PERU

The Republic of Peru is a unitary, semi-presidential representative democratic republic. Legislative power is vested in the Congress (Congreso) of the Republic of Peru, the unicameral house. The 130 members of the house are elected directly by the population for a five-year term by proportional representation. The head of state is the President, elected through direct vote for a five-year term.

In 2002 and still on-going, a decentralisation process was launched, following the country’s transition from military dictatorship to democracy with the 1979 Constitutional Act, and the promulgation of the 1993 Constitution. The 2002 constitutional reform established four levels of government in Peru: central, regional, provincial and district.

The country has two tiers of subnational government, with regions (departamentos) and provincial and district municipalities (municipalidades). Both regional and local governments enjoy political and administrative autonomy over matters within their jurisdiction. To improve co-ordination between levels of government, an institutional framework for inter-governmental commissions was put in place as of 2007. At the end of 2015, there were three commissions considered active by the Decentralisation Bureau: health, labour and education. The lack of implementation is partly due to disagreement about how representatives of local governments should be elected. To overcome this gap, Decentralised Cabinet meetings have been used in recent years for vertical and horizontal co-ordination between levels of government. In March 2017, the Government created a new structure under the Prime Minister’s Cabinet to manage dialogue and coordination with subnational governments.

In April 2022, meetings have been held between the regional councils and representatives of the central government to evaluate the drafting of a financial autonomy law, with the aim of giving budgetary independence to the regional councils and empowering their oversight function. The bill also intends to modify the regional government law, especially regarding the conditions of suspension and vacancy of regional councilors and governors.

TERRITORIAL ORGANISATION
MUNICIPAL LEVEL	INTERMEDIATE LEVEL	REGIONAL LEVEL	TOTAL NUMBER OF SNGs (2021)
1 874 district municipalities (municipalidades distritales) and 195 provincial municipalities* (municipalidades provinciales)		24 regions (departamentos) and the Constitutional Province of Callao
Average municipal size: 15 936 inh.
2 069		25	2 094

*Excluding the province of Callao

OVERALL DESCRIPTION: Peru has a two-tier system of subnational government, composed of departments (regional level) and provincial and district municipalities (local level).

REGIONAL LEVEL: The regional level includes 24 departementos set as regional governments, as well as the Constitutional Province of Callao, surrounding the capital city of Lima, which has the status of a departemento. A referendum on mergers took place in 2005, which led to the rejection of the proposal (the programmed 2009 and 2013 referenda were postponed indefinitely).

Departementos have regional councils, which are headed by presidents, elected for four years according to an electoral system that mechanically hands a governing majority at the local level to the political party owning a majority in the subnational assembly. If no candidate has obtained 30% of the votes cast, a run-off election between the two main candidates is held within 30 days of election day. Regional co-ordination councils (Consejos de Coordinación Regional) are consultative entities composed of elected officials (60% of the council) and civil society members (40%), with a mission to co-ordinate and advise the regional president on a broad range of issues, including the budget. The regional action is executed according to the approved Regional Development Plan and in accordance with the policy established by the regional government and its budget capacity and availability.

The country’s main development challenges stem from acute regional disparities and difficulties in the mountainous zones, and the over-concentration of economic activity in specific territories, especially Lima. Despite the framework established by the National Strategic Development Plan for national policy priorities, and Concerted Regional Development Plans providing a complementary framework for priority setting at a regional level, national policies and priorities are not necessarily reflected in sub-national planning. In this context, the central government presented in May 2021 a Guide for the Concerted Regional Development Plan (Guía para el Plan de Desarrollo Regional Concertado) in order to establish the methodology for the preparation process (formulation or updating) of the Concerted Regional Development Plans and thus align national objectives with regional objectives.

