The road to success

1 March 2013 Following the Colombian government’s announcement of its massive infrastructure programme, the first wave of projects is now hitting the market. Their success will be key to attracting vital international investment, reports Dan Colombini
Colombia is being touted as the rising star of the Latin American PPP market, and now stands on the verge of a huge investment programme that will put it at the forefront of the global infrastructure investment market – if everything goes to plan.

The government is making the most of its recently passed PPP law by developing a considerable pipeline of projects that, on first sight, makes it the envy of the world.

However, there remain plenty of questions hanging over the market – not least whether the country can push projects over the line in a tough financial climate with little experience of the PPP sector.

Colombia’s national infrastructure agency, ANI, has begun to roll out a series of four road projects to kickstart the nation’s wider $60bn (£39bn) infrastructure plan.

Tenders have now been launched for the 30km Mulaló-Lobo Guerrero highway in south-western Colombia and the new Puerto Salgar-Girardot road, which connects the centre of the country with Ecuador. The projects are valued at $1.15bn and $784m respectively.

ANI has also launched the concession for a $768m, 152km highway, linking the coastal cities of Barranquilla and Cartagena. In addition, the East Cundinamarca Perimeter Road, valued at $684m, has also now been announced.

Part of the country’s so-called ‘fourth wave’ of concessions, the projects have been designed to boost Colombia’s transport-related infrastructure investments to 3% of the country’s GDP by 2014.

Speaking at the launch of the projects, ANI president Luis Fernando Andrade said: “We’re kicking off the largest investment programme that the country has seen in terms of investment. We’re taking on a 44 trillion-peso split between a total of 30 projects.”

And that is not all. ANI is set to follow up the latest concessions with three more transport PPPs later this year.

As part of Colombia’s $60bn investment programme, the country has also proposed a host of projects in other areas, including healthcare, public buildings and a privatisation of the country’s airports. Through the country’s National Planning Organisation, Colombia has planned to build six prisons across the country, the first of which could hit the market early next year in Popayan.

In February, PPP Bulletin also revealed that the city of Medellin and capital city Bogota have earmarked three new potential rail PPPs, valued at a total of $3bn. In addition, the municipal government of Cali has proposed a host of new PPP projects, which will include a modernisation of the water and sewage systems of the city and surrounding areas, a new convention centre, social housing and an expanded mass transit system, with new stations.

The municipalities are also pledging to invest some $40bn in infrastructure over the next eight years.

Making the delivery
But with a PPP law that was only implemented in January last year, these are early days for Colombia, and it remains to be seen whether the country has the ability to not only attract interest but also reach financial close on these deals.

As a result, the watchful eye of the international investment community is focusing on the first four pilot projects to determine whether Colombia’s PPP framework can bring the kind of well-structured deals that will attract the investment required for such an ambitious programme.

“As in any country starting a programme, it will be for Colombia to demonstrate that it can take to market well-structured projects reaching financial close within a reasonable time,” explains Santiago Klein, managing director at property consultants
McBains Cooper International. “These projects are vital,” says UK Trade and Investment business specialist Stephen Harris, referring to the four transport schemes already launched by the ANI. He suggests the importance of the pilot projects goes far beyond simply creating a climate for PPP investment.

“Colombia’s transport infrastructure is in a mess and it is very difficult to move around the country. I think President [Juan Manuel] Santos very much sees
these projects as pushing everything else along.”

John Laing investment director Craig Bryant agrees. “The international and domestic parties interested in the Colombian pipeline will look closely at the success or failure of this first wave of projects under the new programme."


As ever, the devil of Colombia’s PPP programme will be in the detail. It does seem that some of the key elements around the payment mechanism and the funding route have not yet been fully decided," says Bryant, "but these should become clearer as the projects are tendered."

In terms of the overall framework, I think that they have made a big effort to make these projects attractive and now we need to see some successful implementation. If they can make it work, I think a lot of people will make it a priority destination."

Pre-qualification for the pilot deals is expected to conclude within the next two months, after which a list of pre-qualified companies and consortiums will compete in the tender process, expected to last six months. ANI then expects to award the contracts at the end of September this year – a fairly quick process by any international comparison.

In the past, previous PPP contract negotiations in Colombia have stalled or collapsed, largely as a result of negative impacts from its fiscal deficits. The new framework in place includes assessment of the federal capabilities to pay and comply with these new deals. And with an economy that is now at investment grade, confidence is running high.

The risk business
Other countries – including the UK – have faced problems down the line after pushing so many projects through an untested PPP route in the early days. In Britain, criticism around the amount of risk priced in by the private sector in the early days, and around the amount of risk transferred across to the private sector, has been behind the negative public image of private finance and the eventual creation of PF2 in December last year.

As ANI irons out these first contracts, the issue of risk allocation could be the deciding factor for many interested parties, particularly international investors. “We are proposing that the demand risk must be retained by the government,” explains Carlos Sanchez-Garcia, junior partner at law firm Duran and Osorio, which is advising the government on the deals.

“It is the rational decision for roads and long-term contracts such as these. You can’t transfer risk that the private sector cannot manage or hedge. It is impossible to control traffic and I know demand risk is therefore a huge concern to investors.”

International investment will be key to the success of these deals, according to Sanchez-Garcia. “You have to ensure that the flow of funds to the private sector is very stable. If you want to tap into international investment, that is key.”

Bryant claims that the "proof will be in the pudding", but thinks risk allocation will certainly be a decisive factor for many investors.

"We don’t know the full details yet but one key question is going to be whether they are going to be demand or availability risk, or a combination of the two’ he explains.

"For ourselves, we would certainly be more wary of full demand risk on potential toll roads in a new market for us, particularly one that is on the other side of the world, and is implementing a new model for PPPs."

According to Klein, the next 24 months will be key to gauging the success of the projects and, in turn, investor interest in the wider pipeline. “Both the construction and financial community in Colombia is extremely strong and technically capable,” he explains.

“So it will be very interesting to see how these projects are awarded among domestic or international players, together with which consortiums and alliances are formed between domestic construction firms and international companies with experience in the operational phase of this type of contract.”

But Klein highlights that with a pipeline as varied in size and depth as Colombia, it is bound to attract interest from the large-scale international investors as the projects begin to hit the market.

If it doesn’t, Colombia will struggle to get anywhere near its plans for $60bn of investment.

This page was last updated on:
21 June 2013.


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