Peru Outsourcing: Will a New President Derail a Country’s Bright Technology Future?

By Luke BujarskiNewly elected President Ollanta Humala holds promise for Peru’s knowledge economy, but many are skeptical of his ability to get things done.  Overall it’s been a rocky start for the new president.  He narrowly slipped into office after battling it out with a former president’s daughter in a run-off election and a scandal involving his brother chumming up to Russian arms manufacturers.  Approval ratings plummeted to only 41 percent right before the election, and now Humala is getting flack for being oddly uncommunicative with the press on his governing strategy, just weeks into his five-year term.

Aside from these shortcomings, his campaign agenda with promised investments in infrastructure and higher education could be a boon for the country’s growing presence of foreign technology and business process outsourcing firms.  “What’s costly to mining and agriculture, could prove to be good for more knowledge intensive sectors,” explained Carmen Rosa Graham former CEO of IBM Peru.

But a more progressive agenda will require Humala to squeeze more revenue out of big business.  As an outsider to Lima’s inner business circles, this could prove to be a challenge.  “He has a very small circle around him; he’s well-intentioned but it’s his ability to lead and fight corruption which I doubt,” explains Graham.

How all of this will translate into policy is yet to be seen, or heard.

Copper and Gold

Peru’s economy consists of light manufacturing, agricultural production and very rich copper and gold deposits dotting the steep Andean region to the east.  With global demand for commodities exploding, the country enjoyed real GDP growth rates in upwards of 10% in 2008.  Growth plummeted in 2009 to barely one percent after succumbing to wild swings in global investment and government spending, but rebounded in 2010 reaching 8.8%, a Latin America record for that year.

Key data points on Peru: 

•  Fourth largest country in Latin America by population with 29.5 million people
• Labor force of 15.68 million people; unemployment rate of 7.9 percent; $9,200 GDP/capita (Brazil$10,800; Mexico $13,900; Colombia $9,800)
• GDP 2010 (PPP) $276 billion; GDP by sector:  Agriculture: 10%; industry: 35%; services: 55%
•  Annual Inflation (consumer prices) at 1.5 % lowest in Latin America

Despite Peru’s strong macroeconomic performance, dependence on minerals and metals exports and imported foodstuffs subjects the economy to fluctuations in world prices.  Poor infrastructure also hinders the spread of growth to Peru’s non-coastal areas, according to the CIA World Factbook.

“IT is not a team sport in Peru. There is strong talent here but it is scattered, unorganized and unmotivated”

Technology Firms Testing Peruvian Capacity

Yet, these conditions have not deterred technology and global services companies from testing out Peru’s domestic and labor market potential.  In addition to multinational giants like IBM and Google, most of LatAm’s names have already set up operations here.  This includes Argentina’s Allus and Belatrix: Spain’s Everis and Indra; Chile’s Sonda and Synapsis; Brazil’s Stefanini and Tivit.  A big highlight in 2010 was Indra’s 75% stake acquisition of COM S.A. one of Peru’s biggest IT services companies.

If Humala succeeds in his negotiations with mining giants like Peruvian company Buenaventura and US-based Newmont on a restructuring of windfall taxes and royalties on production, this could channel additional funding for Peru’s under performing K-12 school system and sub-par telecoms infrastructure.  According to Graham, “supply is not keeping up with demand for quality education, particularly as Lima and other cities expand with lower-skilled migrants from rural Andean portions of the country.  Bilingual education is also practically non-existent in K-12.”

Plans to Organize and Empower Peru’s Information Class

The big kids on the block are not the only ones looking for talented employees.  Joost van Berckel CEO of Content Online, a Dutch firm specializing in web development for small to medium enterprises, recently moved here with his Peruvian wife and settled down in the city of Trujillo, a budding city north of Lima.  “There are very few companies offering professional Internet services and support for enterprises and small businesses here.  I’m seeing big opportunities  in this market.”

In scaling up operations, Joost will be employing locals, but also plans to bring in some of his own people.  “The idea is to construct a new office here in Trujillo and to have 10 workspaces where a mixture of Peruvian and Dutch/European IT personnel are going to work together as a team.  The Peruvians have to work together with externals to achieve a way of balance between the cultures.  Hereby I mean to say that by combining several cultures most likely the local Peruvians will also become more aware of the need to deliver on time.”

Graham agrees that Peru’s technology talent needs a jolt of entrepreneurial spirit and organization.  “IT is not a team sport in Peru. There is strong talent here but it is scattered, unorganized and unmotivated. This makes it difficult to scale up projects.”

Graham also explained that telephony costs in Peru are high, due to lack of competition and low fixed line penetration.  While a big opportunity for those going up against Telefonica Peru, it’s an added cost for BPOs and call center players.  Especially for companies that have their eyes on population centers outside of Lima.  This includes Trujillo, Chiclayo, and Piura to the north and Arequipa to the south, each with close to a million in population.  However, as lower-skilled Andean farmers pour into these coastal hot spots, particularly in the south, this will put additional pressures on education and infrastructure.

The Humala administration is expected to address these issues by working with organizations like Cambia Peru (Change Peru), a development agency committed to mobilizing the country’s knowledge economy.  In a speech leading up to the election, Humala announced that he would create a new government Ministry of Science and Technology dedicated to channeling funding toward advanced education and infrastructure.

Overall, Peru’s future should be bright in the short to mid-term. The pipeline of committed investments in mining, gas, and energy is estimated to be in the $50 billion dollar range.  This should give Humala a good amount of wiggle room over the next five years if he can fulfill on promises and go toe-to-toe with big business.  Ironically, Graham (who also sits on numerous Peruvian investment boards) said that Humala had the full support of inner business circles when it came to voting day.  Whether this was a vote of confidence for the new president or a vote against Fujimori is unclear.

Either way, Humala will need to work to appease both labor and capital if he is to make real progress on Peru’s future.