Peru's Incoming Government Faces Uphill Battle on State Efficiency Promises

As Peru approaches July 28, Keiko Fujimori's incoming government has pledged to improve state efficiency to balance public finances. However, the viability of this promise is questionable. A 2018 Inter-American Development Bank study estimated Peruvian public spending inefficiency at 2.5% of GDP. Videnza Instituto updated this figure for 2025 using the same methodology, calculating inefficiency from public procurement, state payroll, and poorly targeted transfers, now reaching 3.3% of GDP, approximately S/ 40 billion annually. This represents nearly one-fifth of the general government's non-financial expenditure.

Public procurement accounts for two-thirds of this inefficiency, totaling S/ 27 billion. The Videnza analysis reveals the state pays an average of 21% more for goods compared to market reference prices, as evidenced by data from the State Electronic Procurement System (Seace). An additional S/ 7 billion is attributed to public salary premiums for lower-skilled positions, exceeding private sector pay. Furthermore, S/ 6.5 billion in transfers, primarily through VAT exemptions, are misdirected to non-poor households, making it a regressive subsidy. The annual loss from inefficiency surpasses the entire public health expenditure.

Fuerza Popular's plan aims to cap current spending growth at inflation, proposing cuts of S/ 2 billion in 2026 and S/ 8 billion in 2027. While these figures are fractions of the measured inefficiency, their realization faces significant hurdles. Budgetary rigidity is a major constraint, with S/ 9 out of every S/ 10 in current spending already committed to payroll, pensions, and non-discretionary obligations; such nominal cuts are unprecedented. Efficiency savings typically take two to three years to materialize, not within the first budget cycle. Moreover, political interference from Congress, which frequently overrides fiscal concerns by approving costly laws, undermines executive efforts, as noted by the Fiscal Council. The government must first address legal challenges, particularly the constitutional violation of congressional spending initiatives, by taking cases to the Constitutional Court to establish clear spending authority.

To improve public procurement, the government should expand the use of framework agreements and leverage Seace data to set binding reference prices, penalizing agencies that overpay. Emulating Chile's successful model, ChileCompra, which centralizes procurement and aggregates demand through framework agreements and coordinated purchases, is recommended. Chile's 2023 reform reduced direct contracting and introduced electronic reverse auctions, reportedly saving approximately US$ 1.2 billion between 2023 and 2025 while enhancing transparency. Achieving these proposed actions requires political will, technical capacity, integrity, and sanctions against corrupt contractors. The cost of inefficiency is tangible, impacting essential services like healthcare, education, and infrastructure.