BCF7DCFACAE705257C200052B47B/$FILE/28258.pdf (accessed on 15 October 2024).
[19] Official Gazette Law No. 30099 (2013), Law on strengthening fiscal accountability and transparency, https://www.leyes.congreso.gob.pe/documentos/leyes/30099.pdf (accessed on 15 October 2024).
[14] Official Gazette Law No. 30225 (2019), Public Procurement Law, https://www.onpe.gob.pe/modTransparencia/programa-inversiones/normas/TUO-LEY-DE-CONTRATACIONES-ESTADO.pdf (accessed on 5 May 2024).
[2] Official Gazette Legislative Decree No. 1252 (2016), Legislative Decree creating the National System of Multiannual Programming and Investment Management and repealing Law No. 27293, Law of the National System of Public Investment, https://cdn.www.gob.pe/uploads/document/file/204885/DL1252.pdf?v=1594247767 (accessed on 5 May 2024).
[7] Official Gazette Legislative Decree No. 1435 (2018), Legislative Decree establishing the implementation and operation of the FIDT, https://cdn.www.gob.pe/uploads/document/file/309678/Decreto_legislativo_que_establece_la_implementaci%C3%B3n_y_funcionamiento_del_fondo_INVIERTE.pdf (accessed on 5 May 2024).
[20] Official Gazette Supreme Decree No. 287-2015-EF (2015), Provisions for the implementation and operation of the Fiscal Council, created by Law No. 30099, Law on Strengthening Fiscal Accountability and Transparency., https://cdn.www.gob.pe/uploads/document/file/254583/228903_file20181218-16260-qxurrt.pdf?v=1545181027 (accessed on 14 November 2024).
[16] PCM (2024), OECD questionnaire answered by local stakeholders as part of the Peru accession process (RDPC).
[15] Transparency International (2024), Corruption Perceptions Index 2023, https://images.transparencycdn.org/images/CPI-2023-Report.pdf (accessed on 15 October 2024).
← 1. Public investment generally refers to investment in physical infrastructure (e.g. roads, government buildings, etc.) and soft infrastructure (e.g. innovation support, research and development, etc.) with a productive use that extends beyond a year (OECD, 2015[115]). This can include capital expenditure (i.e. gross capital formation and acquisitions) and capital transfers (i.e. investment grants and subsidies in cash or in kind made to other institutional units).