Colombia plays catch-up

How much has Colombia traditionally spent in infrastructure as a percentage of its GDP and how does the current government aim to change that?

LM: The National Infrastructure Agency (ANI) is responsible for structuring PPPs [public-private partnerships] in transportation infrastructure (roads, railways, ports and airports). Traditionally, Colombia has invested around 1.0 percent of GDP in transportation infrastructure, 50 percent of which was through PPPs. The current government is aiming to increase investment in transport infrastructure up to 3 percent of GDP, of which 2 percent would be through PPPs.

In order to achieve this goal, ANI is structuring and will award PPP contracts over the next two years to the amount of $27 billion. The two most significant elements of the programme are road PPPs ($20 billion) and rail PPPs ($6 billion). The typical contract will have one year for pre-construction activities, five years for construction, and 15 years of operation and maintenance.

What sectors will Colombia's infrastructure programme take in and why did you choose to focus more on economic infrastructure? How much new investment does Colombia require?

LM: The infrastructure programme in Colombia will concentrate mainly on economic infrastructure in order to meet the requirements of the Free Trade Agreements that Colombia has recently signed with countries like the US, EFTA [European Free Trade Association], Canada, South Korea, and Turkey (soon to be signed).

The transportation infrastructure programme is critical in this respect. Colombia is lagging behind in terms of the competitiveness of its road and rail infrastructure. As an indication, according to the Competitiveness Rankings of the World Economic Forum, Colombia is placed in positions 109 for roads and 99 for rail, out of 142 countries. The country needs to take a significant leap forward in these areas of infrastructure in order to be able to compete with our trading partners.

What is the role of the National Infrastructure Agency in implementing the government's infrastructure plans?

LM: The role of the National Infrastructure Agency is structuring, promoting, awarding and supervising PPP projects in transport infrastructure. It is also responsible for attracting private investors, both Colombian and foreign.

How would you assess the health of Colombia's banking sector and is there appetite among local banks for project financing? What about institutional sector investment, such as pension funds?

LM: The banking sector of Colombia is very solid. It was not affected at all by the global financial crisis of 2008. Local banks comfortably meet capital requirements and have excellent levels of profitability.

All of the existing road concessions, 25 of them covering 6,000 kms, have been financed by local banks. Unfortunately the Colombian banking sector does not have the capacity to finance the totality of this big wave of infrastructure projects. For this reason we are developing a standardised instrument, an “infrastructure bond”, that will allow the local pension funds to participate in the financing of PPPs as well. We are also promoting the participation of foreign banks in those PPPs that can be financed in foreign currency, such as rail and ports.

Mexico has a robust set of development institutions – Banobras and Fonadin – to help spur infrastructure investment. Do you have or envisage any similar institutions for the Colombian market?

LM: Colombia has been able to finance its PPPs in the past without having to provide financing by government-owned financial institutions. We would expect that this round of PPPs would be financed entirely by the private sector.

You have a new PPP law. Could you tell us what are the main features of the new law and how it improves procurement?

LM: The new PPP law was developed with the support of international experts, in order to incorporate best practices from other countries that have been able to accelerate the development of infrastructure through PPPs.

The most important features are the following:
– Incentives to private initiatives (unsolicited proposals) for projects that do not require government funding;
– Introduction of a pre-qualification phase to limit the number of competitors to those most qualified during the bidding process;
– Introduction of service levels as a criteria to trigger payment for infrastructure;
–  Clarification of regulations governing additions to contracts, including a limit of 20 percent during the life of the contract.

What sort of risk transfer are you planning for your PPPs? Given that much of the programme is focused on economic infrastructure, do you plan to transfer volume/demand risk to the private sector?

LM: The general criteria for risk transfer will be that risk should be borne by the party which is in the best position to manage it. Accordingly, construction and availability risks will be transferred to the concessionaire except in complex works, such as long tunnels.

The volume/demand risk was mostly absorbed by the government in the last road PPPs – Ruta del Sol and Transversal de Las Americas. The government agreed to pay the shortfall, if any, relative to the initial revenue projections, at the end of the contract. The concessionaires took the risk of the revenue distribution over time. We will rely on the advice of our investment bankers as to whether we maintain this scheme in the new concessions.

Regarding “force majeure”, the government will retain only those risks that cannot be insured in the markets.

What competitive advantages would you say Colombia offers in relation to other promising infrastructure markets?

LM: Colombia has proven and solid institutions that should provide ample guarantees to infrastructure investors, and an ambitious PPP programme in transportation only comparable to those found in India and China.

Colombia is the oldest democracy in Latin America and is the only nation in the region that has not rescheduled its foreign debt in the last 100 years. In recent decades, it has promoted very important reforms in the fiscal, economic, and pension areas, which have allowed the country to earn an investment-grade rating.

In terms of laws and regulations that protect investors, Colombia is widely recognised as an investor-friendly environment. For example, Colombia is ranked by the Doing Business report of the World Bank as the fifth-best country in the world in terms of investor protection, and the best in Latin America.

Colombia also has a proven record applying the concession model. We have been making concessions for transportation infrastructure projects for 25 years. During this period we have had a robust legal system that offers clear rules to investors. For example, we have developed an arbitration system to resolve conflicts that ensures objective and timely decisions.