Public-private partnerships begin to pay off despite limitations

In January 2012 the government of President Juan Manuel Santos Calderón issued Law 1508 on publicprivate partnerships (PPPs), better known as the PPP law. More than two years later, the results of the muchtrumpeted announcement have yet to match the fanfare surrounding their launch. The promotion of PPPs could contribute to the development of infrastructure, which is “an absolute necessity in the country”, as Alejandro Arboleda, general manager of Pedro Gómez Infraestructura, a local leader in infrastructure and housing construction, told OBG. “Colombia has an urgent need to triple its infrastructure investment in order to meet the standards of other countries with similar per capita economies,” he added. However, public entities – particularly municipal authorities – are not yet structured to efficiently receive and analyse the proposals that arrive from private investors. The current PPP law needs revision and better practices if the government wants this scheme to make a decisive contribution to national development.

PPP Law

The government is immersed in granting the so-called fourth generation (4G) of road concessions, designed and promoted by the National Infrastructure Agency (Agencia Nacional de Infraestructura, ANI). Many private investors have proposed infrastructure development via the PPP model, primarily for roads, but also for trains and social infrastructure. The 4G concession granting processes have been delayed due to many factors, including prolonged discussions about the balance of risks and the difficulty of achieving financing (see Construction chapter).

Apart from the challenges intrinsic to pushing through the 4G concessions, the status of infrastructure projects has shown that the PPP scheme envisaged in Law 1508 is not working as well as it has in other countries. The Colombian PPP scheme draws a distinction between public projects and projects stemming from private initiative. The relevant article stipulates that "budget resources of national and state entities may not exceed 20% of the estimated total investment in a (private) project.” This article considerably limits the participation of public funds in PPP projects of private initiative.

Private Hopes

Private investors have big hopes for the role of PPPs in Colombia, although they agree that regulatory reforms will be required if the government wants to make this scheme more attractive to investors. Carlos Jacks Chavarría, president of Cemex, the country’s second-largest cement producer, told OBG, “The country has never done such massive infrastructure projects, so it obviously does not have great experience in concessions or PPP structuring. While it seems to be working in the right direction, I see some 10 to 12 months passing before essential details are clear." The fact that the raft of road projects that Colombia has been announcing for the past two years could receive a boost through PPPs is not only recognised locally, but also internationally. In early May 2014, the British magazine The Economist analysed the PPP models applied to infrastructure development in Mexico, Peru and Colombia. The article observed that long distances and topographical complexities increase the cost of projects, and suggested that PPPs would require greater funding from the public sector to succeed.

The Economist’s study concludes that PPPs have proven to be a successful model for ports and airports, and should serve as a complement (but not a substitute) for investments in roads. “Bogotá is enjoying an ideal time in terms of positioning internationally for business,” Juan Gabriel Pérez, General Director of Invest in Bogotá, a promotion agency, told OBG. “This is evidenced by the fact that it receives most foreign investment in new projects coming into the country, excluding oil investments.” Despite the reservations, countries like Chile have successfully used PPPs to develop their roads. All indications are that Colombia could be on the right track and PPPs could complement 4G concessions as a second source of projects. It seems, however, that in order to do so the country must make a number of adjustments to its PPP law.

Process

According to the PPP Law, once a private initiative is presented, the state or local authority enjoys a six-month period (extendable for a further six months) to study, seek clarification, and make observations and suggestions that will help to evaluate the proposal. Once this deadline is reached, the public body must declare the project viable or non-viable. If declared viable, a two-month period is opened in order to reach final agreements regarding the initiative. If an agreement is finally reached, a document is signed and the phases are structured.

This process applies for projects that require public resources – up to a maximum of 20% of the cost – and is longer and more complex than privately funded proposals. If the initiative is fully funded by the private sector, there is a only a month period once viability is accepted. In that time, any other interested firms can send alternative proposals before the competent authority decides to start the project.

Early Projects

Despite the legal and practical limitations of the PPP scheme, national and local government entities have received more than 150 proposals to date. It has been announced that two projects have so far been awarded and that another six will be soon. The approved projects include the highway concessions for Buga-Loboguerrero and Zipaquirá-Palenque, in the central region of the country. With new approvals in sight, the president of ANI, Luis Fernando Andrade, recommends local authorities seek advice from the state agency until they gain expertise in the procedures. “It is important that local authorities establish clear criteria to be met by private investors in each of the stages,” Andrade told reporters in 2014.

In line with the requirements of the PPP Law, 98 of the 150 initiatives presented either do not require any public funds or less than 20% of the total cost, in order to comply with the expected budgets. Meanwhile, according to information from the Register of PPPs (Registro Único de Asociación Público Privada, RUAPP), which records all PPP proposals, 33 private initiatives have been already rejected. The information from the RUAPP says that from the 150 initiatives, 73 projects have been presented to build roads, 17 are related to urban transport, nine are for parking, seven for trains, six for solid waste management, five for urban renewal and other 33 are for public buildings, including prisons, hospitals and others. Several of the 33 initiatives that were already rejected did not meet the legal requirements, as they sought more than 20% in public resources, according to the National Planning Department (Departamento de Planeación Nacional, DNP). Others were rejected for not meeting a priority need or exceeding the budget or time limitations provided by law, among other reasons.

More Than Roads

The interests of private investors extend beyond developing roads through PPPs, with proposals for rail and airport projects also featuring among the project submissions. Of the seven initiatives related to the rehabilitation and construction of railways that the ANI received, four were rejected and the three others are now awaiting consideration.

In relation to airports, the infrastructure agency has so far received six proposals. Of these, one has been rejected so far and five are waiting for a decision. At the regional level, projects are quite varied.

Some of the most significant are the urban renewal of Lleras Park in Medellín; the development of public parking areas for the centre and north of Bogotá; the construction of a logistics centre adjacent to the El Dorado Airport; upgrading the Atanasio Girardot football Stadium in Medellín; as well as the restoration and improvement of the Tequendama International Centre in Bogotá.

Further Down The Line

In the short-term, the goal for Colombia is to approve as many as possible of the 117 proposals that can still be considered viable. A direct consequence of starting new projects will be the boosting of infrastructure development. Projects that are close to receiving approval include the Ibagué- Cajamarca road connection, the Meta road in the east side of the country, and other connections, such as the Cesar-Guajira (north-east) road, and the Bogotá- Villavicencio highway.

There will likely be increased pressure on the government to modify the current limit of 20% public investment for privately proposed projects in order to reach the total of $25bn in private investments that the government is looking for.

The future reform of the PPP Law could open the possibility for pension funds and private equity managers to get involved in the scheme, which represents the commitment that the nation has with the 4G constructors. As the Minister of Finance, Mauricio Cárdenas Santa María, recently told reporters, “These changes will significantly encourage banks, pension fund managers and insurers to participate in this important opportunity.” Finally, local authorities should also increase their efforts to acquire the required techni- cal capabilities to develop PPPs successfully. Small towns and intermediate cities in particular could be the big beneficiaries of the development of PPPs.