Years after the demise of drug kingpin Pablo Escobar in a bloody battle with police in the streets of Medellín, Colombia still battles an image of instability and violence despite the reality that those days have long since waned. As one tourism campaign put it in recent years, the biggest danger visitors now face is that they may not want to leave.
Even still, the Colombian government has fought to draw international investor interest into the country to support development ambitions. One of the champions in this fight has been La Financiera de Desarrollo Nacional (FDN), a development bank formed three years ago under the guidance of former International Finance Corporation capital markets expert Clemente de Valle. As president of the FDN, he took the reins on building a governance structure and a financing framework aimed at attracting institutional investors into construction projects.
The FDN has been instrumental in catalysing the success of the national 4G roads PPP programme and according to de Valle that is just the beginning.
AN INSTITUTIONAL TRANSFORMATION
When de Valle took on the lead role at the FDN, he inherited a majority government-owned company with a well-established back office and existing funding. So rather than rebuild the institution from scratch, he built around these assets with a priority on establishing a strong team and products as well as bringing in new shareholders.
Throughout the process, he focused on three central goals: facilitating project development, attracting institutional investors, and mobilising capital markets. The key, he says, was in taking into account “20 years of the mistakes of development institutions”. Clemente argues that many such institutions have been large, government-owned institutions with a high risk of political capture.
“We learned from the mistake of big [government] shares, the wrong institutional mix, and the wrong governance,” says de Valle.
Much like the National Development Foundation of India model, de Valle says his highest priority was ensuring independence. “We decided not to do this through the capital structure completely, but more through the governance structure,” says de Valle. As part of the structure, de Valle led the creation of an independent, private sector board of directors which gave the FDN the “competitive edge to retain the right people” and ensure that the institution maintains a specialised focus on infrastructure.
“This specialisation, with the right governance, the right skillful individuals, I think is a powerful institutional transformation [that] is already having important effects on the way projects raise money,” he says.
The FDN's first challenge was no easy task: helping the Colombian government to develop a bankable pipeline of transportation PPP projects and seeing that pipeline through the development process amid plunging oil prices and with Latin American currencies in a state of wild flux.
In this setting, the FDN was faced with an overall lack of project finance experience across Colombia, where corporate financing by the nation's largest banks is the norm. This was coupled with development banks' reluctance to take on project risk “because of problems in the past”, leaving the task to commercial banks. “In order to transform the financial system of Colombia,” says de Valle, “we had to be very strong in our project finance focus and we had to take on project risk.”
In the first of the $25 billion Fourth Generation Roads programme – better known as the 4G programme – contracts, de Valle said that it was important for the government to provide some measure of risk cushioning by “eliminating substantial traffic risk”. Looking back, he says it could be argued that the initial 4G contracts are “a bit generous [but] we needed to be generous because we wanted to attract interest from sponsors around the world”.
“As this contract gets a strong track record, the government can gradually rebalance the scheme and transfer more risk to the private sector, but you have to have a good experience [to build from] first,” says de Valle. “We could not fail and that's why we took reasonable actions, in my opinion, in order to succeed. Still, going forward, this has to evolve.”
To date, the FDN has helped the Colombian transportation PPP leader Agencia Nacional de Infraestructura (ANI) to successfully award 26 road projects as part of the 4G programme – 20 of them publicly proposed and six solicited by the private sector. Of these, eight have reached “a very advanced stage of development” and one was closed in February with $260 million in Goldman Sachs-placed tax-exempt bonds and an additional $120 million in backing from local investors through an inflation-linked, cross-listed unidad de valor real (UVR) product.
The successful capital markets transaction was the result of roughly 18 months of working with multilaterals and Goldman Sachs to establish a product that would draw institutional investors to a bond supporting projects from day one at construction start.
“We had to develop a product that would stabilise cashflows, because these projects are very exposed to liquidity risks,” de Valle explains.
“Governments share the risk, but they can take a lot of time to compensate, so there is a lot of risk of liquidity constraints. Our product was developed to deal with that issue, which was probably the biggest concern of most of the ratings agencies and investors.”
With the combined $380 million bond and UVR financing of the Pacifico Tres project in the rearview, de Valle says the FDN was frankly expecting more support through the UVR vehicle, though it is now clear that “local investors in Colombia are still not very sophisticated [and] are accustomed to very basic products”. Thus they were more drawn to the US bond issue in some cases than the local UVR product.
“We underestimated how much work was needed to educate them about these more structured products,” de Valle admits. “So we still need to work heavily with them.”
THE NEXT WAVE
As the 4G programme winds down over the next two to three years, de Valle and his team are working to prepare a pipeline of projects outside the transportation sector in the hopes of maintaining a steady development pipeline in Colombia.
Nationally, the focus for future PPPs is on the healthcare, education and renewable energy sectors. At the local level, de Valle says there has been significant interest from mayors who want to do PPP projects.
To support these goals, the FDN was “very lucky” to be handed roughly $2 billion in fresh capital freed up by the January sale of 57.6 percent in state-owned hydroelectricity company Isagen to a Brookfield Renewable Energy Partners-led consortium. Half of that capital will go toward helping the FDN to meet its goal of investing at the 25 to 30 percent level in projects – currently, its investments sit between 10 to 14 percent – and towards developing the organisation's structural capacity to support projects outside the transportation sector.
“The 4G peak in terms of financing will take place this year and next year,” says de Valle. “We already have a lot of contracts with the big cities who are developing some of their products and which will probably take two or three years to get ready to go to market. It will be interesting because this will allow the pipeline to remain active.”
“I think this is going to be the next wave, with projects coming in at the local and subnational levels,” de Valle predicts.