MUNICIPAL LEVEL: The municipal level comprises two sub-levels: 195 provincial municipalities at the upper level and 1 874 districts municipalities at the lower level. These two municipal levels are independent (Ley Orgánica de Municipalidades). However, provincial municipalities have a co-ordination role across district municipalities within the province. The municipal administration is executed by the municipal councils and the mayor’s office, which are the governing bodies of the municipality, and by the corresponding administrative bodies. The municipal council, made up of the mayor and the councillors (regidores), exercises a normative function (approve, reform or reject norms). The mayor exercises the executive function. The mayor and councillors are elected for a period of four years, according to the same electoral system as above-mentioned for regions, and may be re-elected for a subsequent period. The Metropolitan Municipality of Lima (MML), with the status of provincial municipality, has been transferred additional powers and functions close to those of regional governments since 2011 under a special regime. The MML exercises and assumes regional functions, which implies that the legislation for the regional governments is also applicable to the MML.

Municipalities in Peru are large by international comparison: nearly 16 000 inhabitants vs. 9 700 inhabitants in the OECD on average. However, there is a huge disparity in the distribution of the population between Lima and the rest of the country. Around 30% of the population (9.67 million inhabitants) live in the MML and more than 70% of the municipalities have less than 10 000 inhabitants. The cities of Peru, according to the National Urban Development Plan of the Ministry of Housing, are classified as minor, intermediate and major cities and their population ranges between 2001 and 500 000 inhabitants. To be considered a metropolis, its population must comprise more than 500 001 inhabitants. By 2021, 26 cities had more than 100 000 inhabitants, concentrating 61% of the population, and 8 cities were considered metropolises (Lima, Callao, Arequipa, Trujillo, Chiclayo, Piura, Huancayo and Cuzco), concentrating 43% of the population.

HORIZONTAL COORDINATION: The central government passed a law on Municipal Amalgamation in 2007 encouraging the consolidation of district municipalities through fiscal incentives but its implementation has been limited.

Subnational government competences are determined by the 2002 Basic Law of Decentralisation (Ley de Bases de la Descentralización) which established a distinction between exclusive, shared and delegated competences. Organic laws for each level of government provide more details. Since the Basic Law of Decentralisation, decentralisation in Peru is conceived as a State Policy that has been expressed in a gradual transfer of powers, functions and resources from the National Government to Regional and Local Governments. Yet this process was not effectively implemented before 2007, when the Decentralisation Secretariat was created within the Presidency of the Council of Ministers (PCM), which replaced the former National Council for Decentralisation. This has caused overlaps across all levels of government. Moreover, the process has resulted in significant disparities between subnational governments regarding the adequate and efficient transfer of functions. One of the causes is related to the institutional weakness of some Regional Governments and Provincial and District Municipalities that haven’t built the necessary capacities allowing the adoption of competences coming from the National Government. As of today, the central government is still refining the delimitation of competencies between the different levels of administration, and the main challenge remains the formulation of a new Capacity Development Plan that reinforces subnational governments’ human capital and public officials’ capacities.

Regional competences include education, public health, environmental protection, support for economic growth, land-use planning, as well as culture and citizen participation (shared or delegated). Provinces and districts are responsible for promoting local economic development, and providing public services. They share some basic competences and in addition, provincial municipalities have extended responsibilities regarding local development and spatial planning within the province, as investment and public service projects.

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	Regional level	Municipal level
1. General public services (administration )	Internal administration; Enhance citizen participation	Internal administration (organisation and budget); Supervision of local public works
2. Public order and safety		Public safety
3. Economic affairs / transports	Regional development planning; Road infrastructure, energy, communications; Promotion of employment; Tourism; Support to economic and productive activities and SMEs	Local development and spatial planning (provincial municipalities); Urban and rural development; Public transport and traffic and urban transit management; Tourism
4. Environment protection	Promote sustainable use of forestry resources and biodiversity; Preservation and management of natural reserves and protected natural areas	Protection of the environment; Waste management
5. Housing and community amenities	Land-use planning	Land zoning plans (provincial municipalities); Housing and urban renovation
6. Health	Manage health policies in the region in accordance with national policies and sectoral plans; Supervise and control public and private health services.	Promote and/or organise preventive medicine actions; Build and equip local medical centres (postas médicas) and first aid posts; Carry out prevention programs; Conduct rural sanitation campaigns; Control epidemics
7. Culture & Recreation	Access to culture; strengthening of regional artistic and cultural institutions	Culture; sport and recreation; conservation of archeologic and historic buildings
8. Education	Management of preschool, primary, secondary, and higher non-university education	Participation in the management of education
9. Social Welfare		Management of social programs

Scope of fiscal data: regions, provincial councils, district councils and decentralised agencies.

