Riding the bumps

At $27 billion, the public-private partnership (P3) programme for road and rail launched by Colombia’s Santos administration can’t fail to catch the eye of global infrastructure investors.

The country’s huge need for transportation infrastructure should provide a wave of deals that global infrastructure funds and financiers can capitalise on, especially given that domestic banks are unable to meet the financing requirement on their own.

Nonetheless, the Andean country thus far has only seen significant amounts of capital flowing into its energy-related infrastructure, which has attracted notable groups such as Brookfield Asset Management and IFC Asset Management.

Fund managers say this is largely because the government is not conducting the feasibility studies on P3 projects that are needed to make sure they are bankable and have not addressed all the risk issues for international investors.

From 2008 through the first half of this year, Colombia’s infrastructure sector attracted $2.02 billion of commitments from foreign infrastructure funds, compared with $7.23 billion in commitments for the Latin American region as a whole, according to Infrastructure Investor Research & Analytics.

The same data source finds that, of 27 infrastructure funds currently investing in Colombia, two-thirds have a primary focus on energy-related infrastructure.

‘VERY STABLE’

Brookfield currently has just one investment in Colombia, an electricity distribution utility which was privatised by the Colombian government at the end of 2011 through a public auction, according to Carlos Castro, senior vice president and general manager for Colombia of Brookfield Infrastructure Group, which has a $400 million Colombia infrastructure fund.

“The regulation has been very stable, and that’s one of the things that attract us,” says Castro.

In January 2012, a Brookfield consortium that included the firm’s Colombia Infrastructure Fund acquired a 99.4 percent interest in Empresa de Energia de Boyacá (EBSA), a Colombian regulated electricity distribution operation, for approximately $440 million, as a platform to build a broad-based electricity business in Colombia.

Its $7 billion Brookfield Infrastructure Fund II, which closed in October last year, also has a mandate to invest in Colombia, along with many other countries.

Colombia’s utilities are operated by private companies and regulated by the government. Reforms in the 1990s broke down the original monopoly in the country’s electricity service – with private enterprises encouraged to participate in the generation, transmission and distribution of energy, according to Roberto Steiner and Hernán Vallejo, authors of the paper Colombia: A Case Study.

The reforms led to the creation of the Energy and Gas Regulatory Commission, or CREG, which has since regulated transmission and distribution through price caps, according to Steiner and Vallejo.

Competition among private enterprises has played an increasing role in electricity generation and commercialisation, they stated in the paper.

“Things we’ve looked at so far are energy-related… as the regulatory framework is transparent and consistent, and is well understood,” Viktor Kats, deputy head at IFC Global Infrastructure Fund, says.

IFC’s fund made its first investment in a greenfield port in Colombia, according to Kats. The project, called Pacific Infrastructure, is a greenfield port currently under construction, and a large part of its capacity will be used for oil liquids being exported from the country. IFC, the IFC Global Infrastructure Fund and the IFC African, Latin American, and Caribbean Fund together invested $150 million in the project.

“There has been a lot of investment in the oil and gas sector since 2003 when all the regulations changed. It’s been a very active sector for the economy because one of its export sources is oil,” says Alessia Abello, a partner at law firm Posse Herrera Ruiz.

The enactment of a series of regulatory reforms to make the oil and natural gas sector more attractive to foreign investors led to an increase in Colombian production, according to the latest report from the US Energy Information Agency (EIA).

A partial privatisation of state oil company Ecopetrol (formerly known as Empresa Colombiana de Petróleos) was implemented by the government in an attempt to revive its upstream oil industry, the EIA report said.

Colombia had approximately 2.4 billion barrels of proven crude oil reserves at the end of last year, and the country’s oil production will rise to over 1 million barrels per day in 2013 and continue to rise up to 2015, it is estimated.

Whether Colombia can sustain such production levels over the next few years is important, fund managers say, because foreign investors will then know whether investment in the midstream and downstream infrastructure segments is needed.

Experts say Colombia adopts a different kind of investment model in the oil and gas sector compared with roads and rail.

“Basically you come in as a foreign investor and participate in a bid opened by the National Oil Agency. After you win the tender, you will be responsible for doing everything,” says Abello.

“You can partner with third parties as long as you comply with certain requirements. You are basically free as long as you comply with all the obligations regarding exploration, extraction and transportation, among others,” she adds.

