One giant leap for Colombia

“We want to do in two years what was done in the last 25 years.” The words belong to Luis Fernando Andrade Moreno, president of Colombia’s National Infrastructure Agency, who is speaking to Infrastructure Investor after arriving in London to announce Colombia’s bold new public-private partnership (PPP) programme.

Seated in the plush surroundings of Merchant Taylors’ Hall in the heart of the City, Moreno reflects that road and port PPPs were first undertaken in Colombia in the 1990s and that 6,000 kilometres of roads have been built as a result of contracts signed at the time. So the Latin American country is not new to the PPP but it is, again in the words of Moreno, “stepping up”.

In fact, as the quote in the first sentence above would suggest, it’s quite a step up. Colombia, which has a current annual economic growth rate of around 6 percent per annum plans to increase the amount dedicated to transport infrastructure from 1 percent of gross domestic product (GDP) to 3 percent. The roads element of the new infrastructure programme is alone worth some $20 billion.

CONTRACT DISPUTES

Asked about perceptions investors may have of the country – including past contractual disputes – Moreno says: “We have the experience and have achieved resolution of contract disputes. That gives investors peace of mind. We can structure payments in a way that ensures interests are aligned and we have become more efficient with respect to things that can slow processes down such as land acquisition and permits.”

The programme – which also includes $3.5 billion of rail projects, a couple of dredging projects (to allow better access to ports in Cartagena and Bueneventura), plus a PPP at Baranquilla Airport – is effectively a testing ground for Colombia’s new PPP law, which was passed in December 2011. Moreno says the new law “took international references”, including from the UK, and was drafted with assistance from the World Bank.

Moreno points out that the law contains provisions that should allow Colombia to circumvent some of the problems that have cropped up in the past. For example, he says that bidders have sometimes won contracts by deliberately understating the amount that will need to be spent on the project and then subsequently gone back to government for additional funding. The new law limits the additional amount that can be invested by government to 20 percent of the project’s originally estimated cost. If the required funding rises above the 20 percent level, the project must be put out to the market again. (Moreno says this follows in the footsteps of Chile, which has a similar rule but with a 30 percent limit).

Moreno adds that PPPs in Colombia will from now on make a tighter link between payment and delivery. “The owners of PPP projects could in the past delay work as they would still receive their availability payments and would actually make a profit from delaying construction.” As well as establishing this link, Moreno says the Colombian government is seeking a greater transfer of construction risk to concessionaires “except where things are very difficult to predict at the beginning – for example with some types of tunnel construction – and then we will share the risk.”

With the new law providing clarity in many areas that have caused only confusion in the past, Moreno believes Colombia is in a good position to attract the large amount of private capital that will be required if the programme is to succeed, partly because he believes a standardised PPP contract is emerging that is “easier to manage and understand”. Of the road PPPs that have taken place in the country to date, he says each one has had a different contract.

SCALE OF THE CHALLENGE

But Moreno is under no illusions about the scale of the challenge when it comes to attracting private capital in the quantity required. “The country has never built so much at the same time before,” he says. “If we’re to reach the 3 percent of GDP target, it involves a much larger finance need. Before, we could do it through syndicated loans from local banks but now we need to find a cheaper and efficient mechanism on top of that. So it’s a very significant financing challenge. But there are plenty of investors that want the kind of attractive returns we can offer at a time when other returns are not so good. There will be a strong appetite in London and New York etcetera as long as projects are well crafted and supported.”

If Moreno has his way, infrastructure bonds may well form a crucial component of the “cheaper and effective mechanism” referred to above. He says that conversations about the creation of an infrastructure bond market have already commenced though they are “informal at this point”. He adds: “It will be a team effort with pensions and insurance companies, regulators, ratings agencies and PPP investors to make sure that it works.”

One thing is for sure: a lot is at stake. While much is said about how the electoral cycle can damage long-term infrastructure planning, Colombia is out to prove that a single term of office need not be an obstruction to ambition. By the end of the current government’s term of office in 2014, it is anticipated that the length of four-lane highways in the country will have been increased by 100 percent; rail length by 50 percent; port load capacity also by 50 percent; and airport passengers by 35 percent. No one can accuse this government of lacking ambition.

The programme also includes two dredging projects to allow better access to ports in Cartagena and Bueneventura for large Panama Canal vessels; and a $20 million to $30 million PPP at Baranquilla Airport, the fifth-largest airport in Colombia.

Moreno was in London to attract equity investors, engineering firms and insurance providers from the UK. There has already been strong interest in Colombian infrastructure from companies in Spain, Brazil, Korea, France, Canada and the US as well as the UK, Moreno noted.

COLOMBIA's INFRSTRUCTURE PROGRAMME: THE NUTS AND BOLTS

Colombia’s $20 billion roads programme involves 25 PPPs, typically with 20-year contracts, which will seek to connect the main cities with each other and also with the coastal ports.

Moreno outlines a number of examples, including the $700 million Ibague to La Paila section of a road connecting the capital Bogota with Buenaventura. As with many of the road projects, it is expected to be open to bidding by the second quarter of 2013.

He says that around one-third of a typical road project will focus on increasing lane capacity from two to four lanes; while the other two-thirds will be about improving and maintaining the condition of the roads. A typical contract will see 30 percent of payments to the operator come from tolls and 70 percent from availability payments.

The PPP programme also includes around $3.5 billion worth of rail projects in a move designed to rehabilitate abandoned rail lines and link resource-rich locations for commodities such as coal, coffee and sugar cane with the ports. The rail projects, which are catering to demand from oil and mining companies in particular, are, at least in some cases, expected to be 100 percent-financed by the private sector.