SNA 2008

Availability of fiscal data: Medium

Quality/reliability of fiscal data: High

GENERAL INTRODUCTION: Peru is one of the most decentralised unitary countries of Latin America. Subnational governments have a key role in the economic and social development of the country, assuming important responsibilities, especially in public investments and in the delivery of such essential public services as health and education. According to the Law on Fiscal Decentralisation, the transfer of resources to regional governments is to be implemented gradually, through two stages: (i) the transfer of resources from the national level, and (ii) the allocation of a certain percentage of national taxes and resources to subnational governments. All regional and local governments approve their own budgets. However, the assignment of revenue to local governments in Peru leads to resource imbalances between district and provincial municipalities.

Subnational government expenditure by economic classification
2019	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure	1021	7.6%	34.8%	100%
Inc. current expenditure	684	5.1%	29.5%	67%
Compensation of employees	391	2.9%	42.7%	38.3%
Intermediate consumption	243	1.8%	30.5%	23.8%
Social expenditure	39	0.3%	13.4%	3.8%
Subsidies and current transfers	10	0.1%	7.4%	1%
Financial charges	1	0.0%	0.6%	0.1%
Others	0	0.0%	0.0	0%
Incl. capital expenditure	336	2.5%	54.7%	33%
Capital transfers	5	0%	5.9%	0.5%
Direct investment (or GFCF)	332	2.5%	61.9%	32.5%

EXPENDITURE: In line with the decentralisation process, but also with the increase in revenue from the boom in commodities revenue (canon funds), subnational government expenditure rose from 33% of general government expenditure in 2004 to over 40% in 2013, before decreasing slightly to 34.8% in 2019. In 2019, subnational government expenditure represented 7.6% of GDP, below the OED average of 17.1%. Staff expenditure represented 38.3% of subnational government expenditure and 42.7% of general government staff expenditure. Subnational governments are responsible for the payment of wages and pensions in the sectors of education and health. Regions represented 57% of subnational government expenditure in 2019 and municipalities 43%.

DIRECT INVESTMENT: One distinguishing feature in Peru is the high share of public investment made at the subnational level (61.9% of total public investment in 2019), above the OECD average (54.6%). In 2019, direct investment represented 32.5% of subnational government spending and 2.5% of GDP, well above the OECD average (11.3% and 1.9% respectively).

Public investment is partially maintained by transfer mechanisms (canon funds and earmarked transfers), whose funds must be dedicated entirely to public investment. The main categories of subnational government investment are transportation, sanitation, and education, as well as health for regional governments.

The Department for the Promotion of Private Investment (Gerencia de Promoción de la Inversión Privada) is responsible for promoting private investment and strategic alliances with the national, regional and local governments, private investment and civil society. A Metropolitan Fund for Investment was also created in the metropolitan municipality of Lima to provide resources for financing the Programme for Investment and Urban Works and supervise compliance with contracts involving local private investment.

Between 2016 and 2020, two investment projects were carried out at the local level through public-private partnership (PPP) contracts: (i) a Treatment Plan and Water Utility project for a total amount of USD 221 million and (ii) the expansion of the Lima metro for a total of USD 381 million. Most PPP investment projects are directly managed by the central government though the General Directorate of Policy for the Promotion of Private Investment of the Ministry of Economy and the Private Investment Promotion Agency (Agencia de Promoción de la Inversión Privada) which is a specialized technical body, attached to the Ministry of Economy, and which has the role of promoting private investment in Peru.

