Chinchero airport consortium threatens to file international arbitration but further cancellations of Peruvian infrastructure contracts are unlikely

Delegations of dancers parade in the main square of the Andean city of Cuzco, Peru, on 23 June 2017 as street festivities prepare the grounds for the beginning of the Inti Raymi or Sun Festival.

Cris Bouroncle/AFP/Getty Images: 800207606

The Kuntur Wasi consortium warned on 21 August that it plans to file an international arbitration case against the Peruvian government over the cancellation of its USD525-million contract for the design, construction, and operation of the new Chinchero International Airport in the southern Cusco region. The consortium, comprising Argentina's Corporación América and Peru's Andino Investment Holding, had its contract unilaterally cancelled on 21 May by the Ministry of Transport. This reflected political concern over its funding scheme and after it had been questioned by the comptroller general's office.

The government already has agreed to paid compensation over the cancellation of the Chinchero airport contract. Instead, the dispute centres on how much should be paid to the Kuntur Wasi consortium. The case is currently being handled at the Ministry of Finance's System of Coordination and Response of International Investment Controversies: a government body in charge of identifying and solving investor's disputes before this become contentious and end up in courts. According to the Chinchero airport contract, if an agreement cannot be reached within the six months following the cancellation, the consortium is then free to file for international arbitration.

The original contract had been signed by the previous administration of President Ollanta Humala (2011–16) on 4 July 2014, but was amended by the incumbent government of President Pedro Pablo Kuczynski on 3 February 2017. The comptroller general and some congressional lawmakers were unconvinced of the government's need to allocate more state funding to the project. Kuntur Wasi claimed that the amendment benefitted the government as it saved them interest payments. The government confirmed these claims, arguing that the contract amendment saved the state USD590 million in interest. According to Kuczynski, the overall costs of the contract would otherwise have reached USD1.1 billion. Following the project's cancellation, Kuczynski explained that the project would proceed with another contractor, although the government has not clarified the funding arrangements for the new scheme.

Chinchero's cancellation represents the second time this year – and in a decade – that a large-scale project has been cancelled for reasons other than local opposition (two large-scale mining projects, Newmont's Minas Conga in Cajamarca and Southern Copper in Arequipa, are currently suspended because of local opposition over water supply concerns while Bear Creek's Santa Ana mining project in Puno was cancelled in June 2011 after social protests). On 23 January, the Kuczynski government cancelled the USD7.3-billion Southern Peruvian Pipeline (Gasoducto Sur Peruano) project, led by Brazil's Odebrecht, which was already 30% completed. In cancelling this project, Kuczynski cited failure to secure the required USD4.1 billion of international funding needed for the project, mainly due to concerns over corruption investigations against Odebrecht worldwide. On 21 December 2016, the United States Department of Justice published claims that the Peruvian authorities received nearly USD29 million between 2005 and 2014 from Odebrecth in bribes or funding for political campaigns.

IHS Markit assesses that the Chinchero airport case, despite nor being connected directly with Odebrecht, was affected by increased perceptions of corruption in Peru. The government initially attempted to resist criticism and defend the contract, but cancelled it after weeks of media and popular pressure. In addition to the report of the comptroller general's office, a major driver for the cancellation was pressure from Congress, controlled by the Fujimorista Popular Force (Fuerza Popular: FP) party.

Outlook and implications

Excluding cases related to Odebrecht, the Kuczynski government is unlikely to cancel more infrastructure contracts in the coming year. Odebrecht still holds contracts for at least six highways and road construction works and one port terminal. It is trying to sell these to other contractors. The government is keen to continue attracting foreign direct investment for mining, oil, and infrastructure projects and to promote an image that it is pro-business and guarantees contract stability. Therefore, the Chinchero International airport case is likely to remain an isolated case of state contract alteration.

Nevertheless, the government is highly unlikely to offer acceptable compensation to the Kuntur Wasi consortium. According to IHS Markit sources, government authorities are too sensitive to public opinion and perceptions of corruption following the Odebrecht case to meet the consortium's requests. In particular, the authorities fear that a significant offer of compensation to Kuntur Wasi could be framed by the media, public opinion, or Congress as being too generous or going against the country's best economic interests. As such, in the absence of a deal, the Kuntur Wasi consortium is likely to file international investment arbitration against Peru at the International Centre for the Settlement of Investment Disputes six months after the contract's cancellation.

An indicator of declining state contract alteration risks would be the absence of further government contract cancellations in the next year. Conversely, an indicator of increased state contract alteration risks would be the generation of further allegations of corruption, unrelated to the Odebrecht case, which force the authorities to renegotiate, suspend, or cancel additional contracts under pressure from Congress, the comptroller general's office, or public opinion.