Homebuilding and ambitious infrastructure plans drive expansion

Buoyed by a strengthening of the government’s housing programme, as well as a continued emphasis on improving transport infrastructure across the country, Colombia’s construction sector is well positioned for growth over the coming years. Construction of highways and other infrastructure is accelerating, as successive tenders for the Fourth Generation (4G) road projects are launched. At the same time the programmes to build more than 1m homes during the 2010-14 period is set to continue to mobilise the construction of housing projects across many of the major cities.

According to the National Administrative Department of Statistics, the sector grew by 9.8% in 2013. This is considerably more than the increase of 3.6% in 2012, and is showing a fundamental upswing in many major sub-sectors. The sector represented 6.5% of GDP in 2013, or COP47.6trn ($23.8bn), according to BBVA Bank. However, its composition is generally measured separately, with infrastructure construction representing about half of 7% growth, and general building accounting for the remaining 3.5%, according to the Colombian Chamber for Construction (Cámara Colombiana de la Construcción, CAMACOL). In early 2014 Finance Minister Mauricio Cárdenas Santamaría projected a 4.7% expansion in GDP for the economy, much of it expected to come from the public works.

Housing Programme

uilding homes remains one of the most important activities of the sector. CAMACOL figures show that of the 25m sq metres of new construction licensed on a yearly basis in Colombia, 20m sq metres are for residential building. Although this represents an 80:20 ratio in terms of area, the value-added of general construction in Colombia ( infrastructure not included) is equally divided between residential and non-residential building. This is because office and commercial construction are generally higher value per square metre than residential building, which is driven by the government’s goal to reduce the housing gap. At the start of his tenure, President Juan-Manuel Santos pledged to build 1m homes over 2010-14 to close the housing deficit. Colombia’s housing policy has been divided among different levels. Priority interest housing (vivienda de interés prioritário, VIP) is used to cover the housing needs of the extremely poor, or those sections of the population that have been forcibly displaced. Social interest housing (vivienda de interés social, VIS) aims to help low-income families, and generally involves government subsidies and financing assistance. The third level, non-VIS, is made up of all remaining housing segments, including middle-income to high-income housing.

In 2013 much of government policy for the construction of VIP housing was driven by the Vivienda Gratuita (Free Home) programme, which aimed to construct 100,000 free homes for the most vulnerable part of the Colombian population. Launched in 2012, the programme has the dual objective of combating extreme poverty and reducing the housing gap. As of the first quarter of 2014, according to CAMACOL, 65,000 of these free homes had already been built, but the government has contracted the full number of homes, stating that contracting to delivery of the remaining units could take between a few months and one year.

The free housing programme was a good technical exercise for the construction companies that took part. Because construction was mostly done away from urban centres, contractors had to transfer equipment and resources. “And in several cases contractors needed to expand production capacity, so it was an important project for the companies,” said Sandra Forero Ramírez, executive president at CAMACOL. Since low-income housing involves very tight profit margins for builders, companies participating in the programme were given between 1000 and 1500 homes to build in order to provide sufficient scale.

In late 2013 authorities launched another programme, called Vivienda para Ahorradores (Homes for Savers), which established state incentives to assist low-income families acquire a home. The goal is to build 86,000 new units under this programme (see analysis).

Regionalisation

Building limitations in major cities such as Medellín and Bogotá have helped shift interest from builders away from the main urban centres. This has been strongly felt in Bogotá, where scarcity of land, coupled with a longstanding battle over a contentious urban development plan, has restricted a series of expectations for development. This is weighing more heavily on those developers focusing on low-income housing. “The development of VIS projects in Bogotá has become extremely difficult in recent times,” Felipe Carrizosa, president of IC Constructora, told OBG. “The present administration wants to expand the city in an area that they called the Expanded Centre Initiative, which restricts VIS projects in two ways: firstly it prevents projects from being developed in the periphery or the south, where the soil is cheaper. Furthermore, utility services are being given only to the defined area.”

As a result, focus on some of Colombia’s medium-sized cities is revealing a host of opportunities. Geographically, home building is still skewed towards the major urban centres in terms of the number of new units. There are five big markets that have more than 10,000 homes built per year. In Bogotá and its surrounding area, the figure is around 70,000. The Medellín home construction market sees around 30,000 new units annually, and Cali, with a smaller building pace, has an annual output of 15,000 homes. The city of Bucaramanga, to the east, and the Caribe Region have a yearly output of about 10,000 new homes each.