ⓘ No detailed data available for this country

The vast majority of responsibilities regarding subnational government expenditure are shared with the national government. Education and economic affairs/transport are the two primary categories of subnational government expenditure. In both sectors, local and regional government spending have low efficiency due to the lack of comprehensive plans and investment strategies, as well as the lack of capacity. Regions have undertaken major spending on infrastructure in the past years. Maintenance costs are weighing on regional budgets in the absence of medium-term investment strategies. At the local level, local councils lack operating and planning capacity to carry out school infrastructure. Health (mainly regional responsibility) and environmental protection (mainly municipal responsibility) are two other large categories of spending at the subnational level, after general public services.

Subnational government revenue by category
2019	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total revenue	1114	8.3%	40.6%	100%
Tax revenue	54	0.4%	2.7%	4.9%
Grants and subsidies	994	7.4%	-	89.2%
Tariffs and fees	58	0.4%	-	5.2%
Income from assets	8	0.1%	-	0.7%
Other revenues	0	0%	-	0%

OVERALL DESCRIPTION: Peru has a lower degree of decentralisation for revenue than for expenditure, leading to vertical fiscal gap. Despite a sharp increase in the budget of local governments since 2002, subnational governments depend heavily on central government transfers (89.2% of total subnational revenue in 2019), while the share of tax revenue in their total revenue is very limited (4.9% versus 42.4% on average in OECD countries). Subnational governments benefit from an important source of revenue, namely the exploitation of natural resources (royalties redistributed through canon funds). In fact, while total subnational revenue corresponds to 40.6% of public revenues, subnational governments' tax revenue represents only 2.7% of public revenue.

TAX REVENUE: Regions have no assigned taxes, in contrast with provincial and district municipalities. Besides, the latter cannot set tax bases or rates, which are set by the central government through the Municipal Taxation Act. The most important municipal tax is the property tax (predial) which is assigned to districts. It is based on property value in urban and rural areas, including land and buildings. Districts and provincial municipalities are also assigned a tax on property transactions (Impuesto de Alcabala). Property taxes represented 65.4% of subnational government tax revenues in 2019 (8.3 points increase compared to 2016) and 3.2% of total subnational government revenue (accounting for 0.3% of GDP, compared to 7.1% of GDP on average in the OECD). Provincial municipalities also benefit from the vehicle tax, as well as gambling and lottery taxes. Overall subnational tax revenue in Peru in 2019 were well below the OECD average regarding the share of GDP (0.4% versus 7.1%), public tax revenue (2.7% versus 32.3%) and subnational government revenue (4.9% versus 42.4%).

Peru enacted Law 31 380 and several legislative decrees that modify certain tax provisions and apply for tax year 2022. The reform includes a modification of the Municipal Taxation Act in order to modify the property tax, modify the rate of the tax on recreational vessels, establish a rate of 0% for the Tax on Vehicle Assets in the case of vehicles that have been theft or loss and include tractor-trailers in the scope of the Vehicle Wealth Tax.

GRANTS AND SUBSIDIES: Regional and local governments rely heavily on intergovernmental transfers. This dependency has increased over time, with the intensification of the spending needs of local governments and their limited capacity to generate income from their own sources.

There are seven types of intergovernmental transfers in Peru, which constitute the main source of funding for subnational governments. The primary transfers are the FONCOMUN for the municipalities (Fondo de Compensación Municipal, formula-based on demographic, geographic, socio-economic and fiscal criteria), and the FONCOR for regions (Fondo de Compensación Regional, also formula-based). They are complemented by discretionary ordinary transfers, for both regions and municipalities, which are mostly earmarked to cover the payment of wages and pensions in the sectors of education and health.

In addition, subnational government also receive, in some cases, commodity-based revenues, canon and royalties, which are distributed exclusively to the regional and local governments where the minerals are extracted. Canon represents half of the corporate tax from mining companies (i.e. the other half is retained by the central government), and revenue from royalties is based on the companies’ profits. They are earmarked to finance capital investment. Departments are almost fully financed through ordinary transfers from the central government. Canons and royalties account for 10% of their revenues, whereas they represent a larger share of municipal resources (37%). Since 2012, canon transfers have been decreasing, and compensated by an increase in other transfers earmarked for investment, which had a constraining impact on subnational government autonomy for undertaking investment.

