THE SNIP SNIPPED: STREAMLINED PUBLIC PROJECTS

UNCLAS LIMA 001804 SIPDIS SENSITIVE SIPDIS DEPT FOR WHA/AND, WHA/EPSC, EB/OMA, EB/TPP COMMERCE FOR 4331/MAC/WH/MCAMERON USTR FOR BHARMAN AND MCARRILLO USEU FOR DCM MCKINLEY 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 -------------- -------------- ¶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 -------------- ¶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...? -------------- ¶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 -------------- ¶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