Investment in Colombia’s fourth-generation P3 programme has not generated momentum because the country has yet to evidence the ability to structure and negotiate viable P3 deals with international investors, lawyers and fund managers.

With project delays, escalating costs and ultimately cancellations, the country is earning a reputation for poor delivery.

The Colombian government has awarded six P3 contracts since the inception of the programme in 2012, with a total of $4 billion committed by domestic and international firms, according to Carlos Sanchez-Garcia, a partner at law firm Duran & Osorio.

“These are what we called the first wave, and the first wave is not finished yet. The government is waiting for proposals for two more projects. And after those, there is going to be a second wave of projects, probably another eight tendering processes, and that is going to happen during the second half of this year,” says Sanchez-Garcia, who also serves as legal adviser for the 4G P3 programme launched by the Colombian National Infrastructure Agency.

Despite that, the P3 programme is not progressing at the speed the Colombian government had hoped for, with fund managers and lawyers saying there is a lack of preparation work from the government to address issues such as risk allocations, project financing and technical data.

“The main reason is that they (foreign investors) are not comfortable with the structure of the contract vis-à-vis the needs of financing,” says Abello, adding that she has clients from countries such as France, Italy, Spain, and Brazil that are interested but have yet to deploy capital to the P3 programme.

Toll roads in Colombia typically adopt a BOOT (build-own-operate-transfer) structure that is implemented through concession agreements with a term ranging from 10 to 20 years, according to lawyers.

But the payment mechanism of these contracts may create unwanted liquidity concerns for foreign investors as they sometimes do not have enough certainty regarding the payment stream going forward.

The Colombian government adopts a combination of toll payments and some payments from the public budget for the P3 programme, according to Garcia. Every eight years, parties will review how much is being recovered from tolls and how much is required from the government side, with the government paying the difference between what is needed and what is covered by the concessionaires.

“This scheme is good in the sense that the government is in the end taking the risk. However it also produces some liquidity risk that may be complicated for some investors,” Sanchez-Garcia adds.

Land acquisition for road and rail in the P3 programme may also pose certain refinancing risks for international investors, lawyers say.

“Basically the government partially assumes the risk curve, or the cost of land acquisition, in excess of a specific amount of the contract,” Sanchez-Garcia says.
For the P3 programme to fully pick up steam, the government also needs to fix the process of obtaining environmental licenses, Camillo Villaeces, president of fund manager Ashmore Colombia, says.

“(Colombia’s) environmental agency is not prepared to promptly address this avalanche of environmental licenses… but you will need the licenses for all the roads in Colombia and nobody will finance them until you get the licenses,” says Villaeces.

Ashmore Colombia’s $250 million Colombia Infrastructure Fund has achieved a net return of 30 percent since its inception in December 2010 according to the firm. The firm has pre-qualified for 12 of the road P3 projects and expects to submit offers for some of them during the remainder of the year, according to Villaeces.

“What I would love to see is (the Colombian government) going to market with full environmental licenses and full environmental studies, so that any investors will be aware of the cost of these issues. Same with land acquisitions, going to specific sites and trying to define what the cost is – that would be great,” Sanchez-Garcia says.

Fortunately, the Colombian government appears to realise that certain actions are needed to make sure its ambitious P3 programme will succeed over the coming years.

Last year, President Santos transitioned an existing development bank for the electricity sector into an infrastructure bank, called the National Development Financing Institution (FDN). The bank serves as an additional source of financing for the P3 programme. Recently, the government also enacted a decree that allows institutional investors, such as domestic pension funds, to allocate more money to the infrastructure sector.

“If they (the Colombian pension funds) are going to unlock money, there is going to be a lot of liquidity for this P3 programme, and that’s for the benefit of everyone – the government, the constructors and pension funds,” Sanchez-Garcia says.

This new legislation also allows the FDN to have an exposure of 40 percent of its total infrastructure assets to P3 road concessions, increasing the ability of the bank to finance these kinds of projects.

Colombia is still appealing to global infrastructure funds. There is believed to be the potential for $30 billion of infrastructure deal flow in the country over the next decade, Brookfield’s Castro estimates. This includes the toll roads programme, the privatisation of the power sector, as well as projects needed to support the increase in exploration and production in the oil and gas sector, he adds.

“So, it’s a very interesting time to be here (in Colombia),” Castro concludes.