THE SNIP SNIPPED: STREAMLINED PUBLIC PROJECTS

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SENSITIVE
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USTR FOR BHARMAN AND MCARRILLO
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E.O. 12958: N/A
TAGS: ECON PGOV EINV EAID PE
SUBJECT: THE SNIP SNIPPED: STREAMLINED PUBLIC PROJECTS


Sensitive But Unclassified, please handle accordingly.


1. (U) SUMMARY: With Economy/Finance (MEF) Minister Luis Carranza
out of the country, President Garcia issued an emergency decree
allowing Regional Presidents to approve public investment projects
based solely on project summaries, effectively dismantling the
Finance Ministry's Public Investment System (SNIP). On his return,
Carranza met with Garcia and Prime Minister Jorge del Castillo, and
the President agreed to modify the decree to give the Regional
Presidents authority over only the smaller projects within their
regions. In issuing the decree, Garcia was responding to growing
pressure to speed development projects for the regions, but many
observers believe that dismantling the SNIP could foment
inefficiency and corruption. This back and forth reflects the
inherent tension between the government's desire to get resources
out to the regions fast and its need to make sure public moneys are
judiciously spent. On May 15, Garcia and Carranza announced the
official reorganization of SNIP. END SUMMARY.

FINANCE MINISTER PUSHES BACK ON CONTROL OF SPENDING
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2. (U) On May 9, with his Finance Minister Luis Carranza in France
for debt restructuring talks, President Garcia secured cabinet
approval for an Emergency Executive Decree to streamline the vetting
process for public projects funded or approved by the State. The
decree, published in Pru's official newspaper on May 11, was seen
as effectively dismantling the National System of Public Investment
(SNIP),which is operated by the MEF. (The SNIP is a system whereby
development projects are assessed by an agency of the Finance
Ministry in a process involving evaluation for financial soundness,
rate of return, social impact and other considerations.) Apart from
approving two projects without reference to SNIP vetting, the Decree
set out for the future the types of projects that would be available
for streamlined approval by Regional Presidents. These were:
highways; education and health infrastructure; sanitation; rural
electricity; irrigation systems; hydroelectric plants; and prisons.


3. (SBU) Minister Carranza was reportedly angry about the virtual
dismantling of SNIP fiscal control and, according to news reports
was prepared to resign in protest. On his return to Peru May 12,
Carranza met for several hours with President Garcia and Prime
Minister Jorge del Castillo to discuss the issue. After the
meeting, President Garcia announced that the Decree would be
modified to keep SNIP control over large projects. Both Garcia and
Del Castillo publicly underscored their strong support for
Carranza's continuing in the cabinet as Minister of Economy. (Many
analysts see technocrat Carranza, who is not a member of Garcia's
APRA party, as pivotal to the Garcia government's image as committed
to macroeconomic stability and fiscal responsibility.) A revised
Decree is expected to be issued later this week.


4. Garcia and Carranza seemed to have reached agreement after
Garcia's May 15 announcement that SNIP would be reorganized.
Carranza stated publicly that the SNIP reorganization would preserve
fiscal oversight yet speed up the approval process. The media
reported agreement between various ministers and Carranza that the
new SNIP would not be involved in approval of education, health,
irrigation, transportation and communication. (Note: these
exceptions include many if not most of the infrastructure projects
over which SNIP has had authority. End note.)

REGIONS PRESS GOP TO SPEED UP SPENDING
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5. In issuing the decree, Garcia was responding to growing pressure
to speed development projects for the regions, which are starting to
call on the central government to follow through on its pledges to
do just that. Regional and local governments have long complained
about the tedious SNIP process that involved endless delays in
decision-making and implementation, and President Garcia's move is
part of his promise to accelerate decentralization. The Regional
President of Junin, Vladimiro Huaroc told us May 14 that he welcomed
the President's initial decree and was disappointed that it had been
modified to include only small-scale projects.

REMOVING GOVERNMENT OVERSIGHT...?
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6. At the same time, many observers believe that dismantling the
SNIP could foment inefficiency and corruption by approving projects
without first testing them for feasibility, responsiveness to needs
and cost-effectiveness and by removing central government oversight
over sensitive expenditures. The government's "Investment Shock"
policy, which intended to accelerate the dispersal of government
funds for key equipment purchases, was undermined after it was
perceived as enabling a series of corruptions scandals connected
with equipment expenditures in the Ministries of Interior, Health
and Defense.

COMMENT
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7. (SBU) The Decree and its expected replacement are likely to spawn
continuing debate over public spending in the coming weeks. There
have long been complaints that the SNIP is an obstacle to getting
needed infrastructure built; the counter argument is that regional
and local governments lack the capacity to put forth economically,
environmentally and socially responsible projects. Some infamous
projects, such as new bullfighting rings and large municipal office
buildings in poor municipalities that lacked schools and hospitals.
Peruvians may want the kind of decentralization that this decree
brings, but they also want safeguards against the kind of corruption
that it may facilitate. This recent back and forth reflects the
inherent tension between the government's desire to get resources
out to the regions fast and its need to make sure public funds are
judiciously spent.
STRUBLE