In Colombia, new road projects attract investor attention

Colombia has launched what is known as the fourth generation (4G) road concession programme, which is a major public-private investment initiative. Work on designing the programme first began in 2011. The first 4G concessions were awarded four years later in 2015, with the first construction work commencing in November 2015.

According to Luis Fernando Andrade, president of the National Infrastructure Agency (Agencia Nacional de Infraestructura, ANI), the programme is designed to resolve Colombia’s long-standing deficit in road transport infrastructure and reduce its high logistics costs, to help make the economy more competitive. He calculated that 4G could add 1.5 percentage points to Colombian GDP growth during the construction period, create 200,000 direct jobs and cut the unemployment rate by one percentage point.

Billion-Dollar Roads

A key feature of 4G is its size. Some sources say that total investment in the programme could be as much as COP50trn ($18.4bn) over seven years, while banking association Asobancaria calculates the amount of pre-construction and construction investments to be COP36.7trn ($13.5bn) which, it points out, is 2.7 times greater than the cumulative total invested in the first-, second- and third-generation road building schemes that preceded it. The programme should have a major impact on the macroeconomy.

Daniel Velandia, chief economist of Credicorp Capital, said, “We expect a rebound in 2017 because of the 4G projects. The government is auctioning 26 projects with a capital expenditure of COP30trn ($11bn), and we expect them to be executed in three to four years and to impact positively on the economy.”

According to Andrés Escobar Arango, the deputy minister of finance, bank lending of up to one-third of the total value of 4G investments could be required. Asobancaria also sees the programme boosting GDP growth, although its calculation differs slightly from that made by ANI – it expects an extra 0.4 percentage points of GDP growth on average during the lifetime of 4G in 2015-22. Mauricio Cárdenas, the minister of finance, said in December 2015 that in the first and second waves of 4G auctions, a total of 18 concessions had been awarded, and of those, six had closed their financing arrangements. In the third wave two public sector projects were being auctioned and nine private sector initiatives were awaiting Ministry of Finance approval. Cárdenas said infrastructure investments like these would be “the engine of the Colombian economy in 2016”.

New Concession Model

The basic model for the 4G programmes is that the investment costs will eventually be recovered from toll road revenue over the lifetime of the concessions. Contractors will go through a bidding process, and those whose project plans offer the lowest level of public sector funding are most likely to be selected, but this is not the only criteria. Major efforts have been made to attract initial capital to set the projects in motion. The Ministry of Finance has offered up to COP5trn ($1.8bn) in financing to attract foreign companies into the bidding process. New legislation allows Colombia’s pension funds to invest up to 5% of their total assets into 4G project finance debt funds, which Andrade described as “a really interesting mechanism to provide long-term money at reasonable cost”. Most recently, in January 2016 the Colombian government sold its controlling stake in the power company Isagen for $2bn in order to provide funding for the infrastructure investments. It is Colombia’s biggest move to privatisation in a decade.

An important change in the way the government approaches 4G has had a big impact on the involvement of local banks. In the past, contractors who had won road-building contracts received upfront payments from the government, which were criticised as a source of inefficiency and potential corruption. Now, payments flow at a later stage in the project life-cycle, and are conditional on meeting delivery dates and quality standards. The 4G concession holders are therefore required to cover 20-30% of the overall capital requirement themselves, by raising bank credit or equity capital. They are also supported by a new development bank, the Fondo de Desarrollo Nacional (FDN) which provides subordinated loans to the projects for up to 15% of the total cost. This is designed to reduce the equity capital requirement and to give the banks a greater cushion against their loans. FDN was set up in 2014 with capital contributions from the government and multilateral agencies.

Challenge For The Banks

The new system has had some teething problems, with the banks and the construction companies debating the terms and guarantees required for 4G loans. In many cases the banks are now lending to a 4G project or consortium rather than to an individual construction company, which has required a new set of legal contracts. There were some delays in the launch of the bidding for 4G projects, with Rupert Stebbings, director of equity research at Bancolombia, commenting, “The financing was always going to be complicated given the enormity of the projects.” In effect, the size of the loans concerned, combined with the financial difficulties encountered by Conalvías, a major construction firm with cash-flow problems that had to reschedule its debts, led the banks to adopt a cautious position, asking construction companies seeking loans to make provisions against possible cost overruns.

In November 2015 Asobancaria said it was recommending some modifications to 4G regulations, such as allowing construction companies to have a higher proportion of bank debt relative to the total value of projects. One way this might be achieved was by applying the 25% upper limit independently to each project, and not in a cumulative fashion. Asobancaria was also calling for clarification of legal guarantees and “step-in” rights, where contracts may be taken over if a contractor fails to meet its obligations. Asobancaria also wanted greater certainty on loan disbursement dates, and suggested that loan payments should only commence after all environmental permits and approvals for a project had been issued.

Raising Funds

While 4G presents the banks with a major source of business, a key challenge will be to ensure that sufficient finance can be raised, and that risks are adequately managed. ANI has estimated that eventually between 35 and 40 4G concessions will have been allocated by the end of 2016. The real test is whether enough projects are well-structured.

It is encouraged, however, by the involvement of international banks such as the US’s Goldman Sachs, Japan’s Sumitomo, Chile’s CorpBanca and Spain’s BBVA in some of the agreed projects. Analysts say there will be more international involvement in 4G than in any other previous infrastructure scheme.