OTHER REVENUE: Revenues from user charges and fees, including street cleaning, road tolls, park maintenance, public safety services, administrative fees, etc. are typically larger than tax revenues for subnational governments. In 2019, revenues from fees and tariffs represented 5.2% of total subnational government revenue, slightly above tax revenue which represented 4.9% of subnational government revenue. This category also includes revenues from property (sales, rents and dividends), which accounted for only 0.7% of total subnational government revenue in 2019, and fines and penalties.

Subnational government fiscal rules and debt
2019	Dollars PPP / inh.	% GDP	% general government debt	% SNG debt	% SNG financial debt
Total outstanding debt	73	0.5%	2.0%	100%	-
Financial debt	12	0.1%	0.4%	17%	100.0%
Currency and deposits	0	-	-	0.0%	0.0%
Bonds / debt securities	0	-	-	0.0%	0.0%
Loans	12	-	-	17.0%	100.0%
Insurance pensions	0	-	-	0.0%	-
Other accounts payable	58	-	-	83.0%	-

FISCAL RULES: Fiscal discipline is a key component of the Peruvian decentralisation process. The revised Fiscal Responsibility and Transparency Law 30099, enacted in 2013, reformed the previous Fiscal Responsibility and Transparency Law 27245 and the associated Decree no. 955, which were particularly complex (seven fiscal rules). The 2013 Fiscal Responsibility and Transparency Law streamlined the framework into two rules, and aligned them 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). The debt stock now includes “other accounts payable”. Law 30099 also empowers the executive to regulate the full management and reporting framework associated with these two rules. In 2015, a Supreme Decree 287-2015-EF established a Fiscal Council to provide technical, independent and non-binding opinions on the fulfillment of fiscal rules by the national but also by subnational governments.

In 2017, a new Legislative decree D.I. No. 1275 was enacted that set a new Framework for Subnational Fiscal Responsibility and Transparency (Marco de la Responsabilidad y Transparencia Fiscal Subnacional– MRTF-SN). The MRTF-SN introduced a budget balance rule for subnational government current accounts, with the aim to limit subnational government current expenditure depending on the level of revenue collected. The MRTF-SN established a gradual scale of sanctions for non-compliance with fiscal rules or failing to submit financial information as required by the MEF, easier to be implemented that in the framework of the previous law. However, it also allows exemption from compliance with the fiscal rules when subnational governments have a high credit rating (BBB+ or higher). This provision generates fiscal risks associated with the lack of control over the level of indebtedness of subnational governments.

DEBT: Subnational governments can only borrow under the state guarantee and only for capital investment projects (“Golden Rule”). They are required to submit multi-year reports on fiscal management. The MRTF-SN, which replaced the 2013 Fiscal Responsibility Law, established a set of measures associated with the debt restructuring of regional and local governments. It established that subnational government debt balance must not exceed the average current income of the last 4 years, nor the limits for the issuance of Regional and Local Public Investment Certificates (CIPRL) established by law.

Subnational government debt levels are low (0.5% of GDP), which represents a decrease of almost 3 points compared to 2016. In 2019, regions accounted for 59% of total subnational government debt (4 points increase in comparison with 2016), while the other 41% was held by municipalities. The financial debt is essentially composed of loans, as bond issuing is forbidden for most subnational governments. Other accounts payable represented a large part of the total outstanding debt (83%). Subnational debt is concentrated in a few regions and cities, particularly Lima, which is the only subnational government with access to financial and foreign markets.

TERRITORIAL MANAGEMENT OF THE CRISIS: On March 16, 2020, President Martin Vizcarra announced a State of Emergency, to slow the spread of people infected with COVID-19. The Ministry of Health, in coordination with regional and local governments, was able to increase the response capacity of the health system through the integration of social security (EESSALUD) with the Healthcare Service of the Armed Forces and the private healthcare system, which tripled the number of ICU beds in addition to having more equipment and trained medical personnel. Afterwards, a broader decentralised response to COVID-19 was coordinated with regional and local governments. In Lima, two towers of the Villa Panamericana were enabled to house infected people who did not require emergency care, as well as the Ate Hospital, implemented with 50 ICU beds to receive patients with more serious forms of the illness. This measure was then replicated in every region by implementing a “COVID-19 Hospital” and laboratories for tests processing. Five months after the start of the pandemic in the country, the number of hospital beds had increased by 591% and the number of intensive care units (ICU) by 511%, according to the Ministry of Health (MINSA).

