Public finance in crosshairs of Swiss and Peruvian authorities

Authorities in Peru with help from the Swiss aim to improve public finance to help raise living standards of poor Peruvians, such as those tempted to migrate to shantytowns such as Pachacutec on the outskirts of the capital, Lima. Keystone
This content was published on March 11, 2016
Paula Dupraz-Dobias, Lima, Peru

Swiss authorities have begun trying to help Peru improve its poor management of public finances, an endemic problem that led provinces and local communities to return 60% of the money they received from the central government last year.

A Swiss-funded development programme focuses on the issue of decentralization, a central feature of Switzerland’s governance, with the aim of bringing better financial management and transparency to Peru in the budgetary planning and spending of six regional and five local governments.

Martin Peter, programme manager in Peru for the State Secretariat for Economic Affairs (SECO)External link, said economic governance was one of the main pillars of Swiss economic cooperation in Peru. He explained that while poverty rates have decreased over the past ten to 15 years in Peru, pockets of destitution still exist in many rural areas.

“It is important that you help sub-national governments to spend their money wisely," he said.

The programme is supported by the Basel Institute on GovernanceExternal link, which specialises in the recovery of stolen assets and recently announced the opening of its first international office in Peru. The institute also will work with Peru’s public prosecutor to strengthen investigations into fiscal fraud and corruption.

Swiss and Peruvian officials signed a cooperation agreement last October. Peru is still coming to terms with the legacy of the former Peruvian President Alberto Fujimori, who was jailed for corruption and other charges.

Focus on decentralisation

Oscar Solorzano, who heads the institute’s new Lima office, explained that in Peru, available funds at sub-national levels were not being properly used because previous decentralization policies were accompanied with regional and local governments being given the capacity to spend funds.

“They receive lots of money from the central government and the canon – the extractive industry revenues – and they don’t have the capacity to create complex projects to spend the money.”

Officials from the OECD (Organisation for Economic Cooperation and Development)External link, which partners with the Basel-based institute, also are involved.

Peru, in its aim to become more of an economic power, hopes to join the OECD as a full member by 2021, exactly 200 years after the country gained independence from Spain.

A recent OECD report on Peru cited “coordination problems with central government, weak sub-national institutions, political fragility at the regional level and an inefficient allocation of resources,” as impediments to decentralization.

Changing times

Rossana Polastri, Peru’s vice-minister of finance, present at the meeting, said that after the fall of commodities prices and subsequently lower royalties and tax revenues, the central government “could not be compensating (regions and communities) for any changes in revenues.”

Peru relies heavily on the export of mineral resources, which represent approximately 60 percent of Peru’s total shipments abroad.

“We realize that working with sub-national governments and strengthening governance is not only a matter of corruption, it is efficiency," Polastri said. "During times of lower revenues, it is even more efficient that you are managing scarce resources."

She acknowledged it will be essential to change mindsets towards how public funds are managed before financial governance can be improved in the provinces and local communities.

A region could start the year with 900 projects for money allocated from the central government, though by the end of the year that number could be inflated to 5000.

She said that budget allocation often becomes discretionary and "we cannot have hospitals starved of resources that would instead finance a pool.”

Peter, from SECO, also said that “one element of the programme is to avoid corruption, by strengthening internal control systems,” with government committees within provincial and local government that would help impede such abuse.

“Continual work”

The Basel institute’s programme has helped authorities to introduce strategic planning, then to establish a budget and “translate it into proper execution mechanisms.”

Afterward, the programme reports back to the central government on how fund are dispersed, Peter said.

With a new government in Peru due to take office in July, asked Peter whether there were concerns about lost efforts in working with outgoing national officials.

The programme, he answered “will have to sensitise new partners and bring them on board, and it is a continual work, which will not end over the next months or years.”

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