Finance structure on public-private deals raises concern

Infrastructure development plans are focusing on the concession model to support the expansion of road connections. However, the initial market response to the projects has left much to be desired. Despite the pre-qualification of up to 10 companies for each of the first four projects to be tendered by the government in April 2014, the response from operators has so far been lukewarm.

The first two of the Fourth Generation (4G) projects to be tendered were the Girardot-Puerto Salgar highway public-private partnership (PPP), and the Conexion Pacífico 1 project, which received two offers each. The third tender, the Conexion Pacífico 2, was able to garner interest from only a single consortium. However, things improved considerably by the fourth tender for the 4G projects in May 2014. The 103-km Perimetral de Cundimarca project received offers from four consortia.

Seeing the low number of proposals for its initial tenders, the Colombian government changed some project conditions. It extended the tender deadlines for potential bidders to present proposals, and committed efforts to finding new financing options. Despite this, the market response to the 4G tenders has brought attention to how the current PPP deals are being structured, and whether or not they are strong enough propositions to excite the domestic private sector. “It is not ideal to have such little interest,” Juan Martin Caicedo, the CEO of the Colombian Chamber for Infrastructure (Cámara Colombiana de la Infrastructura, CCI), told OBG. “Around the world, PPP tenders generally have more than one or two interested companies.”

PPP vs. Public Investment

Initial response to the 4G tenders sparked debate over whether Colombia’s infrastructure development plans should in fact be pursued through the traditional concession format. The PPP law in Colombia is very similar to models in the rest of the world, but incorrect estimation of the building costs related to large projects might have provoked over-optimistic governmental expectations about the private interest the road concessions would get. One of the most critical voices came from the CCI, which argued that the financial structuring for the 4G concessions was not thoroughly thought through. “The government believed that the heavy risks arising from social and environmental issues, as well as dealing with local communities, could easily be financed and managed by the private sector. But it turns out this is not necessarily the case,” Caicedo told OBG.

Implementation Of New Rules

Coupled with enhanced investment capacity, authorities also had to implement a new set of regulatory measures to rein in overspending in a sector that has typically suffered from corruption and wasteful use of funds. One of the biggest changes the current government has enacted was the way the state pays contractors. In contrast to previous practices, where the Colombian government would sometimes pay in advance for infrastructure projects, contractors now finance the construction, and are paid by the government as certain functional units of that project are successfully completed, which means that the government pays the contractor once a working part of that infrastructure project is completed. This has allowed increased transparency in the sector, but has sometimes made it more challenging for private firms wanting to participate in the government infrastructure programme to source financing.

Therefore, since each project is divided into its own set of functional units, according to the nature of the infrastructure, some projects will most likely have to be financed by the private sector for most of the construction time.

“We had estimated a certain credit rate in our models, but the companies that presented themselves for the projects had worse financing rates once they went to the banks to get money for the projects,” Cesar Peñaloza, planning manager at the National Infrastructure Agency (Agencia Nacional de Infraestructura, ANI), told OBG.

That puts in question the financing options for the 4G projects, as sovereign governments typically get better financing rates than private companies.

As of April 2014, a Colombian 10-year sovereign bond was valued at approximately 6.5% in the local market, compared to the 11% to 12% rates at which the contractors looking to take part in the concessions were likely be financed.

“This five-point difference represents thousands of kilometres of road the government could build, if it did not have to pay the capital cost of the private partners,” Julio Torres, managing partner at Multiple Equilibria Capital and a former credit director at the national treasury, told OBG.

New Financing Tools

To offset the difference between the financing rates offered by the public banking sector and what was initially estimated by the government, ANI came up with a series of measures. Firstly, the Financiera de Desarollo Nacional (FDN), a state-owned development bank, will offer loans at the rate that had initially been reflected in the government financial models.

Another government-owned institution, Banco Agrário, is set to cover part of the financing. In an effort to further sweeten the deal for concession bidders, the government has announced that it will give part of the future budget allocations in dollars, so that contractors can pay off their debt for project execution more easily.

“We expect that the part of future budget allocations paid in dollars will reach about 30% of the total debt these companies can access. An additional 20% would be covered by the FDN or the Banco Agrário, so this would take them up to 50% of the financing needed,” Peñaloza told OBG.

Adding to this, multilateral lending institutions will most likely also join the fray. The Inter-American Development Bank has expressed willingness to contribute financing for some of the 4G concession projects, and the Corporación Andina de Fomento (CAF) announced in May 2013 it was considering the establishment of a $1bn collateralised debt vehicle to invest in road projects.

Future Budget Allocations

Much of the discussion revolves around the estimated profitability of the concessions. The source of income for the 4G road projects will be a combination of road tolls, and the state’s promise that over a certain period of time, it will give money from the budget to these roads through future budget allocations (vigencias futuras). The budget allocations will average 70% of the financing for each project, and the remaining 30% will be paid by the tolls, depending on the amount of future budget allocations requested by potential operators as they submit their bids. However, doubts abound regarding traffic estimations for some of the projected roads. In a conference debating infrastructure development in Latin America, which took place in the city of Cartagena in June 2014, an AIG official said that traffic predictions for up to 25 out of the 40 4G road concession projects were overstated, making the projects hard to finance.

According to Torres, the current 4G model in place involves too much state commitment for too little private financial contribution or expertise. “Furthermore, the return on capital of building these roads through the PPP system is not that attractive for private contractors, hence the lack of offers,” he told OBG. A better option, according to Torres, would have been to capitalise on Colombia’s current economic position and the fiscal margin to build these roads as public works projects.

In addition, lack of clarity was also created by the requirements of Law 1508 regarding PPPs, and its lack of coordination with the 4G concession structures. The law requires that an analysis should be done before the structuring of any infrastructure project in order to determine if it will be done more efficiently through public work paid for by the state, or in conjunction with the private sector through a PPP arrangement. However, this regulation seems mismatched with the government’s plans regarding the 4G road projects. The initial 4G projects first started to be promoted and structured in 2011, but the law came out in 2012.

“So when a lot of these projects were thought through, the question was not obligatory. What we tell the government is to not forget to always ask whether it is better to do a public works or PPP structuring, because the economic reality changes, the fiscal conditions change and the local conditions change,” Ramírez told OBG.

With strong political commitment and an unprecedented amount of investment, Colombia is in a position to improve its infrastructure in a way that will boost the economy further. However, it is exactly because of the pivotal role that the 4G road programme can have, that authorities need to revisit the way that the current projects are being structured.