Among the measures that the state has taken, there is a subsidy of S/380 soles (approx. USD 100) for 2 million families living in conditions of poverty and extreme poverty and people who work informally or independently. People with a formal job were able to withdraw up to S/2 400 soles (approx. USD 650) corresponding to their CTS (Compensation for Times of Service), while people who did not have a formal job in the last 6 months were able to withdraw up to S/2,000 soles (approx. USD 550) from their pension fund. In addition, by disposition of the central government, the municipalities received injections of funds to organize and distribute food baskets to families in poverty. Likewise, spending on health was increased through allocations to regional governments and the reallocation of spending to emergency care was facilitated.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: Regional and local governments, being closer to citizens, adopted various initiatives aimed mainly at: (i) controlling COVID-19 infections; (ii) managing essential elements of life in their communities, such as markets and public transportation; (iii) guaranteeing the provision of essential products and services for the community; (iv) supporting vulnerable families affected by the quarantine, and (v) making the use of public resources transparent in emergency management. Some municipalities implemented a Local Emergency Operations Centre to develop an information system to co-ordinate the management of the pandemic with local actors. Some also developed platforms to provide essential goods and services to the population close to their homes.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: The halt of economic activity since mid-March 2020 had a direct impact on revenues at the national level, which determines the availability of resources to be transferred to the Regional and Local Governments via Ordinary Resources (the main source of financing of the entities of the two subnational levels of government, which are assigned by the Ministry of Economy without following any specific criteria).

In the case of local governments, another of the main sources of financing is the FONCOMUN, which is financed in turn through an excess rate of the General Sales Tax. With the drop of economic activity, collection through this tax decreased considerably, impacting transfers by FONCOMUN. Prior to the pandemic and the State of Emergency, an average of about S/468 million soles (USD 124 million) per month was transferred to the municipalities. In the second quarter of 2020, amid the paralysis of economic activities, transfers by FONCOMUN barely exceeded S/300 million soles (USD 81 million) per month. Many rural municipalities, where extractive activity is not carried out, receive almost all their resources from FONCOMUN.

In the case of urban municipalities that have tax bases sufficient to generate their own resources, they also have also suffered a sharp drop in their income from this source since April 2020, when the national quarantine was extended. The average collection of S/624 million soles (USD 169 million) per month prior to the pandemic, between Municipal Taxes and other resources directly collected, was reduced to an average of S/105 million soles (USD 124 million) in the second quarter of 2020. The stoppage of economic activities that finance some taxes (such as taxes on slot machines, non-sports shows, among others) as well as the reduction in income of the population that reduces the ability to meet tax obligations (such as the payment of property taxes or municipal excise taxes), has deepened the fall in the collection of these revenues.

ECONOMIC AND SOCIAL STIMULUS PLANS: Peru implemented the Containment and Economic Recovery Plan (Plan de Contención y de Recuperación Económica), the most ambitious economic stimulus plan in the country's history and one of the most important in the region, with an investment equivalent to 20% of GDP.

Regarding the containment measures to fight the pandemic, the government allocated (as of December 2020) more than S/54.7 billion soles (USD 14 800 million). As of July 2020, of this amount, S/830 million (USD 224 million) were transferred to the regional governments and S/440 million (USD 119 million) to the municipal governments. Of the amount transferred to the regional governments, most of the transfers (USD 214 million) were used to improve and strengthen health services and care for the pandemic, specifically the purchase of medicines and medical equipment, as well as contracting specialized services of doctors and nurses for patient care. At the municipal level, the transfers were intended to maintain public order derived from the restriction measures imposed by the government on citizens (USD 68 million) and the rest to various functions, such as complementing health care efforts (USD 22 million), the delivery of baskets and essential goods to the vulnerable population (USD 58 million), among other efforts.