Colombia: A revolution in infrastructure

Jorge Di Terlizzi and Marc Casas of Philippi Prietocarrizosa & Uría look at the future for transport infrastructure in Colombia, the current status of the 4G road concessions and other public-private partnership projects

Colombia’s current economic situation

Over the last few years Colombia’s economy has improved remarkably, so much so that it is one of the most interesting targets for investment in the Latin America and Caribbean region. Its privileged location – less than six hours’ flying time from the main capital cities in North and South America, and with maritime access to both the Atlantic and the Pacific Oceans – makes Colombia a very competitive country with easy access to markets around the globe.

The financial data speak for themselves. According to the World Bank, the GDP per capita of the country has doubled over the last decade, passing from $5,826 in 2000 to $12,424 in 2014 and total international trade –including both exports and imports – has more than quadrupled over the same period, passing from $24,915 million in 2000 to $118,824 million in 2014 according to the National Administrative Department of Statistics (DANE in Spanish). Moreover, for the third year in a row, Colombia has been one of the top 20 destinations for foreign direct investment, which in 2014 amounted to $16,054 million, nearly ten times what it received ten years ago. What is more, this positive growth trend is expected to continue in the coming years. In this sense, the International Monetary Fund’s forecasts place Colombia –along with Peru– at the top of the table of growing economies in the region.

All these figures have had a direct impact on the confidence of investors and traders. Colombia’s credit rating stands at BBB according to Standard & Poor’s and Fitch, and at Baa2 according to Moody’s, which means that the country is in a stable position in terms of credit worthiness. Moreover, Colombia receives the region’s highest ranking for ease of doing business according to the World Bank’s publication Doing Business 2015, which places the country in 34th position out of 189 worldwide economies. In addition, in 2013 Colombia initiated the process to become a full member of the OECD, meaning it has had to make significant efforts to demonstrate its robustness and stability as a regional economy, and to develop an open and transparent investment regime.

The lack of infrastructure: the biggest obstacle to development in Colombia

Notwithstanding all these positive economic indicators, Colombia still has a major deficiency that it needs to overcome in order to continue on the path of successful economic progress. This deficiency is a lack of proper infrastructure. Despite the country’s size (it is among the 30 biggest countries in terms of both population and area), public investment rates in infrastructure have historically been very low owing, among other factors, to the country’s challenging geography (a significant part of the country lies on the Andes and other mountain ranges).

Without doubt the lack of infrastructure is the biggest obstacle to development in Colombia since it increases considerably the cost and time needed to transport freight. This is one of the main reasons why the country is ranked 103 out of 140 in the Business Environment and Infrastructure Index of the World Economic Forum and, specifically, 130 out of 140 for transportation infrastructure. Furthermore, Colombia is ranked 93 out of 189 in the Trading across Borders ranking of the World Bank’s publication Doing Business 2015.

However, Colombia has already begun laying the foundations for the revolution that will bring its infrastructure into line with its economic perspectives. This revolution will provide the country with the transportation routes required to efficiently connect its main production and consumption centres with its ports on the Atlantic and Pacific coasts, its airports and its borders.

The Colombian government’s main plans for infrastructure investment

The current Colombian government is committed to revolutionising the country’s infrastructure network. Its plans have already begun to take shape with (i) the passing of regulations that facilitate the development of large-scale projects such as those required in Colombia and that promote national and international private investments, and (ii) the publication of a list of infrastructure priorities and budget forecasts for the investments that are needed.

The new regulatory scheme

In January 2012 the National Congress enacted the Public-Private Partnership (PPP) Law, which creates the framework to structure and develop major infrastructure projects and associated services, and to attract and retain private investment in this sector. The PPP Law contains an innovative measure that separates PPP projects into two groups as follows:

• PPP projects that are proposed by the government: the government drafts the project and starts the tender procedure to select the successful bidder that will carry out the project.
• PPP projects that are proposed by private companies: before starting the tender procedure to award the project, the government must analyse whether the proposed project is technically and economically feasible and whether it is in the public interest and complies with public policies. If the project entails the disbursement of public resources (up to a maximum of 20% of the budget for the project), once the government has confirmed that the project is feasible, is in the public interest and complies with public policies, the project is put out to tender. The company that proposes the project is given a bonus on top of its final score of between 3% and 10% (depending on the investment amount) as an acknowledgement of its efforts in designing the project. If the project does not entail the disbursement of public resources, the company that proposes the project may submit a second improved bid if its first one is not the best bid.

In November 2013, the National Congress enacted the Infrastructure Law, which has created new and important tools to help concessionaries with, among others, their land acquisition obligations under the corresponding concession agreements. With these tools, the Infrastructure Law aims to overcome the historical inefficiencies of the land acquisition process in Colombia, caused by a challenging judicial expropriation system that more often than not led to considerable delays and cost overruns.

The Infrastructure Law also sets out various measures to speed up the procedures that must be followed by the concessionaires in order to carry out their projects, such as obtaining the corresponding environmental permits and fulfilling other environmental requirements.

Basic infrastructure needs

Apart from approving an infrastructure investment budget, the Colombian government established the country’s infrastructure priorities in the 2010-2014 National Development Plan, which are being discussed and reinforced in the negotiation of the 2014-2018 National Development Plan.

The most important project of those planned by the government is the so-called Fourth Generation of Road Concessions (the 4G Concessions program), which purpose is to create a $25 billion toll road network throughout the country through the award of up to 40 concession agreements. The National Infrastructure Agency (ANI in Spanish) has stated that this means the roads under concession will increase from 6,000km to 11,000km, and the railways from 900km to more than 2,000km. According to the government’s forecast, this represents an investment equivalent to 2-3% of Colombia’s annual GDP. Without doubt, the 4G Concessions program is one of the most ambitious and revolutionary programs in Colombia’s history, and probably one of the biggest PPP infrastructure programs worldwide. Once it has been completed, it will significantly improve transport connections and thereby contribute to improving the economic growth that the country has undergone for years despite the lack of proper infrastructures.

Together with the 4G Concessions program, the Colombian government is also committed to making significant investments in other transport infrastructures, such as ports and airports. The government plans to invest up to $2.1 billion in ports over the period 2015-2018. Over the same period it plans to carry out ten projects in existing airports –representing an investment of $1.8 billion– and to build two new airports at a cost of $2.3 billion.

Another interesting project is the improvement of the navigability of the Magdalena River at a cost of $1.3 billion. This river is the main waterway of Colombia, crossing the country from the centre to the north, along more than 1,500km, before flowing into the Caribbean Sea. The Magdalena River area of influence covers almost 25% of Colombia’s mainland, where most of the population is concentrated and where around 85% of the GDP is generated. Therefore, the improvement of the river’s navigability is a very important step in decongesting freight transport as it will reduce the number of trucks that cross the country’s roads every day.

Finally, there is also a national interest in developing rail infrastructure. The government has not yet designed a specific plan for railways PPPs and for the moment is analysing the feasibility of two unsolicited PPP railway projects that have been structured by the private sector and will be mostly funded by private companies. Nevertheless, the Colombian government may propose and design a PPP railway program in the future similar to the 4G Concessions program for roads.

Source: ANI

The 4G Concessions program projects proposed by the government

In 2014, the ANI began to award the first concession agreements in the first wave of the 4G Concessions program. This process has continued in 2015 with the processing and award of the first concessions in the second wave of the 4G Concessions program. Between the first and second waves, the ANI has 17 projects underway, all at different stages. In order to understand the magnitude of these projects, the following chart sets out their main characteristics:

The economic magnitude of these projects is substantial and poses significant financial challenges for the concessionaires. It is important to highlight that the remuneration the government has to pay to concessionaires under the concession agreements is structured as an availability payment. This means that the concessionaires will not be paid until the project is finalized, delivered to the ANI, and put into operation. Nor will they receive the part of the concessionaires’ remuneration that does not come from the government (i.e. tolls and commercial revenue from road-side services, such as gas stations, restaurants or hotels) until the projects are up and running.

In view of this, the concessionaires need to have very well structured financing schemes, firstly to fund construction costs and later to refinance their debt in order to get more efficient debt/equity ratios according to the real profitability of the roads under concession. Taking into consideration the complexity of the financial needs of the 4G Concessions program, local banks will be accompanied by international banks, multilateral banks and even institutional and financial investors in giving capital injections to concessionaires. This is one of the reasons why it has been so important for the government to guarantee the robustness of the projects, and to maintain the confidence of international investors and traders as to the solvency of Colombia.

The big test of the government’s efforts and the financial arrangements made by concessionaires will come in the coming months once financing for the first awarded projects is agreed.

PPP projects proposed by the private sector

Initially, the 4G Concessions program made provision for a third wave of PPP projects. Nevertheless, the government let the private sector take the initiative and as such the private sector is carrying out some of these projects together with other PPP projects.

The Colombian government has made considerable efforts to analyse the feasibility of these projects and to enable their implementation, especially as most of them have been structured in such a way that they do not require the disbursement of public resources (those that do require public investment can only be 20%-funded with public resources). Unlike 4G Concession program projects proposed by the government, the concessionaires of these unsolicited PPP projects will receive most of their remuneration (or even all of it) from tolls and commercial revenues. As a consequence, these PPP projects receive strong support from the government, as they are a way of helping to overcome the historical lack of infrastructure in Colombia at little or no cost to the public purse.

Details of some of the most relevant unsolicited PPP transportation projects can be found in the following table:

Without doubt, the PPP projects proposed (and funded) by private companies are a very interesting new way of carrying out infrastructure projects in the region and one of the better solutions to Colombia’s current infrastructure deficit, since they have very little impact on public finances. This notwithstanding, this type of project will require specific monitoring by the government to ensure the economic balance of the concessions, especially taking into consideration that all the investments will be covered by private entities and, in particular, through the payment of tolls.

Summary

Colombia has started making inroads to overcome its historical infrastructure deficiencies, which to date have represented the biggest obstacle to development. In line with the significant improvement in Colombia’s economy in recent years –which has been reflected by various international rating agencies–, it is time to provide the country with the proper transportation infrastructures that ensure improved connectivity between the main production and consumption centres, on the one hand, and the ports on the Atlantic and Pacific coasts, the airports and the country’s borders on the other. This improvement in infrastructure will significantly reduce the costs and the length of time required to transport freight around the country, which at the same time will stimulate the development of new businesses.

Work on achieving this goal has already begun with the awarding of the first 4G Concessions program projects and calls for tenders for many other projects, both proposed by the government and by private companies. In the coming months, once financing is in place, works will begin on the first projects that have already been awarded, which in time will be a reality that will benefit all Colombians and others operating in the country.

Jorge Di Terlizzi
Philippi Prietocarrizosa & Uría
Bogotá

About the author

Jorge Di Terlizzi is an advisor to local and international companies on contract law and corporate matters. He has been involved in important privatisation and M&A projects. He is also an advisor to telecommunications, energy, roadway, airport and port concession companies on all matters relating to their PPPs (public-private partnerships) and their financing, construction and equity-funding contracts. Mr Di Terlizzi is member of the board of directors of various Colombian companies. He is Vice President of the Colombian Chamber of Legal Services (CCLS) (2009), an association which gathers more than 18 of the top-ranked law firms in Colombia; President of the CCLS (2010); Member of the CCLS’ Executive Committee (2008-2010); Member of the Bogotá Board of the National Business Association (2010); Member of the Colombian Chamber of Infrastructure (CCI) (2007-2014); and a frequent speaker in the CI’s Infrastructure forums.

Marc Casas
Philippi Prietocarrizosa & Uría
Bogotá

About the author

Marc Casas is a member of the public law department of Uría Menéndez’s office in Barcelona, Spain. In 2012 he was assigned for six months to the Madrid office of Uría Menéndez and since April 2015 he has been seconded as a foreign consultant to the infrastructure and projects department of Philippi Prietocarrizosa & Uría in Bogotá, Colombia. His areas of expertise are administrative law and regulated sectors. In his practice, Mr Casas advises companies and public bodies on public procurement, infrastructures, concessions, permits and licenses, public assets, public authority liability and disciplinary procedures. He also represents clients in litigation. In recent years, Mr Casas has participated in various transactions involving the development and operation of infrastructures, financing and management of public services and other public-private partnership (PPP) projects, both as institutionalised (public-private mixed companies) and contractual (concessions and public agreements).