A move towards the less explored residential markets will allow builders to reduce the land price component in the total cost of projects. “Real estate prices in the northern zone of Cartagena are low when compared to other Caribbean destinations,” Edgar Botero, president of Millennium Development, a domestic development firm in charge of the Hispania resort in Cartagena, told OBG. “Prices usually do not exceed $2300 per sq metre, which is quite attractive for foreign second home buyers,” he added.

Infrastructure

State plans to enhance Colombia’s infrastructure have brought a new wave of dynamism into the construction sector. This is set to increase, as the focus continues on development of infrastructure, though a mixture of public-private partnership (PPP) concessions and regular government contracted construction work. The past few years have seen a rise in the percentage of GDP directed towards infrastructure building. In 2011 the government invested the equivalent of 1% of GDP in infrastructure. This was raised to 1.3% in 2012 and 2% in 2013, according to the Colombian Chamber for Infrastructure (Cámara Colombiana de la Infraestructura, CCI).

“We have expanded expenditure on infrastructure from an average of $2.2bn annually between 2000 and 2010, to $7bn in the 2011-14 period,” César Peñaloza, planning manager at the National Infrastructure Agency (Agencia Nacional de Infraestructura, ANI), told OBG. The ANI is a new government agency created in 2013 to manage Colombia’s concession programme.

Much of this has to do with the existing economic conditions and fiscal margins, which allow the Colombian government to commit to large-scale infrastructure development. Due to the more stable macroeconomic environment, coupled with improved security, execution of budgeted construction work has improved, increasing from an average of 49% in 2002 to 92% in 2013, according to ANI.

Transport

Much of this is being structured through the 4G road concessions, which are heavily focused on improving land connections across the country. The aim is to better connect the hinterland with Colombia’s port infrastructure, and the whole programme is geared to mobilising $25bn to be distributed among 47 different road projects. These will involve 1300 km of new double-lane highways, 140 km of tunnels and 150 km of bridges and overpasses. The 4G road projects are set to take several years to build, but the government hopes they will help cut road transport costs by 20% and reduce transport times between Colombia’s production centres and its ports by 30%, according to a report detailing progress on the infrastructure development published in 2013 by the ANI. Colombia has announced it will award up to 25 highway projects in 2014 and 2015. “Road infrastructure is a top priority for the whole country. Road building faces issues such as difficult topography, lack of consistency across projects, tight budgets, the Colombian peso volatility and consequent financing risks,” Mario Huertas Cotes, president of Colombia contractor MHC, told OBG.

The new model for private-public cooperation in developing infrastructure is now being tested, as the government begun tendering the road projects over the first quarter of 2014. The first project to be put on the market was the COP1.3trn ($650m) Girardot-Pue to Salgar link, which received two offers from consortia involving Colombian and foreign companies.

The Cónexion Pacifico 1 highway concession, estimated to cost $927m, was the second of the 4G road projects to be tendered, and the first of the Autopistas de la Prosperidad road projects, which will consist of 900 km of four-lane highways to increase connectivity across the country. For each of these two initial projects ANI had pre-qualified 10 companies, including domestic and foreign contractors.

In May 2014 the tender for Conexion Pacifico 2 highway, to be built in the region of Antioquia, received only one offer. The limited amount of bids has led to discussion over the choice of the financial structuring of the 4G concessions (see analysis).

Through the PPP model, the government aims to attract private investment to help build and operate the new road connections. “To have 19 interested companies, 10 contractors that are pre-qualified by the government, and then only a limited amount of actual offers is not very positive,” Julio Torres, managing partner at Multiple Equilibria Capital, told OBG.

Other transport tenders are also expected. A project to increase the navigability of the Magdalena River costing up to $1.3bn was launched in April 2013 after delays. Expansion work at the Cartagena and Buenaventura ports, scheduled to cost $500m and $180m, respectively, is also under way (see Transport chapter).

Energy & Water Infrastructure

Investment is also being geared towards improving water accessibility and waste treatment. The project to build the $21m water system to enhance distribution of drinking water in the communities of Los Cordobas, Puerto Escondido and Canalete was tendered in early April 2014. Under construction since late 2012 is the $347m Bello waste-water treatment plant in Medellín. The new unit will be the largest water treatment plant in Latin America, and is expected to come on-line in September 2015. In April 2014 the Ministry of Housing launched a tender for the construction of a COP21.4bn ($10.7m) waste-water treatment plant in the department of Casanare in eastern Colombia.

In the capital, a clean-up project of the Bogotá River has been ongoing, and the government announced in April 2014 that the construction of the $170m Canoas water pumping station will begin in 2014 after several delays. The plant is expected to have a capacity of 14 cu metres per second, and financing will be a joint effort, including the central government, the Bogotá City and Cuadimarca department authorities as well as Empresa de Acueducto, Alcantarillado y Aseo de Bogotá, the city’s water utility.

Infrastructure expansion is also taking place in the energy sector. In late 2013 the Ministry of Mines and Energy confirmed intentions to build a liquefied natural gas regasification plant. The project, expected to cost $400m, will be tendered before the end of 2014. The plant will be able to process 1000 cu metres per day, and it will serve to fuel thermal energy plants, reducing the impact of hydroelectric power generation volatility which has been a problem in years of heavy droughts. Also under expansion is Colombia’s oil pipeline network. Phases two and three of the expansion of the Bicentenario Pipeline, which carries oil from the Llanos region north to the Caribbean coast, are already under way. Budgeted at $5.8bn, the project aims to expand the pipeline’s capacity from 600,000 barrels per day (bpd) of oil to 775,000 bpd by 2015. Oleoducto Central, the company that owns the pipeline, announced it would be selling $400m worth of dollar-denominated bonds during 2014 to help finance the project.

Legislation

Besides increased investment capacity, changes in the legal environment for the sector have also been improving operating conditions for the construction sector. The Santos administration was able to strengthen the sector’s institutional framework through the establishment of a handful of government institutions to better steer the large government projects set to take place. In addition to the establishment of the ANI to manage and oversee all concession agreements, Colombia also created other specialised government bodies with the goal of better organising the overall infrastructure sector.

The National Public Contracting Agency has helped to streamline and digitally structure government buying, contracting and overall information, while the National Authority of Environmental Licensing is structuring all the environmental requirements for construction and development projects. Furthermore, the newly created Intersector Commission for Infrastructure aims to ease coordination between different government bodies that can impact completion time for projects in an effort to centralise approvals.

The Infrastructure Act, passed in 2013, will also accelerate potential delays faced by building contractors. The law aims to reduce expropriation processes to a maximum of 60 days. Still, some requirements of the new laws governing the 4G concessions are cause for concern, such as the new rules requiring concession holders to assume any risks arising from legislative changes over the 25-year period established for the concessions.

On a more positive aspect, the new PPP law has opened the door for unsolicited bids, encouraging the private sector to develop structure projects for certain types of infrastructure. According to the CCI, as of April 2014 a total of 149 projects, worth a total of COP7trn ($3.5bn) had been structured, mostly relating to urban infrastructure, hospitals and schools.

On the general construction side, legislative moves are also being made to increase safety of buildings. The subject became the centre of nationwide attention in late 2013, after the collapse of an apartment building in the city of Medellín which resulted in 11 deaths. The 24-storey tower was part of The Space Condominium block, which had been completed only a few months before. A new bill was brought to congress in early April 2014 by the minister of housing, Luís Felipe Henao Cardona. The set of laws include the implementation of insurance coverage for people affected by incidents resulting from negligent building, whether they are related to project design, materials or soil conditions. The minister also proposed that all construction sites be supervised by external controllers.

Although it agrees that improving safety of construction is essential, CAMACOL suggests that involving the insurers in the construction sector might impact costs negatively, especially regarding the multiple low-income housing developments taking place.

As an option to the insurance policies, CAMACOL is proposing to create a fund which will be structured to compensate owners in similar events. The discussion will establish tighter regulations, potentially resulting in higher costs for builders. But the tragedy in Medellín is a sign that stricter rules are necessary.

Outlook

Despite the positive dynamics, the construction sector is expected to face challenges over the coming years. On the housing development side, restrictions to construction are set to increase. In Bogotá, the housing sector will remain dependent on the legislative battle regarding the capital’s new zoning plan. In most of the bigger cities, private builders and policymakers are set to continue to face low availability of land. This will push authorities to come up with solutions, which might include a stronger focus on projects that combine housing with commercial or retail space in multi-purpose projects. However, this will serve mostly to increase housing availability for the medium- and higher-income housing segments.

The country’s focus on expanding infrastructure will present interesting opportunities for local and foreign construction groups. The amount of work expected to be channelled to the transport sector, as well as into energy and water projects over the coming years, will be beneficial for continued growth of the sector.