Renewed partnership: Private sector involvement is critical for many projects

Public-private partnerships (PPPs) are no novelty in Colombia’s efforts to develop its infrastructure network. Since the early 1990s, a number of projects have been awarded under contractual structures that were amended with each “generation” – currently fourth – of public contracts on offer. However, for a number of reasons, the models have failed to sufficiently attract the private sector expertise and funding required to meet the country’s significant needs. Political instability in a bygone age had pushed the government to delegate risk taking to the private sector, discouraging the participation of foreign investors while local companies winning the bids often lacked the required experience and capacity. Meanwhile, projects were most often awarded to the lowest bidder, who would subsequently renegotiate both the project’s duration and budget as it evolved. This frequently ended with controversy, delays and project abandonment as limited preparatory data and project management flaws led to budget deficits, conflicts with environmental regulation agencies and deviations from planned routes due to complicated access to lands. In some cases, corruption and mismanagement of public funds have led to various scandals and convictions.

A NEW ERA: These issues, on the back of a growing infrastructure deficit, led to the formulation of a new PPP law under the administration of President Juan Manuel Santos. The law was created with the goal of structuring and standardising public contracts, regulating project financing and duration, accelerating conflict resolution, increasing transparency and attracting the participation of private partners. Law 1508, known as the PPP law, was enacted on January 10, 2012. The new legislation stipulates that only projects worth over $1.6m will be eligible for a PPP scheme, concessions are capped at a maximum of 30 years including extensions and additional funding for public initiative projects will be limited to 20% of original project value. The latter should help safeguard against corruption and mismanagement of public funds. Moreover, the law has introduced the concept of availability payments, which limits the government’s obligations to pay contractors until certain service and quality milestones are met. To prove the government’s ability to pay its share, the allocated funds are deposited into a trust until disbursement. Besides transparency for the contracted party, the structure also ring-fences the financial assets of the project as well as the cash flows.

NEW PROPOSALS: Another major difference from previous models is the distinction between projects proposed by public or private initiative. Public initiative projects refer to the traditional manner of public contract allocation. They are promoted by a public entity – typically either the National Infrastructure Agency (Agencia Nacional de Infraestructura, ANI) or the National Institute of Roads (Instituto Nacional de Vías, INVÍAS) – which conducts pre-feasibility studies such as project definition, cost-benefit analysis and risk allocation. All prepared documents are made public after the selection process starts through pre-qualification, public calling or public tender. The 20% cap on additional public funding is only applicable to this scheme.

IDENTIFYING NEEDS: Private initiative projects consist of unsolicited proposals. While these have been carried out in the past, the lack of a clear regulatory framework and non-traditional procurement processes often led to complications in project finance and management. This had adversely affected investors’ interest. Thus, the distinction for private initiatives is essential in Colombia’s ambitions to attract higher levels of private sector participation in infrastructure endeavours.

Under this scheme, the project’s private promoter is to assume all costs incurred for the preparation of the initiative. Once a proposal is created, a two-phase process starts. In the first phase, the promoter will be required to prepare a pre-feasibility study consisting of basic designs, a cost-benefit analysis, operations and maintenance proposals, and financing details. This will be assessed by the relevant public authority – most commonly either ANI or INVÍAS – for a period of up to three months. The second phase, which involves the feasibility stage, will start only if approval of the first phase has been given. During this process, the promoter will go through a financial and technical screening, after which another three-month period is taken to assess the proposal. To encourage the most experienced companies to partake in as many projects as possible, competing parties are allowed to propose alternative offers. If one of these is accepted, the original promoter will have the right to counter propose.

WELCOME CHANGE: The improved structuring and transparency of public projects has been welcomed by the private sector at home and abroad. According to a 2012 report by ratings agency Fitch, “The law sets up the rules to correct past problems – by demanding accurate construction plans and adequate financial planning and requiring project cost overruns to be assumed by the concessionaire – and places limits to the endless renegotiation of contracts.” The agency was particularly pleased with the improved project financing structures that “provide greater assurance to lenders with respect to outstanding payments and the enforceability of security interests”.

While the new PPP law seeks to address the flaws of preceding legal frameworks, it is likely that regulatory decrees will be needed to define its exact application. An area that may deserve further consideration is the level of risk assumed by the private sector, which remains significant. Similar to various countries in Latin America, Colombia faces challenges with the verification of official land entitlements, which has been further complicated by dispossession and illegal land claims by militants over the past decades. Under the new law, investors bear the responsibility for delays incurred by these obstacles. Although work is under way on a new land administration law, the challenges facing its passage are significant and subject to ongoing peace negotiations between the government and militant groups.

Another hurdle investors will be facing is environmental risk. Under the National Code of Natural Renewable Resources and Protection of the Environment, infrastructural developers must obtain environmental permits. This is likely to cause delays as requests typically run into bureaucratic inefficiencies exacerbated by the anticipated rise in projects. While the government has made efforts to increase the capacity of environmental authorities and integrate requests into the preparatory stage, reports of lengthy delays are still common. The introduction of carbon reduction policies is also high on the government’s agenda but will likely clash with its ambitions to ramp up the carbon-intensive transportation network. Investors may need to formalise “legal stability agreements”, which under Colombian law are valid for up to 20 years, to protect their activities from upcoming legislative changes.

POTENTIAL PROBLEMS: Colombia’s new approach to public infrastructure development will rely heavily on the private sector and especially private initiatives, particularly in areas like rail, where proposals to modernise and expand infrastructure predominantly come from mining companies. Although this business-minded attitude caters to the needs of the private sector, some contractors claim that they are hampered by a lack of a predefined master plan. As Bernardo Gamboa, former CEO of construction firm Conciviles, told OBG, “the new regulations are good, but the issues with the infrastructure deficit are not just in the regulations, they also lie in a lack of what is needed.” Gamboa claims that projects of lesser interest to return-seeking investors – such as regional roads and social infrastructure in health and education – are likely to be overlooked